Application of decision rules

[Willers]

I've been spending quite a bit of time looking at the various decision rule approaches to retirement spending management. DW loved the approach when I mentioned it to her because she is the consummate worrier and it would give her piece of mind to know the specific conditions under which we'd adjust spending.

The questions I have is these: for those of you that were retired in 2008-2009 or 2000-2002, how did you approach the spending side of those periods? Did you have rules in place and follow them? If so, how hard was it? Did you just adjust flexibly without rules? Did you not adjust? Did you go into the downturns with a low enough WR that it didn't matter?

Assuming the asteroid stays away we appear to be ready to RE now and this is my remaining concern before scheduling the plug pulling. Thanks!

 

[haha]

There are as many answers to this as there are people on the forum. What it boils down to is how much of your spending could in fact be stopped or cut.

It's interesting to me that during the great depression, movies did a great business, dance halls, arcades, amusement parks, skating rinks, all kinds of what many would call wants rather than needs. But it appears that man does not live by bread alone.

I believe it is also true that people here are not typical of the rest of humans, so I think the reality among hyper savers like many of us might be different.

Much of my spending I really would not like to cut, and I did not during that last mess, but OTOH my income as contrasted to my asset totals did not suffer much. And much of the rest of my spending cannot be cut. Income and property taxes, insurance including medical, dentist appts (even postponing cleanings can cost one's health), cash doctor costs, drugs, basic upkeep on home, condo fees, car upkeep. Food can perhaps be cut some. My technique here would be to eat more or less the same, but less of it. It rarely harms health to get thinner than you might have thought possible.

Stuff like books can be cut, if that is part of your spending, and if you have a decent library where you live. Eating out can be stopped, or more likely downscaled.

Don't forget that a stock market crash will affect the few people who are living from SWR, the rest of humanity can go on spending whatever they want, so things like restaurants may not get much cheaper

In my own case, it is less that I have much spending that would be easy, or perhaps even feasible, to cut, but that I have more income than I need for my current lifestyle. I believe it might be much harder psychologically if I were following an SWR format, where current income is obviously highly dependent on portfolio $ value. Much of what FA gurus try to do is create ad hoc ways of making this less apparent-(Kitces, Pfau, etc.)

Still, a basic fact about SWR approaches is that if portfolio $ value goes down, spending had better too. Any lags are an act of faith.

Things always look different under stress than when planned before, and maybe our rules about stay the course, buying opportunity, etc will suggest the correct action. If we continue to have the Fed created asset economy, we can probably count on that. But certainly in other times bargains have become much greater bargains in bear markets, and sometimes money was not so profligately thrown at any financial disturbance.

Though, since you are trying to calm your wife, perhaps you should ignore this post and just be sure you that have more money than you need.

Ha

 

[W2R]

I've been spending quite a bit of time looking at the various decision rule approaches to retirement spending management. DW loved the approach when I mentioned it to her because she is the consummate worrier and it would give her piece of mind to know the specific conditions under which we'd adjust spending.

The questions I have is these: for those of you that were retired in 2008-2009 or 2000-2002, how did you approach the spending side of those periods? Did you have rules in place and follow them? If so, how hard was it? Did you just adjust flexibly without rules? Did you not adjust? Did you go into the downturns with a low enough WR that it didn't matter?

Assuming the asteroid stays away we appear to be ready to RE now and this is my remaining concern before scheduling the plug pulling. Thanks!

I retired in late 2009, so my experience may or may not be relevant to your question since the market had begun to recover a little bit by that time. There were a lot of predictions of a double dip floating around the internet, though, so I didn't have much confidence that we were done with the crash.

When I retired, I had enough money in cash as part of my portfolio to support me for five years, so I knew I would not have to sell low for that long. This was something I had planned all along, and was not established just due to the crash. I still have enough cash to support me for 5-6 years as a buffer for down markets, even now.

Also I bought a new car two months after I retired, out of money I had set aside from my portfolio during the previous ten years for that exact purpose.

