Another safe withdrawal rate question

[Jarhead*]

Ahh, bucket all. Who cares.

I actually heard a caller on the Lucia radio show asking how much he should put in bucket 1, 2, etc. It became painfully clear that he really thought he could simply pick a number that worked for him for bucket 1. I mean any number - just decide how much you need, assign it to bucket 1, and voila: FIRE. Never mind that this left him with about $1.17 after 7 years.

Jarhead, I'm getting this image of you doing your best Harry Belafonte imitation. It's scaring me.

Actually, it was Hank Williams. (But Harry, putting a Calypso twist on it might be interesting.)

By the way, I like the idea of keeping as much distance as you can before feeling a need to tap your equities.

I've been doing that since I've been retired. My wife was a stay-at home mother, with no real work experience, so that was a consideration. (No pension here).

Having a feeling of being somewhat detached with what's going on in the stock market has worked wonders for my attitude.

Not for everybody, for sure, but for me it's been a good approach so far.

 

[Rich_by_the_Bay]

By the way, I like the idea of keeping as much distance as you can before feeling a need to tap your equities.

Having a feeling of being somewhat detached with what's going on in the stock market has worked wonders for my attitude.

Not for everybody, for sure, but for me it's been a good approach so far.

How much distance did the trick for you (in terms of year's expenses), if you don't mind sharing?

 

[Jarhead*]

How much distance did the trick for you (in terms of year's expenses), if you don't mind sharing?

Rich: Initially, when I retired, (1987) used about 7 years, and since that time have increased a little more, as time has went on.

Currently, I'm about 15 years out. (That will take me to 86).

This strategy has worked for me because we have a pretty good handle on what is required to keep us active and involved.

My wife and I both came from families that were "down where the rubber meets the road", and not having to put our children through that process is very important to us. Consequently, our goal has been to break tradition, and not put our kids through what was required of us.

In any case, we do what we want to do within the parameters we've set up, and not having to spend any "psychic" energy on the state of the "Stock Market" helps a great deal.

On the other hand, if I were a young guy like Nords with a Cola'd pension, health ins. basically taken care of, I'd have no problem at all with a 100% allocation in the market.

 

[Rich_by_the_Bay]

Rich: Initially, when I retired, (1987) used about 7 years, and since that time have increased a little more, as time has went on.

Interesting. That 7 year figure for early FIRE seems to come up repeatedly. I read once that this is about the longest stretch the market every stayed down consistently. Others said that that's long enough that even if most of the market is down, something is up somewhere in your portfolio.

Must be a magic comfort number. Thanks for your perpsective - makes sense to me.

 

[Sam]

Just wondering if the 4% SWR is an attempt to preserve the portfolio or deplete it. (Not ignoring that the market could go either way - just wondering about the intent).

spncity,

Keep in mind that this group is very conservative when it comes to financial safety. Most are well below the already conservative 4%. That's probably the reason why no one has answered your question directly.

The 4% is NOT an attempt to preserve the portfolio value. It's to ensure that your portfolio is not depleted before your time of death.

But, the side effect of the 4% is that not only your portfolio is preserved, it's actually increased significantly, on average. The key word here is average.

To prove this to yourself, simply bring up Advanced FIRECalc, no need to change any value. Just click on "Submit" and look at the result

And here is how your portfolio would have ended up in each of the 106 cycles. The range was $-300,739 to $4,259,606, with an average of $1,284,723.

In the above example, the starting portfolio value is $750,000.

 

[haha]

spncity,

The 4% is NOT an attempt to preserve the portfolio value. It's to ensure that your portfolio is not depleted before your time of death.

As I understand it, it is to ensure that your portfolio does not go to zero. A non-zero depletion is considered to be an ok trip.

Ha

 

[Sam]

Correct. By "depleted", I meant "totally gone".

 

[chinaco]

Do you perceive this as effecting how much money you need to accumulate in aggreagate to allow you to RE? Will this management methodology have any impact on when you RE?

It does not affect when we will retire. The only thing holding us up right now is health care insurance. We qualify for that @ 55.

