Michael Kitces 4% rule podcast on Madfientist

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AlohaJoe
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by AlohaJoe » Fri Sep 01, 2017 3:54 am

aj76er wrote:
Fri Sep 01, 2017 1:40 am
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.
In September 2007 Vanguard TSM paid out 15 cents a share. 12 months later, September 2008, it paid out 13.8 cents a share. 12 more months later, in 2009, it paid out 11.3 cents a share.

If you were expecting the dollar value of your dividends to be stable, you would have been sorely disappointed. Yield does (always) not increase over time. Admittedly, the drop is usually pretty temporary. But many people can't go 3 or 6 months below their "income floor" without problems.
naha66 wrote:
Fri Sep 01, 2017 1:55 am
I'm pretty sure the $ amount of div payout didn't go down in 1999, There was one hell bull market going on.
No, it didn't go down in 1999 but that wasn't quite my point. My point was just to show that dividend yields can go surprisingly low, at least for short periods of time. So the picking the right yield to use for a strategy like that is tricky.

gilgamesh
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 4:01 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.)
This is what I mean by being realistic with spending adjustments too....not that it will ever be 1% with a typical SWR (more like extremely unlikely), but even 3% is a 25% cut if your typical expenses is 4%...can you cut 25%? Then can you stomach just cutting to 3% after a few down years? After 50% drop? Wouldn't you want to cut more? 2.5% is living with 62.5% of your original budget?

I think it's critical to put on dollar amounts how much you really can adjust spending?

smitcat
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by smitcat » Fri Sep 01, 2017 6:08 am

gilgamesh wrote:
Fri Sep 01, 2017 4:01 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.)

This is what I mean by being realistic with spending adjustments too....not that it will ever be 1% with a typical SWR (more like extremely unlikely), but even 3% is a 25% cut if your typical expenses is 4%...can you cut 25%? Then can you stomach just cutting to 3% after a few down years? After 50% drop? Wouldn't you want to cut more? 2.5% is living with 62.5% of your original budget?

I think it's critical to put on dollar amounts how much you really can adjust spending?
I do agree that you are better off knowing how much you can really adjust spending in dollar amounts for potential future adjustments.
But its not quite as devastating for most folks (or at least us) as these % might lead you.
If your future spending is made up of 2/3rds SS and/or other fixed income sources that needs to be calculated as well.
In that case this instance ...."but even 3% is a 25% cut if your typical expenses is 4%...can you cut 25%?' would turn into an 8% cut.

bradshaw1965
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by bradshaw1965 » Fri Sep 01, 2017 6:37 am

VictoriaF wrote:
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
The side gig of $10-20k in this particular podcast is because the audience is early retirees/financial independence folks who have lots of career capital left. I think a lot of the SWR conversations fly past each other between people who think they can handle some flexibility and those who think that's unrealistic. I do think as you get older the options diminish and it's possible the flexibility inferred is overstated.

gilgamesh
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 6:57 am

smitcat wrote:
Fri Sep 01, 2017 6:08 am
gilgamesh wrote:
Fri Sep 01, 2017 4:01 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.)

This is what I mean by being realistic with spending adjustments too....not that it will ever be 1% with a typical SWR (more like extremely unlikely), but even 3% is a 25% cut if your typical expenses is 4%...can you cut 25%? Then can you stomach just cutting to 3% after a few down years? After 50% drop? Wouldn't you want to cut more? 2.5% is living with 62.5% of your original budget?

I think it's critical to put on dollar amounts how much you really can adjust spending?
I do agree that you are better off knowing how much you can really adjust spending in dollar amounts for potential future adjustments.
But its not quite as devastating for most folks (or at least us) as these % might lead you.
If your future spending is made up of 2/3rds SS and/or other fixed income sources that needs to be calculated as well.
In that case this instance ...."but even 3% is a 25% cut if your typical expenses is 4%...can you cut 25%?' would turn into an 8% cut.
Ignoring the fiscal concerns, theoretically SS is the ultimate floor. So, yes! theres significant reduction in the impact of spending reduction, when you have the ultimate floor.

This actually shows the robustness of flooring.

Those who favor flooring wants a floor for certain needs. You need to setup a higher floor when you cannot draw SS and a smaller floor when you can. In other words the need or effectiveness of a TIPS floor is most when you are not drawing SS. It is less when you are drawing SS as part or all of the floor is satisfied by SS.

Therefore, when you are most susceptible prior to SS, when flooring is most needed is when spending adjustment is the hardest.

I hope I am making this clear. As it is an important part. What I am almost saying is...when we ever care about SWR vs flooring is when SWR spending adjustment is most vulnerable...when SWR vs Floor doesn't matter, SWR spending adjustments gets better....not what you want, if spending adjustment is a strategy that brings SWR closer to flooring in dealing with atypical market downturns.

Edit: Much easier way to say....if you need to withdraw most of your income via SWR, spending adjustment is more sensitive, where as if your expenses are covered elsewhere, and your withdrawal from SWR is only part of the income need, then you can adjust SWR spending more easily.

smitcat
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by smitcat » Fri Sep 01, 2017 7:55 am

You have said it fine I am on board as well....

""Those who favor flooring wants a floor for certain needs. You need to setup a higher floor when you cannot draw SS and a smaller floor when you can. In other words the need or effectiveness of a TIPS floor is most when you are not drawing SS. It is less when you are drawing SS as part or all of the floor is satisfied by SS."

In our case we have funds to reach our targeted SS dates held which will least likely be affected by market swings - and in worst case scenario we could always elect to take SS earlier.

"Therefore, when you are most susceptible prior to SS, when flooring is most needed is when spending adjustment is the hardest."
Everyone has a method to view and deal with their own floor - for us it is utilizing 3 floors for our own purposes.
1. A floor that would support all our base costs plus reasonably modest car/home & vacation upgrades over time
2 Another level where we add about $25K 'spendable' dollars each year for additional vacations, car upgrades and such
3. The last level adds an additional $25K 'spendable' dollars each year to increase the above further and leave some legacy

Our aim was/is for funding past level 3 so fall back positions are well understood and form a much lower % of the fixed incomes that one would be concerned about. These levels have worked out well so far and helped us set goals in a way that allowed us to effectively work towards our overall plan. We have made many mistakes along the way but all in all the plan 'feels' good.
YMMV

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VictoriaF
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Fri Sep 01, 2017 8:09 am

bradshaw1965 wrote:
Fri Sep 01, 2017 6:37 am
VictoriaF wrote:
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
The side gig of $10-20k in this particular podcast is because the audience is early retirees/financial independence folks who have lots of career capital left. I think a lot of the SWR conversations fly past each other between people who think they can handle some flexibility and those who think that's unrealistic. I do think as you get older the options diminish and it's possible the flexibility inferred is overstated.
An early retiree interested in a side gig may be able to make $10k-$20k for a few years, but that income should not be extrapolated to the entire length of one's retirement. As one gets weaker, physically or mentally, doing a gig becomes infeasible. It's fun to be a bartender at the age of 60, less so at the age of 80. If a gig requires financial investments it may drain one's assets.

Flexibility is not either-or. There are 50 shades of flexibility, which are difficult to incorporate in spreadsheets.

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 » Fri Sep 01, 2017 8:25 am

smitcat wrote:
Fri Sep 01, 2017 7:55 am
You have said it fine I am on board as well....

""Those who favor flooring wants a floor for certain needs. You need to setup a higher floor when you cannot draw SS and a smaller floor when you can. In other words the need or effectiveness of a TIPS floor is most when you are not drawing SS. It is less when you are drawing SS as part or all of the floor is satisfied by SS."

In our case we have funds to reach our targeted SS dates held which will least likely be affected by market swings - and in worst case scenario we could always elect to take SS earlier.

