Michael Kitces 4% rule podcast on Madfientist

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sreynard
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by sreynard » Fri Sep 01, 2017 6:13 pm

HomerJ wrote:
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.
Dearest Homer, that "would probably be enough" and "you can always" have the strong smell of "hope". More like you have no idea if it would be possible or not, but would live "on a wing and a prayer". Contingency plans that have a little more to back them up would be nice.

Agree with you 100% on running out of time. If I could retire 5 years earlier, I be gone, but only if I had a reasonable expectation of actually being able to survive. It would really really suck to quit your job and then have to tell the wife, "Honey, remember when I told you we didn't need to worry about eating cat food? We could just. . . . Well, I was wrong about that. Would you like the seafood pate or the. . . ." :wink:

gilgamesh
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 6:14 pm

willthrill81 wrote:
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


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).
Can you do the same calculations with the correct returns and show how your statement holds true, thanks!

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willthrill81
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 6:17 pm

gilgamesh wrote:
Fri Sep 01, 2017 6:14 pm
willthrill81 wrote:
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


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).
Can you do the same calculations with the correct returns and show how your statement holds true, thanks!
Easy. 100% / 25 = 4%. Easily achieved with 100% TIPS.
“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

gilgamesh
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 6:29 pm

willthrill81 wrote:
Fri Sep 01, 2017 6:17 pm
gilgamesh wrote:
Fri Sep 01, 2017 6:14 pm
willthrill81 wrote:
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


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).
Can you do the same calculations with the correct returns and show how your statement holds true, thanks!
Easy. 100% / 25 = 4%. Easily achieved with 100% TIPS.
Lol! Ok....but can you do it the way I did in long form. The $100k example where you withdraw 4% and thus $4k each year due to zero inflation, where the market declines by 50%, then you withdraw your annual expense and then the market recovers for the zero real growth at the end you mentioned.

If you are not inclined to, that's fine...I can approach this a different way...but I thought that's the easiest.
Last edited by gilgamesh on Fri Sep 01, 2017 6:41 pm, 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 6:37 pm

Never mind....I said 50% decline and then a 100% recovery. I said that's zero growth, are you saying it's 25% growth? Tell me which one? What I assumed was more generous and the other makes your assertion even worse, no?

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willthrill81
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 6:43 pm

gilgamesh wrote:
Fri Sep 01, 2017 6:29 pm
willthrill81 wrote:
Fri Sep 01, 2017 6:17 pm
gilgamesh wrote:
Fri Sep 01, 2017 6:14 pm
willthrill81 wrote:
Fri Sep 01, 2017 6:12 pm
gilgamesh wrote:
Fri Sep 01, 2017 6:04 pm


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).
Can you do the same calculations with the correct returns and show how your statement holds true, thanks!
Easy. 100% / 25 = 4%. Easily achieved with 100% TIPS.
Lol! Ok....but can you do it the way I did in long form. The $100k example where you withdraw 4% and thus $4k each year due to zero inflation, where the market declines by 50%, the you withdraw your annual expense and then the market recovers for the zero real growth at the end you mentioned.

If you are not inclined to, that's fine...I can approach this a different way...but I thought that's the easiest.
I don't recall the formula off the top of my head that takes volatility into account, but a portfolio with zero real growth would be worth 96% at year 1 of the balance at year 0, and drop 4% more each subsequent year. If the portfolio has less than that, then the real growth rate is clearly negative.

When you take withdrawals into account, a 50% decline plus a 4% withdrawal in one requires a 108.7% increase in the following year to equate to a 0% real, net return.

A 50% decline followed by a 100% increase is a 0% net return. Geometric averages must be used to derive this. The arithmetic average would be 25%, but this is not the return that the investor would actually experience (it's quite meaningless actually).
“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

gilgamesh
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 01, 2017 6:54 pm

willthrill81 wrote:
Fri Sep 01, 2017 6:43 pm
gilgamesh wrote:
Fri Sep 01, 2017 6:29 pm
willthrill81 wrote:
Fri Sep 01, 2017 6:17 pm
gilgamesh wrote:
Fri Sep 01, 2017 6:14 pm
willthrill81 wrote:
Fri Sep 01, 2017 6:12 pm


You are mixing up arithmetic returns (simple average) and compound returns (geometric average).
Can you do the same calculations with the correct returns and show how your statement holds true, thanks!
Easy. 100% / 25 = 4%. Easily achieved with 100% TIPS.
Lol! Ok....but can you do it the way I did in long form. The $100k example where you withdraw 4% and thus $4k each year due to zero inflation, where the market declines by 50%, the you withdraw your annual expense and then the market recovers for the zero real growth at the end you mentioned.

If you are not inclined to, that's fine...I can approach this a different way...but I thought that's the easiest.
I don't recall the formula off the top of my head that takes volatility into account, but a portfolio with zero real growth would be worth 96% at year 1 of the balance at year 0, and drop 4% more each subsequent year. If the portfolio has less than that, then the real growth rate is clearly negative.

When you take withdrawals into account, a 50% decline plus a 4% withdrawal in one requires a 108.7% increase in the following year to equate to a 0% real, net return.

A 50% decline followed by a 100% increase is a 0% net return. Geometric averages must be used to derive this. The arithmetic average would be 25%, but this is not the return that the investor would actually experience (it's quite meaningless actually).
No real growth is not clearly negative. You are mixing up "personal return" vs market return.

50% followed by 108.7% will bring your personal balance in line, but that's not zero real market return. It's more...the direct effect of sequence of return risk

'Personal return' as used here is meaningless.

I did not use the 25% arithmetic return as you rightly point out is meangless, I used the correct Geometric return and called it zero growth.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Goodman60 » Fri Sep 01, 2017 7:58 pm

stlutz wrote:
Fri Sep 01, 2017 4:59 pm
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.
This is the main point in the Kitces work. That by merely taking 4%, you are insuring against exactly that...a big drop in the early years. So, yes, if the market crashes in half, you can continue taking your original 4%, plus inflation, even though it's not actually 6 of 7% of your original balance. Kitces looks at valuations and says that even under today's high valuations, you can safely do a 4% withdrawal rate. And if valuations become lower by the time you actually retire, you might even be able to take more.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by 1210sda » Fri Sep 01, 2017 8:40 pm

Thank you camper 1

Do you know if there is a transcript of the interview available ??

