Year 2000 retirees using the '4% rule' - Where are they now?

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willthrill81
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Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 08, 2018 7:27 pm

There is always discussion regarding withdrawal rates and what is safe. Those who retired in the year 2000 have probably had the roughest road of any retirees in terms of market returns since the early 1970s. Let's take a look to see where they would be today, 18 years later, if they had used a 4% plus inflation withdrawal rate.

First, let's assume that they used a 60/40 portfolio, where half of their equities were in VTSMX (U.S. stocks) and half in VGTSX (international equities), and the bonds were in VBMFX (total U.S. bond market). Let's also assume that their starting portfolio was $1M. Their withdrawals occur at year end (first year withdrawal of $41,355 on 12/31/2000).

Image

As of 12/31/2017, the inflation-adjusted value of the portfolio would have been $670,363. Their last year's withdrawal would have been $58,626. This means that they have about 11.4 years of withdrawals left, assuming a 0% real return going forward. So as long as these retirees get a small real return on their remaining portfolio, they shouldn't have a problem making it to the 30 year milestone typically used in safe withdrawal rate research.

What if they had gone with a more conservative portfolio like 40/60? Their portfolio would now be worth an inflation-adjusted $748,413.

What if they had gone exclusively with U.S. equities and had no international exposure (60 U.S. equities/40 U.S. bonds)? Their portfolio would now be worth an inflation-adjusted $702,401.

Anything could happen going forward, but it looks as though retirees who rigidly followed the '4% rule' will make it to the 30 year milestone. That being said, their portfolio would have dropped to an inflation-adjusted $532,570 in Feb., 2009. The portfolio recovered to $684,815 by the end of 2009, but it still would have been difficult to withdraw that year's spending of $49,965, 7.3% of the remaining portfolio, only 10 years into their retirement.

NOTE: I mistakenly adjusted for inflation twice in the above numbers, which are overly pessimistic. The retirees would have had a nominal balance at the end of 2017 of $982,518, about 16.75 years of spending assuming 0% real growth going forward. So they could 'guarantee' success by buying enough TIPS to cover the next 12 years of spending, ensuring that they make it to the 30 year mark.
Last edited by willthrill81 on Tue Jan 09, 2018 5:46 pm, edited 2 times in total.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by TonyDAntonio » Mon Jan 08, 2018 7:40 pm

Very thought provoking. Just as the Y2Kers were starting to feel good about their retirement account they were clubbed in the head, again, in 2008-9. Couldn't have been very many restful nights.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by PhysicianOnFIRE » Mon Jan 08, 2018 7:48 pm

I find this at least mildly reassuring. Retiring at one of the worst possible times in recent history, and the money's expected to last about 30 years in any of the calculated asset allocations from moderately conservative to very aggressive.

The data also doesn't account for any modification in spending (one would presumably adjust and spend less after losing 30% to 50% of their portfolio), and doesn't account for any new income over that time frame, such as Social Security.

I still plan on being more conservative, because I wouldn't want to cut it close, expect to have a life span of > 30 years at retirement, and would rather watch my portfolio grow than shrink, at least in terms of nominal dollars, if not inflation-adjusted dollars.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Thesaints » Mon Jan 08, 2018 7:50 pm

Assuming a retirement age of 65, about 7% of retirees will survive longer than 30 years.
If the retirement age is 60 we are talking of survival in excess of 30 years for around 20%.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by cfs » Mon Jan 08, 2018 7:53 pm

Thank you Mister Will for the original post, this is good information for those sitting on the retirement fence. And all this happened during the infamous lost decade.Thanks for reading ~cfs~
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by livesoft » Mon Jan 08, 2018 8:04 pm

Any point in buying a SPIA with a fraction (50%?) of the remaining assets now or in the future?
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by snarlyjack » Mon Jan 08, 2018 8:20 pm

Willthrill,

In the calculations (assuming a person starts withdrawing at age 60 &
it's now 30 years later, age 90) is their any money left?

I would think this number would be important also?

