Otar's book: "Unveiling the Retirement Myth"

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Dandy
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Post by Dandy »

Re the 4% rule i.e. take 4% of your portfolio the 1st yr of retirement and then use that amount + inflation for the subsequent years is a good general rule.
BUT when we are talking about a 30 year time span and retirees that have a decent % in equities you have to use some common sense.

If your portfolio get hammered then you really can't just go on adding inflation to last year's amount BLINDLY. It's really a guide not a "rule". I know certain projections re this "rule" discuss skipping the $ add for inflation or reducing the withdrawal if the portfolio takes a hit. That makes a lot of sense. That sounds like a rational approach.

The way I read it if the portfolio takes a "normal" hit -- say 10% there is no need to panic and you may consider continuing with the general 4% + inflation rule -- if you have a 25% hit and/or several years of 10% or more hits to your portfolio then you can't keep following the "rule". It's hard to believe that people would keep taking out 4%+inflation and run their portfolio into the ground in 20 years.

A key consideration to me -- is the 4% providing you with barely enough to make ends meet? If so, then you won't be able to cut back much at all. That speaks to annuitizing enough of your portfolio if/when the 4% is the amount you need to make ends meet. Since luck (bad) can play a part in this situation maybe you start with the 4% "rule" only if you can live on 4% your portfolio if the equity portion lost 25% - e.g. $1million portfolio allocated 50% equity don't follow the 4% rule unless you can live on 4% of $ 750k.
dbr
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Post by dbr »

What is calculated in 4% rule studies is approximately a worst case scenario. In other words, at that withdrawal rate the portfolio would have survived even if the worst considered history of investment returns actually happened. In all other cases one could have taken more money than that without harm. Within that context it is not true that experiencing bad investment returns early in retirement means that a 4% withdrawal portfolio is certainly in trouble.

Now what could happen is worse than the worst cases considered in those studies. Someone who is on the bare edge of 4% SWR really is poised to fail in one of those worse than worst cases. One would certainly think the developing situation would give one pause to consider.

What is actually analyzed is a probability of failure. Given overall random chances characteristic of how things have worked in the past, those 4% withdrawals have, lets say in a given study, 95% or 98% or 99% chance of success, however it turns out. Those few numbers of failures and some successes close to them are dominated by experiences with early bad sequences of returns. Now a statistically useful thing to do would be to calculate the conditional probability of success given knowledge of the early years bad news. Those probabilities are not nearly so optimistic, of course. A problem is that there is barely enough data to estimate the original probabilities. There is not really enough data to get good numbers on conditional probabilities.

The investor experiencing a bad early scenario has to face estimating whether or not things are going to just work out against a significant chance that things really are worse than the worst. Retrenchment, or Plan B, is probably a wise course in such a case.
grayfox
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Post by grayfox »

"4% Rule" is not really much of a rule. I wouldn't even call it a guideline.

It is really just an historical observation. Over fifty-five 30-year periods starting from 1926 to 1981, the Maximum Withdrawal Rate (MWR) for a 75/25 portfolio was never less than 4%.

This is kind of like the 4-minute mile. At one time, the theory among sports experts was that no human could run a mile in under 4 minutes. This theory held up until Roger Bannister broke the 4-minute mile in 1954. So much for that idea.

Image
from http://en.wikipedia.org/wiki/Mile_run_w ... rogression

The current record is 3:43:13 set by Hicham El Guerrouj from Morroco in 1999.

So nobody knows if this 4% observation will hold for every period. In fact, some researchers that looked into that question concluded that it probably will NOT hold.

One paper shows that the MWR has likely dipped below 4% in the mid 1990s when valuations starting going through the roof.

Image
from http://ideas.repec.org/p/pra/mprapa/27487.html

This paper was discussed in this Bogelhead thread http://www.bogleheads.org/forum/viewtop ... hlight=mwr

Even today, it appears likely that MWR will be lower than 4% because the combination of earnings yields, dividend yields and bond interest rates are all lower than they were during the period of the 4% observation.

4% Rule, 4-minute mile, 61 home runs in a season, you can't expect records to stand forever. Records are made to be broken.
gkaplan
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Location: Portland, Oregon

Post by gkaplan »

How about 56 or 714?
Gordon
dandan14
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Post by dandan14 »

snowman9000 wrote:
MWCA wrote:I feel its all mostly luck. Even the best plans can be destroyed with one mistake.
I feel that bad luck should be insured against.
I agree with that. Bad luck can happen in more than just the stock market -- your house can burn down, you can have a long expensive illness, etc -- but people seem to understand the role of insurance for the most part in these instances.

In your retirement savings, however, people in general don't seem to understand insurance. Seems to me that a logical thing to do in retirement is to hedge against any tragic losses using puts that mirror your holdings.

For example, if I have 1M in assets with 400k in equities. Buying puts (i.e. insurance) to cover that 400k against a 10% loss in the next 6 months will cost me about $10k.

I'd be curious to see more data (and I've worked on some of this myself) around a portfolio based around TIPS, Equities, and puts.
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FL_TrailRunner
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Location: Clearwater, Florida

Post by FL_TrailRunner »

Should one also read Jim Otar's previous book, High Expectations & False Dreams (2001), before/after reading Unveiling The Retirement Myth (2009)? Or, are the concepts of the first book covered in enough detail in the second, making it redundant to read both?
jmk
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Re: Otar's book: "Unveiling the Retirement Myth"

Post by jmk »

CaptMidnight wrote:I also appreciated Otar's take on distribution portfolios, his skepticism on Monte Carlo simulations, and some of the other points the Lbill mentioned. However, I was also disappointed that Otar never seemed to express any caution about basing his recommendations and the retirement calculator that he offers solely on backtesting historical data. As we know, the problem with historical data is that there isn't enough of it. While Otar avoids the explicit claim that historical data is sufficient for future planning, both his book and his calculator would be meaningless without that assumption.
I believe to figure out his various probabilities (what he calls "aftcasting"), he considers historical returns in the order they occurred, starting one year at a time from 1900 to present. That seems somewhat arbitrary--assuming history will unfold in the same order this century as the last.

From his website:
When you enter your personal financial data, the model calculates asset values and cash flow streams as if you retired in each of the years since 1900. The actual historic market data is applied to your specific financial situation.
kenner
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Re: Otar's book: "Unveiling the Retirement Myth"

Post by kenner »

The best laid plans of mice and men gang aft agley.
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