"Therefore, when you are most susceptible prior to SS, when flooring is most needed is when spending adjustment is the hardest."
Everyone has a method to view and deal with their own floor - for us it is utilizing 3 floors for our own purposes.
1. A floor that would support all our base costs plus reasonably modest car/home & vacation upgrades over time
2 Another level where we add about $25K 'spendable' dollars each year for additional vacations, car upgrades and such
3. The last level adds an additional $25K 'spendable' dollars each year to increase the above further and leave some legacy

Our aim was/is for funding past level 3 so fall back positions are well understood and form a much lower % of the fixed incomes that one would be concerned about. These levels have worked out well so far and helped us set goals in a way that allowed us to effectively work towards our overall plan. We have made many mistakes along the way but all in all the plan 'feels' good.
YMMV
Sounds good to me too...yes! Everyone have their own needs for flooring....however a robust floor has to have certain characteristics, Michael Zwecher's book on "retirement portfolio" mentions these.

In reality asking everyone to even save 4% SWR is too much to ask....that's heck of a lot of money for almost everyone....even 4% is such a Herculean task many may just give up without trying,...So, I understand the frustrations when people say even 4% isn't enough....I know, from certain angles, absolute bull crap...

These are all so individualistic...I'd say anyone even having remotely enough for 4% SWR or even less has done damn well with their retirement planning.

TN_Boy
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by TN_Boy » Fri Sep 01, 2017 8:34 am

AlohaJoe wrote:
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.
AlohaJoe,

Thanks for the extra information and analysis on this frequently cited paper. When I read the paper before, I found the inability to see their assumptions frustrating (and borderline misleading).

My main takeaway from your analysis (in the blogs) is:
  • Using reasonable costs instead of the 1% AUM fee makes a big difference in results
  • If you believe markets tend to mean-revert, then some of the tragic results (portfolio failures) from Monte Carlo analysis are hard to believe.
We have had other threads recently noting Monte Carlo methods can assume the market sort of goes down forever. I believe most investors, rightly or wrongly (I think mostly rightly) work on the assumption there is some level of mean reversion.

Goodman60
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Goodman60 » Fri Sep 01, 2017 8:57 am

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
You are also missing the taxation problem with TIPS. For large taxable accounts, huge inflation will cause much of the inflation protection to be taxed away. Even in tax sheltered accounts (except Roths), eventually there will need to be big taxes paid on those "not real" inflation gains.

Goodman60
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Goodman60 » Fri Sep 01, 2017 9:03 am

Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security. If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.

dbr
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by dbr » Fri Sep 01, 2017 9:08 am

Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security. If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.
At some point people have to live their lives in a sensible manner. To me continuing to work too long in a job I didn't like rather than retiring just to crank down some hypothetical withdrawal rate for some hypothetical and controllable rate of spending would be insane. I hope people are taking a wholistic approach to this.

bradshaw1965
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by bradshaw1965 » Fri Sep 01, 2017 9:10 am

VictoriaF wrote:
Fri Sep 01, 2017 8:09 am

An early retiree interested in a side gig may be able to make $10k-$20k for a few years, but that income should not be extrapolated to the entire length of one's retirement. As one gets weaker, physically or mentally, doing a gig becomes infeasible. It's fun to be a bartender at the age of 60, less so at the age of 80. If a gig requires financial investments it may drain one's assets.

Flexibility is not either-or. There are 50 shades of flexibility, which are difficult to incorporate in spreadsheets.

Victoria
Agree completely. I don't have a problem with the debate as far as SWR number, I just think you can get lost in a spreadsheet and that adaptability produces the best outcomes. I think the prosperous older old have much more difficulty with being adaptable then they do with money.

gilgamesh
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 9:28 am

Goodman60 wrote:
Fri Sep 01, 2017 8:57 am
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
You are also missing the taxation problem with TIPS. For large taxable accounts, huge inflation will cause much of the inflation protection to be taxed away. Even in tax sheltered accounts (except Roths), eventually there will need to be big taxes paid on those "not real" inflation gains.
TIPS ladder should never in a taxable account to avoid phantom income just like you mentioned...there's no such things as "not real" inflation gain when each rung of your TIPS ladder matures - the inflation gain is very real then and the whole point of forming a TIPS ladder.

So, yeah! If you screw up the basics of TIPS ladder it won't work ... true for everything.
Last edited by gilgamesh on Fri Sep 01, 2017 9:38 am, edited 1 time in total.

gilgamesh
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 9:36 am

Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security. If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.
I agree with almost everything you say in the latter part, as I said pretty much the same thing....however, Yes! There's no such thing as 100% certainty, but 80% certainty for some may be better than 50% certainty, even given the extra "cost" - so, just because 100% certainty is not feasible, one doesn't have to quit trying to achieve more certainty, if the cost is acceptable.

I have no need to retire in my 40's or early 50's, I'm fine working till late 50's...therefore, it's either spending even more money on toys or saving more for a floor. I'm done with toys, so Im going for a floor now....Not buying toys or not setting up floor to retire in my mid 50's is not necessary for me.

So, it's a choice...there's a definite cost to all of this, it's a question of whether it fits your situation...one has to be very aware of what they truly want, not mindlessly follow a recipe.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 9:39 am

dbr wrote:
Fri Sep 01, 2017 9:08 am
Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security. If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.
At some point people have to live their lives in a sensible manner. To me continuing to work too long in a job I didn't like rather than retiring just to crank down some hypothetical withdrawal rate for some hypothetical and controllable rate of spending would be insane. I hope people are taking a wholistic approach to this.
Cannot agree with you more...

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 10:47 am

dbr wrote:
Fri Sep 01, 2017 9:08 am
Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security. If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.
At some point people have to live their lives in a sensible manner. To me continuing to work too long in a job I didn't like rather than retiring just to crank down some hypothetical withdrawal rate for some hypothetical and controllable rate of spending would be insane. I hope people are taking a wholistic approach to this.
+1

Considering that one could just amortize a portfolio in a TIPS ladder and have 25 years of spending (ignoring taxes and any real returns on the TIPS), the "4% rule" is just saying that you can carry that time frame five years further with a high likelihood of success with a reasonably balanced portfolio. And yet this is one of the most hotly disputed topics on this forum. :confused
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Fri Sep 01, 2017 11:06 am

willthrill81 wrote:
Fri Sep 01, 2017 10:47 am
dbr wrote:
Fri Sep 01, 2017 9:08 am
Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security. If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.
At some point people have to live their lives in a sensible manner. To me continuing to work too long in a job I didn't like rather than retiring just to crank down some hypothetical withdrawal rate for some hypothetical and controllable rate of spending would be insane. I hope people are taking a wholistic approach to this.
+1

Considering that one could just amortize a portfolio in a TIPS ladder and have 25 years of spending (ignoring taxes and any real returns on the TIPS), the "4% rule" is just saying that you can carry that time frame five years further with a high likelihood of success with a reasonably balanced portfolio. And yet this is one of the most hotly disputed topics on this forum. :confused
Yeah but the odds of portfolio growth, for later retirement and for heirs, is great with the 4% rule and 50/50 stocks/bonds. With your method, the odds of that are zero and the probability of having nothing if you live 30 years is 100%.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Goodman60 » Fri Sep 01, 2017 11:42 am

gilgamesh wrote:
Fri Sep 01, 2017 9:28 am
TIPS ladder should never in a taxable account to avoid phantom income just like you mentioned...there's no such things as "not real" inflation gain when each rung of your TIPS ladder matures - the inflation gain is very real then and the whole point of forming a TIPS ladder.

So, yeah! If you screw up the basics of TIPS ladder it won't work ... true for everything.
So if you agree that a TIPS ladder should never be in a taxable account, what do you suggest people do who have large amounts in taxable and small (or none) amounts in tax-sheltered?

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Fri Sep 01, 2017 11:48 am

Goodman60 wrote:
Fri Sep 01, 2017 11:42 am
gilgamesh wrote:
Fri Sep 01, 2017 9:28 am
TIPS ladder should never in a taxable account to avoid phantom income just like you mentioned...there's no such things as "not real" inflation gain when each rung of your TIPS ladder matures - the inflation gain is very real then and the whole point of forming a TIPS ladder.

