Forget the 4% safe withdrawal rule -- use RMDs instead.

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CULater
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Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by CULater » Fri Dec 02, 2016 4:56 pm

Finally, a recent study at the Center for Retirement Research at Boston College found that Required Minimum Distributions were a very efficient way to distribute retirement income compared to a number of other well-known methods. Researchers Wei Sun and Anthony Webb created an efficiency index and found that RMDs scored better than the popular four percent rule. A modification of the RMD rule— taking the RMD plus dividend and interest income— was even better.

https://assetbuilder.com/knowledge-center/articles/required-minimum-distributions-not-such-a-bad-thing-after-all
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DaftInvestor
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by DaftInvestor » Fri Dec 02, 2016 5:02 pm

Thanks for sharing but the article says nothing about those of us that have tax-deferred, tax-free, and taxable accounts.
Are they saying ignore the 4% rule - and don't touch/spend anything except your tax-deferred account RMD amount?
That ain't retirement living :)

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by friar1610 » Fri Dec 02, 2016 5:18 pm

DaftInvestor wrote:Thanks for sharing but the article says nothing about those of us that have tax-deferred, tax-free, and taxable accounts.
Are they saying ignore the 4% rule - and don't touch/spend anything except your tax-deferred account RMD amount?
That ain't retirement living :)


The way I read it was that applying the same withdrawal rates used in the RMD tables to any retirement withdrawals was more efficient than using one of the classic rates like 4%.
Friar1610

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by Van » Fri Dec 02, 2016 5:31 pm

I think the RMD distributes based on 1/life expectancy.

So, if you had a $500,000 portfolio and you were 75 years old with a life expectancy of say 15 years, the withdrawal/payout would be $33,333. The next year it would be whatever was in the portfolio X 1/14 and so on. I guess if you live 20 years you are screwed.

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by itstoomuch » Fri Dec 02, 2016 6:24 pm

I know that most of our retirement income is traditional IRA thus under RMD rules.
Our IRAs in annuities are under special RMD rules.
IRA's, not in annuities, are in Discretionary accts and subject to RMD.
Only the Income from the rental and a relatively small amount are in Roth or taxable accounts.
I am not relying on RMD, VW, 4% , or anything other method, but relying on self control spending and self management of remaining funds.

Interesting. Still got a few years to worry about the issue.
YMMV.
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by KnowNth » Fri Dec 02, 2016 6:40 pm

What about before 70?

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by qwertyjazz » Fri Dec 02, 2016 6:40 pm

http://crr.bc.edu/wp-content/uploads/20 ... 10-508.pdf

Not a new article - Kitces has written about it too

It is talking about a spend down strategy that maximizes utility and using life expectancy under reasonable conditions increases utility over a constant withdrawal rate
Using RMD but this is not about IRAs per se but rather total spending rate
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by Rodc » Fri Dec 02, 2016 6:46 pm

You might want to search this site for "variable withdrawal rate" for some related research. Look for a very long thread.
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: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by qwertyjazz » Fri Dec 02, 2016 6:51 pm

Rodc wrote:You might want to search this site for "variable withdrawal rate" for some related research. Look for a very long thread.


What is your take on using utility maximization and constant relative risk aversion framework such as Sun and Webb use versus a strictly maximum spending or lack of failure (running out of money) which seems to be more discussed on this board?

Thank you
QJ
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by Rodc » Fri Dec 02, 2016 7:01 pm

qwertyjazz wrote:
Rodc wrote:You might want to search this site for "variable withdrawal rate" for some related research. Look for a very long thread.


What is your take on using utility maximization and constant relative risk aversion framework such as Sun and Webb use versus a strictly maximum spending or lack of failure (running out of money) which seems to be more discussed on this board?

Thank you
QJ


I do not know the details of what they are doing. I do think consumption smoothing to the extent you can do makes some sense, though watching older relatives outside of surprise expenses like health care they seem to spend less and less over time.

I would say that the longer I invest and watch older relatives the more I dislike complicated schemes. Just so many sources of uncertainty that setting up a precise strategy is false precision. All sorts of things pop up - maybe your car gets totaled or all of a sudden you need a power scooter and a remodel to make it work, or you decide to sell the family home and move across the country to be near your grandkids or market returns are horrible and you really tighten your belt because you are scared or markets do well and you decide you know I am not going to live forever and you take the whole family on a cruise.