By the end of 2010, it looked like the market was beginning to recover. So, I did some remodeling. My WR for 2010 was 2.61% including the remodeling. This was less than my dividends for 2010. Instead of using the cash buffer, I went ahead and rebalanced to my planned asset allocation.

The thought behind having a cash buffer is, if the market crashes I will tighten the belt and I will NOT sell low. During times like right now when the market is thriving, I can spend more but honestly, I am enjoying retirement so much that it is hard to think of anything else that I want to buy.

I guess my rules are pretty informal, because I haven't numerically defined what "selling low" would be. However, it was pretty clear in 2008-2009 that selling then would be selling low, while I didn't consider 2010 to be a year to live off cash only. Unless there is clearly a pretty bad market crash going on, I would just rebalance at the end of the year as always and did after 2010. From October 2008 through April 2009 I bought low and did not sell, because it was obvious to everyone (I think) that we were in a terrible crash. If that should happen again in retirement, I would live off the cash buffer only and do the same.

 

[ERD50]

I've been spending quite a bit of time looking at the various decision rule approaches to retirement spending management. DW loved the approach when I mentioned it to her because she is the consummate worrier and it would give her piece of mind to know the specific conditions under which we'd adjust spending.

Which rules are you considering? From the studies I've made, I think many people overstate the effect of moderate spending cuts.

What success rate does a historical calculator like FIRECalc give you with your current assumptions? Are you planning for an extended joint LE? I'd start there, and then try entering some offsetting income to simulate a cut in spending. I've found that it takes severs cuts over many years (5+?) to have any significant effect. If your portfolio takes a 40% hit, taking spending from 4% to 3% is a pretty minor in comparison.

The questions I have is these: for those of you that were retired in 2008-2009 or 2000-2002, how did you approach the spending side of those periods? Did you have rules in place and follow them? If so, how hard was it? Did you just adjust flexibly without rules? Did you not adjust? Did you go into the downturns with a low enough WR that it didn't matter?

We did not adjust. I am trying to maintain a low enough WR% that I feel reasonably confident that it should be considered a 'forever' portfolio. Lacking a crystal ball, this is a gamble, but so is working long enough to cover almost every possibility (and that could mean working until you die, which 'solves' the 'running out of money problem).

But, DW is still working at a modest paying, part year job that she enjoys, so our WR% during this time is pretty low already - less than 3%. That will go up when she quits until we start collecting SS/Pensions, then back down.

There are as many answers to this as there are people on the forum.

Very true!

What it boils down to is how much of your spending could in fact be stopped or cut. ...

Much of my spending I really would not like to cut, .... And much of the rest of my spending cannot be cut. ...

Yes, I think many LBYM people do not have a lot of discretionary spending. And making cuts to the other stuff would require a big change, like moving to a much lower COL area. That entails expenses (selling, moving, new furniture, etc), and risk (what if you don't like the new place?).

Still, a basic fact about SWR approaches is that if portfolio $ value goes down, spending had better too. Any lags are an act of faith.

I'm not sure I'd call that a 'fact'. I know we've touched on this before, probably no need to re-hash, but it seems to me that a low WR% is so very close to a 'dividends only' approach that it is largely a distinction w/o a difference.

Though, since you are trying to calm your wife, perhaps you should ignore this post and just be sure you that have more money than you need.

Ha

More money is always better! But then it comes down to what it takes to earn that extra cushion. No easy answers.

-ERD50

 

[Chuckanut]

How much we cut depends on many things. I would like to note that we are spending three things - Money, Time and Health.

Interestingly, money is probably a lot more predictable for most of us than our remaining time on this planet and how many healthy years we have left. Healthy we can influence to some extent by maintaining a healthy lifestyle. And, Time flows at a constant rate in only one direction.

The trick is to balance them properly.

While I might cut back if the market went into the tank, I also realize that there are things that I should probably do in the next 10 years because I am also spending my Time and I have no control over that expenditure at all.

 

[Willers]

When I retired, I had enough money in cash as part of my portfolio to support me for five years, so I knew I would not have to sell low for that long. This was something I had planned all along, and was not established just due to the crash. I still have enough cash to support me for 5-6 years as a buffer for down markets, even now.