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 08, 2018 8:25 pm

livesoft wrote:
Mon Jan 08, 2018 8:04 pm
Any point in buying a SPIA with a fraction (50%?) of the remaining assets now or in the future?
I thought about similar strategies myself. Assuming they were 65 when they retired, they would now be 83. SPIAs have an attractive payout ratio at that age. If they used half ($514,737) of their remaining portfolio ($1,029,475 in today's dollars), they would receive $50,328 annually (assumes an opposite sex couple of the same age) with no inflation adjustment. Given their portfolio size, I think this could be a very good strategy.

Alternatively, they could probably put the entire remaining balance in TIPS and get enough real return to make it to 12 years.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by grok87 » Mon Jan 08, 2018 8:27 pm

Thesaints wrote:
Mon Jan 08, 2018 7:50 pm
Assuming a retirement age of 65, about 7% of retirees will survive longer than 30 years.
If the retirement age is 60 we are talking of survival in excess of 30 years for around 20%.
the 7% is for male retirees
https://www.ssa.gov/oact/STATS/table4c6.html

for women retiring at age 65, 14% are expected to reach age 95 or greater

based on the 2014 life table
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 08, 2018 8:28 pm

snarlyjack wrote:
Mon Jan 08, 2018 8:20 pm
Willthrill,

In the calculations (assuming a person starts withdrawing at age 60 &
it's now 30 years later, age 90) is their any money left?

I would think this number would be important also?
I don't understand your question. The numbers in the OP do not assume that the retiree is of any age. They simply demonstrate their portfolio size in year 2000 dollars after 18 years of 4% plus inflation withdrawals. However, it seems very likely that they would at least make it to 30 years. However, whether they actually would and how much they would have left at that point is an unknown.
“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: Year 2000 retirees using the '4% rule' - Where are they now?

Post by 1210sda » Mon Jan 08, 2018 8:42 pm

Very interesting Will.

Where did you get your data? (Returns and Inflation).

Also, did you assume no cutting back on spending in the down years?

Thank you

1210

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by grok87 » Mon Jan 08, 2018 8:43 pm

willthrill81 wrote:
Mon Jan 08, 2018 7:27 pm
There is always discussion regarding withdrawal rates and what is safe. Those who retired in the year 2000 have probably had the roughest road of any retirees in terms of market returns since the early 1970s. Let's take a look to see where they would be today, 18 years later, if they had used a 4% plus inflation withdrawal rate.

First, let's assume that they used a 60/40 portfolio, where half of their equities were in VTSMX (U.S. stocks) and half in VGTSX (international equities), and the bonds were in VBMFX (total U.S. bond market). Let's also assume that their starting portfolio was $1M. Their withdrawals occur at year end (first year withdrawal of $41,355 on 12/31/2000).

Image

As of 12/31/2017, the inflation-adjusted value of the portfolio would have been $670,363. Their last year's withdrawal would have been $58,626. This means that they have about 11.4 years of withdrawals left, assuming a 0% real return going forward. So as long as these retirees get a small real return on their remaining portfolio, they shouldn't have a problem making it to the 30 year milestone typically used in safe withdrawal rate research.

What if they had gone with a more conservative portfolio like 40/60? Their portfolio would now be worth an inflation-adjusted $748,413.

What if they had gone exclusively with U.S. equities and had no international exposure (60 U.S. equities/40 U.S. bonds)? Their portfolio would now be worth an inflation-adjusted $702,401.

Anything could happen going forward, but it looks as though retirees who rigidly followed the '4% rule' will make it to the 30 year milestone. That being said, their portfolio would have dropped to an inflation-adjusted $532,570 in Feb., 2009. The portfolio recovered to $684,815 by the end of 2009, but it still would have been difficult to withdraw that year's spending of $49,965, 7.3% of the remaining portfolio, only 10 years into their retirement.
i actually think i would have panicking in 2003 with the inflation adjusted value of the portfolio down to about $635 k after only 3 years.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Dinosaur Dad » Mon Jan 08, 2018 8:52 pm

thanks for the post, certainly helps defend the 4% benchmark.

To me, the issue now, for those of us approaching retirement is the prospect of lower-than-historic returns...at least for the immediate horizon. I know that none of us can predict, but the fact that Jack Bogle has cited this possibility has me running all of my calculators on a much-lower expectation. Beyond that the issue of course is real return (excess over inflation) and other issues like healthcare inflation and future taxes.

