WSJ article on "The 4% Rule" Here is the link.

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richard
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Re: WSJ article on "The 4% Rule" HERE is the link

Post by richard » Tue Mar 05, 2013 9:20 am

EDN wrote:Yes Richard, I understand independent periods, just as I appreciate the ability and usefulness in using this historical data in bootstrap simulations that eliminate many of these concerns (that come to similar conclusions). But I'm guessing you prefer we forget about those too (and their results).

Glad to hear it. Using the phrase "85 years of US data doesn't have enough independence" did not indicate a great knowledge of the statistical issues with not having enough independent data points.

If historical data is not a reliable guide to the future, because we don't have enough data or because conditions have changed, bootstrapping does not solve the problem. Bootstrapping generally assumes a stable underlying population distribution, which is far from clear. Perhaps you can explain how bootsrap simulation eliminate many of these concerns.
EDN wrote:Your last comment is a telling one. I think your (and others) issue is you are looking for all these planning tools and techniques to tell you precisely what the future will look like, removing all uncertainty from the equation. That isn't retirement planning. Instead, RP is using all of the tools at our disposal (robust financial theory, historical analysis, and statistical modeling including MC and bootstrapping, to name just a few) to build the most realistic expectations about a future that will always be uncertain and unpredictable so that we may make the best decisions possible with the highest probability of success and an appreciation of what could/will go wrong. Nothing more.

This thread is a discussion of the 4% rule, which I regard as "a general rule of thumb based on historical data that's not sufficient to be a reliable predictor of the future."

You objected to that remark, citing 85 years of data and MC simulations. I pointed out their lack of reliability. Your respond in part that the "future that will always be uncertain and unpredictable." Why then are you disagreeing that 4% is a general rule of thumb based on historical data that's not sufficient to be a reliable predictor of the future?

"Robust financial theory, historical analysis, and statistical modeling including MC and bootstrapping" don't advance things much beyond simplistic analysis (although they are not doubt helpful in marketing). They remind me of the old story about the man searching for his keys at night near a lamppost. When questioned as to exactly where the key was lost, he indicated that it was lost elsewhere but that he was searching under the lamppost because the light was better there. We use historical analysis, etc. because the light seems better, but shouldn't fool ourselves that they bring us much closer to finding the keys.

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by richard » Tue Mar 05, 2013 9:33 am

nisiprius wrote:Wade, looking for your personal opinion here. There's a real catch-22 in looking at long-term data, because just about the time a block of data starts to be long enough to mean something, it starts to be long enough that I start to wonder about continuity of the underlying thing. Was the stock market before the SEC and the Investment Company Act of 1940 the same thing as the stock market of today? Should one really expect it to display similar statistical behavior and statistics? Or are apparent watershed events really just what they seem, dividing different eras with different statistics on each side?

So, I'm asking you: in your opinion, was the stock market of the 1920s similar enough in its general financial economics and dynamics?

My own spin is that financial data may be too episodic to do statistics on--i.e. Mandelbrot was right--and that long-term statistics may not be any more reliable than, say, statistics on the "average war."

This is how Frederick Lewis Allen, writing in the 1930s (Only Yesterday) saw it. Does this stock market have the same mean and standard deviation as the stock market of today?
...a group of powerful speculators with fortunes made in the automobile business and in the grain markets and in the earlier days of the bull market in stocks--men like W. C. Durant and Arthur Cutten and the Fisher Brothers and John J. Raskob--were buying in unparalleled volume.... The big bull operators knew, too, that thousands of speculators had been selling stocks short in the expectation of a collapse in the market, would continue to sell short, and could be forced to repurchase if prices were driven relentlessly up. And finally, they knew their American public. It could not resist the appeal of a surging market. It had an altogether normal desire to get rich quick, and it was ready to believe anything about the golden future of American business. If stocks started upward the public would buy, no matter what the forecasters said, no matter how obscure was the business prospect.

If I might respond to your question to Wade, I've frequently said that conditions change, making historical data much less useful. Among other things, we know the past, the world seems safer, we have investment vehicles that didn't exist, tax and other laws have changed, we have modern central banks, technology has made dramatic changes, etc., etc.

Consider some old rules. For example, it used to be said that stock dividends were higher than bond yields because stocks were riskier, so never buy stocks if dividends are lower than interest rates. This was true until about 50 years ago. If you sold at that point, you'd miss a rather long period during which stocks outperformed. Conditions changed.