1210

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by AlohaJoe » Fri Sep 01, 2017 9:42 pm

#Cruncher wrote:
Fri Sep 01, 2017 1:08 pm
Do you have the source, AlohaJoe, for the real returns in the table?
The paper I mentioned is Google-able but here's the link for posterity: https://www.onefpa.org/journal/Pages/In ... eturn.aspx

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by stlutz » Fri Sep 01, 2017 9:59 pm

This is the main point in the Kitces work. That by merely taking 4%, you are insuring against exactly that...a big drop in the early years. So, yes, if the market crashes in half, you can continue taking your original 4%, plus inflation, even though it's not actually 6 of 7% of your original balance.
Let's consider two different people:

Person A retires at age 65 in the summer of 2007. He posts on Bogleheads and asks if he is in good shape with $1M portfolio and his plan to withdraw $40,000 per year. Everyone replies, "Of course--you're set."

Person B is laid off in the spring of 2009. He posts on Bogleheads asking if he is in good shape to retire by taking $40,000 per year from his $650,000 portfolio. Are you saying that wise response should have been, "Of course, you're set," based on using a 6% withdrawal rate?

4% is a great rule of thumb for how much money you need to retire (for a 30 year retirement). It's not a withdrawal strategy. Mutual funds are not an annuity. If you want to take an annuity-type payout option, then buy one, or construct your own using a TIPS ladder. If you want to have an equity-heavy portfolio, then you need to have the ability/willingness to vary your withdrawals by a lot--increasing withdrawals when the market is dropping (is this Japan 1989?) isn't something I can see myself doing in real life. Depending upon your other income streams, that could be no big deal or it could be a big concern.

As noted earlier, a 65 year old male can buy an inflation adjusted annuity that pays out at a 4.5% rate. So, the 4% rule does indicate that you have plenty of money to fund your retirement. In terms of how to turn that money into income, just taking 4% of your portfolio value from the date you retired really has no logic behind it.

Although I've mentioned annuities a couple of times, I'm actually not really a promoter of them--they can be useful depending on the goals and situation. What I'm objecting to is pretending that you have an annuity when in fact you don't.

Whether you have enough to retire and how best to go about using that money are two different questions. That's all I'm pointing out.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 01, 2017 10:09 pm

stlutz wrote:
Fri Sep 01, 2017 9:59 pm
This is the main point in the Kitces work. That by merely taking 4%, you are insuring against exactly that...a big drop in the early years. So, yes, if the market crashes in half, you can continue taking your original 4%, plus inflation, even though it's not actually 6 of 7% of your original balance.
Let's consider two different people:

Person A retires at age 65 in the summer of 2007. He posts on Bogleheads and asks if he is in good shape with $1M portfolio and his plan to withdraw $40,000 per year. Everyone replies, "Of course--you're set."

Person B is laid off in the spring of 2009. He posts on Bogleheads asking if he is in good shape to retire by taking $40,000 per year from his $650,000 portfolio. Are you saying that wise response should have been, "Of course, you're set," based on using a 6% withdrawal rate?
If person B did take out $40,000 per year from that $650,000 portfolio, assuming it was 60% TSM / 40% TBM, that person would now have an inflation-adjusted $895k portfolio ($1.04M nominal). So person B would be doing just fine.

Kitces demonstrated nearly a decade ago that valuations (i.e. CAPE), while not good predictors of short-term or long-term (i.e. 30 year) stock returns, have been an excellent predictor (r > .7) of the success of withdrawal rates. CAPE supported a higher WR in the spring of 2009 than in the summer of 2007.
“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 stlutz » Fri Sep 01, 2017 10:17 pm

I recognize that it would have worked out just fine. The market soaring the way it has in the last 8 years was by no means guaranteed, however.

Was Kitces recommending 6% in the spring of 2009?

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by emoore » Fri Sep 01, 2017 10:43 pm

This thread has gotten ridiculous. If you are anywhere close to 4% you will be fine.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by chinto » Sat Sep 02, 2017 2:09 am

I just want to say, this has been a pretty awesome thread; the diversity of viewpoints has been illuminating. Thanks to all for a fascinating conversation.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Goodman60 » Sat Sep 02, 2017 5:33 am

stlutz wrote:
Fri Sep 01, 2017 9:59 pm
This is the main point in the Kitces work. That by merely taking 4%, you are insuring against exactly that...a big drop in the early years. So, yes, if the market crashes in half, you can continue taking your original 4%, plus inflation, even though it's not actually 6 of 7% of your original balance.
Let's consider two different people:

Person A retires at age 65 in the summer of 2007. He posts on Bogleheads and asks if he is in good shape with $1M portfolio and his plan to withdraw $40,000 per year. Everyone replies, "Of course--you're set."

Person B is laid off in the spring of 2009. He posts on Bogleheads asking if he is in good shape to retire by taking $40,000 per year from his $650,000 portfolio. Are you saying that wise response should have been, "Of course, you're set," based on using a 6% withdrawal rate?
Yes

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Sat Sep 02, 2017 5:41 am

Goodman60 wrote:
Fri Sep 01, 2017 7:58 pm
stlutz wrote:
Fri Sep 01, 2017 4:59 pm
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.
This is the main point in the Kitces work. That by merely taking 4%, you are insuring against exactly that...a big drop in the early years. So, yes, if the market crashes in half, you can continue taking your original 4%, plus inflation, even though it's not actually 6 of 7% of your original balance. Kitces looks at valuations and says that even under today's high valuations, you can safely do a 4% withdrawal rate. And if valuations become lower by the time you actually retire, you might even be able to take more.
4% SWR doesn't insure anything...word is way too strong. Even a TIPS floor doesn't insure anything....both has risks, the latter has less.

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Re: Michael Kitces 4% rule podcast on Madfientis

Post by gilgamesh » Sat Sep 02, 2017 6:09 am

stlutz wrote:
Fri Sep 01, 2017 9:59 pm
This is the main point in the Kitces work. That by merely taking 4%, you are insuring against exactly that...a big drop in the early years. So, yes, if the market crashes in half, you can continue taking your original 4%, plus inflation, even though it's not actually 6 of 7% of your original balance.
Let's consider two different people:

Person A retires at age 65 in the summer of 2007. He posts on Bogleheads and asks if he is in good shape with $1M portfolio and his plan to withdraw $40,000 per year. Everyone replies, "Of course--you're set."