You need some sort of philosophy or plan for some guidance, but you need a fair amount of flexibility as well which means fine details are not of much value. I am getting close and for now I think I will adapt much like I do now where each year I review and maybe every few years adjust the plan. This of course presumes you have enough to be flexible. Otherwise I might be more inclined to get an annuity to reduce risk and get out of the SWR game.
Last edited by Rodc on Fri Dec 02, 2016 7:02 pm, edited 1 time in total.
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: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by qwertyjazz » Fri Dec 02, 2016 7:02 pm

Rodc wrote:
qwertyjazz wrote:
Rodc wrote:You might want to search this site for "variable withdrawal rate" for some related research. Look for a very long thread.


What is your take on using utility maximization and constant relative risk aversion framework such as Sun and Webb use versus a strictly maximum spending or lack of failure (running out of money) which seems to be more discussed on this board?

Thank you
QJ


I do not know the details of what they are doing.

I would say that the longer I invest and watch older relatives the more I dislike complicated schemes. Just so many sources of uncertainty that setting up a precise strategy is false precision. All sorts of things pop up - maybe your car gets totaled or all of a sudden you need a power scooter and a remodel to make it work, or you decide to sell the family home and move across the country to be near your grandkids or market returns are horrible and you really tighten your belt because you are scared or markets do well and you decide you know I am not going to live forever and you take the whole family on a cruise.

You need some sort of philosophy or plan for some guidance, but you need a fair amount of flexibility as well which means fine details are not of much value. I am getting close and for now I think I will adapt much like I do now where each year I review and maybe every few years adjust the plan. This of course presumes you have enough to be flexible. Otherwise I might be more inclined to get an annuity to reduce risk and get out of the SWR game.


Thank you
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by itstoomuch » Fri Dec 02, 2016 7:13 pm

+1 @ Rodc

I've postponed the Nov's radiation treat till Jan 17 to see the next PSA (no prostate) reading. I'm the one who's 66.
YMMV
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by grok87 » Fri Dec 02, 2016 7:21 pm

Rodc wrote:
I would say that the longer I invest and watch older relatives the more I dislike complicated schemes...

http://www.goodreads.com/quotes/268710- ... an-annuity
“people always live for ever when there is an annuity to be paid them” - Jane Austen (Sense and Sensibility)
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by JoMoney » Fri Dec 02, 2016 8:19 pm

I've probably got quite a bit of time before I begin drawing down my assets, but when I do, using an RMD 1/x methodology for the equity portion is what I plan to do.... Coupled with pension, social security, a "bucket" like strategy for emergency/contingency savings, and in much later years consider a SPIA.
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by ReadyOrNot » Fri Dec 02, 2016 9:04 pm

The IRS Required Min Distribution table seems to keep pushing the age for money to run out later as you age, and it seems to put age for money to run out somewhat later than some life expectancy tables. So it may be reasonable if planning up to around 90 is all you need. But you might want to monitor how your remaining balance and your health are doing while you go through your 80's. Maybe just use the principles they use and add a few years.

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by JoinToday » Fri Dec 02, 2016 9:11 pm

Rodc wrote:.....
I would say that the longer I invest and watch older relatives the more I dislike complicated schemes. .....

You need some sort of philosophy or plan for some guidance, but you need a fair amount of flexibility as well which means fine details are not of much value. I am getting close and for now I think I will adapt much like I do now where each year I review and maybe every few years adjust the plan. ....


Simple is key. When I start losing my mental capability, I want simple. When wife or child starts managing assets, they will be grateful that the investments are simple.

JoMoney wrote:I've probably got quite a bit of time before I begin drawing down my assets, but when I do, using an RMD 1/x methodology ....


1/x is what I am planning on (as a goal for a "not to exceed" number), with a 2 or 3 year smoothing. Occasional withdrawals exceeding 1/x are OK, just not every year.
I wish I had learned about index funds 25 years ago

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by longinvest » Fri Dec 02, 2016 9:17 pm

Rodc wrote:You might want to search this site for "variable withdrawal rate" for some related research. Look for a very long thread.

