Help me design a portfolio that generates $50,000 a year

[cute fuzzy bunny]

No and I didn't say that.

Glad you noticed. But I'd point out that I didnt say what you thought *I* said either, before you disagreed with it

I am not completely sure what you mean by 30-40% margins. Could you clarify what you are saying and how you calculating the 30-40% margin? Not sure what Nord's means by 10% belt tightening either.

I think Nords said it well above. Applying logic and precision to something illogical, chaotic and imprecise at best. Presume a margin of error on anything you cannot absolutely and positively be sure of measuring with certainty.

 

[modlair]

I think Nords said it well above. Applying logic and precision to something illogical, chaotic and imprecise at best. Presume a margin of error on anything you cannot absolutely and positively be sure of measuring with certainty.

Sounds good. Just be sure the center of equidistant risk margin evaluation is positioned at 4.65%. And we must be sure this is told to all newcomers with an expectation of Soc. Sec. and put 4% to rest in its grave.

 

[Nords]

Not sure what Nord's means by 10% belt tightening either.

Just the ability to defer spending for a year or two of an ugly market.  Keep driving a beater for another year or two, skip the second cruise, put off that neighbor island vacation, and don't upgrade the media room.  In a really bad decade you might even (*gasp*) consider ESRBob's approach of temporary work.  ("Temporary work" sounds so much more palatable than "Thank you for shopping at Wal-Mart!")  Of course before then you'd also check into selling plasma or redundant organs.

Some people actually continue to save money during retirement.  Belt-tightening would mean that you don't add to those savings.

Sometimes god doesnt feel like smiling.  Anything other than ballparking it with 30-40% margins is a folly.  But then a lot of people want to analyze and plan to the finest details, even though they cant control them.

FIRECalc and all the other financial calculators are trying to predict the future, and Bernstein's five-part "Calculator From Hell" article essentially says that any success rate higher than 80% would require a guarantee that there won't be any surprises for many decades-- no world wars, terrorist incidents, global depressions, oil crises, or dot-com implosions.

While FIRECalc will project history with impressive precision, it's a crapshoot.  It's making sure that your portfolio doesn't fail more frequently in the past than you might be able to handle, even though as Dory says some of the data runs end with a balance of 12 cents.  It's trying to project into the future farther than its history will allow (how many complete runs can you get for a 50-year ER?) and it can't handle anything that history hasn't already covered.  Read Dimson's "Triumph of the Optimists"-- Schiller's returns data may be the best available, but it's filled with interpolations and inaccuracies because companies didn't always report honestly, let alone fully & accurately.  Today's stock indices don't even remotely compare to those of five decades ago, let alone a century ago, and the S&P500 makes significant changes every decade.  Dividend rates have changed over decades.  Tax rates change.  Tax laws have affected investment strategies and their corresponding returns.  Correlations among asset classes have changed over time and will continue to do so unpredictably.  Entire asset classes have been created in the last 20 years that never existed before, and we have no idea what future asset classes are being created.  Monte Carlo simulations are unable to fully model the correlations between one year's returns and the next, let alone all of the other factors.

So, yeah, you can tell me that you have to raise your spending to squeeze out every last bit of performance from your portfolio and not waste your opportunities.  You just can't tell me that you won't need it for some totally unforeseen problem.  I'm no Scrooge McDuck but I don't want to have to ask my kid to pay my grocery bills for me.

Although I agree with Cut-Throat's "What are you saving it for?" philosophy, and I've loosened up my wallet in a couple of small ways, I'm also finding out that the things & experiences I value don't cost a lot of money.  I can only keep track of so many longboards & home improvements, and I can only take so many fantasy vacations.  I can only do martial arts for a certain number of years (it may be too late already).  I'd rather charitably donate my time than my money because there'll be plenty of time to donate my money after I'm not using it anymore.

So I'm finding it hard enough to raise my spending in the first place.  IMO arguing over decimal points elevates the discussion from theory to absurdity.

 

[REWahoo]

IMO arguing over decimal points elevates the discussion from theory to absurdity.

100% 99.35% true.

