No "sequence of returns risk" what to do about withdrawals

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tennisplyr
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No "sequence of returns risk" what to do about withdrawals

Post by tennisplyr » Fri Jul 07, 2017 4:52 pm

So, I retired in early 2011 during the bull market and have been doing just fine. Now that I'm 6+ years into retirement, and luckily avoided a bad sequence of returns, do you think I can do better than a 4% withdrawal. I know this is broad question but I wondering what's a reasonable % to take. I've been doing about 4-5%, am in my midsixties and my AA is 50/50.
Last edited by tennisplyr on Fri Jul 07, 2017 5:14 pm, edited 4 times in total.
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Re: No "sequence of returns risk" what to do about withdrawals

Post by Thesaints » Fri Jul 07, 2017 4:57 pm

tennisplyr wrote:So, I retired in early 2011 during the bull market and have been doing just fine. Now that I'm 6+ years into retirement, and luckily avoided a bad sequence of returns, do you think I can do better than a 4% withdrawal. I know this is broad question but I wondering what's a reasonable % to take. I've been doing about 4-5%.
You have lowered risk by reducing your residual life by 6+ years, but who knows how long it was to begin with ?
If you increase your withdrawal rate risk of outliving your funds will also increase.
The one sure thing is that withdrawing 5% you are assured at least 20 years of nominal withdrawals, all the rest is speculation, one way or another.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by Sidney » Fri Jul 07, 2017 4:58 pm

Assuming the 4/5% is from the original value. If he is taking 4% of the last value, then it will theoretically last forever. Could be a few lean years in the end.
I always wanted to be a procrastinator.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by Thesaints » Fri Jul 07, 2017 5:05 pm

Sidney wrote:Assuming the 4/5% is from the original value. If he is taking 4% of the last value, then it will theoretically last forever. Could be a few lean years in the end.
Since I understand his capital has grown, how could withdrawing more be safer than withdrawing less ?
The reality is that 4% does not assure anything. The only thing we know is that in the past was low enough to allow 35 years of withdrawals from 60/40 portfolio in 93% of cases (numbers may be a little different, I'm quoting from memory).

A classic "riddle" is that assuming I retire on a million and the first year my capital increases to 1.1 millions due to good markets, what forbids me to declare "I was just joking when I said I was retiring last year. I'm only retiring this year and therefore I'll collect 44k, not just 40k" ?
Where is the error, if there is one ?

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Re: No "sequence of returns risk" what to do about withdrawals

Post by Sidney » Fri Jul 07, 2017 5:09 pm

mathematically, if you take only 4% of the prior year end balance, the balance never converges to zero. You always have 96% of the prior balance left. You get hungry at the end though.
I always wanted to be a procrastinator.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by dcabler » Fri Jul 07, 2017 5:10 pm

You might want to check out this article by Michael Kitces for a method to increase withdrawals if things have been going well for you...

https://www.kitces.com/blog/the-ratchet ... he-4-rule/

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Re: No "sequence of returns risk" what to do about withdrawals

Post by Thesaints » Fri Jul 07, 2017 5:23 pm

Sidney wrote:mathematically, if you take only 4% of the prior year end balance, the balance never converges to zero. You always have 96% of the prior balance left. You get hungry at the end though.
It is also true for those who take 99% of balance :)

I think the formulation of the retirement problem mentions equal withdrawals (after inflation). What's the highest figure over N years ?

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Re: No "sequence of returns risk" what to do about withdrawals

Post by ResearchMed » Fri Jul 07, 2017 5:29 pm

tennisplyr wrote:So, I retired in early 2011 during the bull market and have been doing just fine. Now that I'm 6+ years into retirement, and luckily avoided a bad sequence of returns, do you think I can do better than a 4% withdrawal. I know this is broad question but I wondering what's a reasonable % to take. I've been doing about 4-5%, am in my midsixties and my AA is 50/50.
I've never quite understood why there were "certain specific years" for the "sequence of returns" problem.

No matter when one retires, there is that risk.
And then, 5 years later (or such), then "that is where one is THEN", so there is the same forward-looking "sequence of returns" risk.
The person's financial circumstances may have changed, for better or for worse.