Person B is laid off in the spring of 2009. He posts on Bogleheads asking if he is in good shape to retire by taking $40,000 per year from his $650,000 portfolio. Are you saying that wise response should have been, "Of course, you're set," based on using a 6% withdrawal rate?

First we need to clarify whether we are talking about the original 4% rule which is only valid for a 30 year retirement or recently Bengen changing that to 4% SWR for indefinite length of retirement. If the former, then Person B will have to withdraw the same inflation adjusted amount as person A will in 2009. This is around $41,000. Yes $41,000 out of $650,000 is 6.3%. But, remember the 4% starting balance rule adjusted to inflation is for 30 years, not 31,32,29 or 28. So, if your analogy starts 2 years later, boglehead should tell person B to start withdrawing $41,000 and then adjust to inflation and your funds will last 28 years. That's the original Bengen rule....Your analogy does not break it.

I am waiting for the transcripts as I can't listen for over an hour..., so I don't know what Kitces say on how valuation at the start of retirement affects SWR here. But, when you think about it, valuation at the start of retirement should allow person B to start withdrawing $41,000 and adjust to inflation and expect it to last 28 years....if we are going by the worst the past has ever thrown at us


4% is a great rule of thumb for how much money you need to retire (for a 30 year retirement). It's not a withdrawal strategy. Mutual funds are not an annuity. If you want to take an annuity-type payout option, then buy one, or construct your own using a TIPS ladder. If you want to have an equity-heavy portfolio, then you need to have the ability/willingness to vary your withdrawals by a lot--increasing withdrawals when the market is dropping (is this Japan 1989?) isn't something I can see myself doing in real life. Depending upon your other income streams, that could be no big deal or it could be a big concern.

TIPS ladder unlike annuity has liquidity

As noted earlier, a 65 year old male can buy an inflation adjusted annuity that pays out at a 4.5% rate. So, the 4% rule does indicate that you have plenty of money to fund your retirement. In terms of how to turn that money into income, just taking 4% of your portfolio value from the date you retired really has no logic behind it.

Are you sure a 65 year old can buy an inflation adjusted annuity of 4.5%...sounds too good to be true....that's very good info. You cannot extrapolate annuity returns to 4% SWR or any other return as annuity returns include 'mortality credit return' unique only to annuities. Aso, as a side note for sake of completion, even though it has no bearing on what you are saying here, the liquidity and legacy differences

Although I've mentioned annuities a couple of times, I'm actually not really a promoter of them--they can be useful depending on the goals and situation. What I'm objecting to is pretending that you have an annuity when in fact you don't.

My floor plan involves purchasing an SPIA ladders age 80, if needed based on circumstances at that time. In fact two nominal SPIA spaced apart by a few years. The second smaller SPIA for the inflation adjustment to the former. The funds for these SPIA will be from the last two rungs of the TIPS ladder that matures on the years of SPIA purchase. Even a simple TIPS ladder that tracks inflation should keep an approximate tracking of the interest rate changes which affects SPIA figures. To be absolutely accurate you have to duration match your TIPS to the SPIA purchase. Which I've deemed unnecessary for my purposes. An SPIA with significant 'mortality credit' and within state guarantee laws are a solid floor at older age. No need to shy away from them. In fact, all pure SWR proponents should have an SPIA escape in their contingency plan if the unthinkable happens...as below a certain nest egg, 4% SWR has to be (has to be, may be too strong, but really my only option if I decide on a 4%) switched to an SPIA (Shouldn't happen, but a contingency plan for the extremes... reason why I even study reverse mortgage, Medicaid coverage of LTC etc ...contingencies for the extremely unlikely....not to worry, but rather to be prudent and to never think about it unless the situation demands for it)

Whether you have enough to retire and how best to go about using that money are two different questions. That's all I'm pointing out.
Last edited by gilgamesh on Sat Sep 02, 2017 10:16 am, edited 1 time in total.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Bigbonds » Sat Sep 02, 2017 7:32 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.

Wow, I certainly hope you are way off on the flexibility of taking a side gig is overstated. A very, large percentage of the country is actually depending on you to be wrong considering only 15% could fund even a measly one year of retirement. Interesting to say the least.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Goodman60 » Sat Sep 02, 2017 8:04 am

gilgamesh wrote:
Sat Sep 02, 2017 5:41 am
Goodman60 wrote:
Fri Sep 01, 2017 7:58 pm
stlutz wrote:
Fri Sep 01, 2017 4:59 pm
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.
This is the main point in the Kitces work. That by merely taking 4%, you are insuring against exactly that...a big drop in the early years. So, yes, if the market crashes in half, you can continue taking your original 4%, plus inflation, even though it's not actually 6 of 7% of your original balance. Kitces looks at valuations and says that even under today's high valuations, you can safely do a 4% withdrawal rate. And if valuations become lower by the time you actually retire, you might even be able to take more.
4% SWR doesn't insure anything...word is way too strong. Even a TIPS floor doesn't insure anything....both has risks, the latter has less.
Well, by that definition, even insurance companies and the U.S. Government can't "insure". Kitces point is that even with today's valuations, a 4% starting withdrawal rate, which has the real potential to become a 6% or 7% withdrawal rate if markets crash, is within the realm of what most prudent financially astute people would consider to be "safe enough". And that's why your starting number, with valuations like we have today, is 4% and not 6% or 7%.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Sat Sep 02, 2017 9:02 am

Goodman60 wrote:
Sat Sep 02, 2017 8:04 am
gilgamesh wrote:
Sat Sep 02, 2017 5:41 am
Goodman60 wrote:
Fri Sep 01, 2017 7:58 pm
stlutz wrote:
Fri Sep 01, 2017 4:59 pm
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.
This is the main point in the Kitces work. That by merely taking 4%, you are insuring against exactly that...a big drop in the early years. So, yes, if the market crashes in half, you can continue taking your original 4%, plus inflation, even though it's not actually 6 of 7% of your original balance. Kitces looks at valuations and says that even under today's high valuations, you can safely do a 4% withdrawal rate. And if valuations become lower by the time you actually retire, you might even be able to take more.
4% SWR doesn't insure anything...word is way too strong. Even a TIPS floor doesn't insure anything....both has risks, the latter has less.
Well, by that definition, even insurance companies and the U.S. Government can't "insure". Kitces point is that even with today's valuations, a 4% starting withdrawal rate, which has the real potential to become a 6% or 7% withdrawal rate if markets crash, is within the realm of what most prudent financially astute people would consider to be "safe enough". And that's why your starting number, with valuations like we have today, is 4% and not 6% or 7%.
The Full faith of the credit of the United States is not the same as hoping the future of our stock markets will never be worse than the past...I am fine with relying on whatever withdrawal strategy you want, but charecterizing a withdrawal strategy as what it is not, is not something I would encourage.

