Achieving a Higher Safe Withdrawal Rate

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pkcrafter
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Achieving a Higher Safe Withdrawal Rate

Post by pkcrafter »

Achieving a Higher Safe Withdrawal Rate

New study from JFP
Initial withdrawal rate increases of 49 percent to 53 percent can be achieved without any reduction in the 95 percent confidence of success over 30 to 40 years as long as the retiree agrees not to take the inflation increase in years in which the Target Percentage is exceeded.


http://www.fpanet.org/journal/HowtoAchi ... rawalRate/

Paul
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btenny
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Re: Achieving a Higher Safe Withdrawal Rate

Post by btenny »

Thanks Paul. I knew my current 4% of current value was safe but figured early retirement was risky. Now maybe I have some good research to back up increasing my number to more than 4% now that I am older. This data says 6% is safe with no CPI adjustment and 5% is safe with limited CPI adjustment is safe, both for 30 years. This is dramtically more than any other literature I have seen.

Bill
ResNullius
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Re: Achieving a Higher Safe Withdrawal Rate

Post by ResNullius »

Personally, I think the article is bull. The increased withdrawal rate is no different than including an inflation adjustment over time. The difference is little less than green apples versus red apples.
BruceA
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Re: Achieving a Higher Safe Withdrawal Rate

Post by BruceA »

All of this precision seems misguided:

http://www.bogleheads.org/forum/viewtop ... 10&t=64941
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Dale_G
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Dale_G »

Looks great for the financial planner. It adds complexity, requires additional decision making, and looks "scientific".

But "spending it now" and foregoing inflation adjustments for 30 years looks dangerous to me.

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nisiprius
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Re: Achieving a Higher Safe Withdrawal Rate

Post by nisiprius »

Here's the crux of the matter:

"In my experience, retirees are willing to forgo some or all of the annual CPI increases but do not want their withdrawal amount to decrease from the prior year."

How does he know this is true? What is this "experience?" Just his expert opinion? Did clients say this was true on questionnaires? Does he have data? Did he have a statistically valid set of data from clients who actually had to forgo annual CPI increases many years in a row, that shows that they did not find it to be a problem?

Everyone knows that flexible withdrawals will result in a lower failure rate. In fact the original Trinity study explicitly says that the withdrawal rule is "a matter of planning, not of contract" and that people are expected to make course corrections.

The issue is: 1) what is the most comfortable system for adjusting withdrawals?

2) If you're going to make flexible adjustments, what's the evidence that any set of numerical rules is going to work any better than Taylor Larimore's system: "We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized. This is what most people do and it works."
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BruceA
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Re: Achieving a Higher Safe Withdrawal Rate

Post by BruceA »

If you're going to make flexible adjustments, what's the evidence that any set of numerical rules is going to work any better than Taylor Larimore's system: "We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized. This is what most people do and it works."
Agree. I would only add that a detailed understanding of one's financial position, as I have discussed elsewhere, is essential when applying Talyor Larimore's system.

Interestingly, it appears the majority on this forum believe that precise withdrawal programs such as SWR, MCS, Firecalc, etc., which are based upon historical, are the best way to go. Bill Bernstein, rodc, and others seem to feel that those are a fools errand. http://www.bogleheads.org/forum/viewtop ... 10&t=64941
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Cb
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Cb »

nisiprius wrote:....

The issue is: 1) what is the most comfortable system for adjusting withdrawals?

2) If you're going to make flexible adjustments, what's the evidence that any set of numerical rules is going to work any better than Taylor Larimore's system: "We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized. This is what most people do and it works."
Can you point me to any non-anecdotal evidence that that retirees as a group simply withdrawing whatever they feel they need while keeping an eye on their portfolio balance, etc is safer than "any set of numerical rules" such as those described by Bergen, Kitces, etc?

I've known a number or retirees who used that method who returned to work or nearly went broke within a decade.

Cb
ResNullius
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Re: Achieving a Higher Safe Withdrawal Rate

Post by ResNullius »

Cb wrote:
nisiprius wrote:....

The issue is: 1) what is the most comfortable system for adjusting withdrawals?

2) If you're going to make flexible adjustments, what's the evidence that any set of numerical rules is going to work any better than Taylor Larimore's system: "We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized. This is what most people do and it works."
Can you point me to any non-anecdotal evidence that that retirees as a group simply withdrawing whatever they feel they need while keeping an eye on their portfolio balance, etc is safer than "any set of numerical rules" such as those described by Bergen, Kitces, etc?

I've known a number or retirees who used that method who returned to work or nearly went broke within a decade.

Cb
Well...Taylor's approach is entirely anecdotal, so it would be impossilbe to come up with non-anectodal evidence. Frankly, I do what Taylor does, only I haven't had to reduce my spending at all up until now (and hopefully never). Our pre-retirement lifestyle and standard of living is more than accomodated by SS and just a portion of our distibutions, so I hopefully won't ever have to think about it. I've got a feeling that a large percentage of the folks actually retired around here have a somewhat similar approarch, although they might call it something other than "Taylor's way."
jwa
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Re: Achieving a Higher Safe Withdrawal Rate

Post by jwa »

ResNullius wrote:
Cb wrote:
nisiprius wrote:....

