Michael Kitces 4% rule podcast on Madfientist

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camper1
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Michael Kitces 4% rule podcast on Madfientist

Post by camper1 » Thu Aug 31, 2017 8:26 am

Not sure if this has been posted, but this is a very interesting podcast on Mad Fientists website which Kitces gives very clear explanation of the 4% rule. I have read quite a bit on the subject, but listening to the discussion gives me much better understanding of how to look at withdraw rates and early retirement. Also, made me feel better concerning some of my fears concerning future markets effects on withdraw rates.


http://www.madfientist.com/michael-kitces-interview/

Hope others find this interesting also.

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Leesbro63
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Thu Aug 31, 2017 10:29 am

Great podcast. The big thing that I got is that, according to Kitces' study, a 4% SWR is very conservative and all this talk about 3% and even 2% is ridiculously low. Of course this collides w Wade Pfau's study that suggests that in today's low yield environment, under 3% is the true "safe" withdrawal rate.

Go figure

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by David Jay » Thu Aug 31, 2017 10:35 am

Leesbro63 wrote:
Thu Aug 31, 2017 10:29 am
Great podcast. The big thing that I got is that, according to Kitces' study, a 4% SWR is very conservative and all this talk about 3% and even 2% is ridiculously low. Of course this collides w Wade Pfau's study that suggests that in today's low yield environment, under 3% is the true "safe" withdrawal rate.

Go figure
It doesn't really collide with Wade Pfau's study. If you take the AUM fee and the high cost mutual funds out of the study, Wade's number comes out in the mid-3s (i.e. 3.4% - 3.6%, depending on ER), not much below 4%.
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by jesscj » Thu Aug 31, 2017 11:17 am

I listened to it this morning as well, it is a great interview.
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by chinto » Thu Aug 31, 2017 11:26 am

So based on the contents of Ric Edelman's book The truth about your future I had a few conversations with some physicians I know, they lend a level of credence to some of Edelman's futurist views on longevity. Combining that with some conversations with pension actuaries...wow, the implications are staggering. But relevant to this thread is the idea of significantly longer and healthier lives and then the impacts to the economy and of course market returns. It is up to each of to decide how those factors may alter the past historic data that SWR are predicated upon.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by bligh » Thu Aug 31, 2017 2:23 pm

Awesome podcast. One thing I dont get is why more people dont break their retirement spending down into required and discretionary. I dont see why you couldn't say something like 'Your required spending should be less than 3% of your portfolio (ie. worst case) and your discretionary spendings should not be more than 1.5% of your portfolio."

So in good times you spend 4.5% but in bad times you drop it to 3%. Let's face it, I'm probably not going to be eating out as much or going for that Alaskan cruise when the the next 2008-2009 crash comes along. Vacations, restaurants and such are part of my planned/budgeted retirement expenses, but they are discretionary.

Personally that is what I am planning. Stick with an inflation adjusted 4% withdrawal rate, but make sure that I would be able to live a non-miserable existence on 3% if needed. Plus like, most people, I don't account for Social Security at all. That is just a safety factor built into the numbers. I think it will probably be there when I am eligible for it, but am I willing to depend on it being there? No.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Goodman60 » Thu Aug 31, 2017 3:02 pm

I've been thinking about the whole SWR thing for years and years. And that's exactly the tweak I think many of us on BHs are missing. That retirement spending, for many, can be broken down into required spending (our personal overheads that's pretty much fixed, unless we want to do serious ramping up or down) and discretionary spending. Knowing that my required spending is only 2% (just making up the number, for instance) is comforting when times are good and you actually spend 50% more than that (3% withdrawal). The key is to be sure that the discretionary items don't become required items. Travel can easily be ramped back and cars can be paid for during good times and driven for long periods if times get bad.

I'd like to see more discussion of this "two SWR" factor.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Thu Aug 31, 2017 3:11 pm

bligh wrote:
Thu Aug 31, 2017 2:23 pm
Awesome podcast. One thing I dont get is why more people dont break their retirement spending down into required and discretionary. I dont see why you couldn't say something like 'Your required spending should be less than 3% of your portfolio (ie. worst case) and your discretionary spendings should not be more than 1.5% of your portfolio."

So in good times you spend 4.5% but in bad times you drop it to 3%. Let's face it, I'm probably not going to be eating out as much or going for that Alaskan cruise when the the next 2008-2009 crash comes along. Vacations, restaurants and such are part of my planned/budgeted retirement expenses, but they are discretionary.
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Thu Aug 31, 2017 3:17 pm

VictoriaF wrote:
Thu Aug 31, 2017 3:11 pm
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
While I agree with your last paragraph, the main point of the Kitces podcast is that 4% takes into account a 50% drop...even the 89% drop of 1929-32..and is survivable. His point was that anything below 4% was being overly cautious at perhaps a cost of too much austerity. Personally I think we are in unchartered waters with zero percent interest rates and a market that's tripled in 8 years. But I get his point that 4% IS the insurance and you don't need insurance on the insurance.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Thu Aug 31, 2017 3:19 pm

David Jay wrote:
Thu Aug 31, 2017 10:35 am
Leesbro63 wrote:
Thu Aug 31, 2017 10:29 am
Great podcast. The big thing that I got is that, according to Kitces' study, a 4% SWR is very conservative and all this talk about 3% and even 2% is ridiculously low. Of course this collides w Wade Pfau's study that suggests that in today's low yield environment, under 3% is the true "safe" withdrawal rate.

Go figure
It doesn't really collide with Wade Pfau's study. If you take the AUM fee and the high cost mutual funds out of the study, Wade's number comes out in the mid-3s (i.e. 3.4% - 3.6%, depending on ER), not much below 4%.
I am not sure that's right. Didn't Wade's number actually come out slightly below 2% if you factor in a 1% adviser fee? I could be wrong...please show the source if you can to clarify.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by dbr » Thu Aug 31, 2017 3:26 pm

I think the distinction between "required" and "discretionary" is nowhere near as clear cut as one might think. In many cases the categorization is just arbitrary and therefore not all that helpful. It does make sense to contemplate what contingencies might arise and for all of one's expenses, expense by expense, how much might be cut back. One thing I have noticed about contingencies in my spending is that most of them, the larger one's in particular, have not turned out to be discretionary, but they were not known in advance.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Thu Aug 31, 2017 4:55 pm

Leesbro63 wrote:
Thu Aug 31, 2017 3:17 pm
VictoriaF wrote:
Thu Aug 31, 2017 3:11 pm
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
While I agree with your last paragraph, the main point of the Kitces podcast is that 4% takes into account a 50% drop...even the 89% drop of 1929-32..and is survivable. His point was that anything below 4% was being overly cautious at perhaps a cost of too much austerity. Personally I think we are in unchartered waters with zero percent interest rates and a market that's tripled in 8 years. But I get his point that 4% IS the insurance and you don't need insurance on the insurance.
These drops were survived in the circumstances Kitces analyzed, and 4% was the insurance in the past. I agree with you that we are in unchartered waters. And I'll add that the waters are always unchartered. The fall of the Iron Curtain makes difference. The rise of China makes difference. The Internet Age and the Artificial Intelligence Age make difference. Physically-rising waters make unchartered-waters difference. Certain calamities cannot be survived even with the most prudent LMP, but until they happen they are the best we can plan.

