Y2k retiree how is s/he holding up after 2016

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AlohaBill
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Y2k retiree how is s/he holding up after 2016

Post by AlohaBill » Thu Jan 12, 2017 12:36 pm

I have been following the so called hapless 2000 retiree. This is the retiree who retired with a million with 75% stock and 25% bond allocation. The Y2k retiree is mindlessly following a 4% + inflation withdrawal rate. Does anyone know how s/he is holding up after 2016?

Rodc
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Re: Y2k retiree how is s/he holding up after 2016

Post by Rodc » Thu Jan 12, 2017 1:14 pm

No.

Care to let us know?
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: Y2k retiree how is s/he holding up after 2016

Post by livesoft » Thu Jan 12, 2017 1:20 pm

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Kevin M
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Re: Y2k retiree how is s/he holding up after 2016

Post by Kevin M » Thu Jan 12, 2017 1:30 pm

Well, I could spend some time modeling it, but suspect you've already done that, and will let us know. In the meantime, I can Google it: 2000 retiree 4% rule - Google Search.

First link is a Kitces article: 4% Rule Results Since The Tech Bubble & Financial Crisis?, but written in July 2015, so not answering your question about 2016. Still:
As the results reveal in the chart above, despite how shocking the tech crash and the 2008 financial crisis appeared to be in real time, the reality is that such retirees still have portfolios that are performing similar to or better than most of the historical 4% rule scenarios. The 2000 retiree is already half way through the 30-year time horizon with similar wealth to a 1929, 1937, or 1966 retiree had at this point, and the 2008 retiree is even further ahead than any of those historical scenarios (and even ahead of the 2000 retiree, too!).
So if OK in 2015, should still be OK in 2016. However, Kitces article is for 60/40, not 75/25, but suspect also fine for latter.

However:
Arguably, the case of the 2000 retiree is perhaps somewhat concerning, given a 6.2% current withdrawal rate for what is still a 15-year retirement time horizon (as a 65-year-old couple in 2000 would be turning 80 this year) built on a base of currently high market valuations and currently low yields. It wouldn’t be surprising to me to see the year-2000 retiree end out pushing the limits of the 4% rule, given that market valuations were stratospheric at the time, even relative to historical standards.
However:
Still, the current 6.2% withdrawal rate of that year-2000 retiree today is actually modest enough that a retiree couple in such a scenario could simply take the remainder of their portfolio, and buy a joint and survivor single premium immediate annuity with inflation-adjusting payments. At current market rates, the inflation-adjusting payout for the 80-year-old couple (assuming the 65-year-old retirees are now 15 years into retirement) would be 6.5% for their joint lives, more than enough to cover their 6.2% spending rate. Which means even the 2000 retiree isn’t yet below the ‘critical threshold’ that couldn’t simply be guaranteed for life, if depletion was a concern.
And:
In addition, a growing base of research suggests that retiree spending in real dollars tends to decline in later years – i.e., spending increases for retirees in their 70s and 80s don’t even keep pace with inflation – which means in practice a 2000 retiree today is probably even better off and spending even less as a current withdrawal rate than these calculations would suggest.
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Re: Y2k retiree how is s/he holding up after 2016

Post by Snowjob » Thu Jan 12, 2017 2:11 pm

https://www.kitces.com/blog/why-merely- ... ket-crash/

This related article highlights some of biggest challenges.

At some point, 10,15 years of mediocre / declining returns takes out everyone. The 10 year example he speaks of is only a 2 sigma event. The 2000 retiree had a lost decade where the 2008 retire had a much faster recovery in equity prices.

Something to think about when calculating withdrawal rates.

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Re: Y2k retiree how is s/he holding up after 2016

Post by AlohaBill » Fri Jan 13, 2017 1:53 pm

Thank you for your responses. Unfortunately, I have not been able to reply do to a sudden health problem. Again, please accept my apologies.