Rodc,

I think you meant "Variable Percentage Withdrawal" (VPW). Here are the links:

While RMDs adapt withdrawals to market returns, they do not take the retiree's asset allocation into account. VPW improves on this.

VPW is a withdrawal method that adapts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It allows the retiree to spend most of his portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by Rodc » Fri Dec 02, 2016 9:20 pm

longinvest wrote:
Rodc wrote:You might want to search this site for "variable withdrawal rate" for some related research. Look for a very long thread.

Rodc,

I think you meant "Variable Percentage Withdrawal" (VPW). Here are the links:

While RMDs adapt withdrawals to market returns, they do not take the retiree's asset allocation into account. VPW improves on this.

VPW is a withdrawal method that adapts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It allows the retiree to spend most of his portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.


Yes. Thanks. That is the one.
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: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by randomguy » Fri Dec 02, 2016 9:20 pm

friar1610 wrote:
DaftInvestor wrote:Thanks for sharing but the article says nothing about those of us that have tax-deferred, tax-free, and taxable accounts.
Are they saying ignore the 4% rule - and don't touch/spend anything except your tax-deferred account RMD amount?
That ain't retirement living :)


The way I read it was that applying the same withdrawal rates used in the RMD tables to any retirement withdrawals was more efficient than using one of the classic rates like 4%.


The article I read is crap:) Fixed return planning assuming 5% or 8% (really any) return is a waste of time. That is the whole point of the 4% studies which demonstrate the importance of sequence of returns. Plot out the income when the accounts drop 20% and stay there for the first 10 years and you no longer get a nice rising income stream and you can run into issues of rapid account depletion (i.e. look at the 2000-2 crowd where you broke even at best investment wise and if you were taking out 6% or so you were depleting your account at a pretty good clip) during bear markets.

The unlinked to article might be better but a lot comes down to you defintion of efficiency. If it is to have a level income for the next 30 years, the 4% rule can't really be beat. The downside is that most of the time you die with large account balances. If it is to maximize the amount of money distributed over 30 year, then year there are a lot better systems. They all suffer the problem that you have to be willing to spend 20-30% less in the bottom 5% of cases. How you balance those is up to you. The more you are willing to cut spending if things don't work out, the more you can spend in average cases.

People complain about RMDs because they don't want to spend more money. At a certain point people spend what they want to spend. They aren't going to spend 20k more just because they have the money. After 70+ years of living, people are comfortable with where they are.

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by RadAudit » Fri Dec 02, 2016 10:56 pm

I'm fairly sure that if you use the RMD rates to distribute a portfolio, you will reduce the amount in a portfolio in a fairly ordered manner. And if you consistently get 5% and / or 8% returns, you may have money left over. But I'm reminded of the old insurance salesman line - you either live too long or die too soon.

There seems to be too many variables to consider to support a wide spread adoption of this approach in distributing a portfolio in retirement.
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by mcblum » Sat Dec 03, 2016 8:47 am

first of all, with taxable, tax deferred and tax free sub-portfolios, you may have different tax solutions. This can save you money over just your w/d from TRIA or 401k.
secondly, when your RMD passes 4% of your portfolio, pay taxes and put surplus in taxable. This is what I plan to do starting next fall. I'll be 74 in November 2017.
Marty

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by Rodc » Sat Dec 03, 2016 9:08 am

randomguy wrote: The more you are willing to cut spending if things don't work out, the more you can spend in average cases.

People complain about RMDs because they don't want to spend more money. At a certain point people spend what they want to spend. They aren't going to spend 20k more just because they have the money. After 70+ years of living, people are comfortable with where they are.


+1
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: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by RadAudit » Sat Dec 03, 2016 10:16 am

Thanks for the article.

Well, if the 5% and 8% returns don't work out just right and you are concerned about leaving this world without enough to meet your long term goals for your family / charitable giving - remember

... our mortality virtually guarantees that most people will leave some money on the table when they die.


Cheery thought for the eternal problem - you either live too long or die too soon.