Kitces makes certain assumptions that are not realistic. For example, his calculations are based on the investor not changing his portfolio asset allocation when the market drops 50% or more. He takes ACA healthcare exchanges for granted, but they may disappear or become too expensive for young retirees. He also provides a backup plan for a retiree to work in a low-paying job paying $10k-$20k. While some retirees may be interested in such jobs, for a professional to take up a low-skilled job out of necessity can be unbearable. Yes, in his examples, one retired guy has found his calling as a bartender and Mister Money Mustache has unexpectedly monetized his blog--but these are rare exceptions, not strategies.

Victoria
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Thu Aug 31, 2017 5:15 pm

So it's back to the same ole argument: is 4% safe enough or not?Kitces says yes, you say that while it's always different, it's even more different this time that 4% isn't safe enough. So what is YOUR "safe enough" SWR?
Last edited by Leesbro63 on Thu Aug 31, 2017 5:30 pm, edited 1 time in total.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by David Jay » Thu Aug 31, 2017 5:20 pm

Leesbro63 wrote:
Thu Aug 31, 2017 3:19 pm
David Jay wrote:
Thu Aug 31, 2017 10:35 am
Leesbro63 wrote:
Thu Aug 31, 2017 10:29 am
Great podcast. The big thing that I got is that, according to Kitces' study, a 4% SWR is very conservative and all this talk about 3% and even 2% is ridiculously low. Of course this collides w Wade Pfau's study that suggests that in today's low yield environment, under 3% is the true "safe" withdrawal rate.

Go figure
It doesn't really collide with Wade Pfau's study. If you take the AUM fee and the high cost mutual funds out of the study, Wade's number comes out in the mid-3s (i.e. 3.4% - 3.6%, depending on ER), not much below 4%.
I am not sure that's right. Didn't Wade's number actually come out slightly below 2% if you factor in a 1% adviser fee? I could be wrong...please show the source if you can to clarify.
His figure was 2.1%
1% AUM
0.6% ER

If my average ER is .2, then my number is 3.5%
Last edited by David Jay on Thu Aug 31, 2017 5:29 pm, edited 1 time in total.
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Thu Aug 31, 2017 5:29 pm

I feel a bit better, then. It sounds like Pfau's REAL message is that people can't afford to use an adviser in retirement...or, put another way, doing so will cost you about 1/3 of what you can spend each year.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by David Jay » Thu Aug 31, 2017 5:30 pm

Leesbro63 wrote:
Thu Aug 31, 2017 5:29 pm
I feel a bit better, then. It sounds like Pfau's REAL message is that people can't afford to use an adviser in retirement...or, put another way, doing so will cost you about 1/3 of what you can spend each year.
The problem was that he buried it in the notes (that makes it easier to sell annuities), not in the summary.
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Thu Aug 31, 2017 5:32 pm

He seems solid, but anyone with ties to selling financial products is suspect to some degree of "personal interest bias"

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Thu Aug 31, 2017 5:47 pm

Leesbro63 wrote:
Thu Aug 31, 2017 5:15 pm
So it's back to the same ole argument: is 4% safe enough or not? Kitces says yes, you say that while it's always different, it's even more different this time that 4% isn't safe enough. So what is YOUR "safe enough" SWR?
I don't use an SWR. I have a spreadsheet with my projected cash flow until the age of 100. Before taking Social Security, I am spending my taxable assets to pay taxes on Roth conversions and to supplement my pensions. After I start taking the Social Security at the age of 70, the Social Security together with two pensions will cover most of my necessary spending. My remaining assets will be irrelevant to my minimum needs but will provide ample opportunities for frivolous spending, medical disasters, and leaving an inheritance.

Victoria
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by bligh » Thu Aug 31, 2017 6:03 pm

VictoriaF wrote:
Thu Aug 31, 2017 5:47 pm
Leesbro63 wrote:
Thu Aug 31, 2017 5:15 pm
So it's back to the same ole argument: is 4% safe enough or not? Kitces says yes, you say that while it's always different, it's even more different this time that 4% isn't safe enough. So what is YOUR "safe enough" SWR?
I don't have an SWR. I have a spreadsheet with my projected cash flow. Before taking Social Security, I am spending my taxable assets to pay taxes on Roth conversions and to supplement my pensions. After I start taking the Social Security at the age of 70, the Social Security together with two pensions will cover most of my necessary spending. My remaining assets will be irrelevant to my minimum needs but they will provide ample opportunities for frivolous spending, medical disasters, and leaving an inheritance.

Victoria
The 4% withdrawal rate has longer track record and higher success rate than most pensions. I'd take it over most non federal pensions. Pension benefits get cut all the time.

Anyway.. for the majority of us unlucky enough not to have pensions? What do you recommend?

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Thu Aug 31, 2017 6:09 pm

bligh wrote:
Thu Aug 31, 2017 6:03 pm
VictoriaF wrote:
Thu Aug 31, 2017 5:47 pm
Leesbro63 wrote:
Thu Aug 31, 2017 5:15 pm
So it's back to the same ole argument: is 4% safe enough or not? Kitces says yes, you say that while it's always different, it's even more different this time that 4% isn't safe enough. So what is YOUR "safe enough" SWR?
I don't have an SWR. I have a spreadsheet with my projected cash flow. Before taking Social Security, I am spending my taxable assets to pay taxes on Roth conversions and to supplement my pensions. After I start taking the Social Security at the age of 70, the Social Security together with two pensions will cover most of my necessary spending. My remaining assets will be irrelevant to my minimum needs but they will provide ample opportunities for frivolous spending, medical disasters, and leaving an inheritance.

Victoria
The 4% withdrawal rate has longer track record and higher success rate than most pensions. I'd take it over most non federal pensions. Pension benefits get cut all the time.

Anyway.. for those unlucky enough not to have pensions? What do you recommend?
I agree with you about risks of non-Federal pensions. One of my pensions is from a private company and it's the weakest part of my LMP.

The best sources of LMP are Federal-based, inflation-indexed:
- maximum Social Security (delayed until the age of 70)
- TIPS
- I bonds.

Other sources are SPIA ladders, nominal Treasuries, EE bonds, and FDIC-insured CDs.

Victoria
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by ResearchMed » Thu Aug 31, 2017 6:22 pm

There is still the often overlooked issue of adjusting one's spending IF NEEDED, if the results aren't looking quite so promising...

These models assume that someone keeps spending the same way, all the way right into the pit.

There are of course some people who are so much "at the edge" that they can't cut back (not without help of a food bank, or such), but most people, and especially most (or all?) Bogleheads, could scale down the type of car they purchase, or postpone it a year or two or more, or skip a vacation or scale back considerably, or not eat out as often, or only less often and in less expensive places, or not get new linens/sweaters/coat/TV/etc., for a while longer, etc.....

And as mentioned elsewhere, "non-discretionary" expenses also *do* have some discretion in most cases. Yes, food is necessary. But it's hard to imagine that one couldn't cut back at least a bit, etc. In several categories, over time, this can help keep one off the edge, unless one is truly and somewhat desperately already on the edge.

Paring back at the early signs of unexpectedly poor portfolio performance (and/or unexpected expenses), and keeping it there for a few years, could have a big effect, assuming it's not a multiple 1929/etc.
Or paring back more, but later, could also help.

Are there really many here who would just keep up the 4% or 4.5% or 5% or whatever (also depends upon age/number of years support is needed), just watching as the balance heads south due to poor portfolio returns, without starting to make some adjustments?

And this would be even easier for those who have pensions/SS/SPIA's that account for a significant proportion of "non-discretionary" expenses.