But why does "right at retirement" differ from 5 or 10 years in?
How is that different from someone who retires at 55 vs. 65 vs. 75? Isn't there a similar risk for each?
If so, then why would it matter if one is 75, and has *just* retired, or has been retired for several years?

I haven't been able to figure this out.

Thanks.

RM
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Re: No "sequence of returns risk" what to do about withdrawals

Post by Thesaints » Fri Jul 07, 2017 5:37 pm

Everything else being equal, after N years in retirement risk is lower since funds have to last for N less years.
One can check the SSA tables to get an idea of how much the risk of outliving funds drops each passing year.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by ResearchMed » Fri Jul 07, 2017 5:47 pm

Thesaints wrote:Everything else being equal, after N years in retirement risk is lower since funds have to last for N less years.
One can check the SSA tables to get an idea of how much the risk of outliving funds drops each passing year.
But there is possibly less money left as well, and certainly fewer years remaining in terms of a recovery.

We will have a relatively short retirement, meaning a very late retirement, given that DH enjoys his work and is already well past regular retirement age.
I suspect this is a topic for a new thread, but it is very relevant to this topic.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by curmudgeon » Fri Jul 07, 2017 6:02 pm

You have also dropped off six years of the "guaranteed not to fail" scenarios (the ones where you died young). I'm not sure six years is enough to outweigh the inherent uncertainties involved in retirement planning. There are still plenty of unknowns to be allowed for. One thing you might consider is take your gains from the past six years and drop them into a SPIA.

I think there is something to be said for recalculating your retirement income plans every five years or so, based on then-current balances and age. It's probably better if you feel you have extra to use it in "one-time" types of expenses rather than increasing spending which might be harder to turn down.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by warowits » Fri Jul 07, 2017 6:05 pm

tennisplyr wrote: I know this is broad question but I wondering what's a reasonable % to take. I've been doing about 4-5%, am in my midsixties and my AA is 50/50.
I still like the VPW method. For you if you're 65 and have a 50/50 allocation I would say 4.8% of last years balance should be this years distribution. Just keep in mind that in a down year the amount you spend will go down, as it goes up and down with your portfolio balance. It also doesn't get adjusted for inflation.

https://www.bogleheads.org/wiki/Variabl ... withdrawal
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Re: No "sequence of returns risk" what to do about withdrawals

Post by Thesaints » Fri Jul 07, 2017 6:11 pm

I think the research "showing" 4% withdrawal was good for 35 years in 93% of cases completely ignored the possibility of discontinuing withdrawals along the way.

To be perfectly clear I'm a skeptic of such a rule, essentially based only on backtests. I'm even more of a skeptic now, with interest rates so low. My objection is precisely what you guys outline: if 40k out if a million was safe at retirement start, In any year down the road when balance has oscillated above 1M I could recalculate a new 4% amount and logically I should be even safer, since I'm now certainly facing a shorter retirement.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by bligh » Fri Jul 07, 2017 6:25 pm

tennisplyr wrote:So, I retired in early 2011 during the bull market and have been doing just fine. Now that I'm 6+ years into retirement, and luckily avoided a bad sequence of returns, do you think I can do better than a 4% withdrawal. I know this is broad question but I wondering what's a reasonable % to take. I've been doing about 4-5%, am in my midsixties and my AA is 50/50.
My understanding was that the 4% is calculated off of the original 2011 value. So for example, when you retired in 2011, your portfolio was $2 million, your withdrawal amount would be $80K, adjusted for inflation each year. This means, that even if 6 years later, your portfolio is now $3 million due to great market returns, you still continue to withdraw that $80K amount adjusted for inflation. For example, you dont know if a 50% market drop is imminent followed by a 15 year period of really poor returns.

In short, I would stick to the plan. 4% of the original portfolio in 2011. Adjust up for inflation each year. Having avoided the initial sequence of return risk is just helping you remain in the vast majority of cases where the 4% withdrawal rate has worked and adding to your safety margin.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by PhysicianOnFIRE » Fri Jul 07, 2017 6:29 pm

If we're talking about the percentage of the portfolio you had six years ago, it might make sense that you could be OK withdrawing a bit more than 4% of that.