At best, we have no way of knowing whether conditions are sufficiently similar. At worst, they are meaningfully different. We just don't know. Unreliable guidance may be the best we can do, but we have to be especially mindful, including in light of the psychological issues associated with anchoring (http://en.wikipedia.org/wiki/Anchoring).

Much of statistics is based on taking a random sample from an unchanging underlying population. Here, we don't necessarily have either a random sample or an unchanging underlying population.

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by k66 » Tue Mar 05, 2013 10:21 am

I would easily just file this piece at the bottom of the bird cage. The author is is spreading industry hyperbole without any real discussion of why the 4% was deemed to be safe or any of the current rationale for or against it's use. The casual reader is left with a feeling that the 4% rule is inherently flawed and there is a "reasonable" expectation of no recourse.

From the WSJ article:
Well, it was beautiful while it lasted. In recent years, the 4% rule has been thrown into doubt, thanks to an unexpected hazard: the risk of a prolonged market rout the first two, or even three, years of your retirement. In other words, timing is everything. If your nest egg loses 25% of its value just as you start using it, the 4% may no longer hold, and the danger of running out of money increases.


It is precisely these types of articles that I look less and less to newspapers and magazines for information and more for entertainment (or aggravation!). Yes - we know the 4% system (or any type of systematic withdrawal methodology has the potential to run dry... that has always been known. An yes, we know there is a possibility of starting out on a "bad foot". And yes, we have always known making adjustments (say temporary reductions) to the initial SWR in such circumstances would likely be required in order to stay afloat for the long term.

Monte-Carlo and Historical simulations both return the same result: some periods are bound to do better, some worse. No one knows the future. Chance is in the air.

If you had retired Jan. 1, 2000, with an initial 4% withdrawal rate and a portfolio of 55% stocks and 45% bonds rebalanced each month, with the first year's withdrawal amount increased by 3% a year for inflation, your portfolio would have fallen by a third through 2010, according to investment firm T. Rowe Price Group. And you would be left with only a 29% chance of making it through three decades, the firm estimates.


I wondering though, other than on the advice of my portfolio-churning adviser, why I would want or need to rebalance monthly. I think even annually is more than frequently enough, and as we all know, even less frequently using a delta-percent methodology may do no better in the long run and keep rebalancing to just a handful of occasions. The author also seems to be pointing a great surprise that after 12 years into a 30 (?) year retirement that the portfolio has diminished in value. Again, this is not unexpected.

My own simple calc's suggest that a real return of merely 1.4% (4.4% total if you apply 3% inflation as described in the article) per annum would leave you at 66% of the portfolio's initial balance after 12 years (at 4% withdrawal). Continue that 1.4% (real) rate of return onward into the future and you have another 18 years of portfolio life. That's 30 years total by my count.

The odds of a continued 18 year "downturn" are, in my own consideration, not likely; so it means 30+ years.... good enough for me!
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Re: WSJ article on "The 4% Rule" Here is the link.

Post by grayfox » Tue Mar 05, 2013 12:23 pm

nisiprius wrote:Wade, looking for your personal opinion here. There's a real catch-22 in looking at long-term data, because just about the time a block of data starts to be long enough to mean something, it starts to be long enough that I start to wonder about continuity of the underlying thing. Was the stock market before the SEC and the Investment Company Act of 1940 the same thing as the stock market of today? Should one really expect it to display similar statistical behavior and statistics? Or are apparent watershed events really just what they seem, dividing different eras with different statistics on each side?

So, I'm asking you: in your opinion, was the stock market of the 1920s similar enough in its general financial economics and dynamics?

My own spin is that financial data may be too episodic to do statistics on--i.e. Mandelbrot was right--and that long-term statistics may not be any more reliable than, say, statistics on the "average war."

This is how Frederick Lewis Allen, writing in the 1930s (Only Yesterday) saw it. Does this stock market have the same mean and standard deviation as the stock market of today?
...a group of powerful speculators with fortunes made in the automobile business and in the grain markets and in the earlier days of the bull market in stocks--men like W. C. Durant and Arthur Cutten and the Fisher Brothers and John J. Raskob--were buying in unparalleled volume.... The big bull operators knew, too, that thousands of speculators had been selling stocks short in the expectation of a collapse in the market, would continue to sell short, and could be forced to repurchase if prices were driven relentlessly up. And finally, they knew their American public. It could not resist the appeal of a surging market. It had an altogether normal desire to get rich quick, and it was ready to believe anything about the golden future of American business. If stocks started upward the public would buy, no matter what the forecasters said, no matter how obscure was the business prospect.