RM
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by One Ping » Thu Aug 31, 2017 6:41 pm

David Jay wrote:
Thu Aug 31, 2017 5:30 pm
The problem was that he buried it in the notes (that makes it easier to sell annuities), not in the summary.
^ +1 You have to be careful when reading things to consider the source (emphasis added).

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by knpstr » Thu Aug 31, 2017 6:46 pm

VictoriaF wrote:
Thu Aug 31, 2017 3:11 pm
bligh wrote:
Thu Aug 31, 2017 2:23 pm
Awesome podcast. One thing I dont get is why more people dont break their retirement spending down into required and discretionary. I dont see why you couldn't say something like 'Your required spending should be less than 3% of your portfolio (ie. worst case) and your discretionary spendings should not be more than 1.5% of your portfolio."

So in good times you spend 4.5% but in bad times you drop it to 3%. Let's face it, I'm probably not going to be eating out as much or going for that Alaskan cruise when the the next 2008-2009 crash comes along. Vacations, restaurants and such are part of my planned/budgeted retirement expenses, but they are discretionary.
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
What happens when S.S. gets cut, we have hyperinflation (even TIPS with their 6-month lag get adjusted too slow to mitigate this), your pension goes away and the insurance companies your SPIAs are with go out of business? :twisted:

I'm not so certain a 50% drop is catastrophic at 3%. Bonds and even stocks in aggregate (total market) don't change their dividend/interest payments that much. If these still paid 2% of your original amount the remaining, (which may be 4% of the new lowered balance) then a 1% in a 50% drop would turn into 2%. Withdrawing 2% (6% in total counting the interest/dividends of 4%) even in a no-growth environment will last 50 years, by taking the dividends/interest and 2% in principal. Then there is the likelihood of a 50% drop with no future rise, ever.
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Thu Aug 31, 2017 7:17 pm

knpstr wrote:
Thu Aug 31, 2017 6:46 pm
VictoriaF wrote:
Thu Aug 31, 2017 3:11 pm
bligh wrote:
Thu Aug 31, 2017 2:23 pm
Awesome podcast. One thing I dont get is why more people dont break their retirement spending down into required and discretionary. I dont see why you couldn't say something like 'Your required spending should be less than 3% of your portfolio (ie. worst case) and your discretionary spendings should not be more than 1.5% of your portfolio."

So in good times you spend 4.5% but in bad times you drop it to 3%. Let's face it, I'm probably not going to be eating out as much or going for that Alaskan cruise when the the next 2008-2009 crash comes along. Vacations, restaurants and such are part of my planned/budgeted retirement expenses, but they are discretionary.
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
What happens when S.S. gets cut, we have hyperinflation (even TIPS with their 6-month lag get adjusted too slow to mitigate this), your pension goes away and the insurance companies your SPIAs are with go out of business? :twisted:
I will use more assets from my Risk Portfolio (RP) to satisfy my liabilities. My spreadsheet will be revised and by the age of 100 my remaining real balance will be lower.
knpstr wrote:
Thu Aug 31, 2017 6:46 pm
I'm not so certain a 50% drop is catastrophic at 3%. Bonds and even stocks in aggregate (total market) don't change their dividend/interest payments that much. If these still paid 2% of your original amount the remaining, (which may be 4% of the new lowered balance) then a 1% in a 50% drop would turn into 2%. Withdrawing 2% (6% in total counting the interest/dividends of 4%) even in a no-growth environment will last 50 years, by taking the dividends/interest and 2% in principal. Then there is the likelihood of a 50% drop with no future rise, ever.
Stock dividends have dropped significantly in comparison to the early 20th century.
Investopedia wrote:During the 90 years between 1871 and 1960, the S&P 500 annual dividend yield never fell below 3%. In fact, annual dividends reached above 5% during 45 separate years over the period. Of the 30 years after 1960, only five saw yields below 3%. The sharp change in S&P 500 dividend yield traces back to the early to mid-1990s. For example, the average dividend yield between 1970 and 1990 was 4.03%. It declined to 1.95% between 1991 and 2007. After a brief climb to 3.11% during the peak of the Great Recession of 2008, the annual S&P 500 dividend yield averaged just 1.99% between 2009 and 2015.
They may fall even lower in some "new economy."

Victoria
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by EddyB » Thu Aug 31, 2017 7:24 pm

knpstr wrote:
Thu Aug 31, 2017 6:46 pm
VictoriaF wrote:
Thu Aug 31, 2017 3:11 pm
bligh wrote:
Thu Aug 31, 2017 2:23 pm
Awesome podcast. One thing I dont get is why more people dont break their retirement spending down into required and discretionary. I dont see why you couldn't say something like 'Your required spending should be less than 3% of your portfolio (ie. worst case) and your discretionary spendings should not be more than 1.5% of your portfolio."

So in good times you spend 4.5% but in bad times you drop it to 3%. Let's face it, I'm probably not going to be eating out as much or going for that Alaskan cruise when the the next 2008-2009 crash comes along. Vacations, restaurants and such are part of my planned/budgeted retirement expenses, but they are discretionary.
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
What happens when S.S. gets cut, we have hyperinflation (even TIPS with their 6-month lag get adjusted too slow to mitigate this), your pension goes away and the insurance companies your SPIAs are with go out of business? :twisted:

I'm not so certain a 50% drop is catastrophic at 3%. Bonds and even stocks in aggregate (total market) don't change their dividend/interest payments that much. If these still paid 2% of your original amount the remaining, (which may be 4% of the new lowered balance) then a 1% in a 50% drop would turn into 2%. Withdrawing 2% (6% in total counting the interest/dividends of 4%) even in a no-growth environment will last 50 years, by taking the dividends/interest and 2% in principal. Then there is the likelihood of a 50% drop with no future rise, ever.
And what happens when you die at your desk (or other work center) while working the extra years (decades?) to reach that bullet-proof (even if not fallout bunker) level of security?

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Thu Aug 31, 2017 7:33 pm

VictoriaF wrote:
Thu Aug 31, 2017 5:47 pm
Leesbro63 wrote:
Thu Aug 31, 2017 5:15 pm
So it's back to the same ole argument: is 4% safe enough or not? Kitces says yes, you say that while it's always different, it's even more different this time that 4% isn't safe enough. So what is YOUR "safe enough" SWR?
I don't use an SWR. I have a spreadsheet with my projected cash flow until the age of 100. Before taking Social Security, I am spending my taxable assets to pay taxes on Roth conversions and to supplement my pensions. After I start taking the Social Security at the age of 70, the Social Security together with two pensions will cover most of my necessary spending. My remaining assets will be irrelevant to my minimum needs but will provide ample opportunities for frivolous spending, medical disasters, and leaving an inheritance.

Victoria
That convienently ignores the question: you think a 4% SWR is too risky; regardless of your personal situation, what do you think IS a safe SWR for those using this system of retirement asset management?

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by knpstr » Thu Aug 31, 2017 7:36 pm

VictoriaF wrote:
Thu Aug 31, 2017 7:17 pm

I will use more assets from my Risk Portfolio (RP) to satisfy my liabilities. My spreadsheet will be revised and by the age of 100 my remaining real balance will be lower.