If you're talking about your current portfolio, with the recent bull run and historically high valuations, I would definitely not recommend withdrawing more than 4%. Unless you're 80 years old and no one in your extended family has ever hit 90. If that's the case, spend away!

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Re: No "sequence of returns risk" what to do about withdrawals

Post by inbox788 » Fri Jul 07, 2017 8:15 pm

Thesaints wrote:A classic "riddle" is that assuming I retire on a million and the first year my capital increases to 1.1 millions due to good markets, what forbids me to declare "I was just joking when I said I was retiring last year. I'm only retiring this year and therefore I'll collect 44k, not just 40k" ?
Where is the error, if there is one ?
A classic problem in statistics is the 3 door problem.
https://www.theproblemsite.com/games/tr ... /door-hint
It depends on whether the events you're looking at are dependent or independent. Having escaped a bad year and even having had a very good year, does it impact what the expected returns are the following year and years? I'm guessing it's a little of both, so you might not expect to collect $44k with same confidence, but can probably do better than $40k depending on the correlation factor.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by Thesaints » Fri Jul 07, 2017 8:36 pm

We can safely assume that single year returns are uncorrelated.
Besides, that would mean that retiring after a good year is less safe than retiring after a bad one.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by itstoomuch » Fri Jul 07, 2017 8:53 pm

NEI :confused
What is your funding ratio when your include all sources of retirement incomes. :?:
Is your 50/50 AA include SS, Pensions, annuities, rents, and others for the present or future?

example: We could easily do 5%+ Safe withdrawal rate, from our Market account. :annoyed :annoyed :annoyed
see notes below to understand why.
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Re: No "sequence of returns risk" what to do about withdrawals

Post by Chip » Sat Jul 08, 2017 4:53 am

Thesaints wrote:A classic "riddle" is that assuming I retire on a million and the first year my capital increases to 1.1 millions due to good markets, what forbids me to declare "I was just joking when I said I was retiring last year. I'm only retiring this year and therefore I'll collect 44k, not just 40k" ?
Where is the error, if there is one ?
This paradox helps explain why I think "re-retiring" is valid within the context of maximum safe withdrawals.

We've been doing this for 16 years. Each year our withdrawal limit is the maximum of three numbers:

1. 3.5% of date of retirement portfolio size, adjusted for inflation
2. 3.5% of current year portfolio size on Jan 1.
3. Last year's limit, increased by last year's inflation.

We used 3.5% instead of 4% due to early retirement. #1 isn't a factor anymore as the portfolio size has increased such that 2 and 3 will always be larger. The withdrawal limit is now roughly 25% higher than it would be if we adhered to rule 1 only.

Note that this is not a rigid spending plan. We spend what we want. At the beginning of retirement average spending was in the vicinity of the re-retirement limits. Now it's much less than those limits.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by bertilak » Sat Jul 08, 2017 8:26 am

Sequence of returns risk is always highest in the immediate future, which means you are always facing the worst of it. Every day is the beginning of (the rest of) your retirement.

Risk HAS been reduced by reducing the number of years your investments need to support, even if that number is unknown.
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Re: No "sequence of returns risk" what to do about withdrawals

Post by ReadyOrNot » Sat Jul 08, 2017 1:33 pm

Seems that you began early (so had more risk), then knocked down some risk by shortening the remaining years of retirement.
Now, in your mid-sixties, you are about at the age for which the 4% was supposed to apply. So if you re-start from now, you should be OK -- take 4% of your current retirement assets and increase with inflation, or however the rule was supposed to work.
Or at least that gives you the recommendation.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by The Wizard » Sat Jul 08, 2017 5:42 pm

As I've pointed out before, it's not necessary to SPEND all the money you "withdraw" from tax sheltered accounts.
It's common to hear people say they are going to reinvest their RMD, for instance.
I'm not yet RMD age, but after four years of retirement with good market performance, yes I'm "withdrawing" more to control my taxable income between my present age 67 and my early 70s.
Much of my withdrawals are Roth conversions actually, with a smaller portion going into my taxable investment account.