The issue that I struggle with is how to not be too conservative. All of these years, we have forgone spending to accumulate money. When we retire, we want to enjoy it... I am not talking about wasteful spending, but do things we want to do.

If we are too conservative we will underspend and forgo something that we want. I tend to be a careful person (like many on this board). I usually err on the side of caution. Therefore, I might throttle back the cash machine and not need to do so. This is probably more about how to manage expenses (discretionary) than it is how to manage the portfolio.

 

[obryanjf]

...
Another thing worth noting, is that most of us don't actually have portfolio as optimal as shown as in FIRECalc or other calculator, we have have a heavy concentration in company stock or a specific sector, managed mutual funds with higher expenses, money sitting around in your local bank money market.
...

I'm not sure I would call FIRECalc nor the Trinity study portfolio the optimal portfolio. One was S&P and cash. FireCalc 2.0 now has more asset classes, but not a comprehensive list, primarily because the data may not exist over the sim time line.

Generalizing, I did a sim once that showed the difference between S&P/Cash and then a mix of Large/Small x Growth/Value improved SWR's by about .5%. I do not have the data but allocating across commodities, curriencies, REITS, precious metals, etc 'might' improve the SWR further. I do not know the percentages, but to me, it stands to reason that the optimal portfolio which yeilds the highest SWR, is one with more diversification than FIRECalc can simulate.

job

 

[obryanjf]

Another thought,

4% is based on NO external extras. No SS, No Pension, No reverse mortgage, No reduced spending ala Bernicke, etc.

For some those are valid, but not for everybody.

job

 

[2B]

Another thought,

4% is based on NO external extras. No SS, No Pension, No reverse mortgage, No reduced spending ala Bernicke, etc.

For some those are valid, but not for everybody.

I've decided that a "reverse mortgage" is another way of saying that you can't afford where you live. It means you need to downsize seriously.

I've seen older people become obsessed with "staying in their home." It is somehow a reflection of a disorder in their brain and they will do anything to stay in it. If assets become depleted where they need the cash for living, they are destroying their primary asset for assisted living or nursing care. If they have one, all of the policies have limits and then they need cash. Doing a reverse mortgage guarantees they will be destitute when they are forced to move out.

 

[Cut-Throat]

I've decided that a "reverse mortgage" is another way of saying that you can't afford where you live. It means you need to downsize seriously.

I've seen older people become obsessed with "staying in their home." It is somehow a reflection of a disorder in their brain and they will do anything to stay in it. If assets become depleted where they need the cash for living, they are destroying their primary asset for assisted living or nursing care. If they have one, all of the policies have limits and then they need cash. Doing a reverse mortgage guarantees they will be destitute when they are forced to move out.

Not really. - Maybe somebody just wants to tap some equity in the home and blow some $$$ on African Safari while they are able to in their 70s. They don't want to spend any in the portfoilo and see the Reverse Mortage as Extra Cash that they would never get to spend. I think I'd rather spend the banks money than money in my own portfoilo!

I look at it as 'Free money' - If you die living in a $500K house, someone else will get the money! Also, I'd rather shop for a Reverse Mortagage when I didn't need the money, instead of waiting until 'panic time'!

You do know you can't take the house with you - right?


When are you guys going to learn that it's not how much you had, but how much you got to spend?

 

[youbet]

The issue that I struggle with is how to not be too conservative.

And that is a major concern for many on this board. If you haven't followed along with threads involving delaying SS or purchasing immediate annuities in an attempt to spend more earlier without increasing the risk of running out of money, you should find and read them.

Both investment performance and inflation have been extremely variable over history. Firecalc, driven by historical data, gives results which account for that variability and directs withdrawal rates which, in most cases, will result in a significant ending portfolio in order to avoid total portfolio depletion. We can't predict the future and once money is spent, it's gone and unavailable to see you through down markets and/or skyhigh inflation.

There is absolutely no way to ensure you'll spend it all before you die and yet have substantial protection against running out of money. Any scheme involves trade-offs and you must understand yourself and the risks you want to minimize and the risks you're willing to tolerate. This will be very personal to yourself. I find that nine months into RE, my outlook and point of view continues to change and I suspect will for some time to come.