Now, if you say the extra "safety" is too costly for you or even unnecessary, I have no problems, but equating the risks amongst the two or saying SWR insures income even remotely as close to a TIPS ladder is simply erroneous.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by camper1 » Sat Sep 02, 2017 9:51 am

OP here. I didn't realize posting this link would lead to such strong opinions!

Reading the various responses has been enlightening. It seems that there are many paths to take once you achieve FI. Hopefully we all agree that having to choose a plan on how to spend and invest a large nest egg for retirement is a very good problem to have :sharebeer

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Sat Sep 02, 2017 10:08 am

stlutz wrote:
Fri Sep 01, 2017 10:17 pm
I recognize that it would have worked out just fine. The market soaring the way it has in the last 8 years was by no means guaranteed, however.

Was Kitces recommending 6% in the spring of 2009?
Language like "guaranteed" is simply inappropriate in this context and a bit of a straw man. Nothing is truly guaranteed save two things we all know well.

Kitces did note in 2008 when he published his research that when CAPE was historically between 14.7 and 17.6 (the range reached at the lowest ebb of the market in the spring of 2009), the lowest WR that would have succeeded was 4.9%, and the average WR that would have succeeded was 6.3%.
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by raven15 » Sat Sep 02, 2017 12:13 pm

Image
Courtesy of maizeman on the Mr. Money Mustache forum. It combines historical stock data and social security actuarial data. It puts the odds of the 4% rule failing in the proper perspective. Blue is having an equal or greater amount of money than when you retired, light blue is having less than you started with but more than zero.

And the entire long thread:
https://forum.mrmoneymustache.com/inves ... he-4-rule/
It's Time. Adding Interest.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Sat Sep 02, 2017 12:31 pm

Great chart. It clearly shows something most of us don't look at...the chance of death. We worry about having enough money to age 95. And I get it the goal needs to be to have a sustainable lifestyle/withdrawal rate to last as long as we do. But this sort of makes you realize that the odds are that most will die before age 85 and certainly before 90. The odds of starting with a 4% SWR and becoming broke are tiny compared to the odds of living and becoming rich or dying and becoming..well...dead. This pretty much says "4% is certainly safe enough".

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Sat Sep 02, 2017 1:13 pm

Leesbro63 wrote:
Sat Sep 02, 2017 12:31 pm
Great chart. It clearly shows something most of us don't look at...the chance of death. We worry about having enough money to age 95. And I get it the goal needs to be to have a sustainable lifestyle/withdrawal rate to last as long as we do. But this sort of makes you realize that the odds are that most will die before age 85 and certainly before 90. The odds of starting with a 4% SWR and becoming broke are tiny compared to the odds of living and becoming rich or dying and becoming..well...dead. This pretty much says "4% is certainly safe enough".
Just because a chart shows something clearly does not make it right. In fact, I find this chart suspicious, because it does not show the source of the data and the time period it covers.

But even if the chart were accurate as of today, going forward life expectancy can change with new medical technologies. Let's say a new treatment costs $500,000 and extends your life by 10 years. Would you take this treatment? And if yes, what would it do to your SWR with declined assets and extended duration?

Victoria
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by 22twain » Sat Sep 02, 2017 1:17 pm

Many of us probably personally know people who "stress tested" their finances via longevity. My MIL lived to 99 and spent her last 8 years in a nursing home. She still managed to leave some money behind because when she could no longer keep up her house, she sold it and moved to be near us in a LCOL area.

Not surprisingly, my wife and I have both preserved our inheritances, because one of us might need it.
My investing princiPLEs do not include absolutely preserving princiPAL.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Sat Sep 02, 2017 1:43 pm

VictoriaF wrote:
Sat Sep 02, 2017 1:13 pm
But even if the chart were accurate as of today, going forward life expectancy can change with new medical technologies. Let's say a new treatment costs $500,000 and extends your life by 10 years. Would you take this treatment? And if yes, what would it do to your SWR with declined assets and extended duration?

Victoria
Most of the improvements in life expectancy over the last 150 years have been aimed at preventing deaths in the young rather than extending the life of the old.

https://www.infoplease.com/us/mortality ... -1850-2011

For instance, a 50 year old U.S. man in 2011 only had an eight year longer life expectancy than a 50 year old in 1850. For females, the difference in life expectancy is only ten years. These are improvements to be sure, but not earth shattering. It would truly be a breakthrough like the world has never seen for us to suddenly be able to extend the life of a 50 year old by a decade for a mere $500k. It could happen, but it seems very unlikely to happen soon and suddenly to me.
“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 VictoriaF » Sat Sep 02, 2017 1:47 pm

willthrill81 wrote:
Sat Sep 02, 2017 1:43 pm
VictoriaF wrote:
Sat Sep 02, 2017 1:13 pm
But even if the chart were accurate as of today, going forward life expectancy can change with new medical technologies. Let's say a new treatment costs $500,000 and extends your life by 10 years. Would you take this treatment? And if yes, what would it do to your SWR with declined assets and extended duration?

