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Old 01-14-2018, 09:36 AM   #41
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I think withdrawal 4% of the current balance takes care of the up and down factor of the portfolio.
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Old 01-14-2018, 09:39 AM   #42
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If I’m ever in OPs situation, I wouldnt snap back to 4%, I would instead set a floor of 2% of assets and keep adjusting as my assets grew. Why 2% ? Because if the market dropped 50% i would only be withdrawing 4% in that situation and that seems like a reasonable strategy on its face to keep increasing spending while being very safe.
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Old 01-14-2018, 09:43 AM   #43
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I would think so. But given the market over the last 9 years coupled with a well funded starting position, who wouldn’t be?
Yes, if I retired 9 years ago, and followed VPW while the market went up sharply, then I would have spent more in those 9 years by following VPW vs. SWR, and I would still have enough today to weather future storms.

But, if the market had gone down sharply, VPW would tell me to cut my spending (almost) proportionately. That's fine for many of the people here. They figure they've got that much "fun" spending in their budgets that they will be quick to cut.

SWR is for people who don't want to cut spending just because the market goes down. They have to start more conservatively to make that work.
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Old 01-14-2018, 09:54 AM   #44
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Yes. In theory you can reset your SWR to take advantage of higher portfolio values. John Greaney, at Retire early home page, explains the process in this article, The Payout Period Reset Method. He argues that the 4% SWR still holds, but on average you will decrease your terminal portfolio value compared to the original model.

And, if you think about it, this has to be true. Otherwise someone retiring today with your same current portfolio value would not be able to use the 4% rule.

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Exactly. The 4% rule doesn't give a hoot if the owner is retiring for the first time or is ratcheting after being retired for a while.
Note that Greaney starts with a payout rate that he considers 100% safe. In his case, he can ratchet to another 100% safe payout without generating new potential failures.*

The "4% SWR" that gets thrown around here usually means a 95% success rate.
If you don't ratchet up with good early performance, you move your 95% success to 100% success.
If you do ratchet up, you give up your 100% success and go back to 95% success.

I'm not saying that one is better for everyone than the other. I'm saying that the decision to ratchet up is not "free", it involves trading away something of value.


* This assumes, of course, that there is such a thing as a 100% safe withdrawal rate.
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Old 01-14-2018, 10:15 AM   #45
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Theoretically, yes, but that seems to be asking to set yourself up for a failure scenario where you start a sequence at a market high and hit a bad sequence of returns.
This is what I understand even though I do readjust just a bit every few years.

Seems to me the 4% portfolio is supposed to get fat in fat times and you live off of that in lean times when you 'should' have a WR of 2%.

I'm eager to learn more from this thread however.
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Old 01-14-2018, 10:21 AM   #46
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I agree that the traditional 4% SWR, increasing each year with inflation, is for folks who feel they must have a steady income, and certainly don’t want to deal with drops in income. As such it is super conservative for most scenarios.
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Old 01-14-2018, 11:20 AM   #47
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The "4% SWR" that gets thrown around here usually means a 95% success rate.

If you don't ratchet up with good early performance, you move your 95% success to 100% success.

If you do ratchet up, you give up your 100% success and go back to 95% success.




I disagree with this bit, you are not resetting to 95% chance, you are resetting to something less than 95%.


Why? because you are resetting in a only a certain direction, upward, which is not leaving you with random behavior. If you reset infinitely with this method, you will be guaranteed to reach the failing 5% level over time.

This is somewhat like drawing an ace from a deck of cards. 4 in 52. If you don’t put the card back in the deck, your chances have changed and you have changed them.
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Old 01-14-2018, 11:33 AM   #48
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I disagree with this bit, you are not resetting to 95% chance, you are resetting to something less than 95%.

Why? because you are resetting in a only a certain direction, upward, which is not leaving you with random behavior. If you reset infinitely with this method, you will be guaranteed to reach the failing 5% level over time.

This is somewhat like drawing an ace from a deck of cards. 4 in 52. If you don’t put the card back in the deck, your chances have changed and you have changed them.
Isn't this true only if you do not take into account you are now using a survival target of less than the original 30 years?

^ After thinking about it, I disagree with myself. The reset doesn't change the odds. The odds are 95% because you are using historical market returns and those returns don't change simply because you made your first withdrawal from your retirement stash. Example:

I have $1M, run FIRECalc and it says I can withdraw $40,000. If, a year later my portfolio has grown, I have $1.1M and run FIRECalc, it says I can withdraw $44,000.

How is this any different from my friend Bill who retired a year later than I did with $1.1M? FIRECalc says he can withdraw $44,000 so why should I be limited to $40,000 plus inflation?
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Old 01-14-2018, 11:40 AM   #49
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Seems to me the 4% portfolio is supposed to get fat in fat times and you live off of that in lean times when you 'should' have a WR of 2%.
Then how do you explain all those runs in FIRECalc that never get fat yet survive?
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Old 01-14-2018, 11:44 AM   #50
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I agree with you REWahoo. Let's say that I retire at 60 with a 30 year time horizon and use a 4% WR... my risk of failure is 5%. Then 3 years later... I reset/ratchet to 4% of my then higher portfolio.... at that point my risk of failure is less than 5% because my time horizon is only 27 years... so the failure rate might be something like 4.5% or something like that, but it would be less than 5%.