So, yeah! If you screw up the basics of TIPS ladder it won't work ... true for everything.
So if you agree that a TIPS ladder should never be in a taxable account, what do you suggest people do who have large amounts in taxable and small (or none) amounts in tax-sheltered?
In early phases of one's career he should build up retirement assets in 401(k) and IRA, and invest the remaining savings in taxable stock index funds (e.g., TSM). By the time one nears retirement, he should have enough tax-shelters assets to build a TIPS ladder. The taxable savings can be used to pay taxes on Roth conversions.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 12:20 pm

willthrill81 wrote:
Fri Sep 01, 2017 10:47 am
dbr wrote:
Fri Sep 01, 2017 9:08 am
Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security. If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.
At some point people have to live their lives in a sensible manner. To me continuing to work too long in a job I didn't like rather than retiring just to crank down some hypothetical withdrawal rate for some hypothetical and controllable rate of spending would be insane. I hope people are taking a wholistic approach to this.
+1

Considering that one could just amortize a portfolio in a TIPS ladder and have 25 years of spending (ignoring taxes and any real returns on the TIPS), the "4% rule" is just saying that you can carry that time frame five years further with a high likelihood of success with a reasonably balanced portfolio. And yet this is one of the most hotly disputed topics on this forum. :confused
How about inflation? SWR is saying it will match inflation and five years more, no?

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by #Cruncher » Fri Sep 01, 2017 1:08 pm

AlohaJoe wrote:
Thu Aug 31, 2017 9:44 pm
knpstr wrote:
Thu Aug 31, 2017 6:46 pm
[What happens when ...] 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. ...
knpstr is wrong to say "6-month lag". The inflation adjustment is made to TIPS 2 to 3 months after the fact. For example, the 9/1/2017 [*] Reference CPI used to inflation-adjust principal today is 244.955 (see Ref CPI for 2017). This is the same as the CPI-U reported for June 2017 (see CPI-U since 1961). If one assume prices for the month on average are for mid-month, then from June to the first of September is about 2-1/2 months.

Do you have the source, AlohaJoe, for the real returns in the table? When I calculate the effect of the lag, I get results either more or less than the table depending on the time period. For example, your table shows the real yield 1.23% (3.53% - 2.30%) points less if annual inflation is 100%. I get a much larger effect (13.45%) for a one-year ladder; but a smaller effect (0.91%) for a 30-year ladder. My calculations are based on the following simplifying assumptions:
  • One has a ladder with $1,000 constant dollar rungs of hypothetical zero-coupon TIPS with a real yield of 0%.
  • We start the analysis on February 15th with each rung maturing on succesive February 15ths.
  • The CPI has not risen for the past several months. But on the start date it begins climbing at a constant annual rate of 2%, 25%, 100%, 250%, or 500%.
Here are the real returns for each of these inflation rates for ladders running from one year to thirty years.

Code: Select all

Inflation rate            2%       25%      100%      250%      500%
9.5 month's growth    995.88    954.58    865.54    770.29    688.47
Years                 ------------- Annual Real Return -------------
   1                  -0.41%    -4.54%   -13.45%   -22.97%   -31.15%
   5                  -0.14%    -1.53%    -4.63%    -8.11%   -11.28%
  10                  -0.07%    -0.84%    -2.54%    -4.48%    -6.27%
  15                  -0.05%    -0.58%    -1.75%    -3.10%    -4.34%
  20                  -0.04%    -0.44%    -1.34%    -2.37%    -3.32%
  25                  -0.03%    -0.35%    -1.08%    -1.91%    -2.69%
  30                  -0.03%    -0.30%    -0.91%    -1.61%    -2.26%
For example, if the CPI rises 100% annually, the real value of each $1,000 constant dollar redemption will be $865.54. This is because each rung will not be adjusted for the last 2-1/2 months of CPI increase from December 1 to February 15. So instead of each redemption being worth $1,000 in constant dollars, it will be worth only $865.54. A one-year ladder will therefore have a real return of -13.45%, and a thirty year ladder will have a real return of -0.91%. Using the Excel RATE function:

Code: Select all

 865.54 = 1000 * ((1 + 100%) ^ (9.5 / 12) / (1 + 100%))
-13.45% = RATE( 1, 865.54,  -1000, 0, 0, 0)
 -0.91% = RATE(30, 865.54, -30000, 0, 0, 0)

Goodman60 wrote:
Fri Sep 01, 2017 8:57 am
For large taxable accounts, huge inflation will cause much of the inflation protection to be taxed away. Even in tax sheltered accounts (except Roths), eventually there will need to be big taxes paid on those "not real" inflation gains. [underline added]
What you say is true, Goodman60, for taxable accounts; but not for tax deferred accounts like a traditional IRA (TIRA). TIPS held in a TIRA will have an after tax real return equal to the pretax real return -- assuming a constant tax rate -- regardless of the inflation rate, the same as if they were held in a Roth IRA. See my post, Re: Is it time to give-up on TIPS?, for an illustration.

* See the first paragraph in the "Background" section on the left of this web page for how the Reference CPI is interpolated for days other than the first of the month.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by knpstr » Fri Sep 01, 2017 1:46 pm

Thanks for pointing out my error! I just (incorrectly) used the semi-annual interest payments date.

But also thank you for providing the numbers to reinforce the point!
:beer
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 2:00 pm

Leesbro63 wrote:
Fri Sep 01, 2017 11:06 am
willthrill81 wrote:
Fri Sep 01, 2017 10:47 am
dbr wrote:
Fri Sep 01, 2017 9:08 am
Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security. If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.
At some point people have to live their lives in a sensible manner. To me continuing to work too long in a job I didn't like rather than retiring just to crank down some hypothetical withdrawal rate for some hypothetical and controllable rate of spending would be insane. I hope people are taking a wholistic approach to this.
+1

Considering that one could just amortize a portfolio in a TIPS ladder and have 25 years of spending (ignoring taxes and any real returns on the TIPS), the "4% rule" is just saying that you can carry that time frame five years further with a high likelihood of success with a reasonably balanced portfolio. And yet this is one of the most hotly disputed topics on this forum. :confused
Yeah but the odds of portfolio growth, for later retirement and for heirs, is great with the 4% rule and 50/50 stocks/bonds. With your method, the odds of that are zero and the probability of having nothing if you live 30 years is 100%.
That's true, but my point is that the 4% rule is only extending a guaranteed 25 years of TIPS spending by 20%, five years, yet many act as though the 4% rule is very aggressive.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 2:01 pm

gilgamesh wrote:
Fri Sep 01, 2017 12:20 pm
willthrill81 wrote:
Fri Sep 01, 2017 10:47 am
dbr wrote:
Fri Sep 01, 2017 9:08 am
Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security. If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.
At some point people have to live their lives in a sensible manner. To me continuing to work too long in a job I didn't like rather than retiring just to crank down some hypothetical withdrawal rate for some hypothetical and controllable rate of spending would be insane. I hope people are taking a wholistic approach to this.
+1

Considering that one could just amortize a portfolio in a TIPS ladder and have 25 years of spending (ignoring taxes and any real returns on the TIPS), the "4% rule" is just saying that you can carry that time frame five years further with a high likelihood of success with a reasonably balanced portfolio. And yet this is one of the most hotly disputed topics on this forum. :confused
How about inflation? SWR is saying it will match inflation and five years more, no?
TIPS cover inflation. But yes, the 4% rule is saying that you can withdraw an initial 4% and then increase it by inflation each year. My point was merely that the 4% rule isn't extending a guaranteed 25 years of spending by much, yet many treat it as being very aggressive and then gloat about their under 2-3% withdrawal rate.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by aristotelian » Fri Sep 01, 2017 2:14 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%.
That is a pretty big difference IMO. If you are trying to replace 100k of income, that is the difference between having to save 2.5M and 2.78M. If you have 1M, that is the difference between 36K and 40k. Every fraction of a % is a pretty big deal when you are talking within a range of 3-5%.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by HomerJ » Fri Sep 01, 2017 2:20 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%.
Yeah Wade Pfau assumes you are paying an investment advisor 1% a year to manage your money.