Victoria
Then you'll use your RP? What if it drops 50% and never recovers?!? :twisted:

I think those are fair points to question as far as dividend rate, there has been a desire of less dividends and more reinvestment in company operations. However, I don't know if dividends will fall much lower than 2% (not too much left to reduce), though there is a common desire on this board that dividends be 0%. 2% (or 4% after the drop) also includes the bond component, where interest rates could be materially higher in the future.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by knpstr » Thu Aug 31, 2017 7:38 pm

EddyB wrote:
Thu Aug 31, 2017 7:24 pm
knpstr wrote:
Thu Aug 31, 2017 6:46 pm
VictoriaF wrote:
Thu Aug 31, 2017 3:11 pm
bligh wrote:
Thu Aug 31, 2017 2:23 pm
Awesome podcast. One thing I dont get is why more people dont break their retirement spending down into required and discretionary. I dont see why you couldn't say something like 'Your required spending should be less than 3% of your portfolio (ie. worst case) and your discretionary spendings should not be more than 1.5% of your portfolio."

So in good times you spend 4.5% but in bad times you drop it to 3%. Let's face it, I'm probably not going to be eating out as much or going for that Alaskan cruise when the the next 2008-2009 crash comes along. Vacations, restaurants and such are part of my planned/budgeted retirement expenses, but they are discretionary.
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
What happens when S.S. gets cut, we have hyperinflation (even TIPS with their 6-month lag get adjusted too slow to mitigate this), your pension goes away and the insurance companies your SPIAs are with go out of business? :twisted:

I'm not so certain a 50% drop is catastrophic at 3%. Bonds and even stocks in aggregate (total market) don't change their dividend/interest payments that much. If these still paid 2% of your original amount the remaining, (which may be 4% of the new lowered balance) then a 1% in a 50% drop would turn into 2%. Withdrawing 2% (6% in total counting the interest/dividends of 4%) even in a no-growth environment will last 50 years, by taking the dividends/interest and 2% in principal. Then there is the likelihood of a 50% drop with no future rise, ever.
And what happens when you die at your desk (or other work center) while working the extra years (decades?) to reach that bullet-proof (even if not fallout bunker) level of security?
I'm not Jewish but perhaps a relevant quote:
"Instead of promising yourself that you will play golf, read good books, and enjoy time with the family when you retire, you should heed Ben Zomah’s advice and take constant little slices of retirement as it were, each and every day of your life."
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Thu Aug 31, 2017 7:41 pm

Leesbro63 wrote:
Thu Aug 31, 2017 3:17 pm
VictoriaF wrote:
Thu Aug 31, 2017 3:11 pm
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
While I agree with your last paragraph, the main point of the Kitces podcast is that 4% takes into account a 50% drop...even the 89% drop of 1929-32..and is survivable. His point was that anything below 4% was being overly cautious at perhaps a cost of too much austerity. Personally I think we are in unchartered waters with zero percent interest rates and a market that's tripled in 8 years. But I get his point that 4% IS the insurance and you don't need insurance on the insurance.
Most of the times, a google search of 'LMP and boglehead' brings up the thread you started a few years ago...did you know that?

Anyhow, yes! The 4% SWR included the 50% drop and even the 89%. The advantage of TIPS ladder that no one has spoken about is this. Someone here said, why not keep the essential expenses as 3% and total expenses including discretionary expenses as 4.5%. When it comes to SWR, I love this idea. However, my question is, how would you feel about spending even 3% when the entire portfolio is down 50%? What if the following year it goes down another 10%? You and I both know it's worked in the past. But, how would you feel spending 3% after a year of 50% decline followed by another 10% decline? The single most important thing with TIPS ladder is that your future essential expense is covered no matter what...So, even after a 50% drop and another 10% drop you can continue spending that '3% equivalent' without flinching. This to me is priceless.

With LMP, You will not even waste one year of your retirement by tightening your waist hyper aggressively during prolonged market downturns...when your future income stream is not guaranteed, it is impossible not to over correct, even if you know over-correction was never needed in the past....no one can do it...everyone will tighten their belts too much, fearing their future income....anyone disagree ?

Secondly just be truthful of exactly how much you can reduce your spending by....there's certain basic needs beyond which it's not feasible to go down in spending without major compromises to your envisioned retirement lifestyle.

My TIPS ladder covering basic expenses with a side portfolio for discretionary expenses exposed to the market, will allow me to enjoy each and every year of retirement absolutely Irrelevant of what the market may throw at me.

Guess what, the cost for it is quite minimal....about 35%:65% for me in stock to bond allocation on first year of retirement with bigger and bigger stock allocation as you spend down your TIPS. A bond tent around retirement with may be 5% to 15% more bond allocation than conventional advice.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by bligh » Thu Aug 31, 2017 7:45 pm

knpstr wrote:
Thu Aug 31, 2017 7:38 pm
I'm not Jewish but perhaps a relevant quote:
"Instead of promising yourself that you will play golf, read good books, and enjoy time with the family when you retire, you should heed Ben Zomah’s advice and take constant little slices of retirement as it were, each and every day of your life."

I agree! Now if only my boss and clients would agree so they'd let me take those little slices of retirement without also giving me big slices of unemployment. ;)

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Thu Aug 31, 2017 7:48 pm

EddyB wrote:
Thu Aug 31, 2017 7:24 pm
knpstr wrote:
Thu Aug 31, 2017 6:46 pm
VictoriaF wrote:
Thu Aug 31, 2017 3:11 pm
bligh wrote:
Thu Aug 31, 2017 2:23 pm
Awesome podcast. One thing I dont get is why more people dont break their retirement spending down into required and discretionary. I dont see why you couldn't say something like 'Your required spending should be less than 3% of your portfolio (ie. worst case) and your discretionary spendings should not be more than 1.5% of your portfolio."

So in good times you spend 4.5% but in bad times you drop it to 3%. Let's face it, I'm probably not going to be eating out as much or going for that Alaskan cruise when the the next 2008-2009 crash comes along. Vacations, restaurants and such are part of my planned/budgeted retirement expenses, but they are discretionary.
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
What happens when S.S. gets cut, we have hyperinflation (even TIPS with their 6-month lag get adjusted too slow to mitigate this), your pension goes away and the insurance companies your SPIAs are with go out of business? :twisted:

I'm not so certain a 50% drop is catastrophic at 3%. Bonds and even stocks in aggregate (total market) don't change their dividend/interest payments that much. If these still paid 2% of your original amount the remaining, (which may be 4% of the new lowered balance) then a 1% in a 50% drop would turn into 2%. Withdrawing 2% (6% in total counting the interest/dividends of 4%) even in a no-growth environment will last 50 years, by taking the dividends/interest and 2% in principal. Then there is the likelihood of a 50% drop with no future rise, ever.
And what happens when you die at your desk (or other work center) while working the extra years (decades?) to reach that bullet-proof (even if not fallout bunker) level of security?
Did you workout how much longer you have to work to setup a TIPS ladder for basic income followed by TIPS ladder + SS and after age 80 SPIA + SS ...SPIA To be purchased with a maturing TIPS at age 80.

It is dependent on individual factors...but work it out and see...for me, it wasn't that much more of working. I would have gone 50:50 stock allocation in retirement anyways, the TIPS ladder brings it to 35% gradually going to 50% over a few years.

It wasn't bad as I thought it will be...

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by EddyB » Thu Aug 31, 2017 7:56 pm

bligh wrote:
Thu Aug 31, 2017 7:45 pm
knpstr wrote:
Thu Aug 31, 2017 7:38 pm
I'm not Jewish but perhaps a relevant quote:
"Instead of promising yourself that you will play golf, read good books, and enjoy time with the family when you retire, you should heed Ben Zomah’s advice and take constant little slices of retirement as it were, each and every day of your life."