The issue is: 1) what is the most comfortable system for adjusting withdrawals?

2) If you're going to make flexible adjustments, what's the evidence that any set of numerical rules is going to work any better than Taylor Larimore's system: "We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized. This is what most people do and it works."
Can you point me to any non-anecdotal evidence that that retirees as a group simply withdrawing whatever they feel they need while keeping an eye on their portfolio balance, etc is safer than "any set of numerical rules" such as those described by Bergen, Kitces, etc?

I've known a number or retirees who used that method who returned to work or nearly went broke within a decade.

Cb


Well...Taylor's approach is entirely anecdotal, so it would be impossilbe to come up with non-anectodal evidence. Frankly, I do what Taylor does, only I haven't had to reduce my spending at all up until now (and hopefully never). Our pre-retirement lifestyle and standard of living is more than accomodated by SS and just a portion of our distibutions, so I hopefully won't ever have to think about it. I've got a feeling that a large percentage of the folks actually retired around here have a somewhat similar approarch, although they might call it something other than "Taylor's way."

SS & a portion of distributions does it - that's great. It's refreshing to run into someone who doesn't need $250,000,000 a year to retire!!! :beer What you are doing is my fate in life.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Levett »

Let's see.

We've been living through a period of low interest rates, low expected equity returns, low fixed annuity payouts, and folks like Bill Bernstein talkin' 'bout maybe 2% safe withdrawal rates--or let's say "safe" (definitely in quotation marks) withdrawal rates.

And along comes the tooth fairy.

Kinda reminds me of Dirty Harry askin' "Do you feel lucky?" :happy

Lev
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Re: Achieving a Higher Safe Withdrawal Rate

Post by billyt »

My plan is to withdraw a constant percentage each year, without any inflation adjustment. It is nice to know you will never get to a zero balance. Start at 4% and see how it goes. If the portfolio grows it can go towards inflation or more fun, if the portfolio shrinks, the constant percentage dictates a sensible degree of belt tightening. I am not retired yet. I will let you know how it is going a decade or so from now, God willing.

billyt
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Cut-Throat
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Cut-Throat »

billyt wrote:My plan is to withdraw a constant percentage each year, without any inflation adjustment. It is nice to know you will never get to a zero balance. Start at 4% and see how it goes. If the portfolio grows it can go towards inflation or more fun, if the portfolio shrinks, the constant percentage dictates a sensible degree of belt tightening. I am not retired yet. I will let you know how it is going a decade or so from now, God willing.

billyt
+1 You can't lose.............This is a self correcting withdrawal plan.....If it doesn't work, no withdrawal plan will.
BruceA
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Re: Achieving a Higher Safe Withdrawal Rate

Post by BruceA »

Maybe it is worthwhile discussing what is good and bad about SWR.

SWR is very helpful as a working rule of thumb, sort of like Jack Bogle's age in bonds. Some people might assume that with a 1million portfolio that they can safely spend 70 or 80k each year and 4% SWR helps to put the brakes on. It is also helpful in doing very big picture future planning.

However, in my opinion there are too many things wrong with SWR to use it for serious retirement planning:

1. SWR exactly measures the past, giving people the false belief it will scientifically measure the future.

2. SWR is based on historical returns and most experts today believe that average historical returns far exceed expected returns today; some suggest a corresponding reduction in SWR rates.

3. SWR does not take into account taxes and fees, so these amounts must be independently computed. Taxable accounts, Roth, and traditional IRAs must all be dealt with separately.

4. SWR depends on an optimal equity-fixed split (60-40) so adjustments are needed to take into account different splits, use of TIPS, etc.

5. SWR considers historical inflation impact on returns, but not how it impacts an individual's fixed pensions or annuities, so this must be computed separately.

6. SWR does not (cannot) specifically cover black swans. It does account for whatever outliers may have occurred in the past, but it in no way can anticipate what may happen in the future. This point alone has led Bill Bernstein to suggest that a 20% fudge factor is necessary, thereby nullifying the precision of SWR rates.

7. SWR is targeted at what is "safe" and can lead some to spend too little in retirement. Spending (including gifting, charitable, etc.) too little can be almost as bad as spending too much.