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Re: Y2k retiree how is s/he holding up after 2016

Post by k66 » Tue Jan 17, 2017 2:10 pm

I have a spreadsheet whereby I compute my own personal retirement plan against historical bond & equity returns including my own expected age of retirement (age 60), planned deferral of federal pensions (age 70), declining spending program via D. Blanchett, and current income tax regimes (note: because portfolio returns are maintained in real terms, use of current-year taxation levels are assumed to be compatible with non-current-year return histories, though not necessarily). I start with a relative high withdrawal rate (6%) but this is only a target which then declines to 3.5% over a 40 year period (by which time I would be 60+40 = 100 years old). Full pensions (including my wife's) will meet this consumption need (and then some) by my age 74. In actuality, withdrawals are computed as if I were following a RMD table a la Sun & Webb.

Starting with a portfolio balance of $1M in the year 2000, I would have an expected balance of $373.7k as of the end of 2016. This program would have provided total income of $956.4k during that time. Given that is now 2016, having been retired for 16+ years since 2000 (at least in the model's eyes), and able to now pull over $40k annually from federal pensions, it will more than adequately meet the Blanchett consumption model, yet the RMD-based withdrawals will likely continue to provide more. So, in this sense, the year-2000 run appears to be winning for my own personal strategies & needs.
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Re: Y2k retiree how is s/he holding up after 2016

Post by livesoft » Thu Jan 19, 2017 1:16 pm

The following may interest readers of this thread.
Case Study 2000-2016
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Re: Y2k retiree how is s/he holding up after 2016

Post by Chicago60 » Thu Jan 19, 2017 2:38 pm

livesoft wrote:The following may interest readers of this thread.
Case Study 2000-2016
Interesting, indeed. Thanks.

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Re: Y2k retiree how is s/he holding up after 2016

Post by Levett » Thu Jan 19, 2017 2:57 pm

It's all good for this happy 2000 retiree. Never bought into the 4% so-called SWR, nor did I go into retirement 75/25.

Long before it became fashionable, some of us were counseled about LMP (the guaranteed"floor") by, uh, TIAA. 8-)

Lev

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Re: Y2k retiree how is s/he holding up after 2016

Post by Whakamole » Thu Jan 19, 2017 3:08 pm

One of the fundamental problems with the "4% rule" is it treated all retirement years as equally probable, even though someone was much more likely to pull the plug relying on a 4% SWR at market peaks (2000, 2007) then market bottoms (2009, 2002.) As the article points out, it is risky to retire at high CAPE levels (or PE or whatever your valuation of choice is.)

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Re: Y2k retiree how is s/he holding up after 2016

Post by DFAMAN » Thu Jan 19, 2017 3:27 pm

Here is s piece from the Retire Early site where the author looks at how various portfolios would have performed (with 4% inflation adjusted withdrawals) for (i) a retire who retired in 1994 and (ii) a retiree who retired at the beginning of 2000. This is only through 2015, however.

http://www.retireearlyhomepage.com/reallife16.html

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Re: Y2k retiree how is s/he holding up after 2016

Post by ryman554 » Thu Jan 19, 2017 4:22 pm

Whakamole wrote:One of the fundamental problems with the "4% rule" is it treated all retirement years as equally probable, even though someone was much more likely to pull the plug relying on a 4% SWR at market peaks (2000, 2007) then market bottoms (2009, 2002.) As the article points out, it is risky to retire at high CAPE levels (or PE or whatever your valuation of choice is.)
That is incorrect. The 4% rule accounts for all (historically seen, anyhow) retirement environments and provides a scorecard on success..

It makes the claim that there are no (or few) environments where 4% SWR has historically failed. (or that something like 3.5% will always suceed) Failure and success are defined narrowly by having a non-zero dollar value up to 30 years.

It is up to the user to understand what environment they are currently in and what it shares or does not share with previously failed epochs. If you want to use it as a "foolproof strategy", then you should be looking at 0% failure rates, not 5% rates. If you look at 0% failure rates, you end up with something much lower than 4%.