I'm guessing that one could probably "prove" this with Firecalc if one cared enough to bother to do so.
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Old 01-14-2018, 11:46 AM   #51
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I missed it if someone already made this point, but I think Grayhare's statement that they likely only have 8 yrs left to live is the most critical piece of information in the problem. When your maximum remaining lifespan gets short, prediction of the lifespan becomes more certain (in years), so one of the variables that the 4% withdrawal rate is intended to cover becomes more known.

I believe 6.25% at this point would not be too aggressive a withdrawal.

I'd think it through like this.

If I had a high degree of confidence my remaining lifespan was less than N, then I'd ask,

1. What's the largest portfolio decline I think is likely in the next N years.
2. Reducing my current portfolio by that amount, divide by N

That's my withdrawal amount.

For example,

Start with a portfolio of 1000 and an expected max lifespan of 8. Let's say, I expect a maximum potential portfolio decline (real $) of 50% in my remaining lifespan.
So Portfolio reduced by that decline is 1000*.5=500. Remaining amount divided by my lifespan is 500/8=62.5. That's a 6.25% withdrawal rate.

This doesn't work if you potentially have decades left to live, but when you're pretty sure you're in the last 10 years, it seems like a reasonable way to analyze risks in the remaining period left to you.
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Old 01-14-2018, 12:11 PM   #52
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I agree with you REWahoo. Let's say that I retire at 60 with a 30 year time horizon and use a 4% WR... my risk of failure is 5%. Then 3 years later... I reset/ratchet to 4% of my then higher portfolio.... at that point my risk of failure is less than 5% because my time horizon is only 27 years... so the failure rate might be something like 4.5% or something like that, but it would be less than 5%.

I'm guessing that one could probably "prove" this with Firecalc if one cared enough to bother to do so.
+1

Also, you are only resetting after the portfolio has increased. Accordingly, by definition, you have avoided some of the failure scenarios that start with portfolio losses in years 1, 2 or 3 (based on when you reset). I would think even without the shorter time horizon, you are at least statistically even with your starting survivability. Throw in the shorter time horizon and reset WRs should work.
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Old 01-14-2018, 01:52 PM   #53
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How is this any different from my friend Bill who retired a year later than I did with $1.1M? FIRECalc says he can withdraw $44,000 so why should I be limited to $40,000 plus inflation?
Maybe, so Bill will feel financially superior to you and buy you a nice lunch once a month.

Of course this works the other way also, right?

Suppose Bill retires a year later than you and due to a market downturn he 'only' has a measly $900,000. Now he can only withdraw $36,000 while you withdraw $40,000 + inflation. What happens then?
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Old 01-14-2018, 01:53 PM   #54
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Suppose Bill retires a year later than you and due to a market downturn he 'only' has a measly $900,000. Now he can only withdraw $36,000 while you withdraw $40,000 + inflation. What will you do about that?
Buy him lunch once a month.
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Old 01-14-2018, 02:07 PM   #55
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Actually, Bill could pretend he retired the same year as you and have the same withdrawal. And, since he did not actually retire, his portfolio would be $40k greater than yours and he would have to buy you lunch once a month.
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Old 01-14-2018, 02:11 PM   #56
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Actually, Bill could pretend he retired the same year as you and have the same withdrawal. And, since he did not actually retire, his portfolio would be $40k greater than yours and he would have to buy you lunch once a month.
Works for me!
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Old 01-14-2018, 02:39 PM   #57
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The 4% SWR seems like a test to see if you're able to retire.

Once retired, adjust as you feel comfortable.

I agree w OP that having more assets and less years to live several years into retirement allows for higher than original spending projections.
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Old 01-14-2018, 03:33 PM   #58
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So let's say you retired in 1995 with $1M, so you can take out 25K the first year, increased by inflation after that.


The next 5 years the S&P did 37.6%, 23.1%, 33.4%, 28.6%, and 21.0%. Assuming you had a 60/40 AA, your portfolio did about half of that. Taking out 4% + inflation those years, your $1M turns into about $1.68M.


You really think that after 5 years like that, if you reset and take 4% of $1.68M your odds of success are unchanged?


I sure don't. I think someone who retired in early 2000 has as an increased risk as well.


Firecalc and the 4% "rule" are just guidelines. Common sense says that bull markets are eventually followed by bear markets, and the start of a bear market is a more dangerous time to retire than the start of a bull market. I wouldn't advise any one to retire today on a plan that requires 4%+inflation SWR for 30 or more years. I'd get a little buffer in case of a significant correction.

Is there anyone here who retired in early 2000, and has been spending a full 4% increased by inflation each year? How is that going, and how much were you sweating after 2002, and again after 2008? I'm betting at least some were making cutbacks or looking for some PT employment, which is not the same as success. You might've made it without adjustment, because the bear market wasn't
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Old 01-14-2018, 04:18 PM   #59
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I think you are correct. I may be double counting the avoidance of early failures and the shortened withdrawal period. Kites, in the article referenced earlier, probably has it about right. You can reset but only after a 50% portfolio increase from the starting value and then you only get a 10% increase.
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Old 01-14-2018, 04:26 PM   #60
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Our lawyer is innumerate and he said: "Take your stash and divide by the number of years you expect to live. Spend no more than that amount every year on average." So I am thinking we could live for 40 more years.
Your "innumerate lawyer" is over-simplistic, but is doing the first basic step to the calculation.

1/30~3.33% (adjust longevity as needed).

I really think that people coming up with ultra-low SWRs have forgotten about this basic first step.
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