 

[Cut-Throat]

I agree that a decimal point discussion of what is an SWR is, borders on the ridiculous. I think we have to remember that the 4% withdrawal is a 'worst case historical' rate. So maybe it is 4.6% - or if the economy does better than the gloom and doomers think it might be 6 or 7 %!

The point is, you have to be willing to be flexible. I think it makes far more sense to have the 4% include 2% mandatory and 2% discrentionary spending. That way you can adjust, if something goes south.

Anyone that thinks it is possible to 'wake up at age 85 with no assets', is probably not registered on this forum! - I think you might take a peek at your portfoilo at age 72, and change a few spending patterns!

If it pains you to spend money or you don't enjoy it, don't do it! - You don't have to spend 4% - As for myself I love burning Cash! - I would have no problem spending $100 Million! And I would enjoy it! 8)

 

[modlair]

Everyone will do whatever they want, of course. But since decimal points are not worth troubling over, then since 4.65% is closer to 5% than 4%, let's make 5% the standard.

 

[Nords]

Everyone will do whatever they want, of course.  But since decimal points are not worth troubling over, then since 4.65% is closer to 5% than 4%, let's make 5% the standard.

As I'm saying for the third time, I'm not debating the math. I'm trying to point out that the consequences of being a little bit wrong are far more severe than the consequences of being way too much right.

There's no one answer to the "help me design a portfolio", especially when the person posing the question isn't familiar with asset allocation or historical rates of return or volatility tolerance. As Taylor Larimore over at the Vanguard Diehards board says, "There is more than one road to Dublin".

Alerted to those caveats, you are entitled to go forth and to make your own darn decisions for yourself. Hopefully you'll have noticed by now that there are as many "standards" as there are early retirees.

I think it's a disservice (especially to those who are still learning about ER) to flatly state a number without acknowledging the risks and uncertainties surrounding its derivation. You're well within your rights to preach anything you like, but I think that you need to stop trying to convert the rest of the congregation.

 

[Cut-Throat]

Everyone will do whatever they want, of course. But since decimal points are not worth troubling over, then since 4.65% is closer to 5% than 4%, let's make 5% the standard.

I've got an even better formula for you. Every year take 50% of your portfolio and spend it. You'll never run out of money! And you can tell people that your SWR is 50%!

 

[unclemick]

Nope

5% variable - started last year after 12 years of 'cheap bastardhood'.

Also plan to croak precisely at 84.6 - my latest life expectancy estimate from IRS RMD tables - up from 84.3 in the 1990's.

heh heh heh heh heh heh heh heh heh heh heh heh heh

 

[modlair]

Guys, I don't know what the problem is here. What we have is a preference to drag the uninitiated towards leaving a lot of money to heirs. Let them choose for themselves. Give them the mathematically accurate number, that is already substantially negative since it derives from a lower-than-present-day SS total in it, and let them apply their own risk perspective to that number.

I am astounded that this is not accepted as reality. The results are clear. A social security receiving person should be applying his or her own risk perspectives starting at 4.6%. People can decide whatever risks exist that they choose, but it's just completely clear that the correct starting point for applying those risks is 15% higher than the standard. The standard is wrong as a risk applying centerpoint for SS receiving people.

People have their own sets of fears and that's fine. I think there is a case to be made that dying extraordinarily rich is far, far worse than running out of money a few months before you die. Why? Because you had control over the former. You endured self denial that was not necessary and you did it for decades. Chances are if you ran out of money using an already negative leaning SWR (which 4.6% is) -- then it was simply bad luck, out of your control, and accidents happen.

 

[jdw_fire]

As I'm saying for the third time, I'm not debating the math.  I'm trying to point out that the consequences of being a little bit wrong are far more severe than the consequences of being way too much right. 