So bottom line is that a 4% SWR might be helpful as a rule of thumb in big picture planning; however, in my opinion, it does a very poor job of assisting in one's specific retirement income planning.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by ourbrooks »

Cut-Throat wrote:
billyt wrote:My plan is to withdraw a constant percentage each year, without any inflation adjustment. It is nice to know you will never get to a zero balance. Start at 4% and see how it goes. If the portfolio grows it can go towards inflation or more fun, if the portfolio shrinks, the constant percentage dictates a sensible degree of belt tightening. I am not retired yet. I will let you know how it is going a decade or so from now, God willing.

billyt
+1 You can't lose.............This is a self correcting withdrawal plan.....If it doesn't work, no withdrawal plan will.
Perhaps, you are willing to wear a 3 inch long belt? Suppose that you started with $1,000,000 and withdrew 4% to provide your income. Unfortunately, due to bad market conditions, after 15 years, your $1,000,000 has shrunk to $600,000 and, oh by the way, there's been 50% cumulative inflation so your 4% is now worth only $12,000 in real terms. Could you really tighten your belt enough to go from $40,000 in income to $12,000 in real terms. Most people would find that very difficult.

The constant percentage rule has the hidden assumption that your assets are growing nearly as fast as your withdrawal rate. If they're growing more slowly or if there's a major market downturn, you'll wish you'd started at lower withdrawal rate.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Levett »

BruceA--

And that's why, in a nutshell, "safe" is really not safe.

Lev
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Cut-Throat
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Cut-Throat »

ourbrooks wrote:
Cut-Throat wrote:
billyt wrote:My plan is to withdraw a constant percentage each year, without any inflation adjustment. It is nice to know you will never get to a zero balance. Start at 4% and see how it goes. If the portfolio grows it can go towards inflation or more fun, if the portfolio shrinks, the constant percentage dictates a sensible degree of belt tightening. I am not retired yet. I will let you know how it is going a decade or so from now, God willing.

billyt
+1 You can't lose.............This is a self correcting withdrawal plan.....If it doesn't work, no withdrawal plan will.
Perhaps, you are willing to wear a 3 inch long belt? Suppose that you started with $1,000,000 and withdrew 4% to provide your income. Unfortunately, due to bad market conditions, after 15 years, your $1,000,000 has shrunk to $600,000 and, oh by the way, there's been 50% cumulative inflation so your 4% is now worth only $12,000 in real terms. Could you really tighten your belt enough to go from $40,000 in income to $12,000 in real terms. Most people would find that very difficult.

The constant percentage rule has the hidden assumption that your assets are growing nearly as fast as your withdrawal rate. If they're growing more slowly or if there's a major market downturn, you'll wish you'd started at lower withdrawal rate.
And as I said..........If the Constant Percentage of Portfolio Balance does not work......What Withdrawal method will?
If Market conditions are so bad NO Withdrawal Method will work ! Do you Get it?

Also, I believe that your extreme example has not occurred in U.S. History. It's not that hard to create a Straw man condition where any withdrawal method would be that uncomfortable.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by ResNullius »

Also, I believe that your extreme example has not occurred in U.S. History. It's not that hard to create a Straw man condition where any withdrawal method would be that uncomfortable.Cut-Throat
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Yep. The end of the world is the end of the world, and that includes stock portfolios. If things get this bad, then some rural land, supply of guns and ammo, medical supplies, seed, and a couple of goats and chickens will be about all that matters anymore.
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Cut-Throat
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Cut-Throat »

................
Last edited by Cut-Throat on Wed Jan 09, 2013 11:56 am, edited 1 time in total.
Leesbro63
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Leesbro63 »

This article reeks of recency. Where inflation has been slow...probably slower than the decrease in spending as retirees age. But try it starting in 1966. Also the assumption that spending declines as you age might be bad as Medicare costs will certainly rise for all but the poorest people...who have a zero SWR because they have nothing to withdraw from.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by umfundi »

This thread is a perfect example of why Bogleheads is becoming intolerable.

No good advice, lots of rants about what other people should do, and disrespect for people who actually expose their own plans.

Keith
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555
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Re: Achieving a Higher Safe Withdrawal Rate

Post by 555 »

News flash: You can withdraw more now if you withdraw less later.
Leesbro63
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Leesbro63 »

umfundi wrote:This thread is a perfect example of why Bogleheads is becoming intolerable.

No good advice, lots of rants about what other people should do, and disrespect for people who actually expose their own plans.

Keith
I see this as completely the other way around. This is a good example of vetting an idea and having it confirmed, improved, or in this case, shot down for logical, rational reasons.
john94549
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Re: Achieving a Higher Safe Withdrawal Rate

Post by john94549 »

Okey, dokey, anecdotal evidence to follow.

I am retired, and have been for 6+ years. My wife still works (her choice). We are both 65. We have yet to commence any "withdrawal" program. I had always assumed my wife would be retired by now.* As a result, I never calculated our post-65 "income" properly were she not. Moreover, I did not even know about spousal S/S benefits until recently. She will begin collecting same in a few months.

I also freely admit to mis-calculating our tax burden (federal and state) post-65. It is much lower than I anticipated. But, then, we can all agree it has been a moving target these past ten years or so.

I had always assumed we would be in a 4% SWR by now. We're at zero.