He also makes a ton of other assumptions, none of which may turn out to be true. Remember he first posted that study in 2010-2011, based on conditions in 2010-2011. He assumed (like many other experts) that stock returns were going to be low going forward. Instead, we've gotten 12% real for the past 6-7 years.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by HomerJ » Fri Sep 01, 2017 2:28 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.

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.
Good post. It's exactly the point I make when people talk about 4% withdrawals and the chance of "failure".

For most of us here, failure doesn't mean you're eating under a bridge. Failure means you may cut back to 2 vacations a year instead of 4 for a few years during a big crash.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 3:12 pm

HomerJ wrote:
Fri Sep 01, 2017 2:28 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.

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.
Good post. It's exactly the point I make when people talk about 4% withdrawals and the chance of "failure".

For most of us here, failure doesn't mean you're eating under a bridge. Failure means you may cut back to 2 vacations a year instead of 4 for a few years during a big crash.
This is true if 66.66% of your typical retirement annual expenses is allocated for the 4 vacations. Assuming all 4 big vacations costs the same.

Going from 4.5% to 3% is cutting 33.33% cut in expenditure. If that translates into cutting 2 of the 4 vacations, then 4 vacations costs 66.66%

This is why I say it's important actually put it in dollar terms and seeing whether these assumed spending adjustments are possible....trivializing it by saying it's just going from 4 vacations to 2 vacations most likely doesn't apply for most.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 3:22 pm

Leesbro63 wrote:
Fri Sep 01, 2017 11:06 am
willthrill81 wrote:
Fri Sep 01, 2017 10:47 am
dbr wrote:
Fri Sep 01, 2017 9:08 am
Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security. If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.
At some point people have to live their lives in a sensible manner. To me continuing to work too long in a job I didn't like rather than retiring just to crank down some hypothetical withdrawal rate for some hypothetical and controllable rate of spending would be insane. I hope people are taking a wholistic approach to this.
+1

Considering that one could just amortize a portfolio in a TIPS ladder and have 25 years of spending (ignoring taxes and any real returns on the TIPS), the "4% rule" is just saying that you can carry that time frame five years further with a high likelihood of success with a reasonably balanced portfolio. And yet this is one of the most hotly disputed topics on this forum. :confused
Yeah but the odds of portfolio growth, for later retirement and for heirs, is great with the 4% rule and 50/50 stocks/bonds. With your method, the odds of that are zero and the probability of having nothing if you live 30 years is 100%.
Nope! This example again reduces the safe floor strategy into components that just won't be done by anyone following such a strategy. Safe floor is never a stand alone strategy, there is always a side portfolio exposed to the market.

Yes, legacy potential is much minimized, but not zero. If the side portfolio goes to zero, SWR is screwed many folds over.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 3:25 pm

willthrill81 wrote:
Fri Sep 01, 2017 2:01 pm
gilgamesh wrote:
Fri Sep 01, 2017 12:20 pm
willthrill81 wrote:
Fri Sep 01, 2017 10:47 am
dbr wrote:
Fri Sep 01, 2017 9:08 am
Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security. If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.
At some point people have to live their lives in a sensible manner. To me continuing to work too long in a job I didn't like rather than retiring just to crank down some hypothetical withdrawal rate for some hypothetical and controllable rate of spending would be insane. I hope people are taking a wholistic approach to this.
+1

Considering that one could just amortize a portfolio in a TIPS ladder and have 25 years of spending (ignoring taxes and any real returns on the TIPS), the "4% rule" is just saying that you can carry that time frame five years further with a high likelihood of success with a reasonably balanced portfolio. And yet this is one of the most hotly disputed topics on this forum. :confused
How about inflation? SWR is saying it will match inflation and five years more, no?
TIPS cover inflation. But yes, the 4% rule is saying that you can withdraw an initial 4% and then increase it by inflation each year. My point was merely that the 4% rule isn't extending a guaranteed 25 years of spending by much, yet many treat it as being very aggressive and then gloat about their under 2-3% withdrawal rate.
It is not the mere 5 years, it's the 25+5 years the SWR funds are exposed to uncertainty...that's the crux of the issue?...uncertainty all along the three decades.
Last edited by gilgamesh on Fri Sep 01, 2017 3:28 pm, edited 1 time in total.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 3:27 pm

gilgamesh wrote:
Fri Sep 01, 2017 3:12 pm
HomerJ wrote:
Fri Sep 01, 2017 2:28 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.

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.
Good post. It's exactly the point I make when people talk about 4% withdrawals and the chance of "failure".

For most of us here, failure doesn't mean you're eating under a bridge. Failure means you may cut back to 2 vacations a year instead of 4 for a few years during a big crash.
This is true if 66.66% of your typical retirement annual expenses is allocated for the 4 vacations. Assuming all 4 big vacations costs the same.

Going from 4.5% to 3% is cutting 33.33% cut in expenditure. If that translates into cutting 2 of the 4 vacations, then 4 vacations costs 66.66%

This is why I say it's important actually put it in dollar terms and seeing whether these assumed spending adjustments are possible....trivializing it by saying it's just going from 4 vacations to 2 vacations most likely doesn't apply for most.
I think the point is that the majority (>50%) of retirement spending is discretionary for most retirees who are going to be using the '4% rule'. To the extent that that's the case, a 33% reduction in your overall spending would reduce your discretionary spending by 67%, but that's far from living on cat food.

Even many of our 'necessary' expenses have discretionary components. We could cut our food spending in half if we really needed to, we could keep our house warmer in the summer and cooler in the winter than we do to reduce utility expenses, we could drive around less, etc.

It is only the people who are retiring with just enough for a 4% WR to cover their truly necessary expenses that are in the most 'danger', but over a 30 year period, history has shown that they are still on very safe ground.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 3:43 pm

gilgamesh wrote:
Fri Sep 01, 2017 3:25 pm
willthrill81 wrote:
Fri Sep 01, 2017 2:01 pm
gilgamesh wrote:
Fri Sep 01, 2017 12:20 pm
willthrill81 wrote:
Fri Sep 01, 2017 10:47 am
dbr wrote:
Fri Sep 01, 2017 9:08 am


At some point people have to live their lives in a sensible manner. To me continuing to work too long in a job I didn't like rather than retiring just to crank down some hypothetical withdrawal rate for some hypothetical and controllable rate of spending would be insane. I hope people are taking a wholistic approach to this.
+1

Considering that one could just amortize a portfolio in a TIPS ladder and have 25 years of spending (ignoring taxes and any real returns on the TIPS), the "4% rule" is just saying that you can carry that time frame five years further with a high likelihood of success with a reasonably balanced portfolio. And yet this is one of the most hotly disputed topics on this forum. :confused
How about inflation? SWR is saying it will match inflation and five years more, no?
TIPS cover inflation. But yes, the 4% rule is saying that you can withdraw an initial 4% and then increase it by inflation each year. My point was merely that the 4% rule isn't extending a guaranteed 25 years of spending by much, yet many treat it as being very aggressive and then gloat about their under 2-3% withdrawal rate.
It is not the mere 5 years, it's the 25+5 years the SWR funds are exposed to uncertainty...that's the crux of the issue?...uncertainty all along the three decades.
My point is that the 4% rule only needs a little growth in real dollars to stretch that guaranteed 25 years of TIPS out to 30 years with stocks and bonds. Those who want greater security than a 4% WR should probably amortize at least a portion of their capital using TIPS or SPIAs.

