Kitces on Flexible Spending

[USGrant1962]

Michael Kitces has an interesting post where he dives deeper into flexible spending versus FIRE. In the past he has advocated for ratcheting rules, where you start with a safe withdrawal rate and in (the majority of) cases where your portfolio grows notwithstanding withdrawals, you may ratchet up spending over time.

Interesting in this article is that he references a Bengen article that I had not seen before. Bengen shows that 3.5% is the SWR for a 45-year retirement. He did this in 1996, so the "3.5% is the new 4%" isn't so new!

In my mind the money quote is:

...with 40-50+ years to compound, the range of future outcomes is actually much much wider than more retirees realize (or can even comprehend, with “equal” likelihood of a $1M retirement account running out, or turning into $150M, at a 3.5% initial withdrawal rate!

Yikes! Hence the idea that you are very likely to be able to ratchet up. In the context of being prepared for variable spending (up and down) it makes sense.

https://www.kitces.com/blog/the-problem-with-fireing-at-4-and-the-need-for-flexible-spending-rules/?

 

[tulak]

If you play around with FIRECalc, you’ll find that ~3.5% WR is safe forever, or at least as long as FIRECalc has data.

It’s definitely a good starting point, but unless you’re unlucky, it’s probably too conservative.

 

[USGrant1962]

If you play around with FIRECalc, you’ll find that ~3.5% WR is safe forever, or at least as long as FIRECalc has data.

It’s definitely a good starting point, but unless you’re unlucky, it’s probably too conservative.

Yup, that's why I'm comfortable with 4% for 40 years, plus SS which makes it 3% for half those years.

 

[GravitySucks]

In his Reddit AMA, Bengen says he has revised his findings to SAFEMAX = 4.5 % for 30 years and that a 4% WR will last forever.
I have upgraded my withdrawal max after reading that Kitces article at year 6 of retirement due to the great portfolio growth and seeing how little my parents and others actually spent after 80. Now if I could just bring myself to actually spend it....

 

[YVRRocketSurgery]

Interesting article. In some ways, I feel we're looking to somewhat applying similar concepts that Kitces discusses when we retire.

We're looking to ratchet up our core spend based on our taxable dividend portfolio hopefully through dividend increases growing faster than inflation. Conversely, we're looking for our withdrawals from our tax-advantaged retirement accounts to be flexible, based on returns, similar to the guardrail approach, which would support our fun spend like extended travel so potential cuts in this bucket wouldn't be as painful.
I also estimate combined withdrawals during the first couple of years to be in the 3.5% neighbourhood before having the confidence to ramp it up if returns are decent.

 

[Elbata]

In his Reddit AMA, Bengen says he has revised his findings to SAFEMAX = 4.5 % for 30 years and that a 4% WR will last forever.
I have upgraded my withdrawal max after reading that Kitces article at year 6 of retirement due to the great portfolio growth and seeing how little my parents and others actually spent after 80. Now if I could just bring myself to actually spend it....

I'm a big fan of Michael Kitces. For me, he just makes a lot of sense.

The little spending after 80 makes sense to me too. So another reason why it may be OK to have increased spending in years leading to our eighties.

 

[Dtail]

The LTC can be the wildcard spending after reaching 80, but like the article overall.

 

[pb4uski]

I'm a big fan of Michael Kitces. For me, he just makes a lot of sense.

The little spending after 80 makes sense to me too. So another reason why it may be OK to have increased spending in years leading to our eighties.

+1 I'm a fan too... but $150m doesn't pass the smell test.. for $1m to grow to $150m over 50 years would be 10.54% a year and that is with no withdrawals.. so with withdrawals it would be north of 12.5% a year.

...with 40-50+ years to compound, the range of future outcomes is actually much much wider than more retirees realize (or can even comprehend, with “equal” likelihood of a $1M retirement account running out, or turning into $150M, at a 3.5% initial withdrawal rate!

 

[Dtail]

+1 I'm a fan too... but $150m doesn't pass the smell test.. for $1m to grow to $150m over 50 years would be 10.54% a year and that is with no withdrawals.. so with withdrawals it would be morth of 12.5% a year.