Net net to me: you have to balance risk and return carefully, and address downside risk especially. Have a margin of error in your planning. I'm working on it, lots more to consider.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by fishandgolf » Mon Jan 08, 2018 8:58 pm

Excellent post willthrill81......one of the best threads I've read on this forum in weeks! :sharebeer

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by visualguy » Mon Jan 08, 2018 9:04 pm

Interesting. I wonder what it would look like with a 3% withdrawal instead of 4%.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by AlohaJoe » Mon Jan 08, 2018 9:06 pm

willthrill81 wrote:
Mon Jan 08, 2018 7:27 pm
Anything could happen going forward, but it looks as though retirees who rigidly followed the '4% rule' will make it to the 30 year milestone.
I wrote something similar a few months ago; I agree. To provide even more context & support

Image

This chart shows "how much money was left after 16 years" for every year of retirement. (i.e. for someone who retired in 1920, how much was left in 1936, and so on). The flat line shows the Year 2000 retiree. That gives a feel for how many other retirements had even lower portfolios value but also still survived with 4% withdrawals.

And here are the actual portfolio values at the 16 year mark for all the years that were doing even worse than the Year 2000 person -- but still worked out fine.

Image

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by protagonist » Mon Jan 08, 2018 9:17 pm

This is interesting in the abstract, but I am not sure what relevance it has for people retiring today. The past 18 years have been quite interesting, with one of the worst crashes in modern history followed by one of the most lucrative bull markets in modern history. Certainly neither 9/11 nor the 2008 crash nor a 16 year ongoing war in the Middle East could have been predicted on December 31, 1999 when the OP's hypothetical retiree decided to quit working....neither could the near-quadrupling of the Dow in the last 9 years or so. And, similarly, here we sit, in January 2018, with no clue as to what the world will deliver us between now and 2036. Whatever it is, it is bound to be very different than 2000-2018.
Last edited by protagonist on Mon Jan 08, 2018 11:09 pm, edited 2 times in total.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by protagonist » Mon Jan 08, 2018 9:24 pm

AlohaJoe wrote:
Mon Jan 08, 2018 9:06 pm


And here are the actual portfolio values at the 16 year mark for all the years that were doing even worse than the Year 2000 person -- but still worked out fine.

Image
I'm curious, Joe, where you got those numbers....are they available via an online reference? Because I would be curious to see what the numbers would look like for a retiree who retired when I did (March 2008), who adhered to the strict 4% rule. The first couple of years involved a fair amount of nail-biting as you might imagine- and that was before I discovered Bogleheads. Just for fun really....see how I am doing in comparison.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 08, 2018 9:28 pm

visualguy wrote:
Mon Jan 08, 2018 9:04 pm
Interesting. I wonder what it would look like with a 3% withdrawal instead of 4%.
Ask and you shall receive. :D

Image

Had a 3% withdrawal rate been used instead, as of 12/31/2017, the inflation-adjusted remaining portfolio would have been worth $948,819 ($1,390,637 nominal). At the lowest point, the portfolio would have been worth an inflation-adjusted $609,643. Considering that the year 2000 was a terrible year to retire and the portfolio is about back to where it started, it seems to me that 3% is about as conservative as anyone would really need to be unless they wanted to leave behind a large estate.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by AlohaJoe » Mon Jan 08, 2018 9:31 pm

protagonist wrote:
Mon Jan 08, 2018 9:24 pm
I'm curious, Joe, where you got those numbers....are they available via an online reference?
I made them myself; all I have is what I posted already, though.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Okievester » Mon Jan 08, 2018 10:20 pm

grok87 wrote:
Mon Jan 08, 2018 8:43 pm
i actually think i would have panicking in 2003 with the inflation adjusted value of the portfolio down to about $635 k after only 3 years.
Exactly. Thanks to this forum it's gotten easy to ignore the "this time it's different" hype on the upside. However, I vividly recall the drop in 2009 and it's very easy to believe the "world is ending" when the market drops to that degree.

Thanks to the OP. Great post.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Jags4186 » Mon Jan 08, 2018 10:30 pm

willthrill81 wrote:
Mon Jan 08, 2018 7:27 pm
There is always discussion regarding withdrawal rates and what is safe. Those who retired in the year 2000 have probably had the roughest road of any retirees in terms of market returns since the early 1970s. Let's take a look to see where they would be today, 18 years later, if they had used a 4% plus inflation withdrawal rate.

