Houston, we will also have a similar scenario/strategy. The fact you've been RE for 2yrs whilst taking less than your planned G-K based RMD is very promising to me. Especially since 2015 wasn't a great year for markets, wasn't bad either though. 2014 was an excellent year to begin RMD!
SWR another 6.5+ million calculations
- Thread starter LOL!
- Start date
Houston, we will also have a similar scenario/strategy. The fact you've been RE for 2yrs whilst taking less than your planned G-K based RMD is very promising to me. Especially since 2015 wasn't a great year for markets, wasn't bad either though. 2014 was an excellent year to begin RMD!
Huston55
Thinks s/he gets paid by the post
Here's a link to G-K method. There are many G-K references out there but, this is one of the better presentations I've seen.
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.534.3545&rep=rep1&type=pdf
W2R
Moderator Emeritus
I have noticed many forum members reported that their 2016 total spending added up to less than 3% of their prior 12/31 portfolio value.
I'm assuming they are thinking like I am - - let the portfolio grow now, while it can, in preparation for the next big market crash.
I'm assuming they are thinking like I am - - let the portfolio grow now, while it can, in preparation for the next big market crash.
+1. Many discussions of the method, from Pfau to Bogleheads for further exploration, but that Paper (which I had saved in my research file for posterity!) sets it out quite well.
Huston55
Thinks s/he gets paid by the post
Personally, I like Pfau's comparisons of different WD strategies. Here's one of his many papers comparing various withdrawal strategies. G-K is one of those compared.
https://retirementresearcher.com/comparing-retirement-spending-rules-using-historical-data-xyz-rule/
I've also pasted the summary chart, which I think is great.
Attachments
audreyh1
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Retired well below 55. Never felt comfortable using a 4% SWR. Now 57, still at 3.5% of remaining portfolio. Probably won't move to 4% until 65. That's just my comfort level.
We are still not spending as much as we withdraw even at 3.5%, so motivation to increase withdrawal rate is not that high right now. As we get older we'll probably be more aggressive, but that also means we'll be spending more on other folks because it gets harder to spend more on yourself as you get older (unless on medical care or long-term care).
May be I like living on the edge or most likely I just don't want to extend my working years trying to amass more wealth (and reducing the chances of enjoying it) but I'm sticking to the 4% rule as a 'baseline' for spending. I don't think I'll spend 4% every year, some years more but many years less.
Reading this Kitces article makes me feel more comfortable with my logic: Kitces: Smart Fix for the 4% Rule | Financial Planning
Reading this Kitces article makes me feel more comfortable with my logic: Kitces: Smart Fix for the 4% Rule | Financial Planning
JohnDoe123
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That was one of the reasons why I wrote my series on the SWR. I plan to retire in my early 40s (wife in her mid-30s). Many in the FIRE community plan retirement in their 30s. We have 60 years of retirement horizon, compared to the 30 years that the "normal" retirement researchers deal with. All of the rules displayed here have a real final asset value of around -85% or even -90% from the initial at the 10th percentile. And I dare to say that the 10th percentile translates into the 30th considering how expensive both stocks and bonds are, but that's a totally separate discussion, see part 3 of my series. This means they we run out of money after 35 years and/or have to cut withdrawals to almost zero after year 30 with a >10% probability. Not a pretty picture. Not acceptable.
The table from Pfau is extremely helpful in stressing how utterly unhelpful the mainstream research is for folks in the Early Retirement community. And I'm not criticizing Pfau because he's catering to the mainstream retirement business (and he holds a PhD and CFA like I do). I'm mostly criticising the people who blindly extrapolate the Pfau/Kitces/Trinity/etc. results to much longer horizons.
In my view the Trinity and Firecalc approach is useless for extreme potential horizons. The title is kind of grandiose "Ultimate?" too.
Why? Because once you go beyond 50 or years or so some things happen:
The best guess for equities comes from going back to the source of your capital returns: world economic growth and typical real earnings yield. It represents future growth + current payoffs.
The first has been pretty rock solid at 3% real, the second one at 3% or so (5% - 2% inflation), bouncing around quite a bit.
What you are doing when planning for an expected return is making assumptions about those two numbers. It's the same approach that Bogle uses btw.
Personally I'm aiming for 2% growth [lower population growth] and 2.5% current real yield, so 4.5% as a rough sketch.