This was my original plan too, but I could tell that she was nervous about a worst case. We bought into and through 2009 so I take solace in the fact that, although I felt the same pain others did, I kept buying (although not as much as I could have). A cash buffer may still be where we land.

 

[W2R]

This was my original plan too, but I could tell that she was nervous about a worst case. We bought into and through 2009 so I take solace in the fact that, although I felt the same pain others did, I kept buying (although not as much as I could have). A cash buffer may still be where we land.

I am the worst worrier in the universe so I can relate to your wife's concerns. I am thinking that even though my cash buffer will only last me for 5-6 years at my present spending level, still with some serious belt-tightening it would cover me for at least 10 years in a worst case scenario. I would just go back to some serious LBYM and "live like a student" until things got better. Top ramen or whatever is cheap these days, no AC usage, mow the lawn myself instead of going to the gym, and all that sort of thing. That is how I would work through my worries in a worst case scenario.

A cash buffer is nice to have even when there is no crash, because it has other functions:

(1) It makes rebalancing so easy
(2) All my dividends go to that cash buffer until I am ready to withdrawn and spend them.
(3) Also it could be a huge emergency fund if needed due to some disaster (I am thinking of another Katrina, knock on wood).
(4) It gives me peace of mind, which is hard for worriers like me to find.

 

[scrabbler1]

I've been spending quite a bit of time looking at the various decision rule approaches to retirement spending management. DW loved the approach when I mentioned it to her because she is the consummate worrier and it would give her piece of mind to know the specific conditions under which we'd adjust spending.

The questions I have is these: for those of you that were retired in 2008-2009 or 2000-2002, how did you approach the spending side of those periods? Did you have rules in place and follow them? If so, how hard was it? Did you just adjust flexibly without rules? Did you not adjust? Did you go into the downturns with a low enough WR that it didn't matter?

Assuming the asteroid stays away we appear to be ready to RE now and this is my remaining concern before scheduling the plug pulling. Thanks!

I ERed at the end of October, 2008, as the markets were crashing. This proved to be a big benefit for me because it created a huge buying opportunity (to buy lots of extra bond fund shares at bargain basement prices) I did not expect to have as I was forming the plan earlier in 2008. What this did was to expand the surplus, or cushion, of invesment income over expected expenses, enabling me to reinvest more excess dividends than I thought I would be able to. I did not make any changes to my expenses which were in the aggregate roughly the same in ER as they were when I was working. BTW my SWR was in the 2%-2.5% range.

 

[easysurfer]

I FIRE'd in Jan of 2008, before the big meltdown.

During the meltdown, I didn't panic and just waited it out. Things did feel a bit uncomfortable not having a regular paycheck.

I know immediate annuities tend to get a bad rap here, but having one to cover basic expenses in a time of a market dive helped too.

 

[haha]

I'm not sure I'd call that a 'fact'. I know we've touched on this before, probably no need to re-hash, but it seems to me that a low WR% is so very close to a 'dividends only' approach that it is largely a distinction w/o a difference.
-ERD50

Very likely true. I was not thinking of a very low WR when I wrote that.

Ha

 

[Willers]

Which rules are you considering? From the studies I've made, I think many people overstate the effect of moderate spending cuts.

I've spent the most time on the Guyton rules. The VPW and some of the others seem to either product radical dips or leave gobs on the table. Since we've always lived below our means our percentage of fixed expenses is probably higher than many. Also, we're not looking for ways to justify spending a ton early. We like our lifestyle and I'm not sure what I'd do with a bunch of extra cash in a given year. It seems that the higher the wants/needs ratio, the easier it would be to manage in a rules-based approach.

What success rate does a historical calculator like FIRECalc give you with your current assumptions? Are you planning for an extended joint LE? I'd start there, and then try entering some offsetting income to simulate a cut in spending. I've found that it takes severs cuts over many years (5+?) to have any significant effect. If your portfolio takes a 40% hit, taking spending from 4% to 3% is a pretty minor in comparison.