As always, understand what the data tells you, and understand what does not.

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Re: Y2k retiree how is s/he holding up after 2016

Post by Rodc » Thu Jan 19, 2017 8:12 pm

livesoft wrote:The following may interest readers of this thread.
Case Study 2000-2016
Just skimmed it, but it seems that is a Monte Carlo result, not a result based on real funds over that time period. Is that right?
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: Y2k retiree how is s/he holding up after 2016

Post by livesoft » Thu Jan 19, 2017 8:43 pm

Rodc wrote:
livesoft wrote:The following may interest readers of this thread.
Case Study 2000-2016
Just skimmed it, but it seems that is a Monte Carlo result, not a result based on real funds over that time period. Is that right?
No, I do not think so.
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Re: Y2k retiree how is s/he holding up after 2016

Post by Kevin M » Thu Jan 19, 2017 9:20 pm

livesoft wrote:
Rodc wrote:
livesoft wrote:The following may interest readers of this thread.
Case Study 2000-2016
Just skimmed it, but it seems that is a Monte Carlo result, not a result based on real funds over that time period. Is that right?
No, I do not think so.
Neither do I. Maybe it looked like Monte Carlo with a quick glance because he showed the results for a bunch of different equity allocations on one graph, but it's based on historical results.

I really liked the article. Very sneaky how Kitces used 10-year Treasury for the more recent period when long-term bonds did well, and used a short-term Treasury for the 1970s when longer-term bonds did poorly (in real terms).

I liked it so much that I've started reading the series from the beginning (linked article was Part 6).

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Re: Y2k retiree how is s/he holding up after 2016

Post by CaliJim » Thu Jan 19, 2017 9:30 pm

livesoft wrote:The following may interest readers of this thread.
Case Study 2000-2016
very enlightening, especially in view of all the '100% equities' posts we had a few weeks ago.

imho...people just don't 'get' the risk involved with making withdrawals from an equity heavy, declining, portfolio.

and people can be forced into withdrawal mode at any time by circumstances beyond their control. so..folks....always have some bonds!

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Re: Y2k retiree how is s/he holding up after 2016

Post by Kevin M » Thu Jan 19, 2017 10:08 pm

CaliJim wrote:
livesoft wrote:The following may interest readers of this thread.
Case Study 2000-2016
very enlightening, especially in view of all the '100% equities' posts we had a few weeks ago.

imho...people just don't 'get' the risk involved with making withdrawals from an equity heavy, declining, portfolio.

and people can be forced into withdrawal mode at any time by circumstances beyond their control. so..folks....always have some bonds!
Although it may seem like it from some of the charts in this part of the series, the point is really not to have some bonds, but that a 4% withdrawal rate is not necessarily safe. If you start at Part 1, which I just read, you'll see that equity-heavy portfolios generally have done better than bond-heavy portfolios, especially for periods longer than 30 years (which is a big emphasis of this series and apparently of this blog). Again, the dominant theme is that for early retirees with retirements potentially of much longer duration than 30 years, you should probably be using a lower withdrawal rate than 4% regardless of your equity allocation.

To see all of this at a glance, take a look at the chart a few pages down in Part 1: The Ultimate Guide to Safe Withdrawal Rates – Part 1: Introduction – Early Retirement Now

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Re: Y2k retiree how is s/he holding up after 2016

Post by BrandonBogle » Thu Jan 19, 2017 10:30 pm

Kevin M wrote:
CaliJim wrote:
livesoft wrote:The following may interest readers of this thread.
Case Study 2000-2016
very enlightening, especially in view of all the '100% equities' posts we had a few weeks ago.

imho...people just don't 'get' the risk involved with making withdrawals from an equity heavy, declining, portfolio.

and people can be forced into withdrawal mode at any time by circumstances beyond their control. so..folks....always have some bonds!
Although it may seem like it from some of the charts in this part of the series, the point is really not to have some bonds, but that a 4% withdrawal rate is not necessarily safe. If you start at Part 1, which I just read, you'll see that equity-heavy portfolios generally have done better than bond-heavy portfolios, especially for periods longer than 30 years (which is a big emphasis of this series and apparently of this blog). Again, the dominant theme is that for early retirees with retirements potentially of much longer duration than 30 years, you should probably be using a lower withdrawal rate than 4% regardless of your equity allocation.