Victoria
Most of the improvements in life expectancy over the last 150 years have been aimed at preventing deaths in the young rather than extending the life of the old.

https://www.infoplease.com/us/mortality ... -1850-2011

For instance, a 50 year old U.S. man in 2011 only had an eight year longer life expectancy than a 50 year old in 1850. For females, the difference in life expectancy is only ten years. These are improvements to be sure, but not earth shattering. It would truly be a breakthrough like the world has never seen for us to suddenly be able to extend the life of a 50 year old by a decade for a mere $500k. It could happen, but it seems very unlikely to happen soon and suddenly to me.
Aubrey de Grey, https://en.wikipedia.org/wiki/Aubrey_de_Grey and Ray Kurzweil, https://en.wikipedia.org/wiki/Ray_Kurzweil believe that life extension is possible. They may or may not be right, but I would not dismiss it out of hand. The life expectancy statistics in the next 150 years may not resemble life expectancy of the past 150 years, and only the former counts.

Victoria
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by SimpleGift » Sat Sep 02, 2017 2:03 pm

willthrill81 wrote:
Sat Sep 02, 2017 1:43 pm
Most of the improvements in life expectancy over the last 150 years have been aimed at preventing deaths in the young rather than extending the life of the old.
Right. For one, more folks are surviving childhood and living to an older age (in developed countries at least). Also, improvements in health and treatment of disease means more folks are living longer. However, all this greater survival to older ages appears to be pushing up against the natural limits of human life (chart below). As the curves on the chart peak higher and steeper, age-at-death becomes more and more predictable.
By 2050, assuming life extension is impractical (and perhaps undesirable), retirement finances may be much easier to plan!
Cordially, Todd

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by raven15 » Sat Sep 02, 2017 2:16 pm

VictoriaF wrote:
Sat Sep 02, 2017 1:13 pm
Leesbro63 wrote:
Sat Sep 02, 2017 12:31 pm
Great chart. It clearly shows something most of us don't look at...the chance of death. We worry about having enough money to age 95. And I get it the goal needs to be to have a sustainable lifestyle/withdrawal rate to last as long as we do. But this sort of makes you realize that the odds are that most will die before age 85 and certainly before 90. The odds of starting with a 4% SWR and becoming broke are tiny compared to the odds of living and becoming rich or dying and becoming..well...dead. This pretty much says "4% is certainly safe enough".
Just because a chart shows something clearly does not make it right. In fact, I find this chart suspicious, because it does not show the source of the data and the time period it covers.

But even if the chart were accurate as of today, going forward life expectancy can change with new medical technologies. Let's say a new treatment costs $500,000 and extends your life by 10 years. Would you take this treatment? And if yes, what would it do to your SWR with declined assets and extended duration?

Victoria
So far as I know it is the usual S&P US stock returns 1872 through 2016 and life expectancy data from the social security administration.

Is a guarantee of working another 10 years on the small chance you may be able to pay for what may be another 10 years of life in your 100's worth it too you? I guess it depends on how much you like your job relative to what you would be doing if you did not have a job for that 10 years.
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Sat Sep 02, 2017 2:20 pm

raven15 wrote:
Sat Sep 02, 2017 2:16 pm
VictoriaF wrote:
Sat Sep 02, 2017 1:13 pm
Leesbro63 wrote:
Sat Sep 02, 2017 12:31 pm
Great chart. It clearly shows something most of us don't look at...the chance of death. We worry about having enough money to age 95. And I get it the goal needs to be to have a sustainable lifestyle/withdrawal rate to last as long as we do. But this sort of makes you realize that the odds are that most will die before age 85 and certainly before 90. The odds of starting with a 4% SWR and becoming broke are tiny compared to the odds of living and becoming rich or dying and becoming..well...dead. This pretty much says "4% is certainly safe enough".
Just because a chart shows something clearly does not make it right. In fact, I find this chart suspicious, because it does not show the source of the data and the time period it covers.

But even if the chart were accurate as of today, going forward life expectancy can change with new medical technologies. Let's say a new treatment costs $500,000 and extends your life by 10 years. Would you take this treatment? And if yes, what would it do to your SWR with declined assets and extended duration?

Victoria
So far as I know it is the usual S&P US stock returns 1872 through 2016 and life expectancy data from the social security administration.

Is a guarantee of working another 10 years on the small chance you may be able to pay for what may be another 10 years of life in your 100's worth it too you? I guess it depends on how much you like your job relative to what you would be doing if you did not have a job for that 10 years.
It's the other way around: the sooner you retire the longer you live. By retiring early, you extend the duration of your retirement on both ends. And conversely, by working longer you shorten your retirement on both ends.

Victoria
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Sat Sep 02, 2017 2:31 pm

Simplegift wrote:
Sat Sep 02, 2017 2:03 pm
willthrill81 wrote:
Sat Sep 02, 2017 1:43 pm
Most of the improvements in life expectancy over the last 150 years have been aimed at preventing deaths in the young rather than extending the life of the old.
Right. For one, more folks are surviving childhood and living to an older age (in developed countries at least). Also, improvements in health and treatment of disease means more folks are living longer. However, all this greater survival to older ages appears to be pushing up against the natural limits of human life (chart below). As the curves on the chart peak higher and steeper, age-at-death becomes more and more predictable.
By 2050, assuming life extension is impractical (and perhaps undesirable), retirement finances may be much easier to plan!
It appears that age 95 may be the natural upper limit to human life. It is only the very few who live significantly beyond that point. If that is indeed the case, then retirement planning may indeed become a simpler process going forward. As is, the likelihood of at least one member of an opposite sex couple aged 65 making it to 95 is only 18%.
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by ResearchMed » Sat Sep 02, 2017 2:44 pm

raven15 wrote:
Sat Sep 02, 2017 12:13 pm
Image
Courtesy of maizeman on the Mr. Money Mustache forum. It combines historical stock data and social security actuarial data. It puts the odds of the 4% rule failing in the proper perspective. Blue is having an equal or greater amount of money than when you retired, light blue is having less than you started with but more than zero.

And the entire long thread:
https://forum.mrmoneymustache.com/inves ... he-4-rule/
What is really interesting in the graph is the implication for those who have no serious bequest plans, and would be happy (or even prefer) to "spend down".
That light blue is ending with less but still more than zero.

The actual "failure" - as in "running out entirely - seems to be that tiny sliver of red...

I hadn't see any graph like this before.
It suggests that there is likely to be a non-minimally higher withdrawal rate quite possible for those who "just" want to "not fail", and especially if one could make some adjustments if there were to be some downturn.