Somehow, it'll all work out.
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by pkcrafter » Sat Dec 03, 2016 11:14 am

Here's a really nice calculator for RMD. At 70-1/2, spouse <10 years younger, initial withdrawal is 3.6%. At age 73, it is 4%. Play with the Rate of Return slide and watch the chart at the bottom chance shape.

https://www.dinkytown.net/java/RetireDistrib.html


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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by itstoomuch » Sat Dec 03, 2016 11:35 am

nifty calculator.
I'm shooting for the high number. :greedy

YMMV :annoyed
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by jimb_fromATL » Sat Dec 03, 2016 11:45 am

Van wrote:I think the RMD distributes based on 1/life expectancy.

So, if you had a $500,000 portfolio and you were 75 years old with a life expectancy of say 15 years, the withdrawal/payout would be $33,333. The next year it would be whatever was in the portfolio X 1/14 and so on. I guess if you live 20 years you are screwed.


The RMDs are not linear. They're recalculated based on the last year's balance using actuarial statistics for your life expectancy each year. While the withdrawal rate is more than 4% of the remaining balance, it guarantees that you won't run out of money ... though you won't have very much left to withdraw if you live a lot longer than the actuarial statistics indicate.

jimb

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by Van » Sat Dec 03, 2016 12:31 pm

jimb_fromATL wrote:
Van wrote:I think the RMD distributes based on 1/life expectancy.

So, if you had a $500,000 portfolio and you were 75 years old with a life expectancy of say 15 years, the withdrawal/payout would be $33,333. The next year it would be whatever was in the portfolio X 1/14 and so on. I guess if you live 20 years you are screwed.


The RMDs are not linear. They're recalculated based on the last year's balance using actuarial statistics for your life expectancy each year. While the withdrawal rate is more than 4% of the remaining balance, it guarantees that you won't run out of money ... though you won't have very much left to withdraw if you live a lot longer than the actuarial statistics indicate.

jimb


Thanks for the correction. Whether linear or not, I guess one should make sure that one does not live longer than the actuaries think you will. :D

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by longinvest » Sat Dec 03, 2016 12:45 pm

pkcrafter wrote:Here's a really nice calculator for RMD. At 70-1/2, spouse <10 years younger, initial withdrawal is 3.6%. At age 73, it is 4%. Play with the Rate of Return slide and watch the chart at the bottom chance shape.

https://www.dinkytown.net/java/RetireDistrib.html

Paul,

Where do you find a constant annual total real return liquid investment that matches the entry into this calculator? I've been looking for such a liquid investment for a long time, but never found it*. :wink:

* The closet thing I found is a non-rolling TIPS ladder properly constructed as to give fixed annual inflation-adjusted cash flows. Unfortunately, it doesn't match because it has variable annual total real returns determined by market prices, and it can't extend beyond 30 years.

Our wiki's VPW comes with a backtesting spreadsheet which serves to better understand what happens in real life. It shows what would have happened had an investor combined VPW with Social Security (inflation indexed) and a pension (fixed nominal) using two historical data sets: US (1871-2015) and Canada (1970-2015).
Last edited by longinvest on Sat Dec 03, 2016 12:56 pm, edited 1 time in total.
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by Grt2bOutdoors » Sat Dec 03, 2016 12:54 pm

CULater wrote:
Finally, a recent study at the Center for Retirement Research at Boston College found that Required Minimum Distributions were a very efficient way to distribute retirement income compared to a number of other well-known methods. Researchers Wei Sun and Anthony Webb created an efficiency index and found that RMDs scored better than the popular four percent rule. A modification of the RMD rule— taking the RMD plus dividend and interest income— was even better.

https://assetbuilder.com/knowledge-center/articles/required-minimum-distributions-not-such-a-bad-thing-after-all


They must have been reading the Bogleheads forum before they made that astounding discovery. We have been saying that for a while now. While using RMDs may be useful in early retirement, there is no need to withdraw 7 or 8 or 10 percent of assets in later years unless it is really
needed.
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by Kevin M » Sat Dec 03, 2016 1:05 pm

For a few years I've been using basically this approach to help my step father feel more comfortable about how much he and my mom are spending. It's not really spending the RMD, but using the life expectancy table used in the RMD calculation to calculate a safe withdrawal rate from the entire portfolio, including taxable. So it's 1/life-expectancy. I use my mom's age since she is one year younger.