To see all of this at a glance, take a look at the chart a few pages down in Part 1: The Ultimate Guide to Safe Withdrawal Rates – Part 1: Introduction – Early Retirement Now

Kevin
Having just read the 6 available parts and managed to digest a decent part of it, I'm coming away with a few points.
  • Using today's expenses including mortgage, taxes, insurance, car loans, etc., a 3.25% - 3.5% SWR would be ideal for my retirement plans over an originally planned 40 year retirement.
  • If I can get to my # for that SWR, I would be fine over a 50 year retirement (single-digit failure rate), even without accounting for social security.
  • If I account for social security at 1/2 current estimated benefits, I would firmly be at a 3.25% SWR.
  • My AA of 75/25 today may benefit from transitioning to 80/20 (or even higher if I could stomach that) vs. the current plan of going to 70/30 by retirement.
  • Given that I'm on track to retire at 52, I may be able to accelerate that to 48. Getting to 42 or less would require a windfall or cutting back on my lifestyle.
It is a very interesting read!


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Re: Y2k retiree how is s/he holding up after 2016

Post by AlohaJoe » Thu Jan 19, 2017 11:18 pm

BrandonBogle wrote: Having just read the 6 available parts and managed to digest a decent part of it, I'm coming away with a few points.
  • Using today's expenses including mortgage, taxes, insurance, car loans, etc., a 3.25% - 3.5% SWR would be ideal for my retirement plans over an originally planned 40 year retirement.
The series is interesting and useful for planning purposes but, like all such historical backtesting, needs to be taken with a grain of salt. That said, I think the numbers you take about are about as plausible as anything else we're likely to get. But some of the caveats of studies like this:

- A 40 year retirement span means the more recent retiree, retired in 1976. That is, it doesn't cover anyone who retired in 1977-2016.
- The longer the retirement span the more you "overweight" the middle years of the period. By that I mean, the market returns in 2008 only affect 0.9% of the study. But the market returns in 1982 affect 66% of the study.
- The portfolio is simplistic to the point of not reflecting the vast majority of real world portfolios: it only includes large cap stocks and government bonds. Various studies have found that (unsurprisingly) diversification tends to improve the withdrawal rates. Bengen found that adding small caps helped; Kizer found that adding international diversification helps. The vast majority of modern asset classes have only been investable for less than two decades (REITs, high-yield, EM, EM bonds, even international really) so it is hard to know exactly how they'll affect things going forward.
- Then there's the whole "success bias" of the US in the entire 20th century. The US had lower inflation than anywhere else in the world. It had better bonds than anywhere else in the world. And it had better equities than anywhere else in the world. (Okay, a slightly exaggeration, but it was in the top 3 for each category.)

As I said, this doesn't mean the study is wrong or bad or anything. But I think this is an area where Monte Carlo simulations can add another perspective, despite their many short comings.

I wrote a blog showing the results of various Monte Carlo simulations: https://medium.com/@justusjp/multiple-f ... .vbqkswndd

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Re: Y2k retiree how is s/he holding up after 2016

Post by TheTimeLord » Thu Jan 19, 2017 11:20 pm

I tried it using VEU for the equity portion.
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Re: Y2k retiree how is s/he holding up after 2016

Post by TinkerPDX » Fri Jan 20, 2017 12:26 am

livesoft wrote:The following may interest readers of this thread.
Case Study 2000-2016
Thanks for sharing. Interesting indeed.

Curious whether the illustration in the chart accounted for rebalancing. Portfolio Visualizer puts 50/50 US large/total bond at 5.19% CAGR with annual rebalancing.