ETA: Would love to see other graphs like this that could vary the withdrawal rate and also the percent equities, and also for starting at a higher age.

RM
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Sat Sep 02, 2017 2:46 pm

raven15 wrote:
Sat Sep 02, 2017 12:13 pm
Image
Courtesy of maizeman on the Mr. Money Mustache forum. It combines historical stock data and social security actuarial data. It puts the odds of the 4% rule failing in the proper perspective. Blue is having an equal or greater amount of money than when you retired, light blue is having less than you started with but more than zero.

And the entire long thread:
https://forum.mrmoneymustache.com/inves ... he-4-rule/
On which page does this chart appear. I'd like to read the pursuing discussion....the whole thing is too tedious.

Mortality as represented here can indeed be misleading. The chart begins at age 40. So, this is the probabilistic mortality path for a 40 year old and only applies to those retiring at age 40.

Once you make it to say age 60, your chances of reaching higher age is much higher than how it's represented in the chart. This is my biggest problem with the mortality part of the graph.

I however like the fact that the portfolio information extends so far out into retirement and graphically represents failure rates. Adding mortality to the chart unfortunately muddles the issue for reasons given above.

I also wish he did it for AA consistent with other SWR studies and not 100% stocks.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Sat Sep 02, 2017 2:54 pm

gilgamesh wrote:
Sat Sep 02, 2017 2:46 pm
Once you make it to say age 60, your chances of reaching higher age is much higher than how it's represented in the chart. This is my biggest problem with the mortality part of the graph.
My biggest problem is outliers; or rather, outlivers.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Sat Sep 02, 2017 2:59 pm

VictoriaF wrote:
Sat Sep 02, 2017 2:54 pm
gilgamesh wrote:
Sat Sep 02, 2017 2:46 pm
Once you make it to say age 60, your chances of reaching higher age is much higher than how it's represented in the chart. This is my biggest problem with the mortality part of the graph.
My biggest problem is outliers; or rather, outlivers.

Victoria
For those with such concerns, per Kitces, the solution has been to simply use a 3.5% WR instead of 4%. Across time and geography, 3.5% seems to effectively represent the perpetual WR for a reasonably balanced portfolio.
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Sat Sep 02, 2017 3:06 pm

VictoriaF wrote:
Sat Sep 02, 2017 2:54 pm
gilgamesh wrote:
Sat Sep 02, 2017 2:46 pm
Once you make it to say age 60, your chances of reaching higher age is much higher than how it's represented in the chart. This is my biggest problem with the mortality part of the graph.
My biggest problem is outliers; or rather, outlivers.

Victoria
I was talking about the graph itself. However, even in general, outlivers are not a huge problem for me.

It's true, typically averages don't work well in retirement planning and outliers becomes an issue. For instance how to prepare for long term care?....statistics can say anything, but unless those that fall below statistical average pay for the outliers, averages means nothing. Those that either didn't need LTC or needed it for shorter times just don't pay for those that did. Unless you know ahead of time where you will fall, you've got to prepare for the worst.

When it comes to longevity however there's is such a product....SPIA's does exactly that...it takes the money from averages and below averages to pay for the outlivers. So, when it comes to mortality, the outlier problem is solvable to some degree.

Inflation is still a problem....but can be managed.

P.S: Longevity is related to TLC and it's cost is still a problem for outlivers....so outliving can indeed be an issue in that sense.
Last edited by gilgamesh on Sat Sep 02, 2017 3:27 pm, edited 2 times in total.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Sat Sep 02, 2017 3:15 pm

Simplegift wrote:
Sat Sep 02, 2017 2:03 pm
.... However, all this greater survival to older ages appears to be pushing up against the natural limits of human life (chart below)....
Whoah! The only easier bet to win than managed funds vs indexed funds is anyone betting against science and human advancement...it's failed every single time.

Yes! Life forms could certainly have a finite maximum life span, but there is no indication we've reached that for humans. The only thing the graph shows is, such an improvement is very slow (when it comes to peak life expectancy of humans).

However, this has absolutely no relevance to any of our planning. We can safely say, we are not going to leap forward in maximum human life expectancy in our life time.

Sorry! It's my pet peeve ... I hate putting handcuffs on science.

P.S: Just food for thought - hibernation...even a non-complete "hybernation" when you just sleep at night could extend human life - maybe ...there's so much more concepts than "hybernation" that we still just haven't discovered...science is still an infant - IMO always will be.
Last edited by gilgamesh on Sat Sep 02, 2017 3:28 pm, edited 1 time in total.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Sat Sep 02, 2017 3:25 pm

The mortality is a serious problem in the graph as you can read age 80 as having ~50% chance of dying. That's only true of you retired at age 40 and looking at mortality from that date. If you are retiring at age 60, it's completely messed up. Even those who retired at age 40, as they grow older needs to throw the chart away after a few years...each year they live they push the Grey graph lower and lower.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by ResearchMed » Sat Sep 02, 2017 3:34 pm

raven15 wrote:
Sat Sep 02, 2017 12:13 pm
Image
Courtesy of maizeman on the Mr. Money Mustache forum. It combines historical stock data and social security actuarial data. It puts the odds of the 4% rule failing in the proper perspective. Blue is having an equal or greater amount of money than when you retired, light blue is having less than you started with but more than zero.

And the entire long thread:
https://forum.mrmoneymustache.com/inves ... he-4-rule/
Leesbro63 wrote:
Sat Sep 02, 2017 12:31 pm
Great chart. It clearly shows something most of us don't look at...the chance of death. We worry about having enough money to age 95. And I get it the goal needs to be to have a sustainable lifestyle/withdrawal rate to last as long as we do. But this sort of makes you realize that the odds are that most will die before age 85 and certainly before 90. The odds of starting with a 4% SWR and becoming broke are tiny compared to the odds of living and becoming rich or dying and becoming..well...dead. This pretty much says "4% is certainly safe enough".
I mentioned this (er, failure to survive...) above in the next to last paragraph, about "grim":

viewtopic.php?f=10&t=226782&p=3516305#p3516305

And this also fits my comments about how "failure" in those simulations models means "running out entirely", and without any attempt to adjust spending in the least. I doubt many of us (or even non-BH'ers) would keep spending without any adjustment... right over the cliff.

