Independent
Thinks s/he gets paid by the post
- Joined
- Oct 28, 2006
- Messages
- 4,629
I'll look at it this way. The 3.5% comes from some back-testing or Monte Carlo analysis that had a 95% confidence level. That is, you think the 3.5% will fail 5% of the time.Would this work.
Let say you decide you need money for another 30 years. At that point you will be 95 and with your health and family background that is ten years past what you really think you will live. Firecalc says 3.5% (Im making up percentage because I'm too lazy to enter it) So you take your nest egg and live on 3.5% and the world is good.
Five years later, the market has been good to you and you now have 50% more than you had, even with the withdrawals. You run Firecalc again this time for 25 years and it say 4%. You reset and start your retirement over using the new amount, knowing that Firecalc says you will not run out of money before you expect to run out of time.
If the market goes down you just stay the course. You should not have not have to lower your withdrawal from a previous high point, unless you forecast living beyond 95. In my example, you figured your increase on only living 25 years and increased funds. If you now believe you will live to be 100, you would have readjust your SWR. However, that is the same for all of us that decide we are going to live longer than the what original SWR was figured on, and our nest egg is lower.
I will admit that I have not gone through ever scenario, but it seems like anytime your nest egg goes up beyond it's set point, you could reset, using a realistic expected life plus pad. As you get older, the projected end of life date becomes a little easier to grasp.
Now before people jump all over me, I don't do this! As I have posted before, we do not use our nest egg for necessary retirement spending. Currently money from our IRA is rolled over to savings, and will most likely continue to be that way. I have just always pondered why you could not reset your SWR based on expected age and nest egg.
Looking at the individual scenarios in the analysis, you see that none of the failures started with strong returns. All the failures had average or below average (usually below) in the first five years.
If the analysis is reliable, a portfolio growth of 50% indicates that you are in the 100% success group of scenarios. If you continue with your original withdrawal level (which is now 2.33% of your current portfolio) you have a 100% chance of success.
Buy upping your SWR to 4.0%, you put yourself back into the 5% risk of failure world.
I'll try an analogy. Let's suppose someone pays me $$$ to let him shoot at me once from a distance. I'm fairly confident he only has a 5% chance of hitting me, so I take the risk.
He misses on the first shot. Should I say "I'll play again. I'll get a second $$$, and the chance of him hitting me is still just 5%"?
If he misses on the second shot, should I play a third round?
Somehow, ratcheting seems like it introduces more risk.
I might try this rule instead: I'll take the greater of 3.5% of my (inflation adjusted) original portfolio, or 2.33% of this year's portfolio.
Without the ratchet, I will drop my withdrawals when the market goes down.
Another approach, is that I ratchet up, but only to the 100% success SWR.
(Oh, and since I know I've lived the first 5 years, if I'm still in good health, I should change my end point to 26 years or whatever.)