Jim Collins Post--Another SWR Strategy

WARM elevates expense management (which you can control) over portfolio performance (which you can’t control). In the process, WARM lowers the risk of outliving your money, removes the need for expert advisors, and cuts income taxes. The price you pay for all this tranquility is: (1) a slightly larger nest egg; (2) a slightly lower burn rate; or (3) a thoughtful mix of each.


By simply dividing the total portfolio by estimated years of life, neglecting investment returns and ignoring social security, WARM (Wasting Asset Retirement Model) gives a lower spending rate from a portfolio, but the author claims better sleep. Requires portfolio about 20% larger than a 4% SWR spending plan.

Seems like a wasteful way to calculate, although it is novel.
 
growing_older said:
WARM elevates expense management (which you can control) over portfolio performance (which you can’t control). In the process, WARM lowers the risk of outliving your money, removes the need for expert advisors, and cuts income taxes. The price you pay for all this tranquility is: (1) a slightly larger nest egg; (2) a slightly lower burn rate; or (3) a thoughtful mix of each.


By simply dividing the total portfolio by estimated years of life, neglecting investment returns and ignoring social security, WARM (Wasting Asset Retirement Model) gives a lower spending rate from a portfolio, but the author claims better sleep. Requires portfolio about 20% larger than a 4% SWR spending plan.

Seems like a wasteful way to calculate, although it is novel.
Click to expand...
my feeling too . most americans can't even make the grade for a conventional 4% swr . to require 20% more is silly
 
On the start of blog, I thought rayinpenn wrote it!
 
"Save more" is not a helpful contribution to the field of retirement finance, IMO.

Yet you see it all the time.
 
growing_older said:
By simply dividing the total portfolio by estimated years of life, neglecting investment returns and ignoring social security, WARM (Wasting Asset Retirement Model) gives a lower spending rate from a portfolio, but the author claims better sleep. Requires portfolio about 20% larger than a 4% SWR spending plan.

Seems like a wasteful way to calculate, although it is novel.
Click to expand...

Not really. It simply reflects the fact that if you have relatively fewer years left capital reserves starts to dominate returns on capital.

In my case 37 years old. Say maximum life = 100; 63 years left => withdrawal rate of 1.6%. This less than half what most others would say is reasonably ok to make it.

For my granny: 86 years old .. >7%.

I treat is as a sanity check and a 'lower floor' for spending. It's simply the amount in % you can spend if you invest inflation-neutral.
 
the problem is you can't avoid sequence risk and according to milevsky , for the exact same average return the order can have a 15 year difference in how long the money lasts over a 30 year period .
 
mathjak107 said:
the problem is you can't avoid sequence risk ...
Click to expand...
Sure you can. Or, more accurately, you can reduce it to being very low.

Using the bucket approach, I have enough cash and near-cash assets (the short term bucket) to fund our lifestyle for at least five years. The rest of the portfolio is in a "long term" bucket and may even be 100% equities. During a five year time span, the market can be up, down, or sideways. When it's up and maybe when it is sideways, I sell from the long-term bucket keep the short-term bucket topped off. When the market is abysmally down, aka sequence-of-returns risk event, I do nothing. So, just before the crash I will have 4-5 years of spending in my short term bucket. Even if the crash and recovery spans 4 years, I am a happy guy and remain highly confident that I will eventually be able to replenish my short term bucket by selling assets that have recovered from the crash.
 
I too think this is overly-simplistic and doesn't fully contemplate a 1970s style inflation issue. (Though breaking those inflationary means big interest rates which ironically serves to provide some protection to the value of cash.)

That said, on my FIRE analysis spreadsheet I do have a "how long would it last" row where I divide remaining balance by my estimated withdrawal rate. It serves to remind me that fancy math can overshadow the simplicity "that pile of money would last 35 years assuming returns simply match inflation."
 
audreyh1 said:
How to deal with inflation: trim that spending!

Hmmmmmmm....
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I think that, actually, is more sensible than obsessing over withdrawal rates to the tenth of a percent. Really, these calculations are garbage-in, gospel-out for the most part. As Taleb's turkey learned, inductive reasoning can lead to seriously wrong conclusions. Turkey Problem - Nassim Taleb

Life is unpredictable. Investment returns are unpredictable. Hence, spending cannot be predictable. Cars, travel, charity, gifts to family, steak or chicken, etc. are all things that can be managed. Medical events cannot. Even housing cost can be managed if circumstances dictate.