First, let's assume that they used a 60/40 portfolio, where half of their equities were in VTSMX (U.S. stocks) and half in VGTSX (international equities), and the bonds were in VBMFX (total U.S. bond market). Let's also assume that their starting portfolio was $1M. Their withdrawals occur at year end (first year withdrawal of $41,355 on 12/31/2000).

Image

As of 12/31/2017, the inflation-adjusted value of the portfolio would have been $670,363. Their last year's withdrawal would have been $58,626. This means that they have about 11.4 years of withdrawals left, assuming a 0% real return going forward. So as long as these retirees get a small real return on their remaining portfolio, they shouldn't have a problem making it to the 30 year milestone typically used in safe withdrawal rate research.

What if they had gone with a more conservative portfolio like 40/60? Their portfolio would now be worth an inflation-adjusted $748,413.

What if they had gone exclusively with U.S. equities and had no international exposure (60 U.S. equities/40 U.S. bonds)? Their portfolio would now be worth an inflation-adjusted $702,401.

Anything could happen going forward, but it looks as though retirees who rigidly followed the '4% rule' will make it to the 30 year milestone. That being said, their portfolio would have dropped to an inflation-adjusted $532,570 in Feb., 2009. The portfolio recovered to $684,815 by the end of 2009, but it still would have been difficult to withdraw that year's spending of $49,965, 7.3% of the remaining portfolio, only 10 years into their retirement.
Your numbers are pessimistic. You double count inflation. If you are inflation adjusting withdrawals there’s no need to inflation adjust the portfolio balance. At the end of 2017 using your 30/30/40 portfolio you would have $982,518 after withdrawing $58,626 on 12/31/17.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by rgs92 » Mon Jan 08, 2018 10:45 pm

The S&P went from 1500 to over 2700 in those 18 years. Along with dividends, isn't that a decent-enough return to support a retirement withdrawal program? And inflation has been very tame all this time.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 08, 2018 10:46 pm

Jags4186 wrote:
Mon Jan 08, 2018 10:30 pm
willthrill81 wrote:
Mon Jan 08, 2018 7:27 pm
There is always discussion regarding withdrawal rates and what is safe. Those who retired in the year 2000 have probably had the roughest road of any retirees in terms of market returns since the early 1970s. Let's take a look to see where they would be today, 18 years later, if they had used a 4% plus inflation withdrawal rate.

First, let's assume that they used a 60/40 portfolio, where half of their equities were in VTSMX (U.S. stocks) and half in VGTSX (international equities), and the bonds were in VBMFX (total U.S. bond market). Let's also assume that their starting portfolio was $1M. Their withdrawals occur at year end (first year withdrawal of $41,355 on 12/31/2000).

Image

As of 12/31/2017, the inflation-adjusted value of the portfolio would have been $670,363. Their last year's withdrawal would have been $58,626. This means that they have about 11.4 years of withdrawals left, assuming a 0% real return going forward. So as long as these retirees get a small real return on their remaining portfolio, they shouldn't have a problem making it to the 30 year milestone typically used in safe withdrawal rate research.

What if they had gone with a more conservative portfolio like 40/60? Their portfolio would now be worth an inflation-adjusted $748,413.

What if they had gone exclusively with U.S. equities and had no international exposure (60 U.S. equities/40 U.S. bonds)? Their portfolio would now be worth an inflation-adjusted $702,401.

Anything could happen going forward, but it looks as though retirees who rigidly followed the '4% rule' will make it to the 30 year milestone. That being said, their portfolio would have dropped to an inflation-adjusted $532,570 in Feb., 2009. The portfolio recovered to $684,815 by the end of 2009, but it still would have been difficult to withdraw that year's spending of $49,965, 7.3% of the remaining portfolio, only 10 years into their retirement.
Your numbers are pessimistic. You double count inflation. If you are inflation adjusting withdrawals there’s no need to inflation adjust the portfolio balance. At the end of 2017 using your 30/30/40 portfolio you would have $982,518 after withdrawing $58,626 on 12/31/17.
Thanks, I actually had just noticed that. So the retiree would have 16.7 years of spending left, assuming 0% real return, assuring them of making it beyond 30 years.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 08, 2018 10:47 pm