At the beginning of each year I calculate the "safe withdrawal rate" and convert it to monthly portfolio spending. Each month I calculate a rolling 12-month average monthly spending from portfolio assets. Typically they average about 2/3 of the SWR, but recently they splurged on a cruise that kicked the 12-month monthly average right about to the SWR. Seeing that they weren't exceeding the SWR even with this splurge helped my step father not stress out too much over the large expense.

They are mid-80s and also own their house free and clear, so the house is a large reserve asset that can be used to pay for unexpectedly large expenses later in life.

Kevin
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by jimb_fromATL » Sat Dec 03, 2016 1:13 pm

Van wrote:Thanks for the correction. Whether linear or not, I guess one should make sure that one does not live longer than the actuaries think you will. :D


I guess it's one of those which came first things, like the chicken or the egg. If you take out more than the RMD and run out of money while you're very, very old, you probably won't live much longer anyway. ( I heard about somebody who had learned to live without eating, but before he could tell anybody how he did it, he died.)

On the other hand, if you're at the end of your actuarial table life expectancy and drawing social security with, after a few decades of COLA increases I've know some people ranging from 90, 97, and 100 years old who were receiving far more social security than they made in the best years in their jobs.

Don't know whether it's 100% up-to-date, but here's a RMD table from a while back, with the RMD converted to percentages of the balance.

Code: Select all


Age   Divisor % of total
70   27.4   3.65%
71   26.5   3.77%
72   25.6   3.91%
73   24.7   4.05%
74   23.8   4.20%
75   22.9   4.37%
76   22.0  4.55%
77   21.2   4.72%
78   20.3   4.93%
79   19.5   5.13%
80   18.7   5.35%
81   17.9   5.59%
82   17.1   5.85%
83   16.3   6.13%
84   15.5   6.45%
85   14.8   6.76%
86   14.1   7.09%
87   13.4   7.46%
88   12.7   7.87%
89   12   8.33%
90   11.4   8.77%
91   10.8   9.26%
93   9.6   10.42%
94   9.1   10.99%
95   8.6   11.63%
96   8.1   12.35%
97   7.6   13.16%
98   7.1   14.08%
99   6.7   14.93%
100   6.3   15.87%
101   5.9   16.95%
102   5.5   18.18%
103   5.2   19.23%
104   4.9   20.41%
105   4.5   22.22%
106   4.2   23.81%
107   3.9   25.64%
108   3.7   27.03%
109   3.4   29.41%
110   3.1   32.26%

 


jimb

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by Leesbro63 » Sat Dec 03, 2016 1:22 pm

randomguy wrote:
People complain about RMDs because they don't want to spend more money. At a certain point people spend what they want to spend. They aren't going to spend 20k more just because they have the money. After 70+ years of living, people are comfortable with where they are.


I never understood why RMDs and spending have become so linked in people's minds. RMDs are a tax issue, period.

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by jimb_fromATL » Sat Dec 03, 2016 1:35 pm

Leesbro63 wrote:
randomguy wrote:
People complain about RMDs because they don't want to spend more money. At a certain point people spend what they want to spend. They aren't going to spend 20k more just because they have the money. After 70+ years of living, people are comfortable with where they are.


I never understood why RMDs and spending have become so linked in people's minds. RMDs are a tax issue, period.


They are indeed somewhat of a tax issue. On the originally intended 401(k) and IRAs plans with taxes deferred, you've never paid any taxes, and the gubbament wants you to have to pay some of it before you die. The RMD is just calculated to keep you from being forced to take out so much in any given year that you will run out of money before you die.

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by heyyou » Sat Dec 03, 2016 7:53 pm

by KnowNth » Fri Dec 02, 2016 6:40 pm
What about before 70?