Nords, you have done a fine job pointing out the down side of retiring too early but you seem to think the only down side of using a lower that necessary W/D rate is that a person dies with a whole lot of money.  I think the bigger down side is that someone using an overly conservative (small) W/D will put off retirement and runs the risk of dieing shortly after or even before they retire.  As has been put forth here by a number of posters the FIRECalc W/D is used for determining when you are ready to retire and there have been a number of suggestions of ways to reasonably increase that percentage (e.g. Bernicke "Reality Retirement Plan" and the part fixed%/ part variable% model) in what I see as an effort to realisticly make retirement a possibility earlier in someones life.  If said someone uses a reasonable approach to estimating their retirement expenses (something like Cut-Throat's) and then pays attention to their portfolio after retiring (i.e. reducing some of their discretionary expenses in bad years) useing one of the methods mentioned above to increase their initial W/D % will also be safe and the retiree will be able to spend more years retired.  However if they believe the much talked of 4% without doing the analysis, they may very well delay.  I still believe the appropriate thing for any prospective retiree to do is to run FIRECalc with all of their numbers and weigh the risks for themselves.

 

[samclem]

rodmail,
- Running out of money is worse than having money.
- Live on the edge if you want. Really!
- The FIREcalc historical data is not "worst case." Germany in 1930s is "worst case," as are hundreds of other examples. Economic privation is mankind's normal state. We, in the US, particularly since WWII but even before, have not been typical. That is the data used by FIREcalc for domestic returns. So, to assume that the next 50 years will be an extension of the past 50, or 100, is not wise. No, I don't think we should all be stockpiling ammo and condensed milk, but I don't think the numbers ahead will necessarily look a lot like the past.

As others have tried to tell you--you are attributing a level of precision to this business that is not warranted by the data. Given imprecision/uncertainty, the rational course is the conservative one. And, the rational thing to do is to adjust withdrawals as the situation develops over the decades.

So, given the imprecision of it all, why do you want to be out on the bleeding edge?

 

[Nords]

Nords, you have done a fine job pointing out the down side of retiring too early...

Well, I think my only accomplishment so far has been getting trolled by someone who's put up 80-something posts on SWR since April Fool's Day. Deja vu all over again. But thanks anyway.

... but you seem to think the only down side of using a lower that necessary W/D rate is that a person dies with a whole lot of money. I think the bigger down side is that someone using an overly conservative (small) W/D will put off retirement and runs the risk of dieing shortly after or even before they retire.

Can't argue with that ugly scenario, either. Hmmm... dying in my cubicle... eating cat food... dying in my cubicle... eating cat food. Tough choices. I'm just not sure how we quantify which one is more painful or seems to last longer!

Having started my ER during a nasty bear market (without having any idea that this board existed, either) and having watched a few dozen posters work through the process over the last two years, I'd hesitate to recommend an aggressive SWR. No one specifically comes to mind with any high-SWR experience. We had one guy here a while ago who couldn't imagine retiring on less than $85K/year and was quite frustrated that the math couldn't be forced to conform to his standard of living. Another attempted to ER and was extremely upset by watching his money market balance drop by $3000. JohnGalt is ER'd on a very minimal portfolio and claims to have no idea what his SWR is, but I think it's clear from his behavior that his portfolio is barely surviving. I don't think I'd recommend his approach to anyone who doesn't have his brains, guts, & determination.

I'd also recommend against an overly conservative SWR, too, but ***** has done a much better job of demonstrating the flaws in that approach than I ever could. Now that I think about it, he's also about to demonstrate the flaws in the high-SWR approach, too...

I still believe the appropriate thing for any prospective retiree to do is to run FIRECalc with all of their numbers and weigh the risks for themselves.

Extreme SWRs-- both high & low-- require that the person who has to live with the consequences be able to sleep at night. They have to understand the issues and what FIRECalc or any other calculator is telling them-- and what it can never tell them. The answers may also change during ER as a person's situation changes.

That's why I object to "that's the final answer" insistence.

 

[jdw_fire]

Well, I think my only accomplishment so far has been getting trolled by someone who's put up 80-something posts on SWR since April Fool's Day.  Deja vu all over again.  But thanks anyway.

Ouch, it feels like I have been slapped.  What did I do wrong?

Can't argue with that ugly scenario, either.  Hmmm... dying in my cubicle... eating cat food... dying in my cubicle... eating cat food.  Tough choices.  I'm just not sure how we quantify which one is more painful or seems to last longer!