I'd love to see some model that could incorporate some small adjustment if some threshold is breached.
[I had spoken with Kotlikoff (of ESPlanner) way back when his software was still new, and in early versions, about this, and he said there was no way to incorporate such "corrections", so we never purchased the full software.]

Being willing to make even a modest adjustment, especially early, and perhaps "less modest" later, if necessary, should allow someone to start out with a bit higher, and IF things go well, even go up a bit.
Those models show some fabulous assets at the end, but I'm not sure that is the goal of the exercise for most of us.
It absolutely isn't for us; no serious bequest desires/needs.
Even for those with serious bequest motives, it doesn't need to be a strategy of "leave $X and not one dollar less!" - with even the slightest smaller bequest counting as a "failure".

For those who start retirement "not on the edge", there should be quite a bit of flexibility.

(In our case, we'll have a rather short retirement length, due to DH's reluctance actually to quit work he enjoys. I'm not sure how a very short retirement - perhaps 20 or even just 15 years - changes things. We'd need that graph to start at a much later age, possibly 80 or 85; 75 is about to be left in the dust.)

There are a lot of moving parts to all of this, and each of us has quite different "inputs".

I found this chart remarkably encouraging, although we'd obviously much prefer to be in the upper right tail (not gray!), even if we needed to cut back a bit, which seems quite unlikely, given the sliver of red.
That "aqua"/light blue is NOT a "failure" for us, not at all!
Both blues are "the same" to us, and we'd much rather be somewhere in the aqua :wink:
I think that's the point of many (most?) *variable* withdrawal strategies.

RM
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by MIretired » Sat Sep 02, 2017 3:44 pm

gilgamesh wrote:
Sat Sep 02, 2017 3:25 pm
The mortality is a serious problem in the graph as you can read age 80 as having ~50% chance of dying. That's only true of you retired at age 40 and looking at mortality from that date. If you are retiring at age 60, it's completely messed up. Even those who retired at age 40, as they grow older needs to throw the chart away after a few years...each year they live they push the Grey graph lower and lower.
This is neat. You might as well just only look at that graph for a current 85 y.o. And then (along the lines of what we now call a 'safe floor + a RP'), you could setup a 'safe retirement goal + a risky retirement goal'. This is where the plan of buying SPIAs at age 80 shines.

Edit: Ahh! but then you still have the healthcare cost to include in the 'risky retirement goal' plan.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by raven15 » Sat Sep 02, 2017 4:27 pm

gilgamesh wrote:
Sat Sep 02, 2017 2:46 pm
On which page does this chart appear. I'd like to read the pursuing discussion....the whole thing is too tedious.

Mortality as represented here can indeed be misleading. The chart begins at age 40. So, this is the probabilistic mortality path for a 40 year old and only applies to those retiring at age 40.

Once you make it to say age 60, your chances of reaching higher age is much higher than how it's represented in the chart. This is my biggest problem with the mortality part of the graph.

I however like the fact that the portfolio information extends so far out into retirement and graphically represents failure rates. Adding mortality to the chart unfortunately muddles the issue for reasons given above.

I also wish he did it for AA consistent with other SWR studies and not 100% stocks.
Finding discussion was a harder task than you might have guessed! Pages 17 and 20 in that thread contain discussion. But it looks like the original graphs were here (plus others in that general area):
https://forum.mrmoneymustache.com/post- ... msg1438256
And some more info here:
https://forum.mrmoneymustache.com/post- ... msg1493727

Here is the comparison of 4% withdrawal at age 45 vs. age 50. Some other charts (ages 30-50 only, it is Mr. Money Mustache after all) and withdrawal rates (3-6%) are within a few posts of the above links.
Image
Image
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by emoore » Sat Sep 02, 2017 4:55 pm

gilgamesh wrote:
Sat Sep 02, 2017 3:15 pm
Simplegift wrote:
Sat Sep 02, 2017 2:03 pm
.... However, all this greater survival to older ages appears to be pushing up against the natural limits of human life (chart below)....
Whoah! The only easier bet to win than managed funds vs indexed funds is anyone betting against science and human advancement...it's failed every single time.

Yes! Life forms could certainly have a finite maximum life span, but there is no indication we've reached that for humans. The only thing the graph shows is, such an improvement is very slow (when it comes to peak life expectancy of humans).

However, this has absolutely no relevance to any of our planning. We can safely say, we are not going to leap forward in maximum human life expectancy in our life time.

Sorry! It's my pet peeve ... I hate putting handcuffs on science.

P.S: Just food for thought - hibernation...even a non-complete "hybernation" when you just sleep at night could extend human life - maybe ...there's so much more concepts than "hybernation" that we still just haven't discovered...science is still an infant - IMO always will be.
I am huge fan of science but we are nowhere near extending human lives significantly. Maybe in a few hundred or thousand years there will be a significant advancement in life spans but it doesn't seem to be a huge priority now. Clean energy, self driving cars, climate change, etc are the current major scientific focus. We still cannot get off this planet let alone make someone live 150 years.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by chinto » Sat Sep 02, 2017 6:16 pm

One thing I think would be useful is to understand the background of the people posting. I know of two general types of people who once lived in poverty. One group is very cautious and lives their life in acquirement mode against uncertainty. Another is the live for today type, they may save diligently but they have a perspective of I once was broke and they can take it all away from me so I am going to enjoy what I have now, while setting aside a little something to get me by. And then of course there are those who never knew want for basic comforts such as heat, running water, electricity, enough food and felt actual hunger. I am willing to bet people's attitude toward SWR are greatly colored by the simple test of, have they ever experienced real poverty, not the Government definition, but when they did not have enough food to stave off hunger pains, that they had to actually concern themselves with freezing to death did not have running water, electricity.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Sat Sep 02, 2017 6:25 pm

emoore wrote:
Sat Sep 02, 2017 4:55 pm
I am huge fan of science but we are nowhere near extending human lives significantly. Maybe in a few hundred or thousand years there will be a significant advancement in life spans but it doesn't seem to be a huge priority now. Clean energy, self driving cars, climate change, etc are the current major scientific focus. We still cannot get off this planet let alone make someone live 150 years.
Different types of endeavors have different requirements and constraints. Large-scale projects, such as space travel and climate management, require large numbers of participants and national and international funding and coordination. Medicine is different. A small group of medical researchers can design cells that would fix your DNA or micro-robots that would travel along your blood network and remove plaque off its walls.