I agree! Now if only my boss and clients would agree so they'd let me take those little slices of retirement without also giving me big slices of unemployment. ;)
Even though I reserve a reasonable amount of time for reading good books, enjoying time with my family and participating in sports and hobbies that I enjoy more than golf, I'm hoping to do some things in retirement that aren't compatible with my job.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Thu Aug 31, 2017 7:58 pm

Leesbro63 wrote:
Thu Aug 31, 2017 7:33 pm
VictoriaF wrote:
Thu Aug 31, 2017 5:47 pm
Leesbro63 wrote:
Thu Aug 31, 2017 5:15 pm
So it's back to the same ole argument: is 4% safe enough or not? Kitces says yes, you say that while it's always different, it's even more different this time that 4% isn't safe enough. So what is YOUR "safe enough" SWR?
I don't use an SWR. I have a spreadsheet with my projected cash flow until the age of 100. Before taking Social Security, I am spending my taxable assets to pay taxes on Roth conversions and to supplement my pensions. After I start taking the Social Security at the age of 70, the Social Security together with two pensions will cover most of my necessary spending. My remaining assets will be irrelevant to my minimum needs but will provide ample opportunities for frivolous spending, medical disasters, and leaving an inheritance.

Victoria
That convienently ignores the question: you think a 4% SWR is too risky; regardless of your personal situation, what do you think IS a safe SWR for those using this system of retirement asset management?
I don't think that "this systems of retirement asset management" is the best system. Apart from my personal situation, I think that the LMP/RP approach is much more prudent. Bill Bernstein described it in "The Ages of the Investor: A Critical Look at Life-cycle Investing." In essence:
N = your needs
I = your safe retirement income, even if it's just Social Security
(N - I) = amount to be satisfied by your LMP, e.g., a TIPS ladder
R = the amount of remaining assets, i.e., your Risk Portfolio

After you have moved enough assets into the TIPS ladder ("LMP"), what you do with the remaining amount R is not critical. You take money out as you please.

Victoria
Last edited by VictoriaF on Thu Aug 31, 2017 8:03 pm, edited 1 time in total.
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

chinto
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by chinto » Thu Aug 31, 2017 8:02 pm

gilgamesh wrote:
Thu Aug 31, 2017 7:41 pm
Leesbro63 wrote:
Thu Aug 31, 2017 3:17 pm
VictoriaF wrote:
Thu Aug 31, 2017 3:11 pm
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
While I agree with your last paragraph, the main point of the Kitces podcast is that 4% takes into account a 50% drop...even the 89% drop of 1929-32..and is survivable. His point was that anything below 4% was being overly cautious at perhaps a cost of too much austerity. Personally I think we are in unchartered waters with zero percent interest rates and a market that's tripled in 8 years. But I get his point that 4% IS the insurance and you don't need insurance on the insurance.
Most of the times, a google search of 'LMP and boglehead' brings up the thread you started a few years ago...did you know that?

Anyhow, yes! The 4% SWR included the 50% drop and even the 89%. The advantage of TIPS ladder that no one has spoken about is this. Someone here said, why not keep the essential expenses as 3% and total expenses including discretionary expenses as 4.5%. When it comes to SWR, I love this idea. However, my question is, how would you feel about spending even 3% when the entire portfolio is down 50%? What if the following year it goes down another 10%? You and I both know it's worked in the past. But, how would you feel spending 3% after a year of 50% decline followed by another 10% decline? The single most important thing with TIPS ladder is that your future essential expense is covered no matter what...So, even after a 50% drop and another 10% drop you can continue spending that '3% equivalent' without flinching. This to me is priceless.

With LMP, You will not even waste one year of your retirement by tightening your waist hyper aggressively during prolonged market downturns...when your future income stream is not guaranteed, it is impossible not to over correct, even if you know over-correction was never needed in the past....no one can do it...everyone will tighten their belts too much, fearing their future income....anyone disagree ?

Secondly just be truthful of exactly how much you can reduce your spending by....there's certain basic needs beyond which it's not feasible to go down in spending without major compromises to your envisioned retirement lifestyle.

My TIPS ladder covering basic expenses with a side portfolio for discretionary expenses exposed to the market, will allow me to enjoy each and every year of retirement absolutely Irrelevant of what the market may throw at me.

Guess what, the cost for it is quite minimal....about 35%:65% for me in stock to bond allocation on first year of retirement with bigger and bigger stock allocation as you spend down your TIPS. A bond tent around retirement with may be 5% to 15% more bond allocation than conventional advice.
So in a world where health insurance premiums and health care can skyrocket, where real estate taxes can explode, how exactly do you create a LMP when two of the largest catalyst for increases are wildcards? If I would have been depending on I-bonds or TIPs the last 10 years in these two areas I would have been devastated. I like the idea of LMP, I just don't see it as practical because of the wildcards. Nor does anything other than overcompensation seem to a viable alternative.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Thu Aug 31, 2017 8:07 pm

chinto wrote:
Thu Aug 31, 2017 8:02 pm
gilgamesh wrote:
Thu Aug 31, 2017 7:41 pm
Leesbro63 wrote:
Thu Aug 31, 2017 3:17 pm
VictoriaF wrote:
Thu Aug 31, 2017 3:11 pm
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
While I agree with your last paragraph, the main point of the Kitces podcast is that 4% takes into account a 50% drop...even the 89% drop of 1929-32..and is survivable. His point was that anything below 4% was being overly cautious at perhaps a cost of too much austerity. Personally I think we are in unchartered waters with zero percent interest rates and a market that's tripled in 8 years. But I get his point that 4% IS the insurance and you don't need insurance on the insurance.
Most of the times, a google search of 'LMP and boglehead' brings up the thread you started a few years ago...did you know that?

Anyhow, yes! The 4% SWR included the 50% drop and even the 89%. The advantage of TIPS ladder that no one has spoken about is this. Someone here said, why not keep the essential expenses as 3% and total expenses including discretionary expenses as 4.5%. When it comes to SWR, I love this idea. However, my question is, how would you feel about spending even 3% when the entire portfolio is down 50%? What if the following year it goes down another 10%? You and I both know it's worked in the past. But, how would you feel spending 3% after a year of 50% decline followed by another 10% decline? The single most important thing with TIPS ladder is that your future essential expense is covered no matter what...So, even after a 50% drop and another 10% drop you can continue spending that '3% equivalent' without flinching. This to me is priceless.

With LMP, You will not even waste one year of your retirement by tightening your waist hyper aggressively during prolonged market downturns...when your future income stream is not guaranteed, it is impossible not to over correct, even if you know over-correction was never needed in the past....no one can do it...everyone will tighten their belts too much, fearing their future income....anyone disagree ?

Secondly just be truthful of exactly how much you can reduce your spending by....there's certain basic needs beyond which it's not feasible to go down in spending without major compromises to your envisioned retirement lifestyle.

My TIPS ladder covering basic expenses with a side portfolio for discretionary expenses exposed to the market, will allow me to enjoy each and every year of retirement absolutely Irrelevant of what the market may throw at me.