I am a happy turkey right now, relying on inductive reasoning to believe that we have more more money than we will ever need. But the farmer with the axe might come up behind me at any time. There's nothing I can do about that.
 
It would be nice if you included a short descriptive or snippet of each article.
 
OldShooter said:
Sure you can. Or, more accurately, you can reduce it to being very low.

Using the bucket approach, I have enough cash and near-cash assets (the short term bucket) to fund our lifestyle for at least five years. The rest of the portfolio is in a "long term" bucket and may even be 100% equities. During a five year time span, the market can be up, down, or sideways. When it's up and maybe when it is sideways, I sell from the long-term bucket keep the short-term bucket topped off. When the market is abysmally down, aka sequence-of-returns risk event, I do nothing. So, just before the crash I will have 4-5 years of spending in my short term bucket. Even if the crash and recovery spans 4 years, I am a happy guy and remain highly confident that I will eventually be able to replenish my short term bucket by selling assets that have recovered from the crash.
Click to expand...



Interesting. Does that mean your short term bucket is 16-20% of the total? I think I've stumbled into a similar approach that I need to refine.
 
OldShooter said:
I think that, actually, is more sensible than obsessing over withdrawal rates to the tenth of a percent. Really, these calculations are garbage-in, gospel-out for the most part. As Taleb's turkey learned, inductive reasoning can lead to seriously wrong conclusions. Turkey Problem - Nassim Taleb

Life is unpredictable. Investment returns are unpredictable. Hence, spending cannot be predictable. Cars, travel, charity, gifts to family, steak or chicken, etc. are all things that can be managed. Medical events cannot. Even housing cost can be managed if circumstances dictate.

I am a happy turkey right now, relying on inductive reasoning to believe that we have more more money than we will ever need. But the farmer with the axe might come up behind me at any time. There's nothing I can do about that.
Click to expand...
Things that cost $1 in 1999 when I retired, cost $1.45 now. And that's for less than 20 years. That's a lot of belt tightening already. 30-35 years is going to be a lot worse. I don't get the shrinking budget approach to dealing with long-term inflation.
 
OldShooter said:
Sure you can. Or, more accurately, you can reduce it to being very low.

Using the bucket approach, I have enough cash and near-cash assets (the short term bucket) to fund our lifestyle for at least five years. The rest of the portfolio is in a "long term" bucket and may even be 100% equities. During a five year time span, the market can be up, down, or sideways. When it's up and maybe when it is sideways, I sell from the long-term bucket keep the short-term bucket topped off. When the market is abysmally down, aka sequence-of-returns risk event, I do nothing. So, just before the crash I will have 4-5 years of spending in my short term bucket. Even if the crash and recovery spans 4 years, I am a happy guy and remain highly confident that I will eventually be able to replenish my short term bucket by selling assets that have recovered from the crash.
Click to expand...

you are not doing anything with buckets that spending directly from stocks and bonds directly does not do . in fact not using buckets does it better . in a down market you are not selling stocks with a portfolio of stocks and bonds with little cash .. you would be rebalancing taking your spending money from bonds and even buying stocks to build your allocation back up with the extra in a bad down turn . .

buckets are a mental mirage . i use a bucket system but it is a mental thing . nothing really changes because you put some of the bond budget in cash except you get a lower overall return because cash rarely produces what bonds do.

in reality that is all you are doing , you are just taking some bond money and putting it in a lower returning investment rather than use the bonds directly. with buckets you rebalance by number of years of money left in the buckets vs rebalancing by performance like a convention spending plan does .

don't be fooled by your thinking . conventional rebalancing is doing the same thing without buckets . you are are really just rebalancing using different criteria .


interesting interview with kitce's on buckets
http://www.morningstar.com/cover/videocenter.aspx?id=601506
 
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it is but rmd's are screwy as is for a withdrawal rate . most of us don't need those big withdrawals at 85 , you need them in the reverse if anything .
 