rgs92 wrote:
Mon Jan 08, 2018 10:45 pm
The S&P went from 1500 to over 2700 in those 18 years. Along with dividends, isn't that a decent-enough return to support a retirement withdrawal program? And inflation has been very tame all this time.
It's not that simple. The sequence of returns matters a lot when you're making consistent withdrawals from a portfolio.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by visualguy » Mon Jan 08, 2018 11:06 pm

willthrill81 wrote:
Mon Jan 08, 2018 9:28 pm
visualguy wrote:
Mon Jan 08, 2018 9:04 pm
Interesting. I wonder what it would look like with a 3% withdrawal instead of 4%.
Ask and you shall receive. :D
Excellent, thanks!

One thing to note is that bonds had mostly better returns during that period than expected going forward. I'm wondering how different the results would be if bonds were returning 2.5%/yr instead of whatever they were returning.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by rgs92 » Mon Jan 08, 2018 11:14 pm

But a quick experiment Firecalc does not show a failure scenario from this period. Remember that big chunk of bonds you start out with that did extremely well provided a nice cushion. Bonds were yielding about 6% back then.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 08, 2018 11:17 pm

rgs92 wrote:
Mon Jan 08, 2018 11:14 pm
But a quick experiment Firecalc does not show a failure scenario from this period.
FIRECalc cannot analyze this period for 30 years because the 30 years won't be finished until 2029. But failure seems extremely unlikely for these retirees now. They could convert their remaining portfolio to TIPS and be guaranteed nearly 17 more years of spending.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by aj76er » Mon Jan 08, 2018 11:20 pm

Just to make sure I understand the methodology...

3% of initial portfolio balance ($1m) is $30,000.

Based on this starting point, the withdrawal sequence looks like the following:

Year 0: $30,000
Year 1: $30,000 * (1 + CPI_1)
Year 2: ($30,000 * (1 + CPI_1)) * (1 + CPI_2)
...

Where CPI_1 is year 1 inflation; CPI_2 is year 2 inflation; and so on ...

Is this correct?
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by aj76er » Mon Jan 08, 2018 11:26 pm

visualguy wrote:
Mon Jan 08, 2018 11:06 pm
willthrill81 wrote:
Mon Jan 08, 2018 9:28 pm
visualguy wrote:
Mon Jan 08, 2018 9:04 pm
Interesting. I wonder what it would look like with a 3% withdrawal instead of 4%.
Ask and you shall receive. :D
Excellent, thanks!

One thing to note is that bonds had mostly better returns during that period than expected going forward. I'm wondering how different the results would be if bonds were returning 2.5%/yr instead of whatever they were returning.
Note that inflation was also a bit higher, so you need to look at real returns of bonds (which may not be as different?). Also, with a 60/40 AA, my guess is that portfolio performance is mainly driven by equities. Of course, would have to run the numbers to know for sure :happy
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by aj76er » Mon Jan 08, 2018 11:32 pm

willthrill81 wrote:
Mon Jan 08, 2018 9:28 pm
visualguy wrote:
Mon Jan 08, 2018 9:04 pm
Interesting. I wonder what it would look like with a 3% withdrawal instead of 4%.
Ask and you shall receive. :D

Image

Had a 3% withdrawal rate been used instead, as of 12/31/2017, the inflation-adjusted remaining portfolio would have been worth $948,819 ($1,390,637 nominal). At the lowest point, the portfolio would have been worth an inflation-adjusted $609,643. Considering that the year 2000 was a terrible year to retire and the portfolio is about back to where it started, it seems to me that 3% is about as conservative as anyone would really need to be unless they wanted to leave behind a large estate.
Another experiment to try:

Assume the retiree had 2X of living expenses stored in I-Bonds (outside of the portfolio) to guard against sequence of returns risk. What would skipping the 2001 withdrawal do to the portfolio current balance? What about skipping both 2001 and 2002 withdrawals? Basically, what is the "sensitivity" of portfolio balance to sequence of returns risk?

Great thread btw!
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 08, 2018 11:41 pm

aj76er wrote:
Mon Jan 08, 2018 11:20 pm
Just to make sure I understand the methodology...

3% of initial portfolio balance ($1m) is $30,000.