Also curious about higher bond allocations. PV puts 40/60 US large/total bond at 5.22% CAGR with annual rebalancing, 30/70 back at 5.19%.

Also notable that with total market (as opposed to US LC, or SP500 as the link uses), returns are a little better. PV puts 50/50 US total/total bond with annual rebalance at 5.48%.

Is comparing the cumulative returns in this chart to CAGR apples:apples?

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Re: Y2k retiree how is s/he holding up after 2016

Post by AlohaJoe » Fri Jan 20, 2017 12:32 am

TinkerPDX wrote: Curious whether the illustration in the chart accounted for rebalancing.
From the introduction to the series:

"At the end of the month the retiree withdrawals the next monthly installment and rebalances the portfolio weights to the target equity and bond shares."

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Re: Y2k retiree how is s/he holding up after 2016

Post by Sheepdog » Fri Jan 20, 2017 2:19 am

Levett wrote:It's all good for this happy 2000 retiree. Never bought into the 4% so-called SWR, nor did I go into retirement 75/25.
Nor did I. I didn't retire in 2000, but close...10/1998. I have kept considerably less stock equity in these years and have taken out an average of 4.59% annually. I have taken out as needed, basically, (3.11% to 7.54%) and I do not have a pension to add to SS and this. My investments have grown in value. I won't run out or even come close to doing so. 2008-09 was tough mentally though, but other than that, it has been a great retirement.
Advice: try not to make your retirement withdrawal plans complicated. Watch your balances and watch your spending in down periods.
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Re: Y2k retiree how is s/he holding up after 2016

Post by msk » Fri Jan 20, 2017 3:11 am

I did retire on 1.1.2000 :D Anyway at the time I had not heard of any of these withdrawal rules, so I tried to come up with my own. First thing I decided was that I would withdraw more cash when the markets were high and less when markets were low, seemed sensible. It worked well and I am now much richer than I was when I retired. Next, I was and still am 100% stocks because when it comes to push and shove I can still live satisfactorily just on my pension, so my investments really were for splurging on luxuries. Market crash? Just hunker down and buy no luxuries. Recently I gathered the statistics for 50 years, 1966 to 2016 in order to come up with advisories for my heirs (ages 20 to 40). SP500 compounded on average at 6.63% paying a dividend of 3.1% and the inflation rate has been 4% p.a. Tried various withdrawal scenarios based on age, etc. but finally settled on a simple 5.5% p.a. withdrawal rate on whatever the portfolio was worth in that year. If the next 50 years is a roller coaster similar to the previous 50, then their annual withdrawals will still be keeping up with inflation. I.e. they would not have less cash to spend in real terms annually, on average, and they can continue on for many more years. Hence my advice to them: spend no more than 5% of the portfolio value in any given year and you ought to be able to pass on a decent amount to your heirs too.

In reality we will always adjust our withdrawals and expenses to prevailing market realities. Blindly increasing the withdrawal $ number for inflation following a 50% market drop is plain silly IMHO. Cut back withdrawals following a market fall, be generous to charities following market euphoria. Worked very well for me over the past 16 years.

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Re: Y2k retiree how is s/he holding up after 2016

Post by Rodc » Fri Jan 20, 2017 6:39 am

BrandonBogle wrote: [*]My AA of 75/25 today may benefit from transitioning to 80/20 (or even higher if I could stomach that) vs. the current plan of going to 70/30 by retirement.
I suggest you are reading rather more into the the results than the input data support. See for example AlohaJoe. We only have a couple of more or less independent 40+ year periods of data to work with. There is no way that really supports things like "80% stocks is better than 75%". It is only enough to support general conclusions like: "For a very long retirement you should consider having a majority of your investments in stocks which have tended to do much better than bonds over long periods, especially in the US, but please note the data are not definitive since we only have sort of two data points. Fortunately this is in accordance with general theoretical arguments about riskier investments, so we have some hope the conclusion will hold going forward."
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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