I'm sure there are stories out there of folks who planned a 4% SWR commencing at 65 and had to start withdrawals earlier (i.e., the flip-side of our situation).

Amazing. No matter how much you plan, life intervenes.

*A reasonable assumption, based on her comments to me.
Last edited by john94549 on Wed Jan 09, 2013 8:07 am, edited 1 time in total.
dkturner
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Re: Achieving a Higher Safe Withdrawal Rate

Post by dkturner »

555 wrote:News flash: You can withdraw more now if you withdraw less later.
If you withdraw less now can you withdraw more later?
Rodc
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Rodc »

Cut-Throat wrote:
ourbrooks wrote:
Cut-Throat wrote:
billyt wrote:My plan is to withdraw a constant percentage each year, without any inflation adjustment. It is nice to know you will never get to a zero balance. Start at 4% and see how it goes. If the portfolio grows it can go towards inflation or more fun, if the portfolio shrinks, the constant percentage dictates a sensible degree of belt tightening. I am not retired yet. I will let you know how it is going a decade or so from now, God willing.

billyt
+1 You can't lose.............This is a self correcting withdrawal plan.....If it doesn't work, no withdrawal plan will.
Perhaps, you are willing to wear a 3 inch long belt? Suppose that you started with $1,000,000 and withdrew 4% to provide your income. Unfortunately, due to bad market conditions, after 15 years, your $1,000,000 has shrunk to $600,000 and, oh by the way, there's been 50% cumulative inflation so your 4% is now worth only $12,000 in real terms. Could you really tighten your belt enough to go from $40,000 in income to $12,000 in real terms. Most people would find that very difficult.

The constant percentage rule has the hidden assumption that your assets are growing nearly as fast as your withdrawal rate. If they're growing more slowly or if there's a major market downturn, you'll wish you'd started at lower withdrawal rate.
And as I said..........If the Constant Percentage of Portfolio Balance does not work......What Withdrawal method will?
If Market conditions are so bad NO Withdrawal Method will work ! Do you Get it?

Also, I believe that your extreme example has not occurred in U.S. History. It's not that hard to create a Straw man condition where any withdrawal method would be that uncomfortable.
I think that is pretty much correct. If the 4% of current balance rule gets you into trouble due to current balance shrinking, 4% of initial balance plus inflation is an even higher rate of spending will get you into trouble even faster. The way out in the later case is you might get lucky and die before you hit zero and the belt tightening turned out not to be necessary.

I think the key is to make sure that you retire with no or minimal debt to reduce absolutely required income needs, and between social security, pensions if you are so lucky, and annuities, etc. you have a pretty safe income stream that covers or nearly covers that absolutely required income need. Then you can take some pretty heavy belt tightening when needed without too much trouble.

In the end unless you are taking a very small withdrawal rate, in the real world there really is not scheme that is free of the possibility of belt tightening.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by umfundi »

Rodc wrote: I think that is pretty much correct. If the 4% of current balance rule gets you into trouble due to current balance shrinking, 4% of initial balance plus inflation is an even higher rate of spending will get you into trouble even faster. The way out in the later case is you might get lucky and die before you hit zero and the belt tightening turned out not to be necessary.

I think the key is to make sure that you retire with no or minimal debt to reduce absolutely required income needs, and between social security, pensions if you are so lucky, and annuities, etc. you have a pretty safe income stream that covers or nearly covers that absolutely required income need. Then you can take some pretty heavy belt tightening when needed without too much trouble.

In the end unless you are taking a very small withdrawal rate, in the real world there really is not scheme that is free of the possibility of belt tightening.
Michael Zwecher, Zvi Bodie and others point out that you should assure the "floor" of your minimum required income. The lower your retirement resources are, the less risk you can tolerate.

If a 4% withdrawal rate is dicey, there is an option: A Single Premium Annuity which can "yield" much more than 4%, up to nearly 7%.

Of course, it's a stark choice: Be assured of no money after you die, or risk having no money before you die.

Keith
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john94549
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Re: Achieving a Higher Safe Withdrawal Rate

Post by john94549 »

Rodc wrote:
In the end unless you are taking a very small withdrawal rate, in the real world there really is not scheme that is free of the possibility of belt tightening.
I posted my anecdote merely to illustrate that, no matter how much you plan, life is a moving target. I ran across some retirement "projections" I did some fifteen years back, just after I turned 50. Absolutely laughable, as it turned out.

I'm not suggesting planning is useless, of course. I'm glad I erred on the low side. Sort of like playing "Monopoly" when you drew the card "Bank Error in Your Favor." As opposed to "Go to Jail, Go Directly to Jail. Do not Collect $200."