I can spend more or spend less in retirement but for me, it's not like setting the dial on a toaster for lighter or darker...
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Re: No "sequence of returns risk" what to do about withdrawals

Post by randomizer » Sat Jul 08, 2017 5:49 pm

Seems not enough data to compute. You're better off now than you might have been in an alternate universe, but knowing that doesn't help much.
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Re: No "sequence of returns risk" what to do about withdrawals

Post by Watty » Sat Jul 08, 2017 11:15 pm

tennisplyr wrote:So, I retired in early 2011 during the bull market and have been doing just fine. Now that I'm 6+ years into retirement, and luckily avoided a bad sequence of returns, do you think I can do better than a 4% withdrawal. I know this is broad question but I wondering what's a reasonable % to take. I've been doing about 4-5%, am in my midsixties and my AA is 50/50.
There isn't really a good answer for that since the 4% "rule" is really more of an academic study than an actual rule that you can closely follow.

A huge factor in deciding how much you should spend is to consider how willing and able you will be to cut your spending by 10 or 20 percent if you need to.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by WoodSpinner » Sun Jul 09, 2017 10:41 am

Chip wrote:
Thesaints wrote:A classic "riddle" is that assuming I retire on a million and the first year my capital increases to 1.1 millions due to good markets, what forbids me to declare "I was just joking when I said I was retiring last year. I'm only retiring this year and therefore I'll collect 44k, not just 40k" ?
Where is the error, if there is one ?
This paradox helps explain why I think "re-retiring" is valid within the context of maximum safe withdrawals.

We've been doing this for 16 years. Each year our withdrawal limit is the maximum of three numbers:

1. 3.5% of date of retirement portfolio size, adjusted for inflation
2. 3.5% of current year portfolio size on Jan 1.
3. Last year's limit, increased by last year's inflation.

We used 3.5% instead of 4% due to early retirement. #1 isn't a factor anymore as the portfolio size has increased such that 2 and 3 will always be larger. The withdrawal limit is now roughly 25% higher than it would be if we adhered to rule 1 only.

Note that this is not a rigid spending plan. We spend what we want. At the beginning of retirement average spending was in the vicinity of the re-retirement limits. Now it's much less than those limits.
Interesting approach-- how did you arrive at it? Why do you feel it is low-risk?

TIA

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Re: No "sequence of returns risk" what to do about withdrawals

Post by Thesaints » Mon Jul 10, 2017 7:00 pm

in fact, it is certainly higher risk than someone simply withdrawing 3.5% of initial capital.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by TravelforFun » Mon Jul 10, 2017 7:14 pm

If you're retired and rely on 4% or more withdrawal to live on, you would always be affected by prolong bad market returns, regardless of when it occurrs.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by inbox788 » Tue Jul 11, 2017 1:00 pm

WoodSpinner wrote:
Chip wrote:
Thesaints wrote:A classic "riddle" is that assuming I retire on a million and the first year my capital increases to 1.1 millions due to good markets, what forbids me to declare "I was just joking when I said I was retiring last year. I'm only retiring this year and therefore I'll collect 44k, not just 40k" ?
Where is the error, if there is one ?
This paradox helps explain why I think "re-retiring" is valid within the context of maximum safe withdrawals.

We've been doing this for 16 years. Each year our withdrawal limit is the maximum of three numbers:

1. 3.5% of date of retirement portfolio size, adjusted for inflation
2. 3.5% of current year portfolio size on Jan 1.
3. Last year's limit, increased by last year's inflation.

We used 3.5% instead of 4% due to early retirement. #1 isn't a factor anymore as the portfolio size has increased such that 2 and 3 will always be larger. The withdrawal limit is now roughly 25% higher than it would be if we adhered to rule 1 only.

Note that this is not a rigid spending plan. We spend what we want. At the beginning of retirement average spending was in the vicinity of the re-retirement limits. Now it's much less than those limits.
Interesting approach-- how did you arrive at it? Why do you feel it is low-risk?

