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Old 01-15-2018, 11:12 AM   #81
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Kitces and Guyton are not suggesting ratcheting up every year. Their rules are something like "if your portfolio has increased by 50%, you can ratchet withdrawals by 10%, no more than once every three years" and that is what they have tested.

It does result in higher withdrawals (unless the market goes nowhere in your retirement) without any measurable increase in failure rates. These rules are simply harvesting some of the excess portfolio that occurs 90% of the time when following the 4% rule.
Guyton-Klinger WD rules are, IMO, the best test of this, versus speculating. In fact, they are designed to do just that...adjust (“ratchet”) when there’s a significant change in portfolio NW. But, they adjust both up & down. The key aspects of G-K are:

1. Allow higher WDR at beginning of FIRE.
2. Prosperity rule: if NW grows enough that WDs are >20% less as % of NW than when you started, then you can increase WD by 10%.
3. Capital Preservation rule: if NW diminishes enough that WDs are >20% more than when you started, then you must decrease WD by 10%.

There are other nuances but, those are the essential rules.
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Old 01-15-2018, 11:28 AM   #82
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I’ll definitely be looking at VPW and even am considering the simple RMD rules as ways to increase the withdrawal rate as we get older. I know that from a planning point of view it makes sense to increase the draw an make use of it while we are living, rather than pass it on. Even for heirs I would rather gift more while we are alive.

Right now we’re just withdrawing from our taxable accounts and leaving the IRAs until we reach RMD age. And I plan to use the RMD rules to draw from the IRAs when required.

In the meantime I’m withdrawing a fixed 3.5% of our taxable retirement fund for income each year, based on the prior end of year value. Taking into account our IRAs the withdrawal rate is around 3% which is pretty low. We’re 58 and 62.

So our income has grown a lot because our retirement portfolio has grown for many years in spite of withdrawals. If our portfolio drops, so will our income.

Our IRAs are about 15% of our total retirement assets. When we retired quite young we ignored them for planning purposes since they weren’t a large of our retirement assets (may have been 10% back then) and we knew we wouldn’t be tapping into them for a long time (like 31 years for me!). I saw them more like a bonus or fallback if ever needed. So we left them alone.
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Old 01-15-2018, 11:42 AM   #83
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I’ll definitely be looking at VPW and even am considering the simple RMD rules as ways to increase the withdrawal rate as we get older. I know that from a planning point of view it makes sense to increase the draw an make use of it while we are living, rather than pass it on. Even for heirs I would rather gift more while we are alive.

Right now we’re just withdrawing from our taxable accounts and leaving the IRAs until we reach RMD age. And I plan to use the RMD rules to draw from the IRAs when required.

In the meantime I’m withdrawing a fixed 3.5% of our taxable retirement fund for income each year, based on the prior end of year value. Taking into account our IRAs the withdrawal rate is around 3% which is pretty low. We’re 58 and 62.

So our income has grown a lot because our retirement portfolio has grown for many years in spite of withdrawals. If our portfolio drops, so will our income.

Our IRAs are about 15% of our total retirement assets. When we retired quite young we ignored them for planning purposes since they weren’t a large of our retirement assets (may have been 10% back then) and we knew we wouldn’t be tapping into them for a long time (like 31 years for me!). I saw them more like a bonus or fallback if ever needed. So we left them alone.
Audrey-

Curious why you’re attracted to withdrawing more later in FIRE versus earlier. Not judging but, I’ve also reviewed VPW, G-K, and others; and, chose G-K because it enables larger WD earlier in FIRE because that’s when I think the extra $$$ will provide the most value to us.
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Old 01-15-2018, 11:49 AM   #84
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I guess we are in basic disagreement about the success rates after a strong bull market. I make a case for a possible bear market to follow, so reduced success rates. Some simply ignore that possibility and assume the odds are the same no matter when you start, because, you know, Firecalc. ...
I'm not disagreeing with you at all - clearly, in a 95% success run, the failures are the ones starting near the peak of the bull market.

The disconnect is - Firecalc already accounts for this, by using that worst case scenario to set your spending limit.