 

[jdw_fire]

There is absolutely no way to ensure you'll spend it all before you die and yet have substantial protection against running out of money.

Actually this is not correct you can ensure you spend it all before you die and not run out of income. And you touched on the answer in the very same post.

If you haven't followed along with threads involving delaying SS or purchasing immediate annuities in an attempt to spend more earlier without increasing the risk of running out of money, you should find and read them.

One way is to convert your entire net worth into SPIAs.

 

[youbet]

Well, that's right jdw_fire. I let my personal circumstances drift into my analysis.

You could convert 100% of your net worth into SPIAs and they will pay you until death and be worth zero one nano-second after your death. That just doesn't work for my circumstances, but it might for some, and I stand corrected.

Thanks.

 

[chinaco]

And that is a major concern for many on this board. If you haven't followed along with threads involving delaying SS or purchasing immediate annuities in an attempt to spend more earlier without increasing the risk of running out of money, you should find and read them.

An annuity is in our plan.

I intend to watch interest rates and purchase an annuity when the time/deal seems right. Unless interest rates rise and a SPIA looks attractive early on, we will probably wait until around age 65 or so.

DW will take her SS @ 62, I will take mine @ 66.x (mine is the larger amount). That will give the surviving spouse a larger COLA'd Annuity.

We will use thes vehicles and my small pension to build a base income for both of us and the surviving spouse. We hase a target amount in mind. The SPIA will be use to fill the income gap (to create a safe income level for us). I am trying to workout the amount and consider inflation needs. I view the SPIA as tool for mitigation of one type of risk (running out of money). If we spend all of our portofolio but a reserve for inflation contigency.... We should have a dependable income source for life. It is our strategy for the later years mainly.... but it will also fund the mid years of retirement also. We (or the surviving spouse) will have the house (as an asset) and possibly the contingency (inflation reserve) portfolio for very old age needs.

We will probably spend-down a fair amount of our assets (perhaps 50%) in early retirement (55-65). The rest will continue to grow and be used in the next 2 maybe 3 decades.

Since we are conservative, the spend-down will may be a bit of a challenge since we will have to change our habits. We should be able to spend more than we do today. If it turned out that we had to belt tighten to our current spending levels... we would still be content.

 

[youbet]

An annuity is in our plan.

We will probably spend-down a fair amount of our assets (perhaps 50%) in early retirement (55-65). The rest will continue to grow and be used in the next 2 maybe 3 decades.

Sounds reasonable.

Remember while you are spending down those assets during your first decade of RE that you plan to purchase an annuity at around 65 yo. Liquidating a chunk of your remaining portfolio to purchase an annuity would be painful in a down market.

Have you tested your plan (in aggregate - not bucket by bucket) in Firecalc?

 

[chinaco]

Sounds reasonable.
...
Have you tested your plan (in aggregate - not bucket by bucket) in Firecalc?

Not yet. But I intend to do so. I will test each portfolio. Plus aggregate them in some way to understand the total effect.

There are a number of moving parts. I am not too concerned about running out of money. I figure we can tighten the belt if needed.

I am intending to put at least the last 2 decades in a VG target account for the simplicity rebalancing and allocation management of those portfolios. For decade 2 (65-75) I have been thinking of using a target account... But I am not sure. That period of time will only be 10 years out when we retire. A slice and dice approach might work better. That way I can tap into the asset class that is (hopefully) doing well and let the assets that are off recover.

I have wondered if I am over complicating things. I have alot more work to do to develop a plan that I understand. and am confident with... I am not going to go forward with the basic 4% model. I believe the 4% is useful in understanding how things might play out... But (to me) it is a guideline and provide insight. It is not a plan.

I am also working on some basic contengency plans for extreme events if they occur (i.e. high inflation/deflation, protractive bear market, etc...). At least enough to know the common sense approaches to protect our assets. I am not a market timer, but hedging strategies make sense to me... mainly to be used as insurance as opposed to try to make extraordinary gains.