Come to think of it, retirement planning and playing Monopoly. Good (or bad) choices combined with rolls of the dice.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Peter Foley »

In many threads I have offered the advice to use a 4% withdrawal rate based on the Trinity Study. I think if you are in the accumulation phase this is best rule of thumb available in part because it has been so thoroughly studied and debated. Obviously we don't know if the future will reflect the past sufficiently for today's retirees to accept those results as anything close to a guarrantee. If one thinks that 4% is too agressive, the 3% rate in the Trinity Study was 100% successful except for a total bond portfolio. There have been a number of studies that have also explored methods of "adjusting" the 4% rate to improve its probability of success or to increase the withdrawal rate. Two oft cited studies include the effects of not taking a full inflationary adjustment when inflation is high, and resetting the 4% periodically based on portfolio balance.

I think it is absurd to think that responsible individuals will not adjust their spending based on their experiences. Taylor's anecdotal comments reflect that reality.
I especially like John94549's comment
I had always assumed we would be in a 4% SWR by now. We're at zero.

I'm sure there are stories out there of folks who planned a 4% SWR commencing at 65 and had to start withdrawals earlier (i.e., the flip-side of our situation).

Amazing. No matter how much you plan, life intervenes.
A withdrawal rate guide is just that, a guide. It is not an absolute. We are trying to predict the future as best we can.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Zephyr120 »

For me, the outstanding value of the article is Table 3, the outline of portfolio value and withdrawals for each year of retirement. My retirement strategy (in a few years) is to compose such a table and use it each year for feedback on my actual portfolio and withdrawals. Flexibility with withdrawals - raising or lowering them is in the plan. Skipping an expensive overseas trip can lower expenses much more than the 1-5%.

The Trinity study (or rather the data) would be used as a "road test" to make sure the plan at least survives historical returns.

Finally, I plan to incorporate 1) how long we expect to live, 2) asset allocation changes over retirement 3) decline in value of pension and annuities.

And just a style difference: instead of withdrawing x%, I prefer to calculate RMD type numbers - divide portfolio value by x.y (4% is the same as divide by 25).

I'm glad to see the article, as the challenge is to compose rules for raising or lowering the withdrawals, given market returns. It's nice to see these adjustments can be so minor as 1-5% (I'd go for up to 20%).
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Hexdump »

For the calculators that give me an estimate of how long my "portfolio" will last at various rates, they always ask for my portfolio balance.
I have been excluding the equity we have in our house.
Should I, or should I not ?

thanks
Levett
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Levett »

Hi Keith,

I hope you don't think it rude of me to ask whether the choice is quite as stark as you frame it--e.g.,

If a 4% withdrawal rate is dicey, there is an option: A Single Premium Annuity which can "yield" much more than 4%, up to nearly 7%.

Of course, it's a stark choice: Be assured of no money after you die, or risk having no money before you die
.

Moshe Milevsky wisely speaks of product allocation and, in fact, Zwecher and Otar are no less familiar with combining various products.

I've done it myself for 13 yrs. of retirement. Works just fine. :D

Lev
earlyout
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Re: Achieving a Higher Safe Withdrawal Rate

Post by earlyout »

Hexdump wrote:For the calculators that give me an estimate of how long my "portfolio" will last at various rates, they always ask for my portfolio balance.
I have been excluding the equity we have in our house.
Should I, or should I not ?

thanks
I've often asked myself the same question but always decide to not include the equity since it is not an investible asset. I do consider it in my longevity planning as long term care insurance and so it adds a few years to the total.
umfundi
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Re: Achieving a Higher Safe Withdrawal Rate

Post by umfundi »

Hexdump wrote:For the calculators that give me an estimate of how long my "portfolio" will last at various rates, they always ask for my portfolio balance.
I have been excluding the equity we have in our house.
Should I, or should I not ?

thanks
Hex,

My personal answer is "No". We have no intention of moving.

But, you may wish to include at least that part of your equity that you think is accessible if downsizing is an option. In any event, be sure that housing expenses (in your home or somewhere else) are part of the equation.

Keith
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umfundi
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Re: Achieving a Higher Safe Withdrawal Rate

Post by umfundi »

Levett wrote:Hi Keith,

I hope you don't think it rude of me to ask whether the choice is quite as stark as you frame it--e.g.,

If a 4% withdrawal rate is dicey, there is an option: A Single Premium Annuity which can "yield" much more than 4%, up to nearly 7%.

Of course, it's a stark choice: Be assured of no money after you die, or risk having no money before you die
.

Moshe Milevsky wisely speaks of product allocation and, in fact, Zwecher and Otar are no less familiar with combining various products.

I've done it myself for 13 yrs. of retirement. Works just fine. :D

Lev
Lev,

No, not at all. I put it that way because "nothing left after you die" is the standard behavioral argument against SPIAs. It can be a big mental hurdle.

Fortunately, I was forced to confront that issue when last GM offered me a lump sum to buy out my pension. It is now absolutely my plan to purchase annuities as required to compensate for inflation eroding my pension.

The same issue comes up when you discuss delaying Social Security. I mean, which part of an inflation indexed annuity that pays 8% and includes survivor benefits do you not understand? (But, I may not get my "fair share".)