TIA
Thesaints wrote:in fact, it is certainly higher risk than someone simply withdrawing 3.5% of initial capital.
Yes it is, but it's unlikely to be more risky than 4% SWR. I'm trying to imagine the effects of the various options if there are big moves plus or minus 30% early in the retirement.
1. Many past retirees are content with 4% SWR taking bigger risk
2. Many choosing to retire in current year are satisfied with a 4% SWR are taking bigger risk
3. This is one where big swings up and down can increase risk. Up 30% year 1, down 30% year 2, then flat or back to historic returns. (3.5% of 100k = 3.5k; 130k-3.5k=126.5k; 3.5% of 126.5k = 4.4275k; 70% * 126.5k - 4.4275k = 84.1225k; you would be withdrawing 5.26314%!)

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Re: No "sequence of returns risk" what to do about withdrawals

Post by Thesaints » Tue Jul 11, 2017 1:10 pm

IMO, many of those who now take the 4% rule as, well, a"rule" will be bitterly disappointed.

If you think of it, your strategy is initially less risky than a 4% constant withdrawal, but it becomes more risky as soon as your capital oscillates above 114.3% of initial amount.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by rgs92 » Tue Jul 11, 2017 1:27 pm

If you go with Firecalc (or similar), the probabilities are based on a consistent withdrawal rate from day 1. Otherwise you are operating in the great unknown.
This how public pension funds got into trouble (by raising benefits in bull markets).

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Re: No "sequence of returns risk" what to do about withdrawals

Post by Da5id » Tue Jul 11, 2017 1:28 pm

tennisplyr wrote:So, I retired in early 2011 during the bull market and have been doing just fine. Now that I'm 6+ years into retirement, and luckily avoided a bad sequence of returns, do you think I can do better than a 4% withdrawal. I know this is broad question but I wondering what's a reasonable % to take. I've been doing about 4-5%, am in my midsixties and my AA is 50/50.
Just to clarify, is your strategy 4% of current assets fluctuating with current net worth, or the more typical (in SWR land) 4% of your original net worth adjusted for inflation?

In mid-sixties, you could easily live for 30 more years (odds are better if you are married that one wlll live that long). Your sequence of returns risk still remains. That said, if you aren't a worrier (I am personally) you probably can up your discretionary spending some, as long as you are willing to dial it back down if things go badly. I'm assuming you are OK with possibly depleting your assets somewhat over time, as 50% stocks and 5% expenditure can well do that.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by inbox788 » Tue Jul 11, 2017 1:47 pm

rgs92 wrote:If you go with Firecalc (or similar), the probabilities are based on a consistent withdrawal rate from day 1. Otherwise you are operating in the great unknown.
This how public pension funds got into trouble (by raising benefits in bull markets).
Interesting in that we take this information into account (i.e. somewhere in a bull market) when we try to re-retire (i.e. rerate our retirement stream), but it's not a factor when we begin (initial conditions). Let's say MMM retires early at age 55 with $1M invested at Vanguard and 4% SWR ($40,000/year) and a 10 year raging bull market makes his $1M grow to $2M (after annual disbursements). His more conservative twin NNN works an extra 10 years and is also now 65 and has $2M in Vanguard and retires with same plan of 4% SWR (but calculated off a higher beginning amount comes to $80,000/year).
The dilemma comes with MMM re-adjusting retirement plans to those current starting off vs. NNN having to consider the raging bull market and having a different plan given alternate economic conditions. Is the chance of a crash coming more now vs. 10 years ago before the bull market? Are year to year returns dependent or independent events? In general, year to year performance seems to be somewhat random independent events, but crash/recovery cycles seem to imply there is some dependence.

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Re: No "sequence of returns risk" what to do about withdrawals

Post by Thesaints » Tue Jul 11, 2017 2:38 pm

Not to mention than after 10 years your residual retirement is 10 year shorter!

