Welcome to the board, Douglas. Bob drops by every week or so but when a big sculpture show is coming up he's pretty scarce. You may want to e-mail him directly, but in the meantime:
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Originally Posted by DouglasRThompson
1. He states that during a "bad" year, you should only withdraw 95% of what you withdrew the previous year. What is a "bad" year? A certain percentage less than the 9.5% average expected return? No profit? Lost profits?
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A "bad" year is one where the portfolio goes down in value. The idea is that a 4% withdrawal of a smaller portfolio might really be a big step drop in your spending ability, so 95% of the year before is an option for a smaller reduction even though it may be more than 4% of the current portfolio value.
You may withdraw $44K from your $1.1M portfolio in 2007 when you begin ER, but if its 2008 value starts at only $1M then $40K might be too big a whack. Taking $41.8K (95% of $44K) can soften the blow. You could still opt to defer expenses and drop your spending down to $40K. Or even less.
Quote:
Originally Posted by DouglasRThompson
2. What if you have 2 bad years in a row; 3 bad years in a row; etc. Do you keep reducing the amount you withdrew by 5% in each successive bad year?
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Then you start saying "Ouch" and doing as you've asked... $41.8K in 2008, $39.7K in 2009, and so on.
Keep in mind that this is "semi"-retirement, so when your portfolio is dropping you can either cut your spending
or go back to work. The 4%/95% is an attempt to institute a variable-withdrawal scheme without making it too difficult to follow. The vast majority of financial calculators don't expect ERs to change their withdrawals during ER, but in real life at the first sign of adversity most people slam shut their wallets and defer that vacation or major home improvement for another year. This system provides a quick check on whether your portfolio is likely to survive the downturn or whether you want to start ramping up your working hours.
Quote:
Originally Posted by DouglasRThompson
If you are already following this strategy, how is it going for you?
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Five years, no complaints!
The problem is that your question is coming after five years of huge market gains, so we've never been forced to cut spending. You may want to run your ER portfolio through a number of FIRECalc runs and see how it would have survived the worst that most of the 20th century had to offer.