I will answer this, because it is not a matter of opinion, but of observable statistics.

Suppose you model the returns of S&P 500 as a constant-expected return model over some sample period, say 84 months. You can estimate the parameters monthly mean and standard deviation using sample statistics. Let's say the monthly mean return is 1.25% and sd is 3.8%. You can also estimate the sample errors to see how precise are the estimates. If you look at 95% confidence intervals (+/-2 SE's), for mean estimate you get a range of something like 0.5% to 2.0%, and for sd 3.2% to 4.3%

The error on the estimate of mean return is large, compared to the size of the mean. Errors on sd are not as large.

Ah-ha, you say, increasing the number of samples will reduce the error and give a better estimate. We just need to use more months of data.

But then you look at the mean and sd over time, and you find that the parameters are not constant. Mean, SD and correlation vary over time. The underlying process is not stationary. Increasing the number of samples just means you will be using samples from times when mean was much different.

There is nothing you can do to improve the estimate. Not Monte Carlo simulation, not bootstrapping, nothing. You have to live with the uncertainty in the parameters. Mean return will never be known very precisely.
Last edited by grayfox on Tue Mar 05, 2013 12:25 pm, edited 1 time in total.
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Re: WSJ article on "The 4% Rule" Here is the link.

Post by Mitchell777 » Tue Mar 05, 2013 12:24 pm

I do not mind looking at worst case scenarios, but may be I am missing something. If you retired in 2000 and withdrew 3% adjusted for inflation wouldn't SS kick in some time after retirement and at least increase the 29% chance of making it 30 years from year 2010? Unless the argument is that the person retires at age 62, SS is taken then, and the person still needs a 3% withdeawl rate. Under that scenario, the life expectancy would be 62 in yr 2000 + 10 years until 2010 +30 more years = 102 years old.

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Re: WSJ article on "The 4% Rule" HERE is the link

Post by EDN » Tue Mar 05, 2013 12:26 pm

Richard,

I just think we are about as far apart as any two can be in their view of how to plan and make investment decisions. In response to your comments:

richard wrote:A) If historical data is not a reliable guide to the future, because we don't have enough data or because conditions have changed, bootstrapping does not solve the problem. Bootstrapping generally assumes a stable underlying population distribution, which is far from clear. Perhaps you can explain how bootsrap simulation eliminate many of these concerns.

===============================

B) This thread is a discussion of the 4% rule, which I regard as "a general rule of thumb based on historical data that's not sufficient to be a reliable predictor of the future."

You objected to that remark, citing 85 years of data and MC simulations. I pointed out their lack of reliability. Your respond in part that the "future that will always be uncertain and unpredictable." Why then are you disagreeing that 4% is a general rule of thumb based on historical data that's not sufficient to be a reliable predictor of the future?

===============================

C) They remind me of the old story about the man searching for his keys at night near a lamppost. When questioned as to exactly where the key was lost, he indicated that it was lost elsewhere but that he was searching under the lamppost because the light was better there. We use historical analysis, etc. because the light seems better, but shouldn't fool ourselves that they bring us much closer to finding the keys.

================================

D) If I might respond to your question to Wade, I've frequently said that conditions change, making historical data much less useful. Among other things, we know the past, the world seems safer, we have investment vehicles that didn't exist, tax and other laws have changed, we have modern central banks, technology has made dramatic changes, etc., etc.

Consider some old rules. For example, it used to be said that stock dividends were higher than bond yields because stocks were riskier, so never buy stocks if dividends are lower than interest rates. This was true until about 50 years ago. If you sold at that point, you'd miss a rather long period during which stocks outperformed. Conditions changed.

At best, we have no way of knowing whether conditions are sufficiently similar. At worst, they are meaningfully different. We just don't know. Unreliable guidance may be the best we can do, but we have to be especially mindful, including in light of the psychological issues associated with anchoring (http://en.wikipedia.org/wiki/Anchoring).

Much of statistics is based on taking a random sample from an unchanging underlying population. Here, we don't necessarily have either a random sample or an unchanging underlying population.