It's true that there is uncertainty for the entire period, but history has shown that when using the 4% WR, it's virtually always a question as to when you can increase your WR and by how much.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 3:48 pm

willthrill81 wrote:
Fri Sep 01, 2017 3:27 pm
gilgamesh wrote:
Fri Sep 01, 2017 3:12 pm
HomerJ wrote:
Fri Sep 01, 2017 2:28 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.

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.
Good post. It's exactly the point I make when people talk about 4% withdrawals and the chance of "failure".

For most of us here, failure doesn't mean you're eating under a bridge. Failure means you may cut back to 2 vacations a year instead of 4 for a few years during a big crash.
This is true if 66.66% of your typical retirement annual expenses is allocated for the 4 vacations. Assuming all 4 big vacations costs the same.

Going from 4.5% to 3% is cutting 33.33% cut in expenditure. If that translates into cutting 2 of the 4 vacations, then 4 vacations costs 66.66%

This is why I say it's important actually put it in dollar terms and seeing whether these assumed spending adjustments are possible....trivializing it by saying it's just going from 4 vacations to 2 vacations most likely doesn't apply for most.
I think the point is that the majority (>50%) of retirement spending is discretionary for most retirees who are going to be using the '4% rule'. To the extent that that's the case, a 33% reduction in your overall spending would reduce your discretionary spending by 67%, but that's far from living on cat food.

Even many of our 'necessary' expenses have discretionary components. We could cut our food spending in half if we really needed to, we could keep our house warmer in the summer and cooler in the winter than we do to reduce utility expenses, we could drive around less, etc.

It is only the people who are retiring with just enough for a 4% WR to cover their truly necessary expenses that are in the most 'danger', but over a 30 year period, history has shown that they are still on very safe ground.
If you have 50% flexibility in spending , you should be good to go. Just a few points however,

- Anyone truly having 50% more than necessary probably needs to work much longer than someone who went with a floor strategy but say is fine with 30% more in discretionary spending (with 100% being same $ amount for both) .... Assuming the cost of flooring was less than the remaining 20%
- Does one have to eat cat food before that year's retirement is called a failure? It depends on what you call failure in your golden years, for some the threshold may be much higher than having to turn down the furnace.

Basically, I think your point comes down to how much cushion/discretionary amount more than 4% one has. Some do their 4% math ignoring SS and call SS their cushion. BTW, my flooring costs exactly that...I need a nest egg that will give me 4% without SS to set up flooring with SS. However, as mine is tied up in TIPS has a much reduced legacy factor, than if I decided to ignore SS and go with 4% SWR. I much rather prefer the higher certainty over legacy/inheritance factor.

As it has been said. It's very specific for each individual as long as each individual actually evaluate their own situation correctly and decides for themselves.

As I completely agree, asking everyone to save 4% even factoring SS is most of the times too much to ask and totally unnecessary/over kill....those even with slightly less, IMO still have done a darn good job with their retirement planning. :sharebeer

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 4:00 pm

willthrill81 wrote:
Fri Sep 01, 2017 3:43 pm
gilgamesh wrote:
Fri Sep 01, 2017 3:25 pm
willthrill81 wrote:
Fri Sep 01, 2017 2:01 pm
gilgamesh wrote:
Fri Sep 01, 2017 12:20 pm
willthrill81 wrote:
Fri Sep 01, 2017 10:47 am


+1

Considering that one could just amortize a portfolio in a TIPS ladder and have 25 years of spending (ignoring taxes and any real returns on the TIPS), the "4% rule" is just saying that you can carry that time frame five years further with a high likelihood of success with a reasonably balanced portfolio. And yet this is one of the most hotly disputed topics on this forum. :confused
How about inflation? SWR is saying it will match inflation and five years more, no?
TIPS cover inflation. But yes, the 4% rule is saying that you can withdraw an initial 4% and then increase it by inflation each year. My point was merely that the 4% rule isn't extending a guaranteed 25 years of spending by much, yet many treat it as being very aggressive and then gloat about their under 2-3% withdrawal rate.
It is not the mere 5 years, it's the 25+5 years the SWR funds are exposed to uncertainty...that's the crux of the issue?...uncertainty all along the three decades.
My point is that the 4% rule only needs a little growth in real dollars to stretch that guaranteed 25 years of TIPS out to 30 years with stocks and bonds. Those who want greater security than a 4% WR should probably amortize at least a portion of their capital using TIPS or SPIAs.

It's true that there is uncertainty for the entire period, but history has shown that when using the 4% WR, it's virtually always a question as to when you can increase your WR and by how much.
I agree.... However, I want to mention this which is masked when you phrase it the way you have.

A slight real growth is typically enough, when there's not much fluctuation to your nest egg. This 'slight real growth' is a very easy assumption to make during the accumulation phase. During withdrawal phase however, withdrawal on top of market downturn will need more than just a little real growth to recover. That's what sucks!....average slight real growth absolutely doesn't matter.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 4:08 pm

gilgamesh wrote:
Fri Sep 01, 2017 4:00 pm
willthrill81 wrote:
Fri Sep 01, 2017 3:43 pm
gilgamesh wrote:
Fri Sep 01, 2017 3:25 pm
willthrill81 wrote:
Fri Sep 01, 2017 2:01 pm
gilgamesh wrote:
Fri Sep 01, 2017 12:20 pm


How about inflation? SWR is saying it will match inflation and five years more, no?
TIPS cover inflation. But yes, the 4% rule is saying that you can withdraw an initial 4% and then increase it by inflation each year. My point was merely that the 4% rule isn't extending a guaranteed 25 years of spending by much, yet many treat it as being very aggressive and then gloat about their under 2-3% withdrawal rate.
It is not the mere 5 years, it's the 25+5 years the SWR funds are exposed to uncertainty...that's the crux of the issue?...uncertainty all along the three decades.
My point is that the 4% rule only needs a little growth in real dollars to stretch that guaranteed 25 years of TIPS out to 30 years with stocks and bonds. Those who want greater security than a 4% WR should probably amortize at least a portion of their capital using TIPS or SPIAs.

It's true that there is uncertainty for the entire period, but history has shown that when using the 4% WR, it's virtually always a question as to when you can increase your WR and by how much.
I agree.... However, I want to mention this which is masked when you phrase it the way you have.

A slight real growth is typically enough, when there's not much fluctuation to your nest egg. This 'slight real growth' is a very easy assumption to make during the accumulation phase. During withdrawal phase however, withdrawal on top of market downturn will need more than just a little real growth to recover. That's what sucks!....average slight real growth absolutely doesn't matter.
That's where sequence of returns risk comes in, and that's why it's the '4% rule' instead of the '7% rule'; 4% has been low enough to deal with a poor sequence of returns across time and geography. That's the point Kitces made in the interview. It's interesting how he said that the current 'frontier' is determining when retirees can begin withdrawing more than 4% and how much more with safety.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by chinto » Fri Sep 01, 2017 4:12 pm

Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
Perhaps the bottom line is that no matter how much you save, there is no 100% iron-clad security.
Okay agreed.
Goodman60 wrote:
Fri Sep 01, 2017 9:03 am
If you can save 25x spending (4%SWR), you're probably doing about as good as most can do. Many of we Bogleheads are natural savers and can do better. Many (most?) Americans retire with very little except SS. A small group, dedicated to saving, can save enough to do a 4% SWR. And it's not really realistic to expect people to be able to get to a 2-3% SWR for the vast majority of the population.
There are no barriers to most people getting to 2-3% except self-imposed discipline issues. The issue is primarily cultural. The U.S. has been repeatedly noted for its low savings rate, especially when correlated with GDP. So while many struggle to get to 25x, most of the barriers they struggle against are self imposed by lifestyle choices that people make.