The 4% rule is not a rule and it is not even a guideline, since its application it's different for financially identical subjects.
I'd rather call it the "4% factoid"

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Re: No "sequence of returns risk" what to do about withdrawals

Post by tennisplyr » Wed Jul 12, 2017 3:53 pm

Da5id wrote:
tennisplyr wrote:So, I retired in early 2011 during the bull market and have been doing just fine. Now that I'm 6+ years into retirement, and luckily avoided a bad sequence of returns, do you think I can do better than a 4% withdrawal. I know this is broad question but I wondering what's a reasonable % to take. I've been doing about 4-5%, am in my midsixties and my AA is 50/50.
Just to clarify, is your strategy 4% of current assets fluctuating with current net worth, or the more typical (in SWR land) 4% of your original net worth adjusted for inflation?

In mid-sixties, you could easily live for 30 more years (odds are better if you are married that one wlll live that long). Your sequence of returns risk still remains. That said, if you aren't a worrier (I am personally) you probably can up your discretionary spending some, as long as you are willing to dial it back down if things go badly. I'm assuming you are OK with possibly depleting your assets somewhat over time, as 50% stocks and 5% expenditure can well do that.
I am definitely not a worrier and take 4% of current assets which have risen due to bull market and downsizing. I go with the flow, if things go bad I dial back. I really wouldn't say "I can easily live another 30 years". Not very realistic. I only know 1 person who is over 95.
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Re: No "sequence of returns risk" what to do about withdrawals

Post by Da5id » Wed Jul 12, 2017 4:16 pm

tennisplyr wrote: I am definitely not a worrier and take 4% of current assets which have risen due to bull market and downsizing. I go with the flow, if things go bad I dial back. I really wouldn't say "I can easily live another 30 years". Not very realistic. I only know 1 person who is over 95.
http://www.longevityillustrator.org/Profile?m=1 claims a 65 year old male in excellent health has > 20% chance of making 95. Not that rare an event as you might think. But again, if you have lots of room to dial back probably not a problem...

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Re: No "sequence of returns risk" what to do about withdrawals

Post by Chip » Wed Jul 19, 2017 2:32 pm

WoodSpinner wrote:Interesting approach-- how did you arrive at it? Why do you feel it is low-risk?

TIA
Sorry for the delay in replying. Real life interfered. :)

It's a just a logical result (at least to me) of the "riddle" that Thesaints referred to.

Here's another way the riddle plays out: Imagine A and B have identical portfolios and otherwise identical financial situations. Suppose A retires with 1M in Year 1. B retires with 1.3M in Year 2 after the market has gone up 30% (yes, it has happened). B's "4% draw" will always 30% more than A's. Despite identical portfolios. That doesn't make any sense. Clearly A is taking less risk than B (because of smaller draws), but the Bengen study was supposed to provide a "safe withdrawal rate" for the worst retirement year. Clearly Year 1 wasn't the worst year to retire. Year 2 might be, but we don't know.

If you accept the premises of Bengen's study, and believe that future market returns and inflation will resemble the past, then A should be able to ramp up to B's withdrawal rate (after accounting for the fact that A took withdrawals in Year 1 that B didn't). I don't consider this to be "low risk" but I think it fits within the parameters of Bengen's study.

With all that said, we don't try to manage spending to hit a target, though I track spending and compare it to the numbers I mentioned earlier. We let our spending follow Taylor's rule: spend less if the market is tanking, spend a little more if it's doing well. We have a lot of discretionary expenses so cutting back isn't life changing. Several researchers have worked at quantifying Taylor's rule (e.g. Guyton), but all that work presumes the future is like the past. Here's my quick & dirty rule of thumb assuming one has a reasonable portfolio:

<3% withdrawals: Will almost certainly be okay without looking at the portfolio or worrying about market returns.
4% withdrawals: Will almost certainly be okay but had better pay attention if there are multiple down years.
>5% withdrawals: Will have to have some luck. Monitor the market and adapt spending as necessary.

I almost forgot. When I reach Bengen's theoretical retirement age of 65 I should be able to re-retire at a 4% withdrawal rate vs. the current 3.5%. :twisted:

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