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... I'm willing to learn new things, but it's hard to learn when your point isn't being acknowledged. I'll take the hint and bow out. I have my plan that I'll stick with. I've seen nothing here to convince me to change anything. ...
Well, I acknowledged your point. I only think you are mis-applying it. Look at it the other way - we aren't saying that the peak of a bull market isn't a 'dangerous time', we are saying all the other times are 'less dangerous'. So if you are prepared for the 'dangerous time' with a conservative WR, then you will do way better in the other times (all those flat to rising squiggles in a Firecalc output graph). So no, the odds are not the same - but they don't get worse, they only get better. 'Worse' is already baked in the cake. Make sense?

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Old 01-15-2018, 12:10 PM   #85
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That makes sense to me... while I haven't seen the data I suspect that the scenarios that drive the worst case scenarios are preceeded by a strong run... which implicitly addresses Running Bum's concern.... IOW, that is why it is 4% rather than 5% or more.
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Old 01-15-2018, 12:13 PM   #86
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The adjustment for running a more precise computation of the SWR after 1 3 year delay isn't just reduce the life expectancy by 3 years (a 60 year old planning for 30 years vs a 63 year old and a 27 year remaining life). according to the tables, a 60 year old male has a life expectancy of 20.9 years. A 63 year old male has a remaining live expectancy of 18.7. So if you are trying to compute the SWR for a reset, the adjustment is less than the elapsed time since the last reset.

I love math. It confuses so many people, me included!
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Old 01-15-2018, 12:21 PM   #87
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That makes sense to me... while I haven't seen the data I suspect that the scenarios that drive the worst case scenarios are preceeded by a strong run... which implicitly addresses Running Bum's concern.... IOW, that is why it is 4% rather than 5% or more.
Exactly.
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Old 01-15-2018, 12:32 PM   #88
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Found it!

I've been searching for a post on this subject by Dory 36, the creator of FIRECalc, who agrees you can "start over" if you get lucky after retiring and your portfolio increases:

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Originally Posted by wstu32 View Post
trying to follow this...
so if you had a $1million portfolio, you should expect to take out 4% or
$40k per year?
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Yes. That is the rate that would have been safe in the worst we have ever seen, so the 4% number, or $40,000, adjusted each year for inflation, is the commonly discussed safe withdrawal amount. That's what we mean by "safe".

Bonuses or raises? Now, there is another factor that doesn't get discussed all that much in calculations, although it probably gets implemented all the time when we use common sense in deciding how much to spend during our retirement. Let me try to give a logical description.

We are saying that 4% of the starting balance is safe, meaning that starting from any arbitrary point in time, we can initiate a series of ~30 annual withdrawals of 4% of the portfolio balance at that point in time, with adjustments for inflation.

We usually talk about this in the situation when the portfolio goes way down -- and the whole purpose of the safe rate discussions is to give us some comfort that if we stop our paychecks early, we can reasonably count on at least 4% of the balance at that point for the next ~30 years.

But look at the positive side. Let's say that in 5 years, the portfolio is at 1.2 million, after starting at 1 million. (Assume these are all inflation-adjusted dollars for this discussion.)*

What has happened?

One thing that has happened is that we have "lucked out", as the scenario that is worst for the survival of a portfolio is a large and lengthy market decline starting immediately after we decide to begin the withdrawals. Except for that scenario, the rate would be a good bit higher.

Another thing that has happened is passage of time. So now, instead of needing a $1 million portfolio to last for 30 years, we need it to last for only 25 years.

We can take advantage of our good fortune (timing retirement when we don't have an immediate bear market afterwards) and our new circumstances (more money and a shorter time to spend it) in a couple of different ways.

One -- we can start over. Just designate this new moment as the start of the withdrawal program, and take 4% of 1.2 million, or $48,000 instead of $40,000, for the next 30 years (or you could take ~4.2%, since you are now looking at 25 years instead of 30...), or,

Two -- we can take a $200,000 "bonus" to get the portfolio back down to $1 million, and continue drawing 40,000 for 30 years (or 42,000 for 25 years).

(This seems counterintuitive, but all that is happening is that we are reducing the amount that would have been left over at the end of the 30 year period, since we didn't get the bear market in the first 5 years.)