 

[jdw_fire]

An annuity is in our plan.

I intend to watch interest rates and purchase an annuity when the time/deal seems right. Unless interest rates rise and a SPIA looks attractive early on, we will probably wait until around age 65 or so.

DW will take her SS @ 62, I will take mine @ 66.x (mine is the larger amount). That will give the surviving spouse a larger COLA'd Annuity.

You also might want to check out the threads on delaying SS in order to increase your spending prior to age 70. The most cost effective annuity may very well be delaying SS to age 70 while using your portfolio to fund the years prior to 70 at a higher rate then you had previously planned.

 

[jIMOh]

My understanding is the 4% Initial Withdraw rate is based on following assumptions:

Money needs to last 30+ years
3% inflation rate/ 3% increases to withdraws each year
a CONSTANT allocation of 60% equity and 40% bonds throughout retirement.

Meaning that the "optimum" retirement portfolio (99% success rate) is a 60-40 mix with a 4% initial withdraw rate.

70-30 mix had too many "down periods" and did not last 30+ years
50-50 mix did not keep up with inflation.

Meaning the 4% number highly depends on

a) allocation of assets (going forward)
b) performance of market in early years of retirement

To "hedge" these risks, my plan is to make sure I have 7 years income in cash, outside of my allocation, prior to retirement. It might delay ER a year or two, but this reduces the risk of the withdraw rate being incorrect.

 

[chinaco]

To "hedge" these risks, my plan is to make sure I have 7 years income in cash, outside of my allocation, prior to retirement. It might delay ER a year or two, but this reduces the risk of the withdraw rate being incorrect.

I am intending to use a cash account to deal with market down years... But I am considering on 2 - 3 years. Why are you considering 7 years of cash?

 

[jIMOh]

I have seen 3 year periods where market did not recover (2002-2004) and I have read that the 70's were similar. No reason to risk anything similar...

3 year CD ladder. plus 3 years in TIPs or something indexed to inflation is my thought. I am 20-30 years away from doing this, so it's my thought, not what I am doing now.

 

[chinaco]

I have seen 3 year periods where market did not recover (2002-2004) and I have read that the 70's were similar. No reason to risk anything similar...

My thoughts: I probably will not hold that much cash until the late years of retirement. I want to capture a little growth from the portfolio in ER and Mid Ret. (55-75)

A well diversified portfolio should have a mix of assets with low correlation. You can draw from the assets that are having a good year. This is what I like about the slice and dice approach. It is not as simple to manage as the target retirement accounts... but it provides a bit more flexibility.

 

[Rich_by_the_Bay]

To "hedge" these risks, my plan is to make sure I have 7 years income in cash, outside of my allocation, prior to retirement. It might delay ER a year or two, but this reduces the risk of the withdraw rate being incorrect.

If I understand your comment, that strategy puts about 28% of assets in cash and 40% of 72% (the remainder in your "allocation") or 29% of total assets in bonds. That puts you at 57% in fixed income overall. Sure that's what you want? Its certainly a hedge but you will be allocated pretty heavily in fixed income for an early retiree.

Perhaps you'd be better off just carving out a total of 8-10 yrs expenses in cash and the rest in stocks. Gives you a lot of waiting power and still keeps you well in the game.

 

[jIMOh]

My thoughts: I probably will not hold that much cash until the late years of retirement. I want to capture a little growth from the portfolio in ER and Mid Ret. (55-75)

A well diversified portfolio should have a mix of assets with low correlation. You can draw from the assets that are having a good year. This is what I like about the slice and dice approach. It is not as simple to manage as the target retirement accounts... but it provides a bit more flexibility.

2000-2002 was bad, and the S&P barely broke even between 2000 and 2007 (7 years). You can be diversified and still be forced to draw down an asset which has not recovered.

If the drop happens 5-7 years after retirement, not a big deal, if it happens within first year or two of retirement, much bigger deal. I would not keep 7 years of cash throughout retirement, I would just keep it the first year I retire, spend the cash, then use a sensible withdraw strategy, keeping 3-4 years cash most times... more cash after an up year, less after a down year.