I've used the following assumptions:
- Inflation adjusted spending
- SS at 70 with no adjustment for cutbacks
- A few adjustments for deferred comp and a new vehicle early in retirement
- Portfolio: 45% S&P, 10% SC, 35% corporate, 10% 1M Treasury, 0.5% ER. This is very close to my current AA/ER.
- 45 year retirement (we're 52 and 49 now). We both have longevity in our families. A good thing for us, but one more complexity in planning.

I get 100% for all of the time periods from 30-45. FC says we can start with ~4.25% WR. Based on our current portfolio we'd be spending about 3.25% since that's all we need.

That spending range seems to put us squarely between the living from dividend with no worries group and the 4% (or 3.5%?) rule followers. I could probably get to the first group if I worked for a few more years, but I'd rather not.

Yes, I think many LBYM people do not have a lot of discretionary spending. And making cuts to the other stuff would require a big change, like moving to a much lower COL area. That entails expenses (selling, moving, new furniture, etc), and risk (what if you don't like the new place?).

Yup, that's our situation. Not a lot of room to cut w/o feeling it. We do have a plan C to downsize to a less expensive home (it's small but in an expensive location) if needed.

This is a unique planning process since only on our deathbeds will we really know if the plan worked. At work I've always been able to at least ballpark what will happen based on our plans, but then again this takes on an increased significance since it is so personal. I'm pretty sure I'm completely over-thinking this, but that's my nature and I'm always interested in the experiences of those that have been there before me.

It's easier (and faster) to learn from the experiences/mistakes of others than your own, right?

 

[Willers]

I believe it might be much harder psychologically if I were following an SWR format, where current income is obviously highly dependent on portfolio $ value. Much of what FA gurus try to do is create ad hoc ways of making this less apparent-(Kitces, Pfau, etc.)

Still, a basic fact about SWR approaches is that if portfolio $ value goes down, spending had better too. Any lags are an act of faith. Ha

Thanks for your perspective. It does appear sometimes that is what the FA gurus try to accomplish. But then again, they do tend to work for wealth management (and related) firms, including Pfau now.

 

[haha]

I have SS now. For my living I consider that SS and the earnings from my taxable accounts are available, but there is another test: that I do not spend > 3% of Dec 31 (year - 1) taxable assets. I am forced to take RMDs, but I just re-invest them in taxable. I have a relatively small Roth, made recently from conversions, and I leave this alone.

I had some years when I had to scramble and this was not much fun. So I like to play it relatively safe now.

Ha

 

[walkinwood]

... It seems that the higher the wants/needs ratio, the easier it would be to manage in a rules-based approach.

This is a key insight. We ER'd in May '08, so rode most of that downturn. We use a constant %age of portfolio approach, and we cut spending in 2009 by some 15% (I initially had it wrong at 24%). We were able to do that because of the amount of discretionary expenses we had. We still had a great time, just did things that cost less. Interestingly, 6 years into ER, our nominal spending is still less than what I had budgeted for the first year of ER! That means that our annual budget as a percentage of porfolio is now lower than the 4% that Clyatt recommended - so we have headroom in case the market tanks.

- 45 year retirement (we're 52 and 49 now). We both have longevity in our families. A good thing for us, but one more complexity in planning.

We were in the same age range (I was 48, DW 45) when we ER'd. I chose a variable withdrawal policy because most of the constant spending policies test to about 30 years. FIRE, when I tested it, give you higher SWR %ages for 45 years (or was it 50?) than it does for 30 years!

Yup, that's our situation. Not a lot of room to cut w/o feeling it. We do have a plan C to downsize to a less expensive home (it's small but in an expensive location) if needed.

We moved from very expensive NJ outside of NYC to Denver. We had planned a move out of NJ, but didn't have the specifics when we ER'd. Denver wasn't even on our radar at the time. We chose with a lot of requirements besides CoL and are very happy with the decision.

I am glad that we waited to ER till we had some headroom in our savings. Even then, we went back to work briefly in 2010 - looking back it seemed to be more for psychological than financial reasons, but the danger of failure seemed very real at the time.