A) I didn't say history was a perfect guide to the future, or that the return we have are a perfect predictor of future returns. You took issue with the lack of enough independent time series using 85 years of historical data, so I told you that one could run a bootstrap MC simulation to create a large # of independent samples from a limited amount of data. Of course, there are flaws with bootstrapping as well, it doesn't account for volatility clustering (but the ARCH/GARCH line of research has attempted to account for this and it doesn't change the outputs much), nor does it take into account any mean-reversion or momentum in the data, which would improve the outcomes. And it doesn't predict future distributions of returns that may differ from the past, but if historical data does show kurtosis and slight skewness, it would be in the bootstrap simulations.

Anyway, I don't really care about most of this as the most important take away is you can model all different approaches and a reasonable 90% confidence interval of all the outcomes basically overlaps. This doesn't tell us what will happen in the future, again, it simply gives us a baseline or foundation (and a strong one at that) for which to make decisions about the future and evaluate and update those decisions as time goes by.

B) I take issue with my perception that you use the word "reliable" to mean 'all but guaranteed' or 'a sure thing', which is how your comments come across. I agree with you that no model, theory, or historical perspective is perfect by itself or when combined. I disagree that we are basically guessing and don't know much about what could happen or what the future may look like. I think we have a strong understanding of how things should work, as well as a pretty solid +/- interval around those results. If you've read anything I've written here, I urge plans be based on balance and flexibility as well as a sense of history. You have to start somewhere, and everything I mentioned gives you at least a few steps ahead of the starting line. I still want to know what the alternatives are? How do you invest/plan in a world where "you don't know nuttin?"

C) Yes, when we aren't willing to put some shred of faith in the past or analytical models or highly scrutinized capital market theories on risk/return, we resort to fables, conspiracies, and mental short-cuts. That the market continues to march on, recovering from the worst we throw at it, producing recent returns that look like they belong in the same ballpark (if not the same dugout) with the history that everyone wants to do away with no doubt infuriates the "Cult of Pessimists". Financial markets are not some delicate flower that need perfect economic conditions to grow, wilting under the first sign of trouble as the cultists would have you believe. They are a solid foundation and a permanent element that links human interaction and ensures that capital flows to its most productive use and that capitalists can depend on for a return on that capital. Nothing is assured, but to not stand back and marvel at how the system works despite all is flaws is a defeatist view at its finest. And to not incorporate anything about what we've come to learn and observe from it's history is downright dangerous and threading to one's wealth.

D) And I think this comment gets to the heart of your misunderstanding about markets. You've pointed out a number of random and pointless characteristics of how markets have evolved over time, you could have told us a story about once being carried around by horse-driven cart compared to hybrid auto today as a sufficient circumstance to disregard the past. It is here I understand that you don't know how to apply history. You are looking for absolutes, guarantees, an assuredly predictable future that looks like the past before you will make any decisions or "bless" it with your approval for future application. And you take random observations that have little or no impact on prices or future outcomes to indicate some kind of signal when it is just noise. And your historical overview of markets is completely void of any appreciation of basic risk/return tendencies that ultimately drive returns (stock/bond yields instead of beta; the lack of historical investment vehicles despite their representing just commingled funds to own the securities that were frequently traded as individual holdings by investors leading us to the same conclusions; behavioral biases that have always been with us and have never been proven to alter market behavior let alone indicate something exploitable).

I've said all I can on the subject. We know more than we don't, you'd be a fool not to use history, statistical tools, and the application of sound financial theory to your investment decisions while always preserving an element of flexibility for when the unexpected occurs.

Good luck!

Eric

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by YDNAL » Tue Mar 05, 2013 1:33 pm

allocator wrote:"Say goodbye to the 4% rule". Those of you planning for, or are in, retirement (I'm guessing that's just about all of us :wink:) might find this interesting.

http://online.wsj.com/article/SB1000142 ... =rss_Money

SORRY!

These threads always morph into a discussion as such:
1) Well, my calculator says that I'll be fine with 99.99999999% certainty, you nitwit!
2) Because your calculator didn't have batteries in it, you fool!
3) I'm using 1492-2012 returns from the time Columbus discovered America, you meathead!
4) Those are not real returns, you dingbat!

I would prefer to see:
    1) We work for a living and save for the future to use (consume) when we no longer work.
    2) We wish to maintain certain standard of living that hopefully doesn't mean living in a cardboard box under a highway's overpass.
    3) We don't know how long we are going to live, don't know future prices (Inflation), don't know whether money saved will grow/shrink, etc. etc.
    4) Deal with it!
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by MathWizard » Tue Mar 05, 2013 7:28 pm

Having to pick Jan 1, 2000 to make their point is sure telling.