Based on this starting point, the withdrawal sequence looks like the following:

Year 0: $30,000
Year 1: $30,000 * (1 + CPI_1)
Year 2: ($30,000 * (1 + CPI_1)) * (1 + CPI_2)
...

Where CPI_1 is year 1 inflation; CPI_2 is year 2 inflation; and so on ...

Is this correct?
The tool I used to conduct the analysis, Portfolio Visualizer, assumes that the first withdrawal occurs at the end of year 1 rather than at the beginning (i.e. year 0). Logically, this makes sense since the starting portfolio would just be $30k less if you made a withdrawal at year 0.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by HomerJ » Mon Jan 08, 2018 11:42 pm

This is a great graph, but I'd like to see the nominal values instead of the inflation-adjusted ones.

I think anyone retiring with a million dollars would be happy if they still had a million dollars 18 years, even if inflation-adjusted it was only worth $650,000

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 08, 2018 11:46 pm

aj76er wrote:
Mon Jan 08, 2018 11:32 pm
willthrill81 wrote:
Mon Jan 08, 2018 9:28 pm
visualguy wrote:
Mon Jan 08, 2018 9:04 pm
Interesting. I wonder what it would look like with a 3% withdrawal instead of 4%.
Ask and you shall receive. :D

Image

Had a 3% withdrawal rate been used instead, as of 12/31/2017, the inflation-adjusted remaining portfolio would have been worth $948,819 ($1,390,637 nominal). At the lowest point, the portfolio would have been worth an inflation-adjusted $609,643. Considering that the year 2000 was a terrible year to retire and the portfolio is about back to where it started, it seems to me that 3% is about as conservative as anyone would really need to be unless they wanted to leave behind a large estate.
Another experiment to try:

Assume the retiree had 2X of living expenses stored in I-Bonds (outside of the portfolio) to guard against sequence of returns risk. What would skipping the 2001 withdrawal do to the portfolio current balance? What about skipping both 2001 and 2002 withdrawals? Basically, what is the "sensitivity" of portfolio balance to sequence of returns risk?

Great thread btw!
A big problem with that strategy is knowing, a priori, when to use the I-bonds instead of your normal portfolio withdrawals.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by flyingaway » Mon Jan 08, 2018 11:47 pm

Looks like a very good reassurance from the 4% rule.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 08, 2018 11:52 pm

Here's another interesting tidbit. Over this period, with the starting portfolio in the OP, whether the retiree rebalanced their portfolio or not made a sizable difference.

With annual rebalancing: $982,518 (nominal)
Without rebalancing: $831,923 (nominal)

Over the long-term, it doesn't seem that rebalancing affects returns much in the accumulation phase. But it seems that in the withdrawal phase, particularly in bear markets, rebalancing is critical. This may be the most difficult time to do so, however, because it requires the retiree to sell their 'safe' assets (i.e. bonds) to purchase the 'risky' assets that have been declining significantly.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomizer » Mon Jan 08, 2018 11:58 pm

Of course, I don't think I would have stuck with 4% during the dot-com crash or the global financial crisis, and I expect many adjusted their plans (but hopefully didn't panic). This 8 year bull market sure has helped though, hasn't it?
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by flyingaway » Mon Jan 08, 2018 11:59 pm

willthrill81 wrote:
Mon Jan 08, 2018 11:52 pm
Here's another interesting tidbit. Over this period, with the starting portfolio in the OP, whether the retiree rebalanced their portfolio or not made a sizable difference.

With annual rebalancing: $982,518 (nominal)
Without rebalancing: $831,923 (nominal)

Over the long-term, it doesn't seem that rebalancing affects returns much in the accumulation phase. But it seems that in the withdrawal phase, particularly in bear markets, rebalancing is critical. This may be the most difficult time to do so, however, because it requires the retiree to sell their 'safe' assets (i.e. bonds) to purchase the 'risky' assets that have been declining significantly.
If they don't rebalance, how could they maintain the 60/40 allocation? How did they withdraw (from bond or stocks or both) in your calculation?

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Tue Jan 09, 2018 12:02 am

flyingaway wrote:
Mon Jan 08, 2018 11:59 pm
willthrill81 wrote:
Mon Jan 08, 2018 11:52 pm
Here's another interesting tidbit. Over this period, with the starting portfolio in the OP, whether the retiree rebalanced their portfolio or not made a sizable difference.