Victoria
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Sat Sep 02, 2017 8:56 pm

raven15 wrote:
Sat Sep 02, 2017 4:27 pm
gilgamesh wrote:
Sat Sep 02, 2017 2:46 pm
On which page does this chart appear. I'd like to read the pursuing discussion....the whole thing is too tedious.

Mortality as represented here can indeed be misleading. The chart begins at age 40. So, this is the probabilistic mortality path for a 40 year old and only applies to those retiring at age 40.

Once you make it to say age 60, your chances of reaching higher age is much higher than how it's represented in the chart. This is my biggest problem with the mortality part of the graph.

I however like the fact that the portfolio information extends so far out into retirement and graphically represents failure rates. Adding mortality to the chart unfortunately muddles the issue for reasons given above.

I also wish he did it for AA consistent with other SWR studies and not 100% stocks.
Finding discussion was a harder task than you might have guessed! Pages 17 and 20 in that thread contain discussion. But it looks like the original graphs were here (plus others in that general area):
https://forum.mrmoneymustache.com/post- ... msg1438256
And some more info here:
https://forum.mrmoneymustache.com/post- ... msg1493727

Here is the comparison of 4% withdrawal at age 45 vs. age 50. Some other charts (ages 30-50 only, it is Mr. Money Mustache after all) and withdrawal rates (3-6%) are within a few posts of the above links.
Image
Image
Thank you! ...I think the link you gave earlier wasn't the same as above. These graphs in combination really do show the futility in working longer to achieve higher certainty...the higher certainty is mostly achieved by retiring closer and close to death, lol!

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by timmy » Sat Sep 02, 2017 9:05 pm

OP - Thanks for posting. I listened today. I hadn't heard from the MF since his MMM interview. I see that he interviewed Vicki R. Going to listen tomorrow.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Sat Sep 02, 2017 9:20 pm

This post is to just view 4% rule and spending adjustment in a different light...

IMO, willing, or rather the decision to adjust spending or not is the biggest problem with 4% SWR...not many have the steel of nerves to go through with it without unnecessary adjustments...let me explain.

The beauty of 4% SWR is that, it has worked through the toughest times. If you are willing to make spending adjustments, when will you do it? After a 50% stock crash? Why? The whole point of 4% SWR is that it has survived much worse? Again! What if inflation hits double digits...yup! You again will adjust spending unnecessarily.

4% SWR is for those who has the nerves of steels to go through difficult times and not having to adjust spending at all....can you do it? Can you go through the worst that has happened and not flinch? Of course not, you will adjust spending.

Just put yourself in some of the past 30 year periods of market crashes or high inflation and see whether you can muster through it without reducing spending. If you reduced spending (everyone will), you did it unnecessarily.

But, this is the problem...what if the same patterns of somber returns happen again, and you have the nerves of steel and stick to the 4% rule, but the recovery just didn't come as quickly as it did previously...it might be too late to make any spending adjustments then.

Those who say they can adjust spending, will by design, be very inefficient with it - will most likely reduce spending unnecessarily. Deciding when to optimally adjust spending is impossible.

Without a guaranteed future income, it is impossible to optimally utilize 4%...Anyone disagree?...like I said before, the beauty of flooring is in spending through market ups and downs and maximizing each of the golden years.

P.S: If you are willing to adjust spending for every market correction, it will be much better to start with something higher than 4%. Otherwise you are just fooling yourself in thinking you did not incur the cost of flooring....you did without the benefits of it, as your reduced spending was probably all it was needed or even more in expenses to setup a floor in the first place. Another way of saying the same is...when you reduce spending, it's the same as getting poorer returns to spend with TIPS ...you'll spend the same...with TIPS you'll have continued safety, with the other you will leave a larger legacy at the expense of your retirement as you reduced spending unnecessarily....spending adjustment with 4% rule IMO is not the solution, it is the problem.
Last edited by gilgamesh on Sat Sep 02, 2017 9:48 pm, edited 6 times in total.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Johnnie » Sat Sep 02, 2017 9:38 pm

stlutz wrote:
Fri Sep 01, 2017 9:59 pm
This is the main point in the Kitces work. That by merely taking 4%, you are insuring against exactly that...a big drop in the early years. So, yes, if the market crashes in half, you can continue taking your original 4%, plus inflation, even though it's not actually 6 of 7% of your original balance.
Let's consider two different people:

Person A retires at age 65 in the summer of 2007. He posts on Bogleheads and asks if he is in good shape with $1M portfolio and his plan to withdraw $40,000 per year. Everyone replies, "Of course--you're set."

Person B is laid off in the spring of 2009. He posts on Bogleheads asking if he is in good shape to retire by taking $40,000 per year from his $650,000 portfolio. Are you saying that wise response should have been, "Of course, you're set," based on using a 6% withdrawal rate?
My main takeaway from the podcast (and underlying Kitces research) is to add a CAPE 10 factor to the "What is MY SWR given a $X portfolio" when I stop working. At a CAPE 10 of 30, a conservative retiree with a $1m portfolio might dial back that 4%. At a CAPE 10 of 15, taking 6% from a $650k portfolio looks a lot less wild and crazy. PPINGOFR noted, "4% SWR incorporates bad SOR" noted. I also appear to be assuming mean reversion - noted.

Another way to say it is, determining whether you've "hit your number" should incorporate this factor. Your real "number" may be higher or lower depending on CAPE when you stop working.
willthrill81 wrote:
Sat Sep 02, 2017 10:08 am
Kitces did note in 2008 when he published his research that when CAPE was historically between 14.7 and 17.6 (the range reached at the lowest ebb of the market in the spring of 2009), the lowest WR that would have succeeded was 4.9%, and the average WR that would have succeeded was 6.3%.
Kitces mentioned that his research continues, and I think this is part of what he's investigating.

Great podcast, great thread. I don't often read every post in a 3-page thread, but did this one. :)
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