Yeah was wondering about that too. If 1982 was the best starting year of retirement, then even those returns haven't reached 50 years of analysis.

 

[GravitySucks]

Yeah was wondering about that too. If 1982 was the best starting year of retirement, then even those returns haven't reached 50 years of analysis.

Best I could squeeze out of FireCalc was $47M with 50 years and a 3.5% WR

 

[USGrant1962]

Best I could squeeze out of FireCalc was $47M with 50 years and a 3.5% WR

I agree, I wonder if he is using a Monte Carlo model. Those give crazy long-tail numbers, both up and down. He usually sticks to historical models but who knows?

Anyway, with only $47M I guess it is OMY.

 

[footenote]

Great article - thanks for posting it.

On whether he's using historic or Monte Carlo:
"Accordingly, the chart below shows the trajectories of wealth for 50-year retirement time horizons...through various rolling return periods in history."

(The very-high end portfolio values he cites seem way too high to be historical to me as well, fwiw.)

 

[ERD50]

Best I could squeeze out of FireCalc was $47M with 50 years and a 3.5% WR

But FC is inflation adjusted. Perhaps Kitces number was not? 3x inflation over 50 years is not unreasonable, I think.

If we knew the start year for that number, it would be an easy check.

-ERD50

 

[Nature Lover]

I think you're right...that it's a nominal value (as opposed to real). Still surprising though (even $47M real seems unrealistically high if taking out 3.5%/yr). I guess "equal chance of $150M vs running out" is less a statement of confidence about supersized returns, and more a statement of confidence in the portfolio's survival using a 3.5% WR.

Have enjoyed Kitces's writing over the years and enjoyed this article as well.

 

[ExFlyBoy5]

Smart guy making some darn good money teaching others! He does speaking engagements and his fee is $8000-$15000 per engagement. He will do 40 this year (all booked but two) so this is $320,000 to $600,000 plus expenses.

And looks like with 2500 members of the investment professional subscritions, that's another $150,000 to $247,000.

Not too shabby, eh?

https://www.kitces.com/speaking/

 

[HI Bill]

Smart guy making some darn good money teaching others! He does speaking engagements and his fee is $8000-$15000 per engagement. He will do 40 this year (all booked but two) so this is $320,000 to $600,000 plus expenses.

And looks like with 2500 members of the investment professional subscritions, that's another $150,000 to $247,000.

Not too shabby, eh?

https://www.kitces.com/speaking/

Not too, but it sounds an awful lot like w$rk.

 

[foxfirev5]

About a million a year would probably be enough to get me back to w*rk. Fortunately I don't have the personal capital for that to be an option. A man does need to know his limitations.��

 

[ExFlyBoy5]

Not too, but it sounds an awful lot like w$rk.

Well, at a per hour rate, I think the speaking gig is pretty good. Shoot, even at the "base rate", if you figure two days travel and a day of speaking and shaking hands, that's close to $3,000 a day. Certainly worse ways to make that kind of money!



I was never a big fan of public speaking, so I won't be making $ doing that anytime soon. Then again, I have no desire to w*rk for money ever again, either.

 

[USGrant1962]

But FC is inflation adjusted. Perhaps Kitces number was not? 3x inflation over 50 years is not unreasonable, I think.

If we knew the start year for that number, it would be an easy check.

-ERD50

I think you got it. So he is probably correct (which I expected).

 

[GravitySucks]

But FC is inflation adjusted. Perhaps Kitces number was not? 3x inflation over 50 years is not unreasonable, I think.

If we knew the start year for that number, it would be an easy check.

-ERD50

Good point. Thanks.

 

[walkinwood]

It is worth reading Guyton's original paper
Decision Rules and Portfolio Management for Retirees: Is the ‘Safe’ Initial Withdrawal Rate Too Safe? - Cornerstone Wealth Advisors, Inc.


and the Guyton-Klinger paper which builds on the above


Decision Rules and Maximum Initial Withdrawal Rates - Cornerstone Wealth Advisors, Inc.


As we venture into our 12th year of ER - a period that saw a very sharp downturn followed by a long upswing in the markets - I am beginning to look at these variable strategies a lot more closely.