With annual rebalancing: $982,518 (nominal)
Without rebalancing: $831,923 (nominal)

Over the long-term, it doesn't seem that rebalancing affects returns much in the accumulation phase. But it seems that in the withdrawal phase, particularly in bear markets, rebalancing is critical. This may be the most difficult time to do so, however, because it requires the retiree to sell their 'safe' assets (i.e. bonds) to purchase the 'risky' assets that have been declining significantly.
If they don't rebalance, how could they maintain the 60/40 allocation? How did they withdraw (from bond or stocks or both) in your calculation?
If they didn't rebalance, they would have began with a 60/40 allocation and then let the allocation drift from there. They would have sold both equities and bonds in their proportion to the overall portfolio at the end of the year for their annual withdrawals, just the same as with rebalancing.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Tue Jan 09, 2018 12:45 am

randomizer wrote:
Mon Jan 08, 2018 11:58 pm
Of course, I don't think I would have stuck with 4% during the dot-com crash or the global financial crisis, and I expect many adjusted their plans (but hopefully didn't panic). This 8 year bull market sure has helped though, hasn't it?
Of course the bull market helped. But that was pretty much the expected results. The bull market looks great and you go 15%/year is unmaintainable (and it is). But lets not forget that part of the reason we have had so high returns was because of 2008-2009. The reason the market only averages 10% is because those 15%/yr bull markets are followed by -30% bear markets(hopefully for less years). If you just drew a straight line from 1998-2017 you go that was pretty bad 20 year periods every for the stock market with a 7.42 CAGR. If we get less than 8% return for the next decade (i.e. what a lot of people are predicating), it will be the worse 30 year period (nominal terms) in stock market history post 1925.

Obviously non of this predicts the future.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Tue Jan 09, 2018 12:59 am

willthrill81 wrote:
Mon Jan 08, 2018 7:27 pm

As of 12/31/2017, the inflation-adjusted value of the portfolio would have been $670,363. Their last year's withdrawal would have been $58,626. This means that they have about 11.4 years of withdrawals left, assuming a 0% real return going forward. So as long as these retirees get a small real return on their remaining portfolio, they shouldn't have a problem making it to the 30 year milestone typically used in safe withdrawal rate research.

A minor quible but I think this math is wrong as you are mixing nominal dollars and inflation adjusted ones

670k(inflation adjusted dollars)/40k (inflation adjusted dollars)/year = 16.75 years
982 nominal dollars/58.626 (nominal withdrawal)/year = 16.75 years

If you mix nominal dollars and inflation adjusted dollars you get some really weird units:). You are basically double counting inflation by reducing the portfolio while increasing the expenditure.

So to make it 30 years, they can probably stick the money under the mattress:) Or more sanely buy TIPS.

That leads to the question, what do you do at this point of time? Do you stay the 60/40 course? Build a 11 year TIP ladder? Buy an inflation adjusted SPIA (no idea what the rates for a person in the 80ish range would be)?

And what are your longevity expectations? If you are hitting 83 and are still healthy (i.e. not obese, no cancer, diabetes, no cognitive decline, still mobile,no strokes,....) how much have your odds increased to living more than 12 years versus what they were 18 years ago?

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Sandtrap » Tue Jan 09, 2018 1:12 am

Great post.
This reinforces 4 things to me in my particular financial situation (others may be different), that I need to keep in mind going forward.
1. Keep SPIA's on the option table.
2. 25X is not enough, maybe not even close going forward (I don't have a pension or very many alternate income streams).
3. Ability to adjust withdrawals is vital.
4. Explore alternate income streams.

thanks again, great post.
j :D

** Edited for clarity as it applies to my own situation.
Last edited by Sandtrap on Tue Jan 09, 2018 10:55 am, edited 1 time in total.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by AlohaJoe » Tue Jan 09, 2018 1:26 am

randomguy wrote:
Tue Jan 09, 2018 12:59 am
And what are your longevity expectations? If you are hitting 83 and are still healthy (i.e. not obese, no cancer, diabetes, no cognitive decline, still mobile,no strokes,....) how much have your odds increased to living more than 12 years versus what they were 18 years ago?
At age 65, for a single healthy man, you have a life expectancy of 22 more years (to age 87). At age 83 you have a life expectancy of 9 more years (to 92). You're still within the 30-year planning window that is commonly used but the margin is definitely smaller than it was at age 65.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by flyingaway » Tue Jan 09, 2018 1:32 am

Sandtrap wrote:
Tue Jan 09, 2018 1:12 am
Great post.
This reinforces 4 things to me.
1. Keep SPIA's on the option table.
2. 25X is not enough, maybe not even close going forward.
3. Ability to adjust withdrawals is vital.
4. Explore alternate income streams.

j :D
Did OP actually imply that 25X is good?