I was sort of speaking to the marginal situation where 4% is your floor requirement and there is nothing left over. If that is the case, age in bonds and hope for the best is a very poor plan. In my opinion.

Keith
Déjà Vu is not a prediction
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pkcrafter
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Re: Achieving a Higher Safe Withdrawal Rate

Post by pkcrafter »

To paraphrase John Bogle in Piller 9 were he says, "You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both", we can say: You may have a lower and predictable safe withdrawal rate with steady annual inflation increases, or you may have a higher, unpredictable withdrawal rate, but you can't have both.

You won't run out of money if you use a constant percentage withdrawal, but you could end up withdrawing much less than you need.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
ResNullius
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Re: Achieving a Higher Safe Withdrawal Rate

Post by ResNullius »

pkcrafter wrote:To paraphrase John Bogle in Piller 9 were he says, "You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both", we can say: You may have a lower and predictable safe withdrawal rate with steady annual inflation increases, or you may have a higher, unpredictable withdrawal rate, but you can't have both.

You won't run out of money if you use a constant percentage withdrawal, but you could end up withdrawing much less than you need.

Paul
Or...a person could simply use their brain.
Levett
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Levett »

Keith,

Thanx.

Lev
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Re: Achieving a Higher Safe Withdrawal Rate

Post by pkcrafter »

ResNullius wrote:
pkcrafter wrote:To paraphrase John Bogle in Piller 9 were he says, "You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both", we can say: You may have a lower and predictable safe withdrawal rate with steady annual inflation increases, or you may have a higher, unpredictable withdrawal rate, but you can't have both.

You won't run out of money if you use a constant percentage withdrawal, but you could end up withdrawing much less than you need.

Paul
Or...a person could simply use their brain.
Of course, that is the bottom line answer and I fully support using some common sense. I am reminded, though, of something William Bengen said about retiree behavior. In the 70s when inflation was running amok, retirees were giving themselves annual increases of up to 9% annually! The only reason they survived was the great bull run that started in the 80s. So, when we say use common sense, we may have to define common sense. :shock:

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
umfundi
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Re: Achieving a Higher Safe Withdrawal Rate

Post by umfundi »

pkcrafter wrote:
ResNullius wrote:
pkcrafter wrote:To paraphrase John Bogle in Piller 9 were he says, "You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both", we can say: You may have a lower and predictable safe withdrawal rate with steady annual inflation increases, or you may have a higher, unpredictable withdrawal rate, but you can't have both.

You won't run out of money if you use a constant percentage withdrawal, but you could end up withdrawing much less than you need.

Paul
Or...a person could simply use their brain.
Of course, that is the bottom line answer and I fully support using some common sense. I am reminded, though, of something William Bengen said about retiree behavior. In the 70s when inflation was running amok, retirees were giving themselves annual increases of up to 9% annually! The only reason they survived was the great bull run that started in the 80s. So, when we say use common sense, we may have to define common sense. :shock:

Paul
So, what about inflation?

Is there any better advice than have some exposure to stocks, and hope? Is there any expectation that inflation is accompanied by rising stock prices? Conversely, how likely is a bear market and higher inflation?

I suppose what I'm asking is, is there an expected correlation between market prices and inflation?

Keith
Déjà Vu is not a prediction
Levett
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Levett »

I'd be real careful about appeals to "common sense."

Albert Einstein is alleged to have said of "common sense" that it's "the collection of prejudices acquired by age eighteen."

As for me, I start with the adage that "Investing is simple but not easy" (attributed to Warren Buffett), and then I would go one step further:

Investing is simple for satisficers, but it may not be easy for maximizers.

It helps to know which one you are. :happy

Lev
Rodc
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Rodc »

umfundi wrote:
Hexdump wrote:For the calculators that give me an estimate of how long my "portfolio" will last at various rates, they always ask for my portfolio balance.
I have been excluding the equity we have in our house.
Should I, or should I not ?

thanks
Hex,

My personal answer is "No". We have no intention of moving.

But, you may wish to include at least that part of your equity that you think is accessible if downsizing is an option. In any event, be sure that housing expenses (in your home or somewhere else) are part of the equation.

Keith
While you have no intention of moving (so you think now), many end up moving for various reasons (closer to family caregiver, no longer able to handle taking care of a house or lose interest in doing so, need assisted living, etc.). Some of those options may require taping home equity to pull off.

Costs like assisted living can be very high and are highly uncertain, rendering planning dicey. While admittedly somewhat mental accounting, I sort of shove the uncertainly aside and pair it up with home equity (that is I assume they are offsetting and ignore both). In looking at such retirement living options for a family member it looked like costs are aligned (accidental or not) with average cost of a house. Makes sense, if they price much higher few could afford the services and the places would go broke due to too few customers.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Cut-Throat »

pkcrafter wrote:To paraphrase John Bogle in Piller 9 were he says, "You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both", we can say: You may have a lower and predictable safe withdrawal rate with steady annual inflation increases, or you may have a higher, unpredictable withdrawal rate, but you can't have both.