Is it likely someone will be eating cat food if

said someone uses a reasonable approach to estimating their retirement expenses (something like Cut-Throat's) and then pays attention to their portfolio after retiring (i.e. reducing some of their discretionary expenses in bad years)

?

Extreme SWRs-- both high & low-- require that the person who has to live with the consequences be able to sleep at night. 

Extreme or otherwise sleeping is important.

They have to understand the issues and what FIRECalc or any other calculator is telling them-- and what it can never tell them.  The answers may also change during ER as a person's situation changes.

Absolutely!

 

[dory36]

rodmail, I have tried to describe this several times, but maybe I need to give a more explicit example.

Planning using a feasibility tool in 2006 does not dictate your spending for the next 30 years.  If things go well, you adjust. If things go bad, you don't have to adjust if you don't want to. 

From a different thread:

We usually talk about this in the situation when the portfolio goes way down -- and the whole purpose of the safe rate discussions is to give us some comfort that if we stop our paychecks early, we can reasonably count on at least 4% of the balance at that point for the next ~30 years.

But look at the positive side. Let's say that in 5 years, the portfolio is at 1.2 million, after starting at 1 million.

What has happened?

One thing that has happened is that we have "lucked out", as the scenario that is worst for the survival of a portfolio is a large and lengthy market decline starting immediately after we decide to begin the withdrawals. Except for that scenario, the rate would be a good bit higher.

Another thing that has happened is passage of time. So now, instead of needing a $1 million portfolio to last for 30 years, we need it to last for only 25 years.

We can take advantage of our good fortune (timing retirement when we don't have an immediate bear market afterwards) and our new circumstances (more money and a shorter time to spend it) in a couple of different ways.

One -- we can start over. Just designate this new moment as the start of the withdrawal program, and take 4% of 1.2 million, or $48,000 instead of $40,000, for the next 30 years (or you could take ~4.2%, since you are now looking at 25 years instead of 30...), or,

Two -- we can take a $200,000 "bonus" to get the portfolio back down to $1 million, and continue drawing 40,000 for 30 years (or 42,000 for 25 years).

(This seems counterintuitive, but all that is happening is that we are reducing the amount that would have been left over at the end of the 30 year period, since we didn't get the bear market in the first 5 years.)

So... 4% sets your minimum withdrawal even in bad times, but you can adjust upwards following good years.

I'm not sure why you feel we should be talking 4.65, to include Social Security, rather than 4%, the nominal SWR for a portfolio without outside cash infusions. While everyone agrees that the individual differences in our situations are important, it doesn't follow that those outside cash infusions should be averaged in when we are talking about the SWR of a portfolio in its withdrawal phase. We don't insist that everyone plan for a lifespan of the national average, why treat SS any differently? As far as I am aware, none of the dozens of SWR research papers or tools impute outside cash in their results - most don't even allow for it.

The issue of Social Security itself is not by any means universally accepted. The year I retired, Congress decided that full SS payments would not go to people at 65, but not until 67, by the time I reach that age. To Congress, it was a "safe" decision as it would not affect anyone they considered currently retired (i.e., over 65), and they built in a 10 year "safety zone" for people 55 and older.

Unfortunately for many who retired early, money they had perhaps counted on was just snatched away.

Congress could as easily decide this year that it will be 70, so my outside income will be at least 2 and could be 5 years later than I planned. With decades for political winds to change how SS works for many ERs before we can collect, most of us build our go/no-go plans based on what we think we can control, not on proceeds in 2020 of today's government programs, especially when those programs are in financial trouble and have had rule changes in the past few years.  (I say "think we can control" because there is no telling when the political winds might shift enough to start taxing portfolio assets as well as income.)

In any event, not everyone gets Social Security. Many state and local governments opted out on behalf of their employees. Any person who spent their career working overseas (except federal employees). The Amish (although I doubt they are big FIRECalc users anyway -- you kinda need electricity). Or the roughly 15% of FIRECalc users who are non-US residents.

 

[preben]

I agree with Dory that adding in SS or other "extras"(inheritance?) only obscures the picture when looking at firecalc results.