The age 65 to age 100 percentages are in the appendix of the brief, after the End Notes, and that was not mentioned in the text. Save time and mental energy, read the newsletter brief and not the original paper.

http://crr.bc.edu/wp-content/uploads/2012/10/IB_12-19-508.pdf

In a former discussion, it was asked "Why not use that optimal WD method with which those options were compared?" and the brief does not explain the optimal. In other papers on WD methods, the optimal was if the new retiree had known the future returns for each year of retirement.

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by itstoomuch » Sat Dec 03, 2016 8:05 pm

^
heyyou wrote:In a former discussion, it was asked "Why not use that optimal WD method with which those options were compared?" and the brief does not explain the optimal. In other papers on WD methods, the optimal was if the new retiree had known the future returns for each year of retirement.

:oops: :annoyed :idea:

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by hoops777 » Sun Dec 04, 2016 8:32 pm

People get so hung up on rules and finding some magic formula.The magic formula is use common sense and be flexible.
If you need some formula to lock yourself in to then you should not be managing your own money.
K.I.S.S........so easy to say so difficult to do.

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by itstoomuch » Mon Dec 05, 2016 12:52 am

Is there a way to permanently Bookmark this thread in my personal basket?
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by AlohaJoe » Mon Dec 05, 2016 4:21 am

itstoomuch wrote:Is there a way to permanently Bookmark this thread in my personal basket?


Click the wrench icon and select bookmark this thread.

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by AlohaJoe » Mon Dec 05, 2016 5:32 am

qwertyjazz wrote:What is your take on using utility maximization and constant relative risk aversion framework such as Sun and Webb use versus a strictly maximum spending or lack of failure (running out of money) which seems to be more discussed on this board?


It is my impression that utility maximization frameworks have largely displaced "probability of failures" in much (but far from all) of the writing that isn't targeted at a popular audience. (For instance, look over recent papers in the Journal of Financial Planning to see what they use.)

Lack of failure is known to be useless for any kind of variable spending scheme. Say your withdrawal strategy is to spend 50% of your portfolio every year. You are never going to "fail", though in 30 years you may only be withdrawing 12 cents. The 0% probability of failure isn't very meaningful, right?

The kind of framework Sun & Webb use is increasingly common but that doesn't mean it is perfect and without flaws. It assumes constant risk aversion across your life, which is probably not true. It requires you to make guesses about what your risk aversion level is. (Most papers will test various levels to see how it affects the results.) There are some criticisms that the research on risk aversion levels has flaws that result in overestimating people's actual level of risk aversion. (The argument is: most of the research is based on low-stakes games with university students.)

Despite the flaws, the framework is, I think, the best lens to look at different realistic withdrawal schemes. For instance, a onetime Boglehead named gummi proposed a withdrawal scheme he called "Sensible Withdrawals" where each year you might get a "bonus", where can withdraw some portion of the portfolio gains. That is, if the market is flat or down, you are only allowed to withdraw, say $30,000. But if the market was up 7% -- and your portfolio was up $52,000 -- then you could withdraw 25% of that gain -- an extra $13,000 on top of that. So let's compare that to the constant 4% withdrawal scheme.

Image

(I have no idea why my screenshots are coming out fuzzy but hopefully you can still make them out well enough to see what's going on.)

Which of those two is "better"? To make things even less straightforward, say you wanted to compare VPW to "just withdraw 5% of the portfolio balance"

Image

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by Quark » Mon Dec 05, 2016 6:41 am

hoops777 wrote:People get so hung up on rules and finding some magic formula.The magic formula is use common sense and be flexible.
If you need some formula to lock yourself in to then you should not be managing your own money.

The odd thing is, while you're accumulating the usual advice is to have and follow an investment policy statement. In other words, have a formula to lock yourself in.

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by longinvest » Mon Dec 05, 2016 7:16 am

AlohaJoe,

About your data:
AlohaJoe wrote:Image

  1. What is the asset allocation of the portfolio that you backtested?
  2. What are the start age and last withdrawal age?
  3. What data set are you using? (Historical? Which country? What start year? Data set source?)
  4. Are the numbers nominal or inflation-adjusted?