All the best.

 

[walkinwood]

Here's an old thread on Guyton's decision rules along with a spreadsheet that I had created at the time. It has some links to other calculators too. http://www.early-retirement.org/for...tions-using-guytons-decision-rules-29684.html As you enter portfolio values, you'll see the spending changes rather slowly. However, a prolonged downturn in the market (several years) will have a significant impact on spending. It is worth playing with both portfolio values and inflation.

 

[ERD50]

Very likely true. I was not thinking of a very low WR when I wrote that.

Ha

Ah, I follow you - with the basic 4%, that means historical failures about 5% of the time, so those paths would need adjustments to avoid failing.

-ERD50

 

[Willers]

Here's an old thread on Guyton's decision rules along with a spreadsheet that I had created at the time. It has some links to other calculators too. http://www.early-retirement.org/for...tions-using-guytons-decision-rules-29684.html As you enter portfolio values, you'll see the spending changes rather slowly. However, a prolonged downturn in the market (several years) will have a significant impact on spending. It is worth playing with both portfolio values and inflation.

Thanks for the link to the spreadsheet. I'll play around with it. I was drawn to Guyton because it impacts spending when things change, but not as radically or quickly like some other methods. The result will likely be a balance of decreases and the "act of faith" that Ha mentioned. Knowing my tendencies I'll lean toward more cuts.

 

[Meadbh]

I think it's important to have a good sense of one's wants to needs ratio, and to allow some wants. I have been fortunate (so far) to have ER'd during a bull market, but I shudder to think how scary it would have been to ER in 2008. I have pared down my wants significantly both before and after ER, mostly by convincing myself that I didn't really want the things I used to want (such as cable TV) and there isn't much left to pare except travel. I don't think I could live with no travel but in a pinch I could eliminate all overseas or long distance trips for a few years.

 

[braumeister]

A very big part of this is maintaining a cash balance that acts as a buffer for your portfolio withdrawals.

I think I'm about in the middle of members here, with a cash balance of about three years worth of spending. I know some have much more, and many somewhat less, but three years seems good to me and gives great peace of mind.

 

[Willers]

I think it's important to have a good sense of one's wants to needs ratio, and to allow some wants. I have been fortunate (so far) to have ER'd during a bull market, but I shudder to think how scary it would have been to ER in 2008. I have pared down my wants significantly both before and after ER, mostly by convincing myself that I didn't really want the things I used to want (such as cable TV) and there isn't much left to pare except travel. I don't think I could live with no travel but in a pinch I could eliminate all overseas or long distance trips for a few years.

Travel is also our biggest want and that's pretty important to us too. Reducing or eliminating that is our plan B, But that would be pretty depressing for us.

 

[Willers]

A very big part of this is maintaining a cash balance that acts as a buffer for your portfolio withdrawals.

I think I'm about in the middle of members here, with a cash balance of about three years worth of spending. I know some have much more, and many somewhat less, but three years seems good to me and gives great peace of mind.

This is one thing I'm struggling with. I know I'll carry some cash, but I can't decide how much. Right now I'm about where you are, but this will be something DW and I can discuss and see where we land. This might help with the worry she is having about this.

 

[rayvt]

We FIRE'd in 2006 and I use the Guyton-Klinger decision rules with a 4.5% initial w/d rate. Guardrails are 5.4% and 3.6%.

The MWR rule kicked in for 2009 & 2012, the CPR rule kicked in in 2009. The w/d percents (after all rules) has varied from 4.2% to 7.1%. The 7.1% was for 2009 after the big 2008 loss.

A few other points:
If there is a sustained multi-year downturn, ALL withdrawal methods will be harmed. If you don't reduce you'll exhaust your portfolio. If you want to protect the portfolio, you have to reduce your withdrawal.

The thing I like about G-K is that the w/d changes are gradual, some of the other methods can have you cutting your w/d in half after a really bad year or doubling your w/d after a really good year.

Keeping several years in cash is NOT a good plan. The benefits are all psychological not financial. Financially the best thing to do is maintain your asset allocation.