I do think we sometimes are too conservative here actually. Using firecalc we look at the historical WORST case scenario holding US large cap growth minded equity holding only , only holding US based fixed income and for a retiree not willing to reduce the w/r just a LITTLE bit when the market is hit bad .

As raddr-pages.com has showed having a more diversified portfolio(say 20% each SP500,SCV,TIPs,EFA,commodities) have had a 5.7% SWR in the period the study covers (which includes the worst case Firecalc period too).

If one is willing to adjust spending in bad times by freezing inflation increase or similar there is another increase to pick up there.

so basic budget at say 3% and "luxuries" as 2% (2 budget system) seems ok TO ME.

Cheers!

 

[unclemick]

Yep

Da Norwegian wider says - 3% is my current yield - portfolio wise which I can live on in hard times. The extra is lagniappe for the good times.

I too like Raddr's effort to demonstrate the effects of commodities in a diversified portfolio. Haven't done anything about it for my portfolio yet - but it's on the table as a potential diversifier.

heh heh heh heh heh heh heh heh heh heh heh heh

 

[Spanky]

I too like Raddr's effort to demonstrate the effects of commodities in a diversified portfolio. Haven't done anything about it for my portfolio yet - but it's on the table as a potential diversifier.

Professor Siegel says that we should be careful about investing in commodities
http://finance.yahoo.com/columnist/article/futureinvest/4496

 

[modlair]

I'm gonna back out of this thread after this last contribution, folks. I'm not quite sure what standard protocol is supposed to be when you are a relative newcomer and upset longer longevity participants, and since I don't intend upset, I'll keep my hands where they can be seen and step out of the car.

A contribution (of questionable value) re: dory's point: How many get SS.

http://www.census.gov/popest/national/asrh/NC-EST2005-sa.html

This website lays out the demographics of the US. The year of interest was 2003 to accomodate the item below. It appears that about 42 million Americans were over the age of 62ish at that time (I divided the 12 million in the 60-64 category in half). Feel free to check the math on this, I used their excel stuff.

Beyond that, here is a document from Soc Sec Admin

http://www.ssa.gov/history/pdf/T5a4.pdf

It says how many people are getting SS benefits. Answer . . . is kind of hard to answer as you'll see. Excluding disability numbers and children the number seems to be north of 37 million -- but I frankly don't understand the categories and I don't know what divorce does and stuff like that. It starts with 29 million retirees but then there are widows and other people who I thought might be in the right age group that could properly expect COLAed input. Shrug. I freely admit I may have done this wrong -- but 37M is the number I got.

If 37.5ish million is correct and the proper number applicable to this thread's discussion, then . . . it's 88ish% of Americans likely to wander onto this website. As for non Americans . . . no way I can research all of their equivalent programs.

Yeah, I'm kind of surprised 88% is that big a number too. I thought the CSRS people and state employees would be more populous, too. Shrug.

And worse . . . one more thing . . . that Census document that said 42 million. Those might not all be US citizens. That document is just population, not SS qualified or could have been qualified population. Might even include illegals.

Well, that would drive the 88% number higher. Weird.

Very possible I have misunderstood these two documents and I'll read any replies that shoot holes in this interpretation because it may be useful data to have for some other non thread reason.

 

[cute fuzzy bunny]

The good news is that, as a discussion group, you can tell anyone anything you want, whenever you want!

Expecting your analysis to become the defacto standard of "what everone should be told" is true?

I guess thats one way of approaching life. Good luck with it.

JDW - before you pop another gasket, Nords wasnt talking to or about you in his comments, as far as I can see. Just like I wasnt. Detecting a pattern here? :

 

[obryanjf]

I agree with Dory that adding in SS or other "extras"(inheritance?) only obscures the picture when looking at firecalc results.

I do think we sometimes are too conservative here actually. Using firecalc we look at the historical WORST case scenario
............................
If one is willing to adjust spending in bad times by freezing inflation increase or similar there is another increase to pick up there.

so basic budget at say 3% and "luxuries" as 2% (2 budget system) seems ok TO ME.