Guess what, the cost for it is quite minimal....about 35%:65% for me in stock to bond allocation on first year of retirement with bigger and bigger stock allocation as you spend down your TIPS. A bond tent around retirement with may be 5% to 15% more bond allocation than conventional advice.
So in a world where health insurance premiums and health care can skyrocket, where real estate taxes can explode, how exactly do you create a LMP when two of the largest catalyst for increases are wildcards? If I would have been depending on I-bonds or TIPs the last 10 years in these two areas I would have been devastated. I like the idea of LMP, I just don't see it as practical because of the wildcards. Nor does anything other than overcompensation seem to a viable alternative.
Once you reach the Medicare age, your health insurance cost becomes relatively stable. As a retiree you have control over where you live, and thus you have control over your real estate taxes.

Yes, there are many other potential catastrophic expenses, e.g., getting into an accident and becoming disabled or losing your home in a flood. However, you would have the same problem if you were trying to estimate if 4% of your assets is enough.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

gilgamesh
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Thu Aug 31, 2017 8:10 pm

chinto wrote:
Thu Aug 31, 2017 8:02 pm
gilgamesh wrote:
Thu Aug 31, 2017 7:41 pm
Leesbro63 wrote:
Thu Aug 31, 2017 3:17 pm
VictoriaF wrote:
Thu Aug 31, 2017 3:11 pm
In your example, if the retirement portfolio is invested in the typical 60/40 fashion and the market drops 50%, and stays there, even 3% in required distributions can become catastrophic.

As a safer approach, Bill Bernstein divides retirement assets into Liability Matching Portfolio (LMP) and Risk Portfolio (RP). LMP includes income and assets that are as safe as they could be, e.g., Social Security, TIPS, I-bonds, pensions, SPIAs. RP is everything else. LMP covers your required spending, RP provides you with discretionary spending and ultimately, the legacy.

Victoria
While I agree with your last paragraph, the main point of the Kitces podcast is that 4% takes into account a 50% drop...even the 89% drop of 1929-32..and is survivable. His point was that anything below 4% was being overly cautious at perhaps a cost of too much austerity. Personally I think we are in unchartered waters with zero percent interest rates and a market that's tripled in 8 years. But I get his point that 4% IS the insurance and you don't need insurance on the insurance.
Most of the times, a google search of 'LMP and boglehead' brings up the thread you started a few years ago...did you know that?

Anyhow, yes! The 4% SWR included the 50% drop and even the 89%. The advantage of TIPS ladder that no one has spoken about is this. Someone here said, why not keep the essential expenses as 3% and total expenses including discretionary expenses as 4.5%. When it comes to SWR, I love this idea. However, my question is, how would you feel about spending even 3% when the entire portfolio is down 50%? What if the following year it goes down another 10%? You and I both know it's worked in the past. But, how would you feel spending 3% after a year of 50% decline followed by another 10% decline? The single most important thing with TIPS ladder is that your future essential expense is covered no matter what...So, even after a 50% drop and another 10% drop you can continue spending that '3% equivalent' without flinching. This to me is priceless.

With LMP, You will not even waste one year of your retirement by tightening your waist hyper aggressively during prolonged market downturns...when your future income stream is not guaranteed, it is impossible not to over correct, even if you know over-correction was never needed in the past....no one can do it...everyone will tighten their belts too much, fearing their future income....anyone disagree ?

Secondly just be truthful of exactly how much you can reduce your spending by....there's certain basic needs beyond which it's not feasible to go down in spending without major compromises to your envisioned retirement lifestyle.

My TIPS ladder covering basic expenses with a side portfolio for discretionary expenses exposed to the market, will allow me to enjoy each and every year of retirement absolutely Irrelevant of what the market may throw at me.

Guess what, the cost for it is quite minimal....about 35%:65% for me in stock to bond allocation on first year of retirement with bigger and bigger stock allocation as you spend down your TIPS. A bond tent around retirement with may be 5% to 15% more bond allocation than conventional advice.
So in a world where health insurance premiums and health care can skyrocket, where real estate taxes can explode, how exactly do you create a LMP when two of the largest catalyst for increases are wildcards? If I would have been depending on I-bonds or TIPs the last 10 years in these two areas I would have been devastated. I like the idea of LMP, I just don't see it as practical because of the wildcards. Nor does anything other than overcompensation seem to a viable alternative.
Healthcare costs and LTC is a wild card no matter what type of withdrawal method used.

There are two distinct problems here...don't mix the two. First is figuring out how much you need. Second is how you are going to get this amount you've decided you need.

SWR vs LMP only deals with this latter part.

Yes! The most difficult part of figuring out the amount needed for basic expenses is healthcare cost and LTC.

Me personally...I will only have 5-7 years without Medicare...I just have to take that risk. LTC and other contingency spending will be provided with the expected growth of my side portfolio from which I will only withdraw 3 to 3.5%. If it doesn't, I don't care....my basic expenses are covered and will allow for non-luxury LTC.

P.S: real estate taxes is possibly a wild card too, but not as much as the other two. I personally don't think, just moving is always an option (another reason I think there's limitation on how much one can tighten their belt without totally destroying their envisioned retirement lifestyle)

P.S2: My basic needs TIPS ladder has quite a lot reserved for traveling for the first 10 years (I consider traveling in retirement as basic things I envisioned for retirement), if healthcare does spiral out of control I am willing to take a cut on those as well.
'
Last edited by gilgamesh on Thu Aug 31, 2017 8:19 pm, edited 1 time in total.

chinto
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by chinto » Thu Aug 31, 2017 8:17 pm

VictoriaF wrote:
Thu Aug 31, 2017 8:07 pm

Once you reach the Medicare age, your health insurance cost becomes relatively stable. As a retiree you have control over where you live, and thus you have control over your real estate taxes.

Yes, there are many other potential catastrophic expenses, e.g., getting into an accident and becoming disabled or losing your home in a flood. However, you would have the same problem if you were trying to estimate if 4% of your assets is enough.

Victoria
On Medicare, my understanding is its finances are in peril which I think makes it a poor choice to view in terms of stability of cost. I'll give you the: where you live, to a great extent.

And I agree if you were trying to determine if 4% of your assets was enough you would have the same problem. Which is rather my point, it is very, very hard to model you expenses for either a LMP or a 4% withdraw (or even a 1.6 to 1.8% withdraw) for those without Government provided healthcare and pensions.

Obviously I have no answer for the problem other than vast over compensation for you anticipated expenses - which is admittedly not much of a plan.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Thu Aug 31, 2017 8:26 pm

chinto wrote:
Thu Aug 31, 2017 8:17 pm
On Medicare, my understanding is its finances are in peril which I think makes it a poor choice to view in terms of stability of cost. I'll give you the: where you live, to a great extent.
As i understand it: If you have all varieties of Medicare and a Medigap policy, your insurance costs are predictable and your out of pocket costs are zero.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by AlohaJoe » Thu Aug 31, 2017 9:31 pm

VictoriaF wrote:
Thu Aug 31, 2017 8:26 pm
chinto wrote:
Thu Aug 31, 2017 8:17 pm
On Medicare, my understanding is its finances are in peril which I think makes it a poor choice to view in terms of stability of cost. I'll give you the: where you live, to a great extent.
As i understand it: If you have all varieties of Medicare and a Medigap policy, your insurance costs are predictable and your out of pocket costs are zero.
My guess is that chinto is referring to how Medicare is even more underfunded (according to the latest Trustees Report) than Social Security (though it gets far less attention than Social Security scaremongering). If Medicare benefits are cut by, say, 40% over the next 2 decades (or become means tested or some other fairly large change) then it is really a fool's errand to pretend you have "liability matched" since no one can actually predict your liabilities 2 decades out.