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by letsgobobby » Tue Jan 09, 2018 1:40 am

PhysicianOnFIRE wrote:
Mon Jan 08, 2018 7:48 pm
I find this at least mildly reassuring. Retiring at one of the worst possible times in recent history, and the money's expected to last about 30 years in any of the calculated asset allocations from moderately conservative to very aggressive.

The data also doesn't account for any modification in spending (one would presumably adjust and spend less after losing 30% to 50% of their portfolio), and doesn't account for any new income over that time frame, such as Social Security.

I still plan on being more conservative, because I wouldn't want to cut it close, expect to have a life span of > 30 years at retirement, and would rather watch my portfolio grow than shrink, at least in terms of nominal dollars, if not inflation-adjusted dollars.

:beer
-PoF
yes, it's very much a glass half full vs glass half empty perspective.

half full: worst time in modern history to retire, and I'm probably going to make it to thirty years, as planned
half empty: with stock valuations still very high, it's entirely possible the next ten years will have a negative return. I'm taking out 9% of my portfolio this year; there is a real chance I don't make it to thirty years as planned.

I doubt I would have felt comfortable pulling out 4% if I had retired in 2000.

I also wouldn't feel comfortable pulling out 4% if I retired today.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Tue Jan 09, 2018 2:26 am

randomguy wrote:
Tue Jan 09, 2018 12:59 am
willthrill81 wrote:
Mon Jan 08, 2018 7:27 pm

As of 12/31/2017, the inflation-adjusted value of the portfolio would have been $670,363. Their last year's withdrawal would have been $58,626. This means that they have about 11.4 years of withdrawals left, assuming a 0% real return going forward. So as long as these retirees get a small real return on their remaining portfolio, they shouldn't have a problem making it to the 30 year milestone typically used in safe withdrawal rate research.

A minor quible but I think this math is wrong as you are mixing nominal dollars and inflation adjusted ones

670k(inflation adjusted dollars)/40k (inflation adjusted dollars)/year = 16.75 years
982 nominal dollars/58.626 (nominal withdrawal)/year = 16.75 years

If you mix nominal dollars and inflation adjusted dollars you get some really weird units:). You are basically double counting inflation by reducing the portfolio while increasing the expenditure.

So to make it 30 years, they can probably stick the money under the mattress:) Or more sanely buy TIPS.
Yes, I noticed that after the OP. At this point, they could be essentially guaranteed to make it to nearly 35 years by putting the entirety of their portfolio in TIPS. So they could ensure that they make the 30 year milestone at this point if they so desired.
randomguy wrote:
Tue Jan 09, 2018 12:59 am
That leads to the question, what do you do at this point of time? Do you stay the 60/40 course? Build a 11 year TIP ladder? Buy an inflation adjusted SPIA (no idea what the rates for a person in the 80ish range would be)?

And what are your longevity expectations? If you are hitting 83 and are still healthy (i.e. not obese, no cancer, diabetes, no cognitive decline, still mobile,no strokes,....) how much have your odds increased to living more than 12 years versus what they were 18 years ago?
If you're 83, do you really need an inflation-adjusted SPIA? Realistically, you probably don't have more than another 10-15 years left, and that inflation-adjustment comes with a steep price tag when you can even find it.

I think a regular SPIA might be worthwhile to consider, as well as a TIPS ladder. I never think that equities should be completely off the table either.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Tue Jan 09, 2018 2:30 am

Sandtrap wrote:
Tue Jan 09, 2018 1:12 am
Great post.
This reinforces 4 things to me.
1. Keep SPIA's on the option table.
2. 25X is not enough, maybe not even close going forward.
3. Ability to adjust withdrawals is vital.
4. Explore alternate income streