How do you "value" your portfolio for SWR?

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effillus
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How do you "value" your portfolio for SWR?

Post by effillus » Thu Dec 08, 2016 10:30 am

With the market reaching new heights, so too is my 403b. But I have a feeling I'm just deluding myself if, for safe withdrawal rate purposes, I base my withdrawals on its current highest-ever value. At the same time, last February, when my portfolio was a lot lower, I didn't consider that to be the real value, either. Portfolios go up and down. How do you ignore highs and lows and "fair value" yours?

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Re: How do you "value" your portfolio for SWR?

Post by mak1277 » Thu Dec 08, 2016 10:50 am

The value is the value. If I was going to adjust anything to account for uncertainty/price fluctuations, I'd adjust my SWR.

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Re: How do you "value" your portfolio for SWR?

Post by jebmke » Thu Dec 08, 2016 10:52 am

mak1277 wrote:The value is the value. If I was going to adjust anything to account for uncertainty/price fluctuations, I'd adjust my SWR.
I think most people just use judgement and reduce expenses when asset values decline. I know a lot of retirees and not one of them uses a mathematical system to base their withdrawal from holdings.
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Re: How do you "value" your portfolio for SWR?

Post by mak1277 » Thu Dec 08, 2016 11:03 am

jebmke wrote:
mak1277 wrote:The value is the value. If I was going to adjust anything to account for uncertainty/price fluctuations, I'd adjust my SWR.
I think most people just use judgement and reduce expenses when asset values decline. I know a lot of retirees and not one of them uses a mathematical system to base their withdrawal from holdings.
I didn't really even mean it that way. I just meant that if I was concerned about future price fluctuations, I might say from the beginning, "I want to use a SWR of 3.5% to do my retirement planning instead of 4%."

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Re: How do you "value" your portfolio for SWR?

Post by pkcrafter » Thu Dec 08, 2016 11:10 am

Most investors nearing retirement want to reduce portfolio volatility to minimize big swings in asset value so they can make reliable decisions. Those with lots of financial ability may not worry about it so much.

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Re: How do you "value" your portfolio for SWR?

Post by KlangFool » Thu Dec 08, 2016 11:15 am

mak1277 wrote:
jebmke wrote:
mak1277 wrote:The value is the value. If I was going to adjust anything to account for uncertainty/price fluctuations, I'd adjust my SWR.
I think most people just use judgement and reduce expenses when asset values decline. I know a lot of retirees and not one of them uses a mathematical system to base their withdrawal from holdings.
I didn't really even mean it that way. I just meant that if I was concerned about future price fluctuations, I might say from the beginning, "I want to use a SWR of 3.5% to do my retirement planning instead of 4%."
Adjust your AA when your portfolio grow bigger and you want to reduce volatility.

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Re: How do you "value" your portfolio for SWR?

Post by DaufuskieNate » Thu Dec 08, 2016 11:20 am

If, in addition to the increase in portfolio value, the CAPE 10 multiples on equity have increased or interest rates have declined, I adjust my expected return accordingly and re-run a monte carlo analysis to see if a change in withdrawal rate is warranted.

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Re: How do you "value" your portfolio for SWR?

Post by Orion » Thu Dec 08, 2016 11:28 am

To my knowledge, most SWR studies use market value so any other value you impose is creating your own methodology. Not that there's anything wrong with that, but unless someone applies that methodology and back tests it, it's just (more of) a guess. That said, I do guess a bit, lowering the percentage or the value "somewhat" in high valuations times. I do it because I'm inherently value-oriented, and a somewhat conservative.

Of course there are a lot of different ways of coming up with an SWR number so you might want to look for a study that actually works more like the way you react to the market or you might want to get a spreadsheet and start imposing some ideas on it to see what it comes up with. I spent quite a bit of time doing that some years ago, but in the end it didn't really have much of an effect on my withdrawals.

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Re: How do you "value" your portfolio for SWR?

Post by kolea » Thu Dec 08, 2016 12:08 pm

effillus wrote:With the market reaching new heights, so too is my 403b. But I have a feeling I'm just deluding myself if, for safe withdrawal rate purposes, I base my withdrawals on its current highest-ever value. At the same time, last February, when my portfolio was a lot lower, I didn't consider that to be the real value, either. Portfolios go up and down. How do you ignore highs and lows and "fair value" yours?
This may be a little bit of semantics, but SWR is not really your withdrawal rate. It is a theoretical number that came from doing backtesting and making some assumptions.

Your withdrawal amount should be based on your portfolio, your budget, your goals, and your withdrawal method. The last can be a fixed amount, a fixed percentage, variable percentage, gliding path, etc. There are probably a hundred different withdrawal methods. Many of those methods use your current portfolio valuation so if you retired at a high, your future withdrawals will be based on the current situation, not the past.

My recommendation is to use a method if withdrawal that does not depend heavily upon your portfolio balance but is based on a budget. I use a fixed percentage of my current balance with a floor and ceiling. The fixed percent produces a big withdrawal when the market is high but I never spend it all (because it is over my budget) and put the remainder back into my portfolio.
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Re: How do you "value" your portfolio for SWR?

Post by nisiprius » Thu Dec 08, 2016 12:31 pm

In 1998, in 'Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable,' Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz wrote:The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.
That's a quotation from an influential 1998 study.

In my personal opinion, numbers like 4% are just rough rules of thumb for planning purposes. Since they aren't very precise to begin with, there's no need to be very precise about valuing your portfolio.

On the face of it, in these studies, a "4% rate" means the results of withdrawing 4% of the market value of your portfolio, whatever it is, in your first year of retirement, and then increasing that dollar number with inflation in subsequent years... with no adjustments for what is happening to the market value of the portfolio. And the studies ask, almost as a thought experiment, "if you had done that with portfolio X, at every possible starting point within the last ninety or so years, what percentage of the time would the portfolio have lasted 30 years?"

So, yes, it includes the case where you retire in September of 1929 and base your first year's 4% at values at the height of a bubble, and saying that 4% "was safe" or "had a 5% failure rate" includes the cases where you start during a bubble and continue to draw bubble-based dollar numbers throughout a long bear market.

In my opinion, if you don't believe present market levels are "real," you might just as well just go straight to the withdrawal rate itself and make your personal pessimism correction to the withdrawal rate--applying them to the numbers that come out of the Monte Carlo simulator--rather than going 'round Robin Hoods barn and applying the correction to the numbers that go into the calculator.
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Re: How do you "value" your portfolio for SWR?

Post by pkcrafter » Thu Dec 08, 2016 1:07 pm

effillus, just to cover the other important aspect of retirement funding you have to also protect against inflation eroding your spending power.

See discussion here:

viewtopic.php?f=1&t=204870

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Re: How do you "value" your portfolio for SWR?

Post by tennisplyr » Thu Dec 08, 2016 1:19 pm

I take what I need in absolute dollars within reason. I tend not to sweat it if I'm a little off.
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Re: How do you "value" your portfolio for SWR?

Post by sperry8 » Thu Dec 08, 2016 1:30 pm

First no one knows where we are... I've been hearing for the past 2 to 3 years how we are at a high and yesterday we hit another new high for US Stocks. Who knows, perhaps we have another new high to come? And another... Or perhaps yesterday was the short-term high.

The reality is I take my SWR annually based on my total assets as of Jan 1. Then the following year, I take my SWR based again annually on my assets as of that Jan 1. If my assets drop dramatically (as happened in 08/09) then the following year I will adjust my SWR. But I do not do this during the year or the volatility up/down would drive me bonkers. My SWR isn't set so tightly as to require me to adjust monthly anyway and I don't recommend you set yours to this level either. Set it based on long-term goals and pull annually based on total assets as of Jan 1 (so increases/decreases during the year in assets don't matter til next Jan 1). The only time I may start to tighten belt mid-year is during substantive crashes.
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Re: How do you "value" your portfolio for SWR?

Post by rapporteur » Thu Dec 08, 2016 1:51 pm

I'm going to 'misinterpret' the question in order to answer a related one:

So, how do I 'value' my portfolio? [...for SWR or any other purpose]

The most important part of my valuation is to bring the tax-sheltered and tax-exposed portions of my portfolio to a common basis in terms of principal (i.e., as if converted to a tax-exposed basis). This recognizes that the dollars in my tax-exposed portfolio are 'fully mine' (at least on Jan 1) whereas the dollars (even the principal dollars) in my tax-sheltered portfolio are subject to tax on withdrawal.

Over quite a broad range of withdrawal rates (anywhere from RMD to, say, several additional percent) my (Canadian) rate of tax is (roughly) 30%. (Not quite the same as marginal rate; this is the total incremental tax on the withdrawal divided by the total amount of the withdrawal.)

If, for example, I have $1,000,000 in tax-sheltered accounts and $2,000,000 in tax-exposed accounts, i would calaculate my revalued portfolio as: $1,000,000 x (1-30%) + 2,000,000 = $2,700,000 (i.e., as if it were completely held tax-exposed).

Regards,

PS In effect, my tax-sheltered account is not fully mine - I have a 'silent partner', the government. In my case, the split between me and my 'partner' is 70:30. I get to manage both my and my partner's share as I see fit (they're part of a common pool), but my partner gets 30% of both the principal and the profit on any money withdrawn from the account.

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Re: How do you "value" your portfolio for SWR?

Post by dbr » Thu Dec 08, 2016 3:58 pm

I think many responders missed the question, or I did. I am assuming the context for this question is that one sets the amount of withdrawal by multiplying the portfolio value AT THE TIME OF RETIREMENT, aka the initial portfolio value, by the chosen SWR. The study then assumes fixed real withdrawals in that amount no matter how the portfolio evolves from there. The OP, then, is worried that he does not want to set an unrealistic withdrawal rate based on the accident of the portfolio reaching a very high value at the point of retirement or a very low value on that date.

This is a legitimate question which does bedevil the concept of using SWR as a plan.

Answers?

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Re: How do you "value" your portfolio for SWR?

Post by jebmke » Thu Dec 08, 2016 4:02 pm

dbr wrote:This is a legitimate question which does bedevil the concept of using SWR as a plan.

Answers?
Don't use SWR as a plan.

It is more of a "curb feeler"
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Re: How do you "value" your portfolio for SWR?

Post by dbr » Thu Dec 08, 2016 4:03 pm

sperry8 wrote:First no one knows where we are... I've been hearing for the past 2 to 3 years how we are at a high and yesterday we hit another new high for US Stocks. Who knows, perhaps we have another new high to come? And another... Or perhaps yesterday was the short-term high.

The reality is I take my SWR annually based on my total assets as of Jan 1. Then the following year, I take my SWR based again annually on my assets as of that Jan 1. If my assets drop dramatically (as happened in 08/09) then the following year I will adjust my SWR. But I do not do this during the year or the volatility up/down would drive me bonkers. My SWR isn't set so tightly as to require me to adjust monthly anyway and I don't recommend you set yours to this level either. Set it based on long-term goals and pull annually based on total assets as of Jan 1 (so increases/decreases during the year in assets don't matter til next Jan 1). The only time I may start to tighten belt mid-year is during substantive crashes.
Do you mean you vary your withdrawal according to total assets using a fixed rate of withdrawal, or that you take a fixed real withdrawal at a variable rate on current assets, or that you reevaluate what withdrawal rates are safe?

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Re: How do you "value" your portfolio for SWR?

Post by dbr » Thu Dec 08, 2016 4:03 pm

jebmke wrote:
dbr wrote:This is a legitimate question which does bedevil the concept of using SWR as a plan.

Answers?
Don't use SWR as a plan.

It is more of a "curb feeler"
Yep. I like that characterization.

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Re: How do you "value" your portfolio for SWR?

Post by Artsdoctor » Thu Dec 08, 2016 5:03 pm

The original question is almost like a Rorschach test. There are several ways to interpret.

I thought the OP was asking how to put a number on the total portfolio value prior to the SWR. If someone's going to take a first withdrawal of 4%, it's going to be 4% of what? Is it every single account? Do you add checking accounts? Do you add cash in the safe? How about all those British pounds you have left over from your last trip?

And then there's the question of marking to market. If one person has twenty-five $100,000 CDs in banks around town (with an NAV of $1), and another has twenty-five $100,000 brokered CDs at Vanguard (with NAVs varying all over the place), the "value" of the CD total is going to be completely different between the two people--even if the coupon rates and maturities are all identical. By why would there be in difference in the amount to be withdrawn?

I would anticipate just taking an estimate, perhaps a very round number, and just adjusting it as necessary with each year. If there's been a huge run-up in December and you choose December 31 as the date you add up everything, so be it.

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Re: How do you "value" your portfolio for SWR?

Post by rapporteur » Thu Dec 08, 2016 8:09 pm

If one insists on a setting a SWR at the beginning of retirement, how to 'value' one's portfolio?

First, this is a stupendously bad strategy. 'Set it and forget it' for perhaps a forty-year retirement almost guarantees that one will either founder on the Scylla of financial ruin having prematurely depleted the portfolio, or be sucked into the Charybdis of living a pinched, niggardly existence during retirement while leaving an unspent fortune behind. SWR is merely a historical guideline that should be used to help in formulating a better strategy.

However, with that said, what 'value' should one use if one insists on using such a flawed strategy?

Here's one possibility, but still not a good one: 'Normalize' one's equity porfolio based on the CAPE on retirement day . If CAPE is, say, 25% higher than the 'norm' (and I'll leave it to others to struggle with what the norm is or should be) then adjust the 'effective value' of one's equity portfolio accordingly. So a nominal $1,000,000 equity portfolio with a 25% elevated CAPE on retirement day might be treated as 'only worth' $800,000. This 'cooking the books' is mostly just a cosmetic alternative to downgrading the SWR percentage (e.g., from 4% to 3%).

Regards,

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Re: How do you "value" your portfolio for SWR?

Post by kolea » Thu Dec 08, 2016 8:21 pm

dbr wrote: This is a legitimate question which does bedevil the concept of using SWR as a plan.

Answers?
I think I may have also misinterpreted the question. I believe I answered what dbr is saying, but there is another way SWR is used, and that is to figure out whether you have reached your "magic number". If you have a good idea of what income you want, and you believe in the 4% SWR rule, then your magic number = 25 x projected income during retirement.

The question then is: should I pull the rip cord and jump into retirement because my portfolio has reached my SWR-based magic number? How do I trust it given market volatility?

That is also an interesting question. All I can say is that when I reached my "magic number" I gave notice of retirement for a full year later to my work. So I suppose I had some flexibility (plus more savings) to back out of it if the market took a dip. But I also then recalculated my actual withdrawal amount so I don't use 4% anyway.
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Re: How do you "value" your portfolio for SWR?

Post by sperry8 » Fri Dec 09, 2016 12:58 am

dbr wrote:
sperry8 wrote:First no one knows where we are... I've been hearing for the past 2 to 3 years how we are at a high and yesterday we hit another new high for US Stocks. Who knows, perhaps we have another new high to come? And another... Or perhaps yesterday was the short-term high.

The reality is I take my SWR annually based on my total assets as of Jan 1. Then the following year, I take my SWR based again annually on my assets as of that Jan 1. If my assets drop dramatically (as happened in 08/09) then the following year I will adjust my SWR. But I do not do this during the year or the volatility up/down would drive me bonkers. My SWR isn't set so tightly as to require me to adjust monthly anyway and I don't recommend you set yours to this level either. Set it based on long-term goals and pull annually based on total assets as of Jan 1 (so increases/decreases during the year in assets don't matter til next Jan 1). The only time I may start to tighten belt mid-year is during substantive crashes.
Do you mean you vary your withdrawal according to total assets using a fixed rate of withdrawal, or that you take a fixed real withdrawal at a variable rate on current assets, or that you reevaluate what withdrawal rates are safe?
My SWR is not fixed since my annual spend varies. I do however reevaluate it each Jan 1 depending on asset base. And I also attempt to keep a cap on my SWR never allowing it to go above 4% regardless of asset level (this is the tightening I speak of or what you refer to as reevaluate). Over the past 4 years my SWR is just under 3%. However, that is more to do with my asset base increasing due to stocks being up rather than me lowering my SWR from its initial 3.5% to the current 2.95%. My spend in dollars is relatively constant each year. I would tighten my belt (lower my spend) if that number were going up towards 4%... but since it isn't, I don't worry about it.

I also have found that 4% is too low and that I likely could approach 5% SWR (at least over the past 9 years since I retired).
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Re: How do you "value" your portfolio for SWR?

Post by nisiprius » Fri Dec 09, 2016 10:00 am

dbr wrote:I think many responders missed the question, or I did. I am assuming the context for this question is that one sets the amount of withdrawal by multiplying the portfolio value AT THE TIME OF RETIREMENT, aka the initial portfolio value, by the chosen SWR. The study then assumes fixed real withdrawals in that amount no matter how the portfolio evolves from there. The OP, then, is worried that he does not want to set an unrealistic withdrawal rate based on the accident of the portfolio reaching a very high value at the point of retirement or a very low value on that date.

This is a legitimate question which does bedevil the concept of using SWR as a plan.

Answers?
The answer is clear. It just happens to be weird.

Yes, indeed, this is just the situation that traditional safe withdrawal studies assume. The "4%," or whatever number is mentioned, is the first year's withdrawal--it's assumed you'll increase it for inflation in subsequent years, and it is 4% of the portfolio value whatever that happens to be on the day you retire.

Yes, it's weird, and the weirdness underlines that these studies are, as jebmke puts it, curb feelers, not precision tools.

Yes, if investors A and B retire on 1/1/2008 and 1/1/2009 respectively, and if they both had 60/40 portfolios showing $1,000,000 on 1/1/2008, then this is the situation that these studies assume in their simulations:

Investor A withdraws $40,000 at the start of 2008, $39,858 at start of 2009, $40,511 at start of 2010, $41,790 at start of 2011, and so on.

Investor B has only $778,000 at the start of 2009, and thus withdraws only $31,120 at the start of 2009, while investor A is withdrawing $39,858. Investor B continues to withdraw slightly increasing dollar amounts of around $30,000+ while investor A withdraws slightly-increasing dollar amounts of around $40,000+.

And if the studies show a 95% "portfolio survival rate" for thirty years, what it means is that historically, if you had investors following that system in every possible starting year from 1926 to the present, 95% of them would have had their portfolio last at least 30 years.

Obviously (?) investor B is more likely to have her portfolio last 30 years than investor A.

But the point is, if you want to throw in some Kentucky windage, you might as well throw it into the 4%, not into the number you use to calculate the 4%. There's no advantage in taking a rough guess first and then doing precise calculations on it. It's just a way of kidding yourself and avoiding the truth, which is that stocks are risky and you are guessing.

P.S. There are vague plum-pudding charts like these that suggest what most people believe, which is that higher P/E's predict lower future returns:

Image

In among the SWR studies I wouldn't be surprised if someone has tested a system in which the initial first-year withdrawal is indeed "discounted according to CAPE" or something like that. But since I wouldn't take it seriously myself I can't be bothered to look for it.
Last edited by nisiprius on Fri Dec 09, 2016 10:07 am, edited 1 time in total.
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Re: How do you "value" your portfolio for SWR?

Post by dbr » Fri Dec 09, 2016 10:04 am

sperry8 wrote:
My SWR is not fixed since my annual spend varies. I do however reevaluate it each Jan 1 depending on asset base. And I also attempt to keep a cap on my SWR never allowing it to go above 4% regardless of asset level (this is the tightening I speak of or what you refer to as reevaluate). Over the past 4 years my SWR is just under 3%. However, that is more to do with my asset base increasing due to stocks being up rather than me lowering my SWR from its initial 3.5% to the current 2.95%. My spend in dollars is relatively constant each year. I would tighten my belt (lower my spend) if that number were going up towards 4%... but since it isn't, I don't worry about it.

I also have found that 4% is too low and that I likely could approach 5% SWR (at least over the past 9 years since I retired).
You appear to be talking about your your actual withdrawal rate. Safe withdrawal rate (SWR) is something entirely different. A person can, of course, set their actual withdrawals equal to a computed safe withdrawal rate, which is why I asked how you are computing your SWR and if either the SWR or the amount of money corresponding to the SWR is being recomputed every year (The rate could be unchanged while the amount of money varies if the computation refers the rate to current portfolio balance. That is an option, but in many models the SWR is referred to the portfolio balanced at the beginning of retirement and the amount thereby withdrawn is indexed upward by inflation each year.)

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Re: How do you "value" your portfolio for SWR?

Post by MI_bogle » Fri Dec 09, 2016 10:32 am

nisiprius wrote:
But the point is, if you want to throw in some Kentucky windage, you might as well throw it into the 4%, not into the number you use to calculate the 4%.
I have nothing to add, but thank you for introducing "kentucky windage" to my vocabulary! And its related term according to Wikipedia: Arkansas Elevation

I will promptly add both to my lexicon

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Re: How do you "value" your portfolio for SWR?

Post by Clive » Fri Dec 09, 2016 11:09 am

effillus wrote:With the market reaching new heights, so too is my 403b. But I have a feeling I'm just deluding myself if, for safe withdrawal rate purposes, I base my withdrawals on its current highest-ever value. At the same time, last February, when my portfolio was a lot lower, I didn't consider that to be the real value, either. Portfolios go up and down. How do you ignore highs and lows and "fair value" yours?
SWR is based on historic data, the highest safe value that could be drawn for all 20, 30, 50, whatever years. Given sufficient history that will likely include having started at relative highs, ended at relative lows ... worst case(s). So a guide as to a reasonable chance of success, but bearing in mind that doesn't guaranteed against a new outlier worst case (history across the last 100+ years however has seen some pretty bad periods).

SWR is more or less based on having started at a historic high, ended at a historic low, worst case outcome. More generally you might anticipate a better outcome, excepting perhaps if you start at what appears to be (and later transpires to actually having been) a relative high.

If say you've saved up 50 times spending (so 2% target SWR), then provided the SWR for your target portfolio/asset allocation is 2% or better you're pretty safe. So you calculate the $ value of that, say $40,000 ($2M portfolio value) and draw that the first years spending, uplift it by inflation and draw that inflation adjusted amount the next year ... etc. An extension to that is if in later years 2% of the current (at that time) portfolio value is higher than your current SWR $ value then you can reasonably revise your SWR amount to that higher $ figure. In effect you start off relatively conservatively and then potentially see income grow at a faster than inflation rate. Alternatively you can continue to just run as-is (inflation pacing income) and likely leave a even greater inheritance. Or another alternative is to de-risk the portfolio further, perhaps by moving some of stock value over to TIPS.

A word of caution however. Using US data for historic stock rewards results in a higher SWR % than if I use historic UK stock data. 100+ years ago the UK was a already developed market that saw its dominant position fade, with the US taking over that lead role. The US was more of a emerging market so-to-speak. Whose to say for instance that over the next century the current developed US market might lose its dominant role over taken by perhaps China, or see lower rewards from having transitioned from being more of a historic emerging market to being a developed market. A good choice of stock when assessing SWR would be to use a broader global stock index. I do not however know of a good source of long term global stock index (total return) data that extends back 100 years or so. Yet another factor is to account for inflation, costs and taxes, which were historically higher i.e. higher historic rewards didn't necessarily transpose into higher actual rewards.

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Re: How do you "value" your portfolio for SWR?

Post by sperry8 » Fri Dec 09, 2016 12:14 pm

dbr wrote:
sperry8 wrote:
My SWR is not fixed since my annual spend varies. I do however reevaluate it each Jan 1 depending on asset base. And I also attempt to keep a cap on my SWR never allowing it to go above 4% regardless of asset level (this is the tightening I speak of or what you refer to as reevaluate). Over the past 4 years my SWR is just under 3%. However, that is more to do with my asset base increasing due to stocks being up rather than me lowering my SWR from its initial 3.5% to the current 2.95%. My spend in dollars is relatively constant each year. I would tighten my belt (lower my spend) if that number were going up towards 4%... but since it isn't, I don't worry about it.

I also have found that 4% is too low and that I likely could approach 5% SWR (at least over the past 9 years since I retired).
You appear to be talking about your your actual withdrawal rate. Safe withdrawal rate (SWR) is something entirely different. A person can, of course, set their actual withdrawals equal to a computed safe withdrawal rate, which is why I asked how you are computing your SWR and if either the SWR or the amount of money corresponding to the SWR is being recomputed every year (The rate could be unchanged while the amount of money varies if the computation refers the rate to current portfolio balance. That is an option, but in many models the SWR is referred to the portfolio balanced at the beginning of retirement and the amount thereby withdrawn is indexed upward by inflation each year.)
Fair enough. I didn't mean to mislead. In my case my SWR and AWR are similar (imo). I do not follow the dictionary definition you describe and personally don't see how one can (since one's assets change) and thus one's AWR can change along with it.
Humbling BH contest results: 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

azanon
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Re: How do you "value" your portfolio for SWR?

Post by azanon » Fri Dec 09, 2016 12:28 pm

effillus wrote:With the market reaching new heights, so too is my 403b. But I have a feeling I'm just deluding myself if, for safe withdrawal rate purposes, I base my withdrawals on its current highest-ever value. At the same time, last February, when my portfolio was a lot lower, I didn't consider that to be the real value, either. Portfolios go up and down. How do you ignore highs and lows and "fair value" yours?
I find the calculator at http://www.portfoliocharts.com to be a pretty good starting point (I have no affiliation to that site). It gives both a SWR, and a withdrawal rate that would sustain initial principle. Just punch in your portfolio for your numbers.

As for an actual withdrawal system, I like Boglehead VPW for many reasons, but actually one of them is because the system would swiftly "correct for" any erroneous starting assumptions in the following year's withdrawal.

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sperry8
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Re: How do you "value" your portfolio for SWR?

Post by sperry8 » Fri Dec 09, 2016 12:56 pm

azanon wrote:
effillus wrote:With the market reaching new heights, so too is my 403b. But I have a feeling I'm just deluding myself if, for safe withdrawal rate purposes, I base my withdrawals on its current highest-ever value. At the same time, last February, when my portfolio was a lot lower, I didn't consider that to be the real value, either. Portfolios go up and down. How do you ignore highs and lows and "fair value" yours?
As for an actual withdrawal system, I like Boglehead VPW for many reasons, but actually one of them is because the system would swiftly "correct for" any erroneous starting assumptions in the following year's withdrawal.
Interesting, never heard of VPW but this is sort of what I do on my own. Multiplying the current portfolio balance by my needed monies to get my AWR. I don't live above my means, so the VPW would result in my withdrawing more money than needed... so in my case my AWR is also a SWR. I agree with what nisipirus describes below... coming up with an SWR at the time of retirement 1x and never resetting it is absurd. Your portfolio may not be "correct" at that time. It can be artificially high or low... it is better to reset over time (I do this annually) but it should be done at some interval. At least VPW tries to take that into account.
nisiprius wrote:
dbr wrote:I think many responders missed the question, or I did. I am assuming the context for this question is that one sets the amount of withdrawal by multiplying the portfolio value AT THE TIME OF RETIREMENT, aka the initial portfolio value, by the chosen SWR. The study then assumes fixed real withdrawals in that amount no matter how the portfolio evolves from there. The OP, then, is worried that he does not want to set an unrealistic withdrawal rate based on the accident of the portfolio reaching a very high value at the point of retirement or a very low value on that date.

This is a legitimate question which does bedevil the concept of using SWR as a plan.

Answers?
The answer is clear. It just happens to be weird.

Yes, indeed, this is just the situation that traditional safe withdrawal studies assume. The "4%," or whatever number is mentioned, is the first year's withdrawal--it's assumed you'll increase it for inflation in subsequent years, and it is 4% of the portfolio value whatever that happens to be on the day you retire.

Yes, it's weird, and the weirdness underlines that these studies are, as jebmke puts it, curb feelers, not precision tools.

Yes, if investors A and B retire on 1/1/2008 and 1/1/2009 respectively, and if they both had 60/40 portfolios showing $1,000,000 on 1/1/2008, then this is the situation that these studies assume in their simulations:

Investor A withdraws $40,000 at the start of 2008, $39,858 at start of 2009, $40,511 at start of 2010, $41,790 at start of 2011, and so on.

Investor B has only $778,000 at the start of 2009, and thus withdraws only $31,120 at the start of 2009, while investor A is withdrawing $39,858. Investor B continues to withdraw slightly increasing dollar amounts of around $30,000+ while investor A withdraws slightly-increasing dollar amounts of around $40,000+.

And if the studies show a 95% "portfolio survival rate" for thirty years, what it means is that historically, if you had investors following that system in every possible starting year from 1926 to the present, 95% of them would have had their portfolio last at least 30 years.

Obviously (?) investor B is more likely to have her portfolio last 30 years than investor A.
Humbling BH contest results: 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

Ron
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Re: How do you "value" your portfolio for SWR?

Post by Ron » Fri Dec 09, 2016 2:55 pm

SWR as a plan or used to value your portfolio? Nope.

Retired just under ten years thus far. Some years I/we take out more; some years I/we take out less to cover our retirement expenses.

Just for giggles, using the current Fidelity Retirement Report that I ran on December 3rd, shows that based upon joint assets (wife/me) and joint retirement expenses for 2017, it is forecast that we will have an SWR of 8.26% and this is under the option of "Assuming Significantly Below Average Market Conditions".

Under the "Assuming Average Market Conditions" options, our SWR is forecast to be 7.04% for 2017.

However, in 2018 (when both wife/me will claim our age-70 SS) our forecast SWR is between 1.29% and 1.46% for both options, with average market returns giving an SWR not exceeding 2.40% through age 100.

The question is should have we adhered to a "rule" that would seriously curtail our retirement experience over the last (almost) decade before all our retirement sources came "on-line" or just look at it as a "curb feeler" as has been discussed?

Just another POV, FWIW....

- Ron

PS: My grandmother's '53 Chevy Bel Air had curb feelers; made a real racket if you got too close to the curb. But if you really wanted to park on the curb, you were free to do so :D .

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Re: How do you "value" your portfolio for SWR?

Post by kolea » Fri Dec 09, 2016 3:29 pm

"Curb feelers" is one of those expressions that separates Boomers from everyone else. :)
Kolea (pron. ko-lay-uh). Golden plover.

wolf359
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Re: How do you "value" your portfolio for SWR?

Post by wolf359 » Fri Dec 09, 2016 4:02 pm

effillus wrote:With the market reaching new heights, so too is my 403b. But I have a feeling I'm just deluding myself if, for safe withdrawal rate purposes, I base my withdrawals on its current highest-ever value. At the same time, last February, when my portfolio was a lot lower, I didn't consider that to be the real value, either. Portfolios go up and down. How do you ignore highs and lows and "fair value" yours?
I believe that you've stated in the past that you're newly retired, and that you're currently in withdrawal mode. The 4% SWR is the theoretical number that you could safely withdraw (inflation adjusted) and still have the portfolio survive for 30 years.

The way you're talking about it, you're calculating 4% of each year's balance. That's fine, and works as well. That's called a constant percentage method, and will never run out of money (but the amount you withdraw each year could vary greatly.) This strategy works best if your pensions and social security already cover at least your core expenses.

There's no need to "fair value" the portfolio value. Withdrawal rates aren't that precise. See here to explore various withdrawal methods: https://www.bogleheads.org/wiki/Withdrawal_methods

I suggest using Taylor Larimore's approach:
I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

So what happened? 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.
Another popular approach previously mentioned is Variable Percentage Withdrawal. https://www.bogleheads.org/wiki/Variabl ... withdrawal

heyyou
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Re: How do you "value" your portfolio for SWR?

Post by heyyou » Fri Dec 09, 2016 6:17 pm

SWR implies the 4% real WD using retirement day asset value, rain or shine.
The fixed percentage of recent portfolio value suits me. I use the RMD % recalculated to include younger ages. We adapt our spending to our income, instead of forcing the WD to adapt to our previous income.

MnD
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Re: How do you "value" your portfolio for SWR?

Post by MnD » Sat Dec 10, 2016 8:25 pm

Our actual withdrawal approach will be 5% of annual portfolio value.
It compensates for big swings in portfolio value and might be appropriate for those that can handle the income variability.
Unlike 4% inflation-adjusted approach you have no portfolio failures and no run-away portfolios where you die with funds several multiples more than what you retired with.

John Z
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Re: How do you "value" your portfolio for SWR?

Post by John Z » Sat Dec 10, 2016 8:53 pm

Sorry if this was previously mentioned.

For 4.5 years of retirement, at the end of each quarter I take 1% of my retirement portfolio (either TIRA or Roth IRA to minimize taxes) so if the pot is lower, I get less, if higher, I get more. I put the proceeds either in checking to live on or my taxable Target Retirement Fund. For me this is pretty simple and direct.

Hope this helps.

MathWizard
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Re: How do you "value" your portfolio for SWR?

Post by MathWizard » Sat Dec 10, 2016 10:28 pm

In deciding whether I have enough, I use the 4%
rule of thumb, however, I adjust the value of my equities down if the current PE ratio exceeds 16.
Right now, the S&P is at about 20, so I estimate the value at about 16/20ths of its current valuation.

My reasoning is that I believe in a return tom
Mean return, so I should expect returns more like what would be expected from a long term average of the PE. This avoids silly cases where the 4% SWR predicts success in 2000, when PEs were sky high, but not the next year when PEs started to return to some semblance of reality.

This is not something I was taught or have heard elsewhere, and many might not agree, but you asked what I do. YMMV.

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