Even in my relatively naive knowledge of stock markets in the late 90's I knew
you had better not base retirement on the valuation then. Everone was touting
that this time was different. We had a new economy. The usual just before a bust.

If you are going to retire when P/E ratios are at stratospheric levels, at least apply
a discount to your portfolio. In the 90's, P/E ratios for the DJIA zoomed from a reasonable
15 to about 28 in just a single decade. So about half of the rise in the DJIA was just P/E ratio.
This would make it wise to expect a return to the mean, and see the DJIA stay flat for
the next decade, so you might discount your portfolio by 50% (or maybe by a factor of 15/28).
Things are a littel worse than RTM, because in a time when everyone thinks manna is coming
from heaven, they spend more, so earnings will be somewhat higher than normal. Let's
say there was a 10% earnings premium due to this effect, and when the bust hits, another 10%
lowering of the earnings due to doom and gloom.

Then you should adjust by (15/28) * (1/1.20) = 0.446429 , or you should then assume that a true valuation
of the DJIA on Dec 31, 1999 would be: 11497.12 * 0.446429 = 5132.65 with a P/E of 15, and you would need
to adjust the equity portion of your portfolio accordingly, and probably also apply this to your bond allocation,
but probably a smaller drop, maybe a little less than half the 55% drop, e.g. 20%.

In other words the draw on a 60/40 should have reduced to 4% of 60%*.446429 + 40%*.80 , which would be
2.36% rather than 4%.

This would get rid of the poor returns early on, and probably allow something more like a 5% adjusted draw.
The trinity study had a great deal of very high average returns because it focused so much a very low
probablility of failure.

If you remove some of the more obvious traps (Valuation like Dec 31 1999) by adjusting back to a normal P/E
ratio. How many of the bad outcomes go away, can we go higher than 4% adjusted SWR at a 98% confidence
of not running out over 30 years? Though you shuold also be able to adjust upwards fopr P/E's much below 15,
I'm not yet ready to endorse increasing valuations when they are below 15, just decreasing them when they
are much over 15.

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by Mitchell777 » Wed Mar 06, 2013 7:39 am

One of the things I have not seen mentioned in a lot of the Safe Withdrawl Rate articles is the tax status of ones investments. Seems there is a difference, to take an exteme, between someone with $1M in tax defered accounts vs someone with $1M in non retirement accounts. Not so much if most of the $1M in non retirement accounts has not been taxed. 60% of my investmenst are in non retirement account simply because I ran out of space in the 401K and IRA's over the years. Much of the non retirement money has been taxed (the fixed income) and a good bit (but not most) of the stock mutual fund money in the non retirement money has been taxed due to decisions prior to learning about index funds. Seems it makes a difference in a safe withdrawl rate

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by MathWizard » Wed Mar 06, 2013 11:23 am

Mitchell777 wrote:One of the things I have not seen mentioned in a lot of the Safe Withdrawl Rate articles is the tax status of ones investments. Seems there is a difference, to take an exteme, between someone with $1M in tax defered accounts vs someone with $1M in non retirement accounts. Not so much if most of the $1M in non retirement accounts has not been taxed. 60% of my investmenst are in non retirement account simply because I ran out of space in the 401K and IRA's over the years. Much of the non retirement money has been taxed (the fixed income) and a good bit (but not most) of the stock mutual fund money in the non retirement money has been taxed due to decisions prior to learning about index funds. Seems it makes a difference in a safe withdrawl rate


I agree that you should discount money sitting in a 401K or a TIRA, as opposed to a ROTH.
i-orp is a good tool for that, since it tries to takes taxes into account when withdrawing.

For most people, taxes won't make much of a difference, because they will make so little that they will
pay no tax. For them no discount is required.

The members on this board though have a different mind-set than average about retirement, and will
probably have substantial amounts. (I feel like I am behind the curve with this crowd, even though
I am on track for a comfortable retirement even if I retire early. I am light-years ahead of the average household.
I just can't imagine how some people are going to make it in retirement, maybe they will just "die in the harness"
like people use to.)

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by john94549 » Wed Mar 06, 2013 12:49 pm

Folks in the popular financial press could do everyone a huge favor by dropping the words "safe" and "rule" whenever "4%" appears in the piece.

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by Orion » Wed Mar 06, 2013 2:19 pm

Mitchell777 wrote:Seems it makes a difference in a safe withdrawl rate


I don't think it's the SWR that changes. SWR studies always assume that taxes are one of your many expenses. Determining how much of it goes to taxes has always been left as an exercise for the reader. Of course, this exercise is somewhere between difficult and impossible and probably sneaks up on some retirees.