OldShooter said:
Using the bucket approach, I have enough cash and near-cash assets (the short term bucket) to fund our lifestyle for at least five years. The rest of the portfolio is in a "long term" bucket and may even be 100% equities. During a five year time span, the market can be up, down, or sideways. When it's up and maybe when it is sideways, I sell from the long-term bucket keep the short-term bucket topped off. When the market is abysmally down, aka sequence-of-returns risk event, I do nothing. So, just before the crash I will have 4-5 years of spending in my short term bucket. Even if the crash and recovery spans 4 years, I am a happy guy and remain highly confident that I will eventually be able to replenish my short term bucket by selling assets that have recovered from the crash.
Click to expand...

Assuming that a person is rebalancing regulalry, do they stop rebalancing when the market goes down and just spend from the (cash? ST bonds?) bucket? If so, and as they continue to spend down the "bucket," they are playing a game of chicken, hoping the markets rebound before the bucket runs dry. Meanwhile, they are not rebalancing (i.e. buying more stock shares as their prices go down). This seems like a bit of market timing, and in a situation where emotions will likely be running high.
mathjak107 said:
buckets are a mental mirage . . .

interesting interview with kitce's on buckets
Cashing Out of the Bucket Strategy
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Right, and Kitces does a good job of showing it (I liked his piece here . It changed my thinking on buckets). Now, if a person isn't going to rebalance when the market has a multi-year decline, and is just going to spend down the bucket and bet that stocks recover before the bucket runs dry, then it's a different situation.
 
Wow. A guy goes to bed with no work planned for Monday morning and now there is all this typing ... :LOL:
audreyh1 said:
Things that cost $1 in 1999 when I retired, cost $1.45 now. And that's for less than 20 years. That's a lot of belt tightening already. 30-35 years is going to be a lot worse. I don't get the shrinking budget approach to dealing with long-term inflation.
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Sorry. Maybe I shouldn't have quoted your post. I was trying to make the bigger point that the seemingly-popular notions around here that withdrawals will be level and spending will be level are clearly impossible. Re inflation, looking back 30 years we see a dollar then will buy 45 cents worth of stuff now. Probably one cannot completely accommodate that with spending changes, but IMO for most people there is more flexibility than they will realize unless they get crunched. But maybe the portfolio has had a nice ride with inflation. Then they can simply increase their withdrawal rate to one that is still safe but which is more comfortable.

jazz4cash said:
Interesting. Does that mean your short term bucket is 16-20% of the total? I think I've stumbled into a similar approach that I need to refine.
Click to expand...
Well, in my case I really don't think in terms of percentages very much. Assuming one has a portfolio size that can be reconciled to lifetime spending needs, then those needs (in dollars) and a bucket horizon decision (3 years, 5 years, ... ) give you a short-term bucket size. The rest of the portfolio is in the long term bucket. If you are lucky enough to have a very large portfolio or parsimonious enough to have a small spending rate, then the short term bucket might be only 5% of your portfolio! For a scenario where the whole portfolio might be needed and growth is only moderate, the % in the long term bucket will decline over time. When you're 94YO, you may have nothing left in the long term bucket!

mathjak107 said:
you are not doing anything with buckets that spending directly from stocks and bonds directly does not do . in fact not using buckets does it better . in a down market you are not selling stocks with a portfolio of stocks and bonds with little cash .. you would be rebalancing taking your spending money from bonds and even buying stocks to build your allocation back up with the extra in a bad down turn . .

buckets are a mental mirage . i use a bucket system but it is a mental thing . nothing really changes because you put some of the bond budget in cash except you get a lower overall return because cash rarely produces what bonds do.

in reality that is all you are doing , you are just taking some bond money and putting it in a lower returning investment rather than use the bonds directly. with buckets you rebalance by number of years of money left in the buckets vs rebalancing by performance like a convention spending plan does .

don't be fooled by your thinking . conventional rebalancing is doing the same thing without buckets . you are are really just rebalancing using different criteria .


interesting interview with kitce's on buckets
Cashing Out of the Bucket Strategy
Click to expand...
Hard to take all of that on. Start here: Both you and Kitces are basing your arguments a false premise: That the short term bucket is cash. Certainly there is some, for the next few months of spending maybe, but the rest can be in (for example) a 5 year bond ladder or CD ladder. Or maybe a floating rate/bank loan fund. For me any of that is "near cash" because it is easily turned to cash, albeit possibly at a small penalty. So whether that 5 year Aaa corporate bond is in the first bucket or the second bucket, it's still the same bond with the same YTM and the same low risk.