You won't run out of money if you use a constant percentage withdrawal, but you could end up withdrawing much less than you need.

Paul
If you 'end up withdrawing much less than you need' with a constant percentage withdrawal, then the market conditions are such that NO withdrawal method will save you. Also most constant percentage withdrawal methods increase the percentage withdrawal with age, so you are not relying on continuing growing principal to maintain spending.

The big advantage of withdrawing a percentage of remaining portfolio balance is that you cutting expenses when the portfolio declines and increasing spending when the portfolio gains. Exactly what you should be doing. More Selling high instead of Selling Low.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Rodc »

You won't run out of money if you use a constant percentage withdrawal, but you could end up withdrawing much less than you need.
Running out of money is the ultimate form of "you could end up withdrawing much less than you need."

One is a gradual decline in income and likely doable if unpleasant.

The other is a sudden catastrophic decline in income.

You takes your choices.

In practice I suspect very few set up a fixed withdrawal and stick to it in the face of looming disaster. Fixed withdrawal is just a rough planning tool, not a practical strategy.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by pkcrafter »

Rodc:
In practice I suspect very few set up a fixed withdrawal and stick to it in the face of looming disaster. Fixed withdrawal is just a rough planning tool, not a practical strategy.
Well, as Bengen said, some retirees increased withdrawals in line with high inflation rates, so that is documentation that investors can do dumb things. I would agree that no set and forget withdrawal strategy is absolutely safe or absolutely optimal. As for fixed withdrawal, I would also agree, it may not always be practical, so do we not recommend the "safe" withdrawal rate with annual inflation increases? The problem is many retirees much prefer a known income every year. A fixed percentage is safer but annual income is not dependable.

Paul
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Re: Achieving a Higher Safe Withdrawal Rate

Post by BruceA »

For what it's worth, here is my summary of all this.

SWR (4% and variations) is an excellent rule of thumb. It is generally conservative and very easy to implement. Much better than winging it for those looking for something simple and conservative. Having said that, there are several problems with SWR as I enumerated above. I would think that anyone planning to use SWR should understand each of the seven problem items and make sure you are comfortable you have those under control.

Financial circumstances and investments vary considerable among individuals. IMO it is much better to evaluate one's specific personal situation going forward than to use a rule of thumb based on history. So my recommendation is to spend the time and effort to: a) fully understand one's specific situation going forward and compute a base case annual available spend; b) consider worse-case scenarios based on your own facts, and either, make sure you can live with them, or revise your plan so that you can; c) armed with this analysis, apply the common sense approach using good judgment to deal with your planning going forward.

You have to be either lucky or rich to succeed using a gut-feeling common sense approach without sufficient analysis of your present situation. So I believe that the best approach is a well-informed common sense approach based upon a thorough analysis of one's financial circumstances as I have suggested in earlier posts.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by pkcrafter »

BruceA wrote:For what it's worth, here is my summary of all this.

SWR (4% and variations) is an excellent rule of thumb. It is generally conservative and very easy to implement. Much better than winging it for those looking for something simple and conservative. Having said that, there are several problems with SWR as I enumerated above. I would think that anyone planning to use SWR should understand each of the seven problem items and make sure you are comfortable you have those under control.

Financial circumstances and investments vary considerable among individuals. IMO it is much better to evaluate one's specific personal situation going forward than to use a rule of thumb based on history. So my recommendation is to spend the time and effort to: a) fully understand one's specific situation going forward and compute a base case annual available spend; b) consider worse-case scenarios based on your own facts, and either, make sure you can live with them, or revise your plan so that you can; c) armed with this analysis, apply the common sense approach using good judgment to deal with your planning going forward.

You have to be either lucky or rich to succeed using a gut-feeling common sense approach without sufficient analysis of your present situation. So I believe that the best approach is a well-informed common sense approach based upon a thorough analysis of one's financial circumstances as I have suggested in earlier posts.
Good summation, here's a +1.

Paul
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Re: Achieving a Higher Safe Withdrawal Rate

Post by likop »

My question to the group is not on withdrawal rate, but rather on my withdrawal approach. Please let me know what you think about the following that I want to start in a couple of years.

1. Keep cash (or equivalent) reserve that is sufficient for 3 years of living expenses. The rest in 70/30 fixed income/equity allocation.

2. I am fairly confident that I should not ever have to liquidate any of the fixed income/equity instruments because of the size of the portfolio (and modest living expenses) and having the cash to ride out three years of downturn.

3. Provide for on-going living expenses via income/dividends from fixed income and equities. Periodically rebalanced to maintain 70/30 ratio.

4. If fixed income and equity income/dividends exceed required living expenses, reinvest the leftover. If fixed income and equity income/dividends are not sufficient to cover living expenses, augment from cash reserve.