For simplicity I discount my tax advantaged savings rather than including higher taxes in the budget side later as the SWR studies assume. Unfortunately, the amount of discount for future taxes is a guess.

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by FinancialDave » Wed Mar 06, 2013 7:21 pm

john94549 wrote:Folks in the popular financial press could do everyone a huge favor by dropping the words "safe" and "rule" whenever "4%" appears in the piece.


I'll buy into dropping the word "safe" -- as this is relative based on your own investments. It has been (I believe) referred to as "the 4% rule" for some 15 years and I see no problem or reason to change. It is just a good general starting point for most investors to consider, especially when they are 20 to 30 years from retirement and wanting some goal post to head toward. Of course like many defacto sayings that we have used over the years, sometimes the original definition of the rule is lost in the shuffle -- but I leave it to these threads and elsewhere to keep dredging it up every so often.

fd
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Re: WSJ article on "The 4% Rule" Here is the link.

Post by Wild Willie » Wed Mar 06, 2013 8:05 pm

I read this article yesterday and just saw this thread. If I could be so bold as to "cut to the chase" (as it were), I didn't see anyone discuss the alternative suggestion mentioned in the article about another SWR strategy, that being the one that suggested one use the IRS actuary tables to obtain one's life expectancy and divide that number into one's total portfolio each year to arrive at one's, let's call it your SWA i.e. your Safe Withdrawal Amount. It automatically compensates for when you have one down year (or more) by dropping the amount one would withdraw (or increasing it if one has a good year).

Now, before someone jumps on me, I realize that one would have to be prepared to accept varying amounts each year, but all in all, it makes sense to me. Especially when I compared it to my present SWR which is 4% each year (not increased for inflation), it increased the amount I could supposedly withdraw to 1.5 times what I am presently withdrawing. Whoopee! Free money, right? :beer

No, I don't intend to change my withdrawals, but still it is "food for thought".

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by zaboomafoozarg » Wed Mar 06, 2013 11:37 pm

Meh, these threads are always depressing. By the time I get to the end of them, I feel like I'll be lucky to get 0% real return over the next 30 years.

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by Sunflower » Wed Mar 06, 2013 11:53 pm

zaboomafoozarg wrote:Meh, these threads are always depressing. By the time I get to the end of them, I feel like I'll be lucky to get 0% real return over the next 30 years.


I agree, and lots of times I feel this contributes to the "noise" we're supposed to ignore. But, keeping things in perspective, what else are we supposed to do? Keep on keeping on. That's the best thing for me. You too, I hope.

:beer

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Re: WSJ article on "The 4% Rule" Here is the link.

Post by FinancialDave » Thu Mar 07, 2013 12:49 pm

Wild Willie wrote:I read this article yesterday and just saw this thread. If I could be so bold as to "cut to the chase" (as it were), I didn't see anyone discuss the alternative suggestion mentioned in the article about another SWR strategy, that being the one that suggested one use the IRS actuary tables to obtain one's life expectancy and divide that number into one's total portfolio each year to arrive at one's, let's call it your SWA i.e. your Safe Withdrawal Amount. It automatically compensates for when you have one down year (or more) by dropping the amount one would withdraw (or increasing it if one has a good year).

Now, before someone jumps on me, I realize that one would have to be prepared to accept varying amounts each year, but all in all, it makes sense to me. Especially when I compared it to my present SWR which is 4% each year (not increased for inflation), it increased the amount I could supposedly withdraw to 1.5 times what I am presently withdrawing. Whoopee! Free money, right? :beer

No, I don't intend to change my withdrawals, but still it is "food for thought".


I did mention in my earlier post that this was discussed in an AAII journal (specifically Dec 2012) article. When compared to the standard 4% rule, it was very similar. It does have some things going for it, namely:

1. Doesn't require you to adjust for inflation, as all the adjustments are done by just following the IRS RMD tables. Thus it is easy to follow.
2. It does allow a much better way for you to manage your wealth, because it is drawing down always as a percentage of what you have left and not a fixed amount every year.
3. Since consumption is not restricted to income, you are less likely to chase dividends and more likely to have a balanced portfolio.
4. Market fluctuations of your portfolio will cause you to have "consumption fluctuations" which may or may not be a good thing (IMO).

fd
I love simulated data. It turns the impossible into the possible!

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