Re "mental mirage" all of anyone's retirement planning really boils down to mental accounting. So no x-ring with those bullets.

Re rebalancing, it is not at all like rebalancing. Consider this scenario:

My average spend rate is $50K/year. I have $200K in my near bucket and $5M, all equities, in my long bucket. I do this because I believe 4 years is probably long enough to ride out any market storm I might encounter. The long bucket is 100% in equities. My AA is 200/5000.

At the end of next year, the market has been fairly calm so I sell $50K of equities and top up the short bucket. My AA is now 200/4,950.

The following two years the market takes a huge hit, my $4,950 goes to $3,000 in the first year. I won't sell anything so my AA is 150/3,000. The second year, the market has recovered a little but I'm still not going to draw, so my AA is 100/4,000. At the end of the third year I'm a little nervous about my small near-in pot and the portfolio is back to $4,000, so I draw $150K. Now my AA is 200/3850. So I think you can see that these AA changes look nothing like rebalancing. Because it is not a rebalancing strategy.

A less aggressive investor might not be 100% in equities in the long bucket but rather have a more traditional mixture. That changes the numbers at each juncture but the AA still waves around, completely uncontrolled.

A second false premise in your argument is that the long term bucket must contain bonds. IMO that's not necessary due to the short-term bucket being large enough to ride out most unpleasantness, but there's nothing wrong with it either. If you have both fixed-income and equities, then you may well want to be looking at AA ratios either solely in the long bucket or for the whole portfolio. That's a sort of second-order effect due to your decision to hold bonds. It has nothing to do with the bucket strategy.

Whew! Can I go for my second cup of coffee now?
 
samclem said:
... Now, if a person isn't going to rebalance when the market has a multi-year decline, and is just going to spend down the bucket and bet that stocks recover before the bucket runs dry, then it's a different situation.
Click to expand...
Yes.

Re "betting that stocks recover before the bucket runs dry" IMO that is a bit alarmist. After a big hit, stocks recover over a period of a few years, so while the need to replenish a short-term bucket may not permit waiting for 100% recovery the scenario is hardly all-or-nothing. And, if the long term bucket contains bonds, then the risk is even lower. Never zero, of course.

And again IMO, a bucket strategy fits well with a 100% equity allocation in the long bucket.
 
OldShooter said:
Hard to take all of that on. Start here: Both you and Kitces are basing your arguments a false premise:
Click to expand...
No. It's that your description is just playing word games. The true fact is that your aaset allocation is how your total assets are allocated. Choosing to declare a chunk of your assets to be a near-cash bucket doesn't make that disappear from your asset allocation. Playing word games does not change the reality of the situation.


A second false premise in your argument is that the long term bucket must contain bonds.
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There is no "long-term bucket". There is no "short-term bucket". There is just you deciding to change your asset allocation implictly instead of explicitly.

Stocks are real. Bonds are real. CD's are real. They all exist. Buckets are not real, they are just a mental construct.

I think it was Kitces that pointed out a fallacy with this line of thinking: A person sets up a large cash bucket (short-term bucket) because they prefer an AA with a smaller stock allocation. But spending money from the cash bucket in a bear market, they are shifting to a *higher* stock allocation. Worst case, if the bear market goes so long that they've spent all the cash bucket, they are 100% in stocks.

Re rebalancing, it is not at all like rebalancing. Consider this scenario:
Click to expand...
Indeed, that's not rebalancing as it is commonly understood. That's just changing your mind at whim, doing whatever your emotions tell you do do.


Re "mental mirage" all of anyone's retirement planning really boils down to mental accounting.
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That's not what mirage means.
Mirage means: "something illusory, without substance or reality."

I have $200K in my near bucket and $5M, all equities, in my long bucket.
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You're kidding, right? This is a 96/4 AA. 96% stocks and 4% bonds/cash.
So after tapping your near-bucket for 4 years, your AA is now 100/0. I would submit that there is no substantive difference between a 96/4 AA and a 100/0 AA.
 
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