As many have noted we are a country where the so called poor are obese, have a cell phone, drive to the grocery store, and live in air conditioning with a color television. It is an entitlement culture, a culture that does not celebrate independence due to thrift and frugality, but that venerates the spendthrift lifestyle. And that is why so many born here find difficulty reaching even for 25x. I have not noted this issue among my former Russian or Chinese friends for example. Every last one of them has 25x within 20 years of hitting our shores.

gilgamesh
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 4:20 pm

willthrill81 wrote:
Fri Sep 01, 2017 4:08 pm
gilgamesh wrote:
Fri Sep 01, 2017 4:00 pm
willthrill81 wrote:
Fri Sep 01, 2017 3:43 pm
gilgamesh wrote:
Fri Sep 01, 2017 3:25 pm
willthrill81 wrote:
Fri Sep 01, 2017 2:01 pm


TIPS cover inflation. But yes, the 4% rule is saying that you can withdraw an initial 4% and then increase it by inflation each year. My point was merely that the 4% rule isn't extending a guaranteed 25 years of spending by much, yet many treat it as being very aggressive and then gloat about their under 2-3% withdrawal rate.
It is not the mere 5 years, it's the 25+5 years the SWR funds are exposed to uncertainty...that's the crux of the issue?...uncertainty all along the three decades.
My point is that the 4% rule only needs a little growth in real dollars to stretch that guaranteed 25 years of TIPS out to 30 years with stocks and bonds. Those who want greater security than a 4% WR should probably amortize at least a portion of their capital using TIPS or SPIAs.

It's true that there is uncertainty for the entire period, but history has shown that when using the 4% WR, it's virtually always a question as to when you can increase your WR and by how much.
I agree.... However, I want to mention this which is masked when you phrase it the way you have.

A slight real growth is typically enough, when there's not much fluctuation to your nest egg. This 'slight real growth' is a very easy assumption to make during the accumulation phase. During withdrawal phase however, withdrawal on top of market downturn will need more than just a little real growth to recover. That's what sucks!....average slight real growth absolutely doesn't matter.
That's where sequence of returns risk comes in, and that's why it's the '4% rule' instead of the '7% rule'; 4% has been low enough to deal with a poor sequence of returns across time and geography. That's the point Kitces made in the interview. It's interesting how he said that the current 'frontier' is determining when retirees can begin withdrawing more than 4% and how much more with safety.
Ok! Then you misspoke on your first post, if you really meant 4% just needs a little real growth?...you can't have it both ways. History's worse is not just a little real growth.
Last edited by gilgamesh on Fri Sep 01, 2017 4:20 pm, edited 1 time in total.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by sreynard » Fri Sep 01, 2017 4:20 pm

gilgamesh wrote:
Fri Sep 01, 2017 3:12 pm
HomerJ wrote:
Fri Sep 01, 2017 2:28 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.

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.
Good post. It's exactly the point I make when people talk about 4% withdrawals and the chance of "failure".

For most of us here, failure doesn't mean you're eating under a bridge. Failure means you may cut back to 2 vacations a year instead of 4 for a few years during a big crash.
This is true if 66.66% of your typical retirement annual expenses is allocated for the 4 vacations. Assuming all 4 big vacations costs the same.

Going from 4.5% to 3% is cutting 33.33% cut in expenditure. If that translates into cutting 2 of the 4 vacations, then 4 vacations costs 66.66%

This is why I say it's important actually put it in dollar terms and seeing whether these assumed spending adjustments are possible....trivializing it by saying it's just going from 4 vacations to 2 vacations most likely doesn't apply for most.
This is an very good point. Unless some of your planed vacations involve Mars, you really need to run the numbers and see what the consequences actually are in dollars, not just as a percent. That cut from 4 vacations to 2 could easily turn into a cut from 4 to -4. Not something I want to just wave my hands at and paper over with assumptions.

I'll be adding a few new columns to my spreadsheet and doing some figuring this weekend. . . . How low can I really go?

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 4:22 pm

gilgamesh wrote:
Fri Sep 01, 2017 4:20 pm
willthrill81 wrote:
Fri Sep 01, 2017 4:08 pm
gilgamesh wrote:
Fri Sep 01, 2017 4:00 pm
willthrill81 wrote:
Fri Sep 01, 2017 3:43 pm
gilgamesh wrote:
Fri Sep 01, 2017 3:25 pm


It is not the mere 5 years, it's the 25+5 years the SWR funds are exposed to uncertainty...that's the crux of the issue?...uncertainty all along the three decades.
My point is that the 4% rule only needs a little growth in real dollars to stretch that guaranteed 25 years of TIPS out to 30 years with stocks and bonds. Those who want greater security than a 4% WR should probably amortize at least a portion of their capital using TIPS or SPIAs.

It's true that there is uncertainty for the entire period, but history has shown that when using the 4% WR, it's virtually always a question as to when you can increase your WR and by how much.
I agree.... However, I want to mention this which is masked when you phrase it the way you have.

A slight real growth is typically enough, when there's not much fluctuation to your nest egg. This 'slight real growth' is a very easy assumption to make during the accumulation phase. During withdrawal phase however, withdrawal on top of market downturn will need more than just a little real growth to recover. That's what sucks!....average slight real growth absolutely doesn't matter.
That's where sequence of returns risk comes in, and that's why it's the '4% rule' instead of the '7% rule'; 4% has been low enough to deal with a poor sequence of returns across time and geography. That's the point Kitces made in the interview. It's interesting how he said that the current 'frontier' is determining when retirees can begin withdrawing more than 4% and how much more with safety.
Ok! Then you misspoke on your first post, if you really meant 4% just needs a little real growth?...you can't have it both ways. History's worse is not just a little real growth.
No I didn't. My point then was that you only need a little growth in real dollars (on average, over the 30 year period) to achieve a 30 year period of 4% withdrawals. And yes, sequence of returns risk is a real problem, and that's why the SWR is only 4% and not a substantially higher number.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Goodman60 » Fri Sep 01, 2017 4:26 pm

chinto wrote:
Fri Sep 01, 2017 4:12 pm

There are no barriers to most people getting to 2-3% except self-imposed discipline issues. The issue is primarily cultural. The U.S. has been repeatedly noted for its low savings rate, especially when correlated with GDP. So while many struggle to get to 25x, most of the barriers they struggle against are self imposed by lifestyle choices that people make.

As many have noted we are a country where the so called poor are obese, have a cell phone, drive to the grocery store, and live in air conditioning with a color television. It is an entitlement culture, a culture that does not celebrate independence due to thrift and frugality, but that venerates the spendthrift lifestyle. And that is why so many born here find difficulty reaching even for 25x. I have not noted this issue among my former Russian or Chinese friends for example. Every last one of them has 25x within 20 years of hitting our shores.
Great post. You are probably right. Most of the folks who I know who have financial security got there by deferring gratification. And most who I know who have financial insecurity got there by refusing to defer gratification. So, yeah, it's not impossible but culturally not encouraged to save 25x spending needs.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by bligh » Fri Sep 01, 2017 4:29 pm

gilgamesh wrote:
Fri Sep 01, 2017 3:48 pm
If you have 50% flexibility in spending , you should be good to go. Just a few points however,

- Anyone truly having 50% more than necessary probably needs to work much longer than someone who went with a floor strategy but say is fine with 30% more in discretionary spending (with 100% being same $ amount for both) .... Assuming the cost of flooring was less than the remaining 20%
- Does one have to eat cat food before that year's retirement is called a failure? It depends on what you call failure in your golden years, for some the threshold may be much higher than having to turn down the furnace.

Basically, I think your point comes down to how much cushion/discretionary amount more than 4% one has. Some do their 4% math ignoring SS and call SS their cushion. BTW, my flooring costs exactly that...I need a nest egg that will give me 4% without SS to set up flooring with SS. However, as mine is tied up in TIPS has a much reduced legacy factor, than if I decided to ignore SS and go with 4% SWR. I much rather prefer the higher certainty over legacy/inheritance factor.

As it has been said. It's very specific for each individual as long as each individual actually evaluate their own situation correctly and decides for themselves.