Funnily enough this approaches the Trinity results, so I guess I'm sort of contradicting myself here
Let's just say it's the right result with the wrong approach
In addition I'd argue that going above 75% equities is not wise at all. For a few theoretical percentage points success increase one gives up the opportunity to move to a higher equity percentage and buy low when stuff hits the fan (or floor). In addition you'll pay an emotional toll in the form of higher volatility.
Long story short: 3% or even 5%, and financial worry should not be #1. You can't get more precision out of the fuzzy future anyway.
Why? Because once you go beyond 50 or years or so some things happen:
- You have to live from capital returns, not capital buffers
- Historical sample sizes become too small
- Start and end valuation multiples matter less
- The odds of other events start dominating, from revolutions to sudden sickness, tax changes etc ..
The best guess for equities comes from going back to the source of your capital returns: world economic growth and typical real earnings yield. It represents future growth + current payoffs.
The first has been pretty rock solid at 3% real, the second one at 3% or so (5% - 2% inflation), bouncing around quite a bit.
What you are doing when planning for an expected return is making assumptions about those two numbers. It's the same approach that Bogle uses btw.
Personally I'm aiming for 2% growth [lower population growth] and 2.5% current real yield, so 4.5% as a rough sketch.
Funnily enough this approaches the Trinity results, so I guess I'm sort of contradicting myself here
Let's just say it's the right result with the wrong approach In addition I'd argue that going above 75% equities is not wise at all. For a few theoretical percentage points success increase one gives up the opportunity to move to a higher equity percentage and buy low when stuff hits the fan (or floor). In addition you'll pay an emotional toll in the form of higher volatility.
Long story short: 3% or even 5%, and financial worry should not be #1. You can't get more precision out of the fuzzy future anyway.
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To each his own, but be aware that if you are married and both are 40 years old there is a 27% chance that one of you will be dead after year 30.
Not to mention that investment returns are not a stochastic process. 10% failure does not mean all that much with the information we have compared to, say, 2% failure. There is a boat load of unavoidable uncertainty there.
Golden sunsets
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This was my initial reaction as well, in addition to the fact that few early retirement folks would argue that a 4% SWR is safe for retirements beyond 30 years.
In addition to that, and no disrespect to Mr. ERN, but you lost me as a reader, when you stated in another string that 30% of your investment portfolio is devoted to selling naked puts using 3x leverage. Just sayin..... On the one hand you argue for more conservative spending while on the other hand utilize aggressive investing techniques.
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JohnDoe123
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In my view the Trinity and Firecalc approach is useless for extreme potential horizons. The title is kind of grandiose "Ultimate?" too.
Why? Because once you go beyond 50 or years or so some things happen:
- You have to live from capital returns, not capital buffers
- Historical sample sizes become too small
- Start and end valuation multiples matter less
- The odds of other events start dominating, from revolutions to sudden sickness, tax changes etc ..
The best guess for equities comes from going back to the source of your capital returns: world economic growth and typical real earnings yield. It represents future growth + current payoffs.
The first has been pretty rock solid at 3% real, the second one at 3% or so (5% - 2% inflation), bouncing around quite a bit.
What you are doing when planning for an expected return is making assumptions about those two numbers. It's the same approach that Bogle uses btw.
Personally I'm aiming for 2% growth [lower population growth] and 2.5% current real yield, so 4.5% as a rough sketch.
Funnily enough this approaches the Trinity results, so I guess I'm sort of contradicting myself here
In addition I'd argue that going above 75% equities is not wise at all. For a few theoretical percentage points success increase one gives up the opportunity to move to a higher equity percentage and buy low when stuff hits the fan (or floor). In addition you'll pay an emotional toll in the form of higher volatility.
Long story short: 3% or even 5%, and financial worry should not be #1. You can't get more precision out of the fuzzy future anyway.
I don't think that your expected real equity return is far off. I would have personally put it at 4.0%, rather than 4.5%, but I'm not going to argue about 50bps.
But what you seem to forget is that you won't get the average return every year. Due to the stochastic nature of equity returns and sequence of return risk, you'd have to lower the withdrawal rate. How much? Well, you don't like the Trinity Study approach. Me neither, but until you show me a better way to gauge the haircut I have to apply to get a sense of tail event probabilities, I'll stick to my methodology. A naive approach a la withdrawal rate = expected return is not going to cut it for me.