At some level it is simply a matter of branding -- liability matching portfolios don't match liabilities in any meaningful sense because normal generally people don't have liabilities once their mortgage is paid off and kids are out of school. But a LMP does build an "income floor" or "secure income floor" or "making sure my best guess at bare necessities is covered" or some other similar kind of wording. And many people want that and are willing to pay what it costs to create.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Thu Aug 31, 2017 9:39 pm

AlohaJoe wrote:
Thu Aug 31, 2017 9:31 pm
VictoriaF wrote:
Thu Aug 31, 2017 8:26 pm
chinto wrote:
Thu Aug 31, 2017 8:17 pm
On Medicare, my understanding is its finances are in peril which I think makes it a poor choice to view in terms of stability of cost. I'll give you the: where you live, to a great extent.
As i understand it: If you have all varieties of Medicare and a Medigap policy, your insurance costs are predictable and your out of pocket costs are zero.
My guess is that chinto is referring to how Medicare is even more underfunded (according to the latest Trustees Report) than Social Security (though it gets far less attention than Social Security scaremongering). If Medicare benefits are cut by, say, 40% over the next 2 decades (or become means tested or some other fairly large change) then it is really a fool's errand to pretend you have "liability matched" since no one can actually predict your liabilities 2 decades out.
Thank you for a clarification. It makes more sense now.

I don't think that Medicare benefits would be simply cut. It's more likely that to control costs some treatments will not be covered and medical tourism will be sanctioned.
AlohaJoe wrote:
Thu Aug 31, 2017 9:31 pm
At some level it is simply a matter of branding -- liability matching portfolios don't match liabilities in any meaningful sense because normal generally people don't have liabilities once their mortgage is paid off and kids are out of school. But a LMP does build an "income floor" or "secure income floor" or "making sure my best guess at bare necessities is covered" or some other similar kind of wording. And many people want that and are willing to pay what it costs to create.
It's definitely true for me. I keep track of my current expenses, I make assumptions about future expenses, and I want to have an income floor to cover these expenses in the foreseeable future. I am more willing to keep assets for this income floor in low-earning investments than to use historical performance as a guide for how much faster my portfolio could grow.

Victoria
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by AlohaJoe » Thu Aug 31, 2017 9:44 pm

knpstr wrote:
Thu Aug 31, 2017 6:46 pm
we have hyperinflation (even TIPS with their 6-month lag get adjusted too slow to mitigate this)
As an aside, there's an article in the Journal of Financial Planning on exactly this called "Inflation, Hyperinflation, Adjustment Lags: Why TIPS Don't Guarantee Real Returns".

Despite the scary sounding title I found the results reassuring.

Image

If you compare the difference between "lagged adjustments" and "instantaneous adjustments" it is still only 1.2% with 100% annual inflation. It isn't until you get to 500% annual inflation that I'd say there's a real concern. I have a feeling if the US ever hit 500% annual inflation....things would not be pretty in many other areas :happy

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by JBTX » Thu Aug 31, 2017 9:50 pm

Listened to entire podcast, that was really informative, thanks for linking!

Over the years or reading this and that, maybe WSJ, Forbes, Money or some other periodical I recall seeing an article/s that indicated that 4.0% based upon some modeling may get you into the 90%+ probability of having enough money, but you had to get to about 3.0% to get to near 100%. According to Kitces, even if you retired in 1929 or 1966 4% would still have worked. I wonder what the discrepancy is?

He did indicate that internationally in some countries it data may have been as low as 3.5%. He didn't mention Japan specifically. Of course this excludes impact of major war.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by JBTX » Thu Aug 31, 2017 9:52 pm

AlohaJoe wrote:
Thu Aug 31, 2017 9:44 pm
knpstr wrote:
Thu Aug 31, 2017 6:46 pm
we have hyperinflation (even TIPS with their 6-month lag get adjusted too slow to mitigate this)
As an aside, there's an article in the Journal of Financial Planning on exactly this called "Inflation, Hyperinflation, Adjustment Lags: Why TIPS Don't Guarantee Real Returns".

Despite the scary sounding title I found the results reassuring.

Image

If you compare the difference between "lagged adjustments" and "instantaneous adjustments" it is still only 1.2% with 100% annual inflation. It isn't until you get to 500% annual inflation that I'd say there's a real concern. I have a feeling if the US ever hit 500% annual inflation....things would not be pretty in many other areas :happy
Interesting and somewhat reassuring graph.

Where did the real return of 3.5% come from? Basically now its close to zero, isn't it?

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by AlohaJoe » Thu Aug 31, 2017 10:01 pm

David Jay wrote:
Thu Aug 31, 2017 5:20 pm
Leesbro63 wrote:
Thu Aug 31, 2017 3:19 pm
David Jay wrote:
Thu Aug 31, 2017 10:35 am
Leesbro63 wrote:
Thu Aug 31, 2017 10:29 am
Great podcast. The big thing that I got is that, according to Kitces' study, a 4% SWR is very conservative and all this talk about 3% and even 2% is ridiculously low. Of course this collides w Wade Pfau's study that suggests that in today's low yield environment, under 3% is the true "safe" withdrawal rate.

Go figure
It doesn't really collide with Wade Pfau's study. If you take the AUM fee and the high cost mutual funds out of the study, Wade's number comes out in the mid-3s (i.e. 3.4% - 3.6%, depending on ER), not much below 4%.
I am not sure that's right. Didn't Wade's number actually come out slightly below 2% if you factor in a 1% adviser fee? I could be wrong...please show the source if you can to clarify.
His figure was 2.1%
1% AUM
0.6% ER

If my average ER is .2, then my number is 3.5%
You can't just add the ER back in like that (the math is marginally complicated so it doesn't work exactly like that), though it is a decent approximation. If you are interested in the details, Gordon Pye has a somewhat older paper (from 1999) called "Adjusting Withdrawal Rates for Taxes and Fees" that goes through it in more detail.

As a pet peeve, it isn't "Pfau's study". There were 3 authors on the original paper and he wasn't even the lead author on it. The authors were David Blanchett (who, for my money, does the most interesting research out there) as the lead author, Michael Finke, and then Wade Pfau. Pfau reused the model they developed together in other papers he authored by himself.

I corresponded with Blanchett & Finke briefly about their research and they were kind enough to provide the underlying spreadsheet that they used. (It turned out there was an error in their published paper, so I was having difficulty reproducing their results.) It made it easier to see the assumptions that went into the model. (Which wasn't always very clear from the paper.)

Their assumptions were:
- It used the yield on corporate bonds as of late 2012 (since that's when they did the research)
- They assume equities will return 2% less than their US historical average. (This is a fairly common assumption among people, thinking that future US returns will look more like historical global returns.)
- They assume a 1% AUM fee
- They assume the "bond" part of the portfolio is 80% corporate bonds and 20% cash

They also arrive at their results via Monte Carlo analysis, which lacks mean reversion which (probably) exists to some extent, so it overstates bad (and good) outcomes. That would drive down the SWR.

I found that when I used their model but used a typical Boglehead-style portfolio then a 4% withdrawal rate continued to work 76% of the time -- even with low bond yields and reduced expectations for equities.