5. Refill cash reserve (back to 3-year living expense amount) with fixed income and equity income/dividends when excess is available.
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Re: Achieving a Higher Safe Withdrawal Rate

Post by umfundi »

likop wrote:My question to the group is not on withdrawal rate, but rather on my withdrawal approach. Please let me know what you think about the following that I want to start in a couple of years.

1. Keep cash (or equivalent) reserve that is sufficient for 3 years of living expenses. The rest in 70/30 fixed income/equity allocation.

2. I am fairly confident that I should not ever have to liquidate any of the fixed income/equity instruments because of the size of the portfolio (and modest living expenses) and having the cash to ride out three years of downturn.

3. Provide for on-going living expenses via income/dividends from fixed income and equities. Periodically rebalanced to maintain 70/30 ratio.

4. If fixed income and equity income/dividends exceed required living expenses, reinvest the leftover. If fixed income and equity income/dividends are not sufficient to cover living expenses, augment from cash reserve.

5. Refill cash reserve (back to 3-year living expense amount) with fixed income and equity income/dividends when excess is available.
likop,

I posted a discussion of a similar scheme here:
http://www.bogleheads.org/forum/viewtop ... 4#p1577464

Some comments on what you say:

I think you do need to compute a withdrawal rate to estimate the life of your plan. Life = N years = 1/Rate, so, for example 2.5% gives an estimate of 40 years. 5% (20 years) for example might be a concern, depending on your age (or you and a partner's combined life expectancy) and your desire for a legacy.

Conceptually, you are making two buckets.
Bucket A: 3 years of cash and
Bucket B: N-3 years 0f your 70/30 income/equity asset allocation (AA).

You can then calculate an overall AA as 3/N cash, 0.7*(N-3)/N income and 0.3*(N-3)/N equity. How does that feel?

Is this being done with tax advantaged funds or not? Is there any reason to prefer dividends vs. capital gains if you liquidate some assets?

Your 70/30 fixed income/equity allocation sounds conservative to me, particularly if "fixed income" means medium-term bonds. If "fixed income" includes dividend-paying stocks, you are somewhat mixing dissimilar assets.

You are somewhat adopting a strategy of "Income Investing" by relying on dividends and distributions to generate resources for income (withdrawal) or rebalancing. I think current opinion does not advise this because, for example, low interest rates might cause you to move from bonds to dividend-paying stocks, distorting your AA. Some call it "chasing yield".

My opinion is to set an AA and invest it in a tax-efficient manner. If you need to liquidate assets to generate cash, so be it.

So, your "Bucket A" is 3 years cash. Is that enough? What would you do if equities drop by 50% and stay there for 5 years? I am not criticizing your plan, I am asking you to consider scenarios in advance. Then, if they occur, you can say, "I have a plan for that".

"Bucket B" is your 70/30 mix of income/equities.

The bottom line (I think) is to understand what is really going on here. Your Bucket A is a fixed amount of cash. Done. Sort of like an emergency fund.

Let's go two or three years down the road. Well, Bucket A is still 3 years' cash, the same as before. All the net action must therefore be with Bucket B. Bucket B is funding your income, Bucket A is a reserve. So, really: If there is some major market event, are you prepared to leave Bucket B alone and actually deplete Bucket A to zero?

If this were my plan, I would stretch Bucket A to 5 or even 7 years, and would make Bucket B at least 50/50 stocks/bonds. And I would check the withdrawal rate so the expected plan life is at least 30 years.

If any of this looks dicey, there are investment advisers (I am not one) and online tools that will allow you to explore (via Monte Carlo simulation) the interplay of your AA in Bucket B and the expected life (or probability of success) of your plan.

Good luck!

Keith
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Rodc
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Re: Achieving a Higher Safe Withdrawal Rate

Post by Rodc »

likop wrote:My question to the group is not on withdrawal rate, but rather on my withdrawal approach. Please let me know what you think about the following that I want to start in a couple of years.

1. Keep cash (or equivalent) reserve that is sufficient for 3 years of living expenses. The rest in 70/30 fixed income/equity allocation.

2. I am fairly confident that I should not ever have to liquidate any of the fixed income/equity instruments because of the size of the portfolio (and modest living expenses) and having the cash to ride out three years of downturn.

3. Provide for on-going living expenses via income/dividends from fixed income and equities. Periodically rebalanced to maintain 70/30 ratio.

4. If fixed income and equity income/dividends exceed required living expenses, reinvest the leftover. If fixed income and equity income/dividends are not sufficient to cover living expenses, augment from cash reserve.

5. Refill cash reserve (back to 3-year living expense amount) with fixed income and equity income/dividends when excess is available.
This known as a "bucket approach". It is more mental accounting than real. It contains no magic, works fine for some, has some distinct drawbacks as well.

If you wish you can do a search on this website for a number of very informative threads where people have hashed this out in detail. My sense is that after all is said and done most here don't see this as great way to go, but YMMV.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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