Also, quite amazingly, you're contradicting yourself in that same post. If equities have 4.5% real yield and you want 75% or less equity weight, where's the 25%? In bonds? With 0.5% real yield right now? 0.75*4.5%+0.25*0.5%=3.5%. There goes your 4% rule.
JohnDoe123
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What's with the sour mood here in the forum? We all seem to agree that <4% is the prudent thing to do, right? Let's all do a high-five
and group hug and be happy!As I mentioned before, some very influential bloggers (Mr. Money Mustache, MadFIentist, etc.) all claim the 4% rule is a-OK. You are right in that many of my close blogging friends are much more cautious. And most of them like my SWR series because finally, someone spent the effort to do some SWR research for the FIRE crowd and confirm what many already suspected.
Since I'm the first to do a comprehensive analysis for the FIRE crowd I am entitled to a slightly "self-confident" title. If you come up with something better, use an even more grandiose title.
And no disrespect to you, but this seems to be the last resort of folks who ran out of good arguments: the "you lost me as a reader when ..."
It's a red herring. Besides, my put selling strategy has less risk than equities (about half, 6% p.a. since 2011). Exactly because I am a conservative and cautious investor. Explaining it would require more details on option math, risk management,etc., but I'm not going to waste any more space on this red herring.
Not we, you.
WADR, this is not a new topic, and there is quite a lot of "comprehensive analysis" already out there.Since I'm the first to do a comprehensive analysis for the FIRE crowd I am entitled to a slightly "self-confident" title. If you come up with something better, use an even more grandiose title.
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REWahoo
Give me a museum and I'll fill it. (Picasso) Give
What you are seeing is the usual reaction when a new member signs on and immediately proclaims he's the smartest guy in the room....
Dd852
Full time employment: Posting here.
Yogi Berra — 'It's tough to make predictions, especially about the future.' All of us would like to be safe and sure. None of us can be. We all have to use a combination of math, history, common sense and luck. And be prepared to be self contradictory and flexible if we have to be
JohnDoe123
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Let me guess, it must be the same reaction as mine when I see people criticizing my work, ostensibly without reading any of it. I know how you feel!
Huston55
Thinks s/he gets paid by the post
First, I've read all the posts to date in your series, and I DO like the analysis & the numbers. However, I tend to like numbers (even though they is hard) and that's not unusual in this community; lots of 'analyticals' around here.
But...
This...
and this.
I would also suggest that, to truly serve the community you say you're targeting (the 30/40-something early retirees with 40yr+ retirements), you need to heed Totoro's words and address events 'outside the math.'
But...
This...
and this.
I would also suggest that, to truly serve the community you say you're targeting (the 30/40-something early retirees with 40yr+ retirements), you need to heed Totoro's words and address events 'outside the math.'
Let me guess, it must be the same reaction as mine when I see people criticizing my work, ostensibly without reading any of it. I know how you feel!
You do say in your disclaimer that your blog is written for "entertainment purposes only" so just consider us friendly hecklers in the "entertainment" audience.
When you first started your blog in Mar. 2016, you posted in your "About" tab, "Currently, we have accumulated enough assets to fund a comfortable retirement at a 4% withdrawal rate.". By April 15, 2016 you posted that "We don't like the 4% rule". What did you do as far as research for retiring in 2018? Did you only read other "bloggers" who are posting their "entertainment purposes only" blogs? Are you sure about retiring in 2018 when you are only learning the ropes?
In your notes under "Asset Allocations 3/2016" :
You got your home equity estimate from Zillow. Don't do that! Think you said you were in banking, why would you take a "zestimate"? From their web site, "Nationally, the Zestimate has a median error rate of 4.5%, which means half of the Zestimates in an area are closer than the error percentage and half are farther off." Which half are you?
I wondered about this statement too, "Funds in the 401k are all no fee, apparently subsidized by the employer. Nice!" APPARENTLY!! Don't you know?
Enjoyed reading your blog.
JohnDoe123
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you do say in your disclaimer that your blog is written for "entertainment purposes only" so just consider us friendly hecklers in the "entertainment" audience.
Ha, that's a good one! And I'm dodging the tomatoes here.
Geez, you did a deep dive. Did you find any quotes from when I wrote for the High School newspaper? Now, there is some really embarrassing stuff!