I wrote two longer blog posts on their research for those who are interested.
https://medium.com/@justusjp/deconstruc ... 26793fa0bc
https://medium.com/@justusjp/more-on-lo ... d3f87b47d0

Personally, I came away feeling that even when people throw their worst at the "4% Rule" -- low yields and reduced equity returns going forward -- I felt it came away looking pretty good. Sure 76% success isn't 95% or 100%. But I am sympathetic to Bill Bernstein's point that any number above 80% is fooling yourself due to the possibility of things like war/confiscation/hyper-inflation.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by AlohaJoe » Thu Aug 31, 2017 10:12 pm

JBTX wrote:
Thu Aug 31, 2017 9:52 pm
Where did the real return of 3.5% come from? Basically now its close to zero, isn't it?
He didn't write the paper today ;) it is from a few years ago.

That said, I think he was just using illustrative numbers to show how it would play out.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Thu Aug 31, 2017 10:22 pm

AlohaJoe wrote:
Thu Aug 31, 2017 9:44 pm
knpstr wrote:
Thu Aug 31, 2017 6:46 pm
we have hyperinflation (even TIPS with their 6-month lag get adjusted too slow to mitigate this)
As an aside, there's an article in the Journal of Financial Planning on exactly this called "Inflation, Hyperinflation, Adjustment Lags: Why TIPS Don't Guarantee Real Returns".

Despite the scary sounding title I found the results reassuring.

Image

If you compare the difference between "lagged adjustments" and "instantaneous adjustments" it is still only 1.2% with 100% annual inflation. It isn't until you get to 500% annual inflation that I'd say there's a real concern. I have a feeling if the US ever hit 500% annual inflation....things would not be pretty in many other areas :happy
I agree LMP, LDI may not be the best way to put it....safe floor more appropriate. Having said that...

On one side we have SWR which says the next 30 years will never be worse than any of the previous 30 years. To date we've never had inflation of more than 30%. So even an inflation of 50% in unheard of. We have 'safe floor' as an alternative to SWR, and we are saying 500% inflation can break it? Even 100% doesn't do much.

Then we are saying what if we let many of our seniors die without healthcare, then what will happen to the safe floor.

These two show how robust the safe floor really is, no?...takes some extreme scenarios to break it, in comparison what will break SWR....a mere 50% inflation (compared to 500%, it's a mere ) with the returns of any 30 year period to date.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by aj76er » Thu Aug 31, 2017 11:58 pm

Recently, I've been tracking the yield of my portfolio both in terms of dollars and %. Its been more of a curiosity; but lately I've started thinking about it as an income floor that the portfolio can generate, while anything over that as supplying variable income.

To put numbers on it, say 2% is today's yield. That's your base draw. For an early retirement, then say 1% or even 1.5% could be your variable draw during up years. One could also use VPW withdrawal method to determine the variable draw for their specific situation (by getting the SWR for that year and subtracting current yield).
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by AlohaJoe » Fri Sep 01, 2017 12:16 am

aj76er wrote:
Thu Aug 31, 2017 11:58 pm
Recently, I've been tracking the yield of my portfolio both in terms of dollars and %. Its been more of a curiosity; but lately I've started thinking about it as an income floor that the portfolio can generate, while anything over that as supplying variable income.

To put numbers on it, say 2% is today's yield. That's your base draw. For an early retirement, then say 1% or even 1.5% could be your variable draw during up years.
For all of 1999, the dividend yield of the S&P 500 was only 1.17%. That means if you said "my income floor of what I absolutely need to live is $25,000" then you would have actually only received $15,000 ... that's a massive $10,000 shortfall so just counting coupons wouldn't have helped.

If 2% was your "amount required for an income floor" then from 1997 to 2007 you wouldn't have received enough. You would have experienced substantial discomfort -- cancelling health insurance, not paying property taxes, not buying necessary prescriptions, etc.

Something similar has happened with all yields -- for all equity and bond funds.

If you use things like yields as your income floor then you have to pick the lowest number ever seen historically (which is uncomfortably close to 1% in many cases) and hope that it never goes lower in the future. (Even though it has in other countries; so you're left hoping it won't happen in the US.)

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by aj76er » Fri Sep 01, 2017 1:40 am

AlohaJoe wrote:
Fri Sep 01, 2017 12:16 am
aj76er wrote:
Thu Aug 31, 2017 11:58 pm
Recently, I've been tracking the yield of my portfolio both in terms of dollars and %. Its been more of a curiosity; but lately I've started thinking about it as an income floor that the portfolio can generate, while anything over that as supplying variable income.

To put numbers on it, say 2% is today's yield. That's your base draw. For an early retirement, then say 1% or even 1.5% could be your variable draw during up years.
For all of 1999, the dividend yield of the S&P 500 was only 1.17%. That means if you said "my income floor of what I absolutely need to live is $25,000" then you would have actually only received $15,000 ... that's a massive $10,000 shortfall so just counting coupons wouldn't have helped.

If 2% was your "amount required for an income floor" then from 1997 to 2007 you wouldn't have received enough. You would have experienced substantial discomfort -- cancelling health insurance, not paying property taxes, not buying necessary prescriptions, etc.

Something similar has happened with all yields -- for all equity and bond funds.

If you use things like yields as your income floor then you have to pick the lowest number ever seen historically (which is uncomfortably close to 1% in many cases) and hope that it never goes lower in the future. (Even though it has in other countries; so you're left hoping it won't happen in the US.)
Interesting. I've only been tracking it for a year or so. I haven't bothered to look up historical numbers. Again, it's been more of a curiosity. A couple of thoughts about your post:

The important number is net dollar amount, not %. So in 1999, the price appreciation would have kept the net income the same or higher. Remember, yields (%) and prices ($) move inversely.

Based on above, I would expect the income from yield to increase over time, regardless of whether % moves up or down. This is due to tendency of long term price increases in equities. Inflation and real earnings growth are drivers of this increase.

I think that bonds and stocks tend to compete; so in a crash as yields of stocks go up (price goes down), yield of bonds go down (price goes up). Thereby, keeping net income relatively intact. Of course, no garauntee. Also depends on relative duration of bonds.

Anyway, some real historical data on a balanced portfolio would be enlightening.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by naha66 » Fri Sep 01, 2017 1:55 am

AlohaJoe wrote:
Fri Sep 01, 2017 12:16 am
aj76er wrote:
Thu Aug 31, 2017 11:58 pm
Recently, I've been tracking the yield of my portfolio both in terms of dollars and %. Its been more of a curiosity; but lately I've started thinking about it as an income floor that the portfolio can generate, while anything over that as supplying variable income.

To put numbers on it, say 2% is today's yield. That's your base draw. For an early retirement, then say 1% or even 1.5% could be your variable draw during up years.
For all of 1999, the dividend yield of the S&P 500 was only 1.17%. That means if you said "my income floor of what I absolutely need to live is $25,000" then you would have actually only received $15,000 ... that's a massive $10,000 shortfall so just counting coupons wouldn't have helped.

If 2% was your "amount required for an income floor" then from 1997 to 2007 you wouldn't have received enough. You would have experienced substantial discomfort -- cancelling health insurance, not paying property taxes, not buying necessary prescriptions, etc.

Something similar has happened with all yields -- for all equity and bond funds.

If you use things like yields as your income floor then you have to pick the lowest number ever seen historically (which is uncomfortably close to 1% in many cases) and hope that it never goes lower in the future. (Even though it has in other countries; so you're left hoping it won't happen in the US.)
I'm pretty sure the $ amount of div payout didn't go down in 1999, There was one hell bull market going on. If he was already retired no affect at all. Alohajoe you can do better than that :confused Most if not all don't cut dividend amount in the middle of a bull market, now if if you want site 2008/09 okay you might have a case.

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