A 65-years old retiree with a 50/50 portfolio should have an initial $48,000 withdrawal. The initial $56,800 withdrawal of your example indicates either a very short retirement horizon (retiring at age 73 with a 50/50 portfolio) or retiring with a 100% stocks portfolio at 65!
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by longinvest » Mon Dec 05, 2016 7:23 am

Here's a more realistic VPW backtest, starting in one of the worst historical retirement start years (1966):

Image
(Source: wiki: Variable percentage withdrawal)

Note how when combined with Social Security (inflation-indexed) and a pension (fixed nominal), and using a portfolio with a significant amount of bonds, total income was almost always increasing in nominal terms. Portfolio balance (nominal) did not start decreasing before the retiree reached age 90.

At age 80, a wise retiree still in good health could use part of the portfolio to buy an inflation-indexed Single Premium Immediate Annuity (inflation-indexed SPIA) to assure a lifelong income floor and eliminate longevity risk. Yes, he'll be poorer after age 100 if he succeeds at depleting the portfolio by spending all VPW withdrawals after age 85 (this is unlikely if he's still in good health as most retirees slow down external activities at that age), but he'll have enough until the end of his life, even if he survives to age 115 or beyond. (How likely is that?!)
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by hoops777 » Mon Dec 05, 2016 12:11 pm

Quark....this has nothing to do accumulating.I am referring to retirement withdrawal methods being overdependent on a formula which just makes no sense to me.Set up what you think will be best for you but have the common sense to adapt to circumstances.
K.I.S.S........so easy to say so difficult to do.

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by qwertyjazz » Mon Dec 05, 2016 6:33 pm

Alahojoe
Interesting points. One other point is Samuelson's (I think) classical analysis that under CRRA a constant AA makes sense. A fuller analysis testing various risk profiles makes a lot of sense. I will have to read more of the apllied literature you mention.

Thank you
QJ
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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by AlohaJoe » Mon Dec 05, 2016 6:39 pm

qwertyjazz wrote:Alahojoe
Interesting points. One other point is Samuelson's (I think) classical analysis that under CRRA a constant AA makes sense. A fuller analysis testing various risk profiles makes a lot of sense. I will have to read more of the apllied literature you mention.



Samuelson has since admitted he was wrong; his analysis had assumptions that were too unrealistic. When you add in the fact that people can and do change jobs, a constant AA no longer makes sense. (For more see the 1992 paper with Bodie, Samuelson, and Merton.)

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by qwertyjazz » Mon Dec 05, 2016 6:40 pm

Quark wrote:
hoops777 wrote:People get so hung up on rules and finding some magic formula.The magic formula is use common sense and be flexible.
If you need some formula to lock yourself in to then you should not be managing your own money.

The odd thing is, while you're accumulating the usual advice is to have and follow an investment policy statement. In other words, have a formula to lock yourself in.


Interesting point. I think a lot of it might have to do with the imprecision of spending versus a relatively simple AA model (pick a couple of percentages that have to add to one). Spending relates to expected future gains and relative utilities of multiple potential states. There might not be a great simplifying model that both avoids behavioral mistakes (like AA and rebalancing) and also maximizes utility. Hence the Taylor method of each year see where you are at and spend accordingly makes sense.
If there were a simple, relatively complete model, then using it during retirement would likewise make sense.

My current thoughts, but I need to read more in the field. I also have a feeling that my thoughts will change in the next decade as new research comes out.
G.E. Box "All models are wrong, but some are useful."

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Re: Forget the 4% safe withdrawal rule -- use RMDs instead.

Post by qwertyjazz » Mon Dec 05, 2016 6:43 pm

AlohaJoe wrote:
qwertyjazz wrote:Alahojoe
Interesting points. One other point is Samuelson's (I think) classical analysis that under CRRA a constant AA makes sense. A fuller analysis testing various risk profiles makes a lot of sense. I will have to read more of the apllied literature you mention.



Samuelson has since admitted he was wrong; his analysis had assumptions that were too unrealistic. When you add in the fact that people can and do change jobs, a constant AA no longer makes sense. (For more see the 1992 paper with Bodie, Samuelson, and Merton.)


Yes but the analysis starting this thread used a constant CRRA - in retirement the Human capital argument from the 1992 paper would not apply - I think
G.E. Box "All models are wrong, but some are useful."

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