I could retire at a 4% rule and that cash flow would allow me a very comfortable retirement. But as I write, just in the subsequent sentences:
"Why not just call it quits now? Very simple, Papa ERN is old enough to have lived through two stock market crashes in 2001 and 2008/9 and thinks that it’s wise to milk his salary and Wall Street bonus gravy train for a little longer."
So, in other words, I planted the seed of being cautious about withdrawal rates right in one of my first posts. Staying true to my beliefs. Now, when quoted out of context it may seem odd, but not when reading just a few sentences more.
Did you only read other "bloggers" who are posting their "entertainment purposes only" blogs? Are you sure about retiring in 2018 when you are only learning the ropes?
I've been around the block (and blogs) of finance for quite a while. I studied under Nobel Prize winners, hold a PhD, hold the CFA charter and work in asset management as a senior researcher and portfolio manager for a multi-billion dollar fund. And you're 100% right. I am still learning the ropes. I learn new stuff every day: working, blogging, reading other blogs, reading posts in this and other forums, etc.
Are you open to learning?
I use a point estimate. My experience is that units my condo building are sold pretty close to their Zestimate. So, when the exact same unit with same floor plan and same everything one floor down sells for X, and the Zestimate for that unit and my unit is X+/-0.5%, I would say I trust the Zestimate. I agree that for single-family homes there is a lot more vatriation. Two 3,000 sqft homes right next to each other might have the same Zestimate. But one is renovated the other is crummy. Hence 4.5% MER.
[/font]i wondered about this statement too, "funds in the 401k are all no fee, apparently subsidized by the employer. Nice!" apparently!! Don't you know?
Enjoyed reading your blog.
Apparent:
(according to Webster's)
1: readily seen; exposed to sight; open to view; visible:
2: capable of being easily perceived or understood; plain or clear; obvious:
Apparently, it should be apparent to everybody here that I know with 100% certainty that my employer self-manages the index funds in our 401k at zero fees, all in-house, one floor below my office.
Thanks for stopping by my blog. Your clicks are very, very much appreciated.
audreyh1
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
No, those additional income streams don't count as part of the withdrawal. They are additional income.
Some folks model a higher withdrawal rate before social security comes on line and FIRECALC will model that for you.
audreyh1
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Sure, which is why the early retiree is usually accepting a somewhat reduced income stream due to a longer retirement. The choices are usually - work longer to have a higher retirement income, or retire earlier on less.
BTW, the close enough comment was not comparing 3.5% to 4%, those aren't close. I was just saying 3.5% was in the ballpark for the 40 year retirement SWR.
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daylatedollarshort
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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The mean dividends, interest, rental and other property income according to the Consumer Expenditure Survey for households 65+ is under $4K. So 4% or 1% is probably not going to make a big lifestyle difference to most age 65+ households.
A 2012 AARP Public Policy article states, "About three out of four (76.6%) older people in the highest income quintile had asset income, with a median of $3,454."
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Not really. Specifically, MMM does claim it's ok but not because 4% covers a worst case scenario. He claims this because there are other factors for a very early retiree, and 4% is close enough as a first approximation.
The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?”
Snippet (but really, I recommend you read the whole thing):
I'm not a MMM fan, but that piece is very well-written.
Another popular guy with a solid view:
Stocks — Part XIII: The 4% rule, withdrawal rates and how much can I spend anyway?
Again, it's about wisdom in life once you get the ballpark right.
Since I'm the first to do a comprehensive analysis for the FIRE crowd I am entitled to a slightly "self-confident" title. If you come up with something better, use an even more grandiose title.
You are not. Hard to claim you are a researcher if you don't do your research first. Not to mention your definition of being comprehensive is not mine.
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I didn't forget that. We have different approaches. Yours is purely treating stock market returns as a stochastic process. It isn't. Pretending it is one can be useful as a first approximation, but not more than that.
It is not naive in my view. What is naive is trying to get a hyperprecise result that is 1) impossible to obtain and 2) in a context where hyperprecision doesn't matter.
A better approach is to get a first order approximation, and apply that to the unique context of a life of a person with a very long time horizon. We are not running a billion dollar hedge fund here, this is about decisions in context of a young persons life.
For one, there's more than bonds, and you know that. And getting at 3.5% or 4% wasn't my point. My point was it depends on key assumptions that are unknowable, but a good first guess will put you anywhere from 3% to 5% as I wrote at the end of my post. So work with that, pick your number and move on to the other factors.
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