So... 4% sets your minimum withdrawal even in bad times, but you can adjust upwards following good years.

Hope this helps -- dory36
Note the idea of taking a "bonus" from your appreciated portfolio rather than upping your withdrawal rate. Tax implications might make that unwise, but it is an interesting option.
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Old 01-15-2018, 12:39 PM   #89
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I guess we are in basic disagreement about the success rates after a strong bull market. I make a case for a possible bear market to follow, so reduced success rates. Some simply ignore that possibility and assume the odds are the same no matter when you start, because, you know, Firecalc. I'm willing to learn new things, but it's hard to learn when your point isn't being acknowledged. I'll take the hint and bow out. I have my plan that I'll stick with. I've seen nothing here to convince me to change anything.


btw, that 30 years starting point, then 3 years later means 27 left, doesn't really work out. If you make it 29 years, does that mean you will die the next year and that's all you should plan for?
The SWR calculations are already based on the worst possible sequence of returns historically.. i.e. it already includes all those "retire into a bear market" scenarios that have ever happened with the known data. If you wanted to retire with a "SWR" based on "rosy" conditions then your SWR would be MUCH higher than the traditional 4% that is generally discussed.

Now, if you want to be pessimistic (which many do) you can assume that future sequence of returns will be worse than anything we've seen in history and plan for a lower withdrawal rate as a result.

As for your second point, we have to assume something for planning purposes. If you start by assuming you'll live to X age, it makes sense that 3 years later you'll assume you're still going to live to that same age unless there are other material changes which would indicate you should change that assumption. Being in great (relative) health 29 years later would obviously be something that would constitute a "material change" that would justify adjusting that assumption... not having died in the first 3 of those 30 years wouldn't really qualify as a material change imo though.
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Old 01-15-2018, 12:56 PM   #90
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REWahoo,

WOW, thank you very much for finding Dory's post and posting it. So very clear!
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Old 01-15-2018, 12:56 PM   #91
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I'm not disagreeing with you at all - clearly, in a 95% success run, the failures are the ones starting near the peak of the bull market.

The disconnect is - Firecalc already accounts for this, by using that worst case scenario to set your spending limit.




Well, I acknowledged your point. I only think you are mis-applying it. Look at it the other way - we aren't saying that the peak of a bull market isn't a 'dangerous time', we are saying all the other times are 'less dangerous'. So if you are prepared for the 'dangerous time' with a conservative WR, then you will do way better in the other times (all those flat to rising squiggles in a Firecalc output graph). So no, the odds are not the same - but they don't get worse, they only get better. 'Worse' is already baked in the cake. Make sense?

-ERD50
That's still not making sense to me. Correct me if I'm wrong, but Firecalc isn't saying there is a 95% chance of success any time you retire, it is saying that for every 100 historical starting points, there are 95 successes and 5 failures. If you have the bad "luck" (not noticing you're deep into a bull market that could turn) to retire in one of those failure points, you don't have a 95% chance of success; you have 0% chance from that particular point (if history repeats) if you stick with 4% WR + inflation. Firecalc isn't saying that even in a worst case 4% will work, it only says that most of the time it will work, even in some pretty bad cases.

If you've done well and want to reset to take advantage of the gains, clearly you were in one of the 95 good starting points. That one is taken out of the card deck, and now you are at 94 starting points, and 5 failures, with the caveat that one or more of those 5 failures might not fail anymore with the shortened time. So now you have a 4% WR that works most of the time, but you are rolling the dice more often rather than sticking with a winner.

Reset too often, and you increase your odds of landing on one of those 5 failure points. Again, it might not be a failure point anymore with a shorter remaining lifespan, but you might also live longer than you expected such that it still is a failure point.

I like the idea of a partial ratcheting up. Practically speaking, ratcheting back down is things turn bad probably works too, as long as you react pretty quickly.
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Old 01-15-2018, 12:59 PM   #92
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Audrey-

Curious why you’re attracted to withdrawing more later in FIRE versus earlier. Not judging but, I’ve also reviewed VPW, G-K, and others; and, chose G-K because it enables larger WD earlier in FIRE because that’s when I think the extra $$$ will provide the most value to us.
We’re still young retirees and still expect a longer than 30 year period. I haven’t been comfortable increasing withdrawal rate above 4% until DH gets closer to 70. Maybe we’ll increase it to 4% when he reaches 65.