Cheers!

This is a nearly perfect quote, IMHO.  4% is thrown around here way too much and by the majority is nearly gospel.  My playing around research  has proven to me to not only consider the inflation adjusted approach but keep some flexibility in the withdrawl scheme.  Using some form of portfolio adjustment and inflation adjustment will buy you 1% additional.  Using Ty's 'Reality' approach adds about another 1%, and adding extras (job's extras of SS, DWSS and pension) is about 1%.   So perhaps 3% more than the generally accepted Fixed, Inflation Adjusted, SWR; IN MY CASE.  Add higher diversification levels and maybe that buys a little more.  

Many here say it is too risky or they do not want to eat cat food in their old age, blah, blah.  Way too over dramatic.  Granted I'll run more simulations, shave a couple tenths off my final number and add a couple of years to life expectantcy for good luck, so I'll end up around 6% maybe.  I'll also continue to monitor the portfolio to see if it is working like most people here will do.  That should keep me from ending up with cat food when I'm 85 (God willing i make it there).

I would love if someone validated/refuted my conclusions.  The 4% number is conservative, and only one withdrawl scheme.  I would love to hear of others that are using other alternatives and indicate how it is working.  To those that want to use 4% Inflation Adjusted Fixed, more power to you, everyone has to use the method that they can understand and be comfortable with.

job

 

[jdw_fire]

JDW - before you pop another gasket, Nords wasnt talking to or about you in his comments, as far as I can see. Just like I wasnt. Detecting a pattern here? :

OK CFB maybe I'm slow and don't understand the lingo, what does all this mean and to whom was he referring with this?  

Well, I think my only accomplishment so far has been getting trolled by someone who's put up 80-something posts on SWR since April Fool's Day.  Deja vu all over again.  But thanks anyway.

 

[cute fuzzy bunny]

I'll give you a hint. Theres another poster in this same thread with over 80 posts that so far has only really talked about SWR's, not that theres anything wrong with that. Its not you.

SWR's are probably not as interesting to most posters here than a lot of the "SWR challengers" might think. Heck, I was retired for 3 years before I even heard the term SWR. I'm surprised I even survived that three year period, safe in my ignorance

However, it seems rather immutable that for what firecalc does, investing and spending in a manner consistent with how it is coded, if one were to emulate that investing and spending, 4% would have been the most you could have spent 'safely' by its terms of what 'safe' is, no more and no less...through the historic period for which it has data. Its simply one data point.

You can add other incomes, social security, play with withdrawal times and dates, add expenses, tweak the inflation numbers. Knock yourself out.

Bottom line is, the hilarity reality that ensues will be absolutely, positively, 100% different from what you "calculated". With this or any other tool.

So I guess its good that I was well practiced in "doing it wrong" and have persisted in this process of investing soundly with decent diversity, staying fully invested, not being overly conservative or trying to "play to not lose too badly", spending what seems prudent and enjoying my life, and paying heed to the fact that my portfolio value continues to grow rather than shrinks at an alarming rate.

Continue course, light hand on the rudder, enjoy the sunny days and be prepared to change plans when you see clouds approaching or that first big drop of rain from nowhere hits you between the shoulder blades.

4%? 4.65? 6? 2? 3?

How many angels on the head of a pin?

 

[jdw_fire]

I'll give you a hint.  Theres another poster in this same thread with over 80 posts that so far has only really talked about SWR's, not that theres anything wrong with that.  Its not you.

Thanks for clearing that up for me.   BTW what does "getting trolled by someone" mean?

 

[cute fuzzy bunny]

Seriously?

Someone who posts with the primary purpose of the post being to get a rise out of someone in order to increase their sense of self worth, with very little interest in the actual subject matter at hand. Usually picks one topic and bangs away on it until everyones sick of hearing about it and just the newb's get worked up over it.

I'm not sure theres trolling action here, but then I dont care about SWR's. Seems like a lot of interesting dialog. Until it gets to the point where the accusations start, real or perceived, and someone believes that their idea(s) or points of view are the only ones that matter. Then its not productive.