As I completely agree, asking everyone to save 4% even factoring SS is most of the times too much to ask and totally unnecessary/over kill....those even with slightly less, IMO still have done a darn good job with their retirement planning. :sharebeer
I think my outlook is that if I am unlucky, I will just suck it up and lower my expenses. Just like I would have pre-retirement. People get unlucky, bad sequence of returns occur, depressions happen and hyper inflation happens. Why would my life post retirement be any different? You were hoping to have two cars but the market took a nose dive and stayed down.. oh well, one car it is for now. Maybe I'll use public transport. Woe is me. Maybe I will try to find a part time job somewhere, or move to a lower cost of living area. Will I like it? probably not. Will I make do with what I have? absolutely. I'll just hope it is a temporary inconvenience. If it is permanent, oh well. Also, We are talking about the perfect storm here.. being blessed with a really long life at the same time as being cursed with one of the worst portfolio performance periods in history. I like my chances.

Put another way, if you are retiring as a $2 million net worth household, and a paid off house.. more than 95% of American households will have less than you do to face economic hardships. Sure you may say that they will be able to work, but remember that during the great depression there was 25% unemployment, and who knows how much under employment.

I am basically saying that it is great that we are aiming for more security in retirement than we have during our working lives but you reach a point of diminishing returns with it. To go to from a 5% withdrawal rate to a 4% one, you need 5X more in annual expenses, but to go to 3% you need a further 8X more, and to reach a 2% withdrawal rate.. you need a further 17x. Meanwhile, my hair is graying, tumors might be growing, knees are weakening, arteries are clogging, vision is blurring and joints are starting to ache and the grave is definitely looming. I think at some point in your life you have to look at your portfolio and realize that if the chances of you dying in the next 10 years is much higher than the chances of your portfolio being depleted .. you should stop stressing so much over your portfolio.

One option could be to hold 2 years of expenses in cash plus a portfolio that is 25X your comfortable annual expenses. That way at a total of 27x you are able to sleep well at night and endure some really bad times. Take social security early. That is part of the problem, there are an endless number of combinations and ways of tackling the risks. At some point you just have to say "this is good enough. I'll take my chances and adapt as necessary".
Last edited by bligh on Fri Sep 01, 2017 4:46 pm, edited 2 times in total.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 4:30 pm

willthrill81 wrote:
Fri Sep 01, 2017 4:22 pm
gilgamesh wrote:
Fri Sep 01, 2017 4:20 pm
willthrill81 wrote:
Fri Sep 01, 2017 4:08 pm
gilgamesh wrote:
Fri Sep 01, 2017 4:00 pm
willthrill81 wrote:
Fri Sep 01, 2017 3:43 pm


My point is that the 4% rule only needs a little growth in real dollars to stretch that guaranteed 25 years of TIPS out to 30 years with stocks and bonds. Those who want greater security than a 4% WR should probably amortize at least a portion of their capital using TIPS or SPIAs.

It's true that there is uncertainty for the entire period, but history has shown that when using the 4% WR, it's virtually always a question as to when you can increase your WR and by how much.
I agree.... However, I want to mention this which is masked when you phrase it the way you have.

A slight real growth is typically enough, when there's not much fluctuation to your nest egg. This 'slight real growth' is a very easy assumption to make during the accumulation phase. During withdrawal phase however, withdrawal on top of market downturn will need more than just a little real growth to recover. That's what sucks!....average slight real growth absolutely doesn't matter.
That's where sequence of returns risk comes in, and that's why it's the '4% rule' instead of the '7% rule'; 4% has been low enough to deal with a poor sequence of returns across time and geography. That's the point Kitces made in the interview. It's interesting how he said that the current 'frontier' is determining when retirees can begin withdrawing more than 4% and how much more with safety.
Ok! Then you misspoke on your first post, if you really meant 4% just needs a little real growth?...you can't have it both ways. History's worse is not just a little real growth.
No I didn't. My point then was that you only need a little growth in real dollars (on average, over the 30 year period) to achieve a 30 year period of 4% withdrawals. And yes, sequence of returns risk is a real problem, and that's why the SWR is only 4% and not a substantially higher number.
Ok! To me your first statement is obviously wrong, especially given your second statement. But let me sleep on it (edit: as you don't make these mistakes, so I might be missing something)...in the mean time someone else with a clear mind may want to dissect it...I'm tired now.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 4:34 pm

gilgamesh wrote:
Fri Sep 01, 2017 4:30 pm
willthrill81 wrote:
Fri Sep 01, 2017 4:22 pm
gilgamesh wrote:
Fri Sep 01, 2017 4:20 pm
willthrill81 wrote:
Fri Sep 01, 2017 4:08 pm
gilgamesh wrote:
Fri Sep 01, 2017 4:00 pm


I agree.... However, I want to mention this which is masked when you phrase it the way you have.

A slight real growth is typically enough, when there's not much fluctuation to your nest egg. This 'slight real growth' is a very easy assumption to make during the accumulation phase. During withdrawal phase however, withdrawal on top of market downturn will need more than just a little real growth to recover. That's what sucks!....average slight real growth absolutely doesn't matter.
That's where sequence of returns risk comes in, and that's why it's the '4% rule' instead of the '7% rule'; 4% has been low enough to deal with a poor sequence of returns across time and geography. That's the point Kitces made in the interview. It's interesting how he said that the current 'frontier' is determining when retirees can begin withdrawing more than 4% and how much more with safety.
Ok! Then you misspoke on your first post, if you really meant 4% just needs a little real growth?...you can't have it both ways. History's worse is not just a little real growth.
No I didn't. My point then was that you only need a little growth in real dollars (on average, over the 30 year period) to achieve a 30 year period of 4% withdrawals. And yes, sequence of returns risk is a real problem, and that's why the SWR is only 4% and not a substantially higher number.
Ok! To me your first statement is obviously wrong, especially given your second statement. But let me sleep on it...in the mean time someone else with a clear mind may want to dissect it...I'm tired now.
To put it simply, you need zero real growth to achieve a 25 year retirement at a 4% withdrawal rate.

So to extend that retirement to 30 years with a 4% withdrawal rate, you only need a relatively small amount of real growth over the entire period.

Where you might need (and historically have received) a lot of growth is after a major market decline (i.e. 40-50%). And if that growth doesn't happen quickly, you could be in trouble. But Kitces' point is that 4% is low enough that even if this very unfortunate (and rare) situation arises, 4% has been low enough to get you through the bad years and still leave you with enough capital to see it through to the good years (i.e. deal with a poor sequence of returns).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

ResearchMed
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by ResearchMed » Fri Sep 01, 2017 4:42 pm

HomerJ wrote:
Fri Sep 01, 2017 2:28 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.

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.
Good post. It's exactly the point I make when people talk about 4% withdrawals and the chance of "failure".

For most of us here, failure doesn't mean you're eating under a bridge. Failure means you may cut back to 2 vacations a year instead of 4 for a few years during a big crash.
[emphasis added]

This isn't noted often enough (in my mind, anyway).

Very few of us (any of "us" in BH?) would just sit back, continuing to spend "just the same" for discretionary expenses, oblivious to the poor performance of the portfolio.

Even if it means "only one vacation in two or three years" and a few other cost-cutting measures in a timely fashion, there's a good chance that IF one cuts back a bit, things will recover and you'll be back to the planned 2 per year, or just one for a while.
Or it could be 2 per year, but shorter, less expensive, etc.,and ditto other budget cuts.
That "4%" model is very conservative.

To go from a "comfortable but not extravagant" retirement to eating cat food under a bridge... how likely is that, really, for those who plan ahead, aka "Bogleheads"?
(Or from extravagant, to "only" comfortable, or very comfortable, etc.)

With the "4% + portfolio growth", it's also fairly likely that there will be enough for 3 vacations each year (or the money spent however one wishes).

Those simulations show a rather remarkable proportion of outcomes with an even more remarkable fortune "left over".
For those with serious legacy desires, fine. More than fine!
For others, if the portfolio is "not declining" (this is most of the cases), back to the vacation planning forum! (Or the luxe car, or the philanthropy, or new hobbies...)