In terms of use of the funds - we’re good with gifting a lot more as we get older. We don’t really need to spend it on ourselves.

Currently our annual withdrawal way exceeds our spending and will likely do so (knock on wood) until we hit another nasty bear market which could bring income down closer to our current spending. In the meantime unspent income has accumulated in short-term funds and is a sizeable stash.

We already travel as much as we can. We could set up a second household if we decided that makes sense for us. Also we’re self-funding LTC and may have a big payment into a CCRC one day. I don’t personally count on our expenses dropping as we get older.
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Old 01-15-2018, 01:08 PM   #93
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Found it!

I've been searching for a post on this subject by Dory 36, the creator of FIRECalc, who agrees you can "start over" if you get lucky after retiring and your portfolio increases:


[see quote below, I won't re-paste it all]


Note the idea of taking a "bonus" from your appreciated portfolio rather than upping your withdrawal rate. Tax implications might make that unwise, but it is an interesting option.
Thanks for digging that out, I'll save a copy to my (virtual) files.

The bonus idea does sound like a heck of a lot more fun! And it should satisfy the crowd that says spend it while you are young(er) and more able to enjoy it.

I recall some earlier discussions on this as a "retire again and again" or maybe "retire again & again" (if anyone wants to try to search for it), and out of all the various variable spending plans, this one does the absolute best at optimizing how much you can spend, and minimizing the amount "left on the table". It really has to if you think about it - a constant re-evaluation of safety, but not "too safe". And yes, it gets to the point of "data mining", because you end up matching withdrawals to the historical scenarios - but it is still useful as a guide, to be used with some discretion.

But if you already use a conservative WR, updating the amount to reflect that %against a larger portfolio is still conservative.

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Old 01-15-2018, 01:15 PM   #94
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Found it!

I've been searching for a post on this subject by Dory 36, the creator of FIRECalc, who agrees you can "start over" if you get lucky after retiring and your portfolio increases: ....
Can we add that to a sticky in an appropriate place? I'm sure the topic will come up again.
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Old 01-15-2018, 01:19 PM   #95
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Can we add that to a sticky in an appropriate place? I'm sure the topic will come up again.
Actually it is already a sticky - or at least within one. You can find it in the FAQ forum as the second bullet point under http://www.early-retirement.org/foru...ead-33198.html. It is post #28 in the "Explain the 4% withdrawal rate" thread.
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Old 01-15-2018, 01:35 PM   #96
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I'm curious about one other thing. When people talk about a 30 year horizon that the 4% guideline applies to, are you using life expectancy tables or something similar like that which give a typical life span, or are they doing more of a "worst" case, with worst meaning the longest your portfolio would probably have to survive?


For example, the SS calculator says on average I'll probably live another 27 years. I'm 56 now. But that means that anything above average, and I'll live longer. I've run my VPW table to last beyond 100. Not because I expect to live over 100, but because I don't want to hit 100 and have very little beyond SS to live on.
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Old 01-15-2018, 01:39 PM   #97
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I think the reason that 30 years was used was that few 65 years olds lived to beyond 95 back in 1998.

Quote:
The payout periods examined were 15 years, 20 years,
25 years, and 30 years. These payout periods are consistent
with the life expectancy of most retirees.
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Old 01-15-2018, 01:50 PM   #98
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Then how do you explain all those runs in FIRECalc that never get fat yet survive?
I can't explain it. It's just my view of it, and, as are many things I believe, likely flawed. I'm not an expert here but few would contribute if we limited inputs to those who are.

My thinking is that some years one "could" WD 6% and other years 2% depending on portfolio growth/or not. The 4% allows one to build up a reserve of sorts in strong years to fill-in for lean years.

But that's just how I view it. As noted, the concept could be flawed.
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Old 01-15-2018, 02:05 PM   #99
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That's still not making sense to me. Correct me if I'm wrong, but Firecalc isn't saying there is a 95% chance of success any time you retire, it is saying that for every 100 historical starting points, there are 95 successes and 5 failures. If you have the bad "luck" (not noticing you're deep into a bull market that could turn) to retire in one of those failure points, you don't have a 95% chance of success; you have 0% chance from that particular point (if history repeats) if you stick with 4% WR + inflation. Firecalc isn't saying that even in a worst case 4% will work, it only says that most of the time it will work, even in some pretty bad cases. ....
You're not "wrong", I'm just not sure there is much to be gained by looking at it your way.

I prefer to use a 100% historical success rate in these discussions, that gives you a continuum. With 95% success, you create a binary condition, where you could hypothetically have dozens of portfolios end at +$1 called SUCCESS, and a few at -$1 called FAILURE. But is a $2 delta significant to you? So significant as to call one a SUCCESS, and the other a FAILURE? In real life, it would be approached differently.

You can 100% insure "success" by that definition with a constant % of portfolio plan. But of course, there's no magic there - you can end up with tiny withdraw amounts for years on end - hey, my portfolio is down to $100 in an investment that keeps up with inflation, I get to take out $4.00 this year, and $3.84 next year, down to $2.77 ten years from now, and my portfolio is still in "success" territory! But it isn't meaningful to your life.


So for example, regardless your WR or chosen success %, the future is unknown, and if you found yourself 10 years in, with a shrunken portfolio, you probably are going to be reevaluating things. If you are willing to assume the future won't be too much worse than the worst of the past, you might look at the squiggly lines on your original graph, and see how low portfolios were at year 10 that still succeeded. You might decide you are OK, recovery is likely, or that you are in trouble and decide to adjust downward. After all, with 95% you assume some failures, and even with 100%, we can't know the future won't be worse than the worst of the past. You need to reevaluate if your portfolio shrinks, and make a judgment call on your confidence factors. That's life.

OK, so if we look at past market conditions, and have some good correlation that those 5% failures occurred near market peaks (I think that's probably the case, though inflation and other factors are in play), then sure, you could say with some confidence that an overall 95% success factor might really be assumed to be much lower if we currently look similar to those past 'fail' conditions. But like I said, that's baked into the cake, or as [correction] REWahoo pb4uski said, it's why FIRECalc says 4% under those inputs, and not 5%. It is the bad years that drove the 4% value, it really has nothing at all to do with the good years.

So look at it this way - historically, any WR from ~ 3.5% - 4% is 'flirting' with a danger zone if you retire into a bad scenario. The only real option is to be more conservative - what else can you do (if were looking for actionable items here, and not just a debate on probability and statistics)? And if you're trying to be conservative, why even think about a 95% success rate? Go to 100%, and then reduce that WR until the lowest ending portfolio has some buffer that you can accept. Or work until you die.

The advantage of a conservative starting WR is that you can conservatively apply the "retire again & again" scenario going forward, as the odds are pretty good you will be on one of the 'good' paths.

I think I'd agree with you - if you are using 95% success, and do a full ratchet up at every opportunity, you are increasing your odds of failure if you do it blindly. But as I said, that doesn't match up with a conservative approach anyhow, so I don't think it's really relevant. If I decide to ratchet up, it will be based on a conservative initial WR, and probably only a partial ratchet up. Or I might decide my heirs/charity can use it more than I can, and not ratchet up spending at all (but maybe give it away instead).

-ERD50
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Old 01-15-2018, 02:12 PM   #100
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I'll add a short view from a different angle. We've had a few posters who said they are taking some much higher WR. That seems 'scary' to many of us conservative types, but who knows?

FIRECalc shows that a 6% WR has ~ 50% survival under defaults. So theres a better than even chance the gambler can come back and say "Suckers! I spent 2x what you did every year for the past 30 years, and my portfolio is just fine!". And he'd be right.

Lots of ways to look at it. And if you have a plan B, maybe 6% or more makes good sense? I don't think there's any right answer, since the future is unknown. I guess all I shoot for is a good understanding of the options/pros/cons.

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