The "failure" percentage in these models means that the particular simulation did not end with a positive balance. And that would have been without any alteration of spending pattern, as if the portfolio performance was simply invisible.
But the shortfall could have been very low in some of those cases, and that's far from "failure" in practical, realistic terms. That means, what? That the last check bounced?
Yes, some of the failures could be catastrophic (very few in the models, hence the very conservative nature of this model), but... would one *really* not notice and make some adjustments, most likely starting some time in advance of that "failure" (meaning, running out entirely)?

Also, not meaning to focus on the grim, a good number of "us" wouldn't actually make it to the endpoint anyway.
This is only a potential problem for those who live a nice long life, which cuts down dramatically the proportion of retirees who will actually encounter this.
And again, IF one was in an unfortunate time period where things weren't going very well (the majority of time periods would go very well indeed), one should have been paying attention before hitting zero. Long before, when there is time to make budget adjustments.

Sure, be prudent, but don't ignore the option to cut back a bit, by instead starting/continuing forgoing some retirement choices one might have desired.

RM
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by stlutz » Fri Sep 01, 2017 4:59 pm

I think the "two vacations a year instead of four" formulation is perhaps too dismissive. The reason the retiring in 1966 scenario is so disturbing to study is that a) you find out rather quickly you can't take out as much as you might have hoped; b) once you made the adjustment to lower your withdrawal amount you had to stick with that lower rate for something like 15 years before things started to look better.

It is an oft-repeated (and good) point that if you start out taking 4% and the market declines significantly in year 2, that you are not going to happily take 6 or 7% going forward forever. If you thought 4% was going to give you $40K income but you in reality can only take $25K, that's not skipping a vacation or two, that's basically living a very different retirement than planned/hoped.

Sure, you're not ending up under a bridge but the adjustments involved in the realistic worst case scenarios (e.g. those not involving a nuclear war) are still significant.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Fri Sep 01, 2017 5:04 pm

stlutz wrote:
Fri Sep 01, 2017 4:59 pm
Sure, you're not ending up under a bridge but the adjustments involved in the realistic worst case scenarios (e.g. those not involving a nuclear war) are still significant.
A nuclear war is the easiest case: when you know that it's coming you spend as much as possible as quickly as possible.

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Last edited by VictoriaF on Fri Sep 01, 2017 5:23 pm, edited 1 time in total.
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by HomerJ » Fri Sep 01, 2017 5:18 pm

gilgamesh wrote:
Fri Sep 01, 2017 3:12 pm
HomerJ wrote:
Fri Sep 01, 2017 2:28 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.

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.
Good post. It's exactly the point I make when people talk about 4% withdrawals and the chance of "failure".

For most of us here, failure doesn't mean you're eating under a bridge. Failure means you may cut back to 2 vacations a year instead of 4 for a few years during a big crash.
This is true if 66.66% of your typical retirement annual expenses is allocated for the 4 vacations. Assuming all 4 big vacations costs the same.

Going from 4.5% to 3% is cutting 33.33% cut in expenditure. If that translates into cutting 2 of the 4 vacations, then 4 vacations costs 66.66%

This is why I say it's important actually put it in dollar terms and seeing whether these assumed spending adjustments are possible....trivializing it by saying it's just going from 4 vacations to 2 vacations most likely doesn't apply for most.
You don't have to cut all the way back to 3%. All the scenarios where 4% fails, people are just assumed to be just blindly pulling 4% pius inflation each year no matter what.

Just cutting back enough where you stop taking inflation adjustments for 5-10 years would probably be enough to change the numbers.

Plus, you can always just get a SPIA 15 years in, if a good chunk of your money is gone.

People here are way too conservative. And that's coming from me! I'm already way over on the scaredy cat scale.

People need to recognize there is another risk besides running out of money. The risk of running out of time. Working an extra 3-5 years to get your SWR down to 3% may be a very poor decision.

gilgamesh
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 6:04 pm

willthrill81 wrote:
Fri Sep 01, 2017 4:34 pm
gilgamesh wrote:
Fri Sep 01, 2017 4:30 pm
willthrill81 wrote:
Fri Sep 01, 2017 4:22 pm
gilgamesh wrote:
Fri Sep 01, 2017 4:20 pm
willthrill81 wrote:
Fri Sep 01, 2017 4:08 pm


That's where sequence of returns risk comes in, and that's why it's the '4% rule' instead of the '7% rule'; 4% has been low enough to deal with a poor sequence of returns across time and geography. That's the point Kitces made in the interview. It's interesting how he said that the current 'frontier' is determining when retirees can begin withdrawing more than 4% and how much more with safety.
Ok! Then you misspoke on your first post, if you really meant 4% just needs a little real growth?...you can't have it both ways. History's worse is not just a little real growth.
No I didn't. My point then was that you only need a little growth in real dollars (on average, over the 30 year period) to achieve a 30 year period of 4% withdrawals. And yes, sequence of returns risk is a real problem, and that's why the SWR is only 4% and not a substantially higher number.
Ok! To me your first statement is obviously wrong, especially given your second statement. But let me sleep on it...in the mean time someone else with a clear mind may want to dissect it...I'm tired now.
To put it simply, you need zero real growth to achieve a 25 year retirement at a 4% withdrawal rate.

Let's takes just this first statement of yours...

Assume zero inflation for 25 years. Assume you have $100k nest egg. You start out with $4k/year asjusted for inflation it lasts for 25 years right? It holds true even with positive inflation. But, zero makes the following calculations much easier as I don't have to go back and forth with real and nominal figures.

First year $100k, you take $4k end of year $96k balance. Following year, Jan 1 your portfolio drops 50%, you have $48k you withdraw $4k, it's down to $44k. Now, the stock rebounds 100% you are back to $88k. Zero real growth but you have $88k instead of the $92k you should have for your statement to hold true.

That's why you can't have both ways...the classic sequence of return risk.

P.S: If you are talking about your personal return and not that of stock market, it would make even less sense...your personal return of real zero could mean 12% or 25% market real growth...has no real life application.

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willthrill81
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 6:12 pm

gilgamesh wrote:
Fri Sep 01, 2017 6:04 pm
willthrill81 wrote:
Fri Sep 01, 2017 4:34 pm
gilgamesh wrote:
Fri Sep 01, 2017 4:30 pm
willthrill81 wrote:
Fri Sep 01, 2017 4:22 pm
gilgamesh wrote:
Fri Sep 01, 2017 4:20 pm


Ok! Then you misspoke on your first post, if you really meant 4% just needs a little real growth?...you can't have it both ways. History's worse is not just a little real growth.
No I didn't. My point then was that you only need a little growth in real dollars (on average, over the 30 year period) to achieve a 30 year period of 4% withdrawals. And yes, sequence of returns risk is a real problem, and that's why the SWR is only 4% and not a substantially higher number.
Ok! To me your first statement is obviously wrong, especially given your second statement. But let me sleep on it...in the mean time someone else with a clear mind may want to dissect it...I'm tired now.
To put it simply, you need zero real growth to achieve a 25 year retirement at a 4% withdrawal rate.

Let's takes just this first statement of yours...

Assume zero inflation for 25 years. Assume you have $100k nest egg. You start out with $4k/year asjusted for inflation it lasts for 25 years right? It holds true even with positive inflation. But, zero makes the following calculations much easier as I don't have to go back and forth with real and nominal figures.

First year $100k, you take $4k end of year $96k balance. Following year, Jan 1 your portfolio drops 50%, you have $48k you withdraw $4k, it's down to $44k. Now, the stock rebounds 100% you are back to $88k. Zero real growth but you have $88k instead of the $92k you should have for your statement to hold true.

That's why you can't have both ways...the classic sequence of return risk.

P.S: If you are talking about your personal return and not that of stock market, it would make even less...your personal return of real zero could mean 12% market real growth...has no real life application.
You are mixing up arithmetic returns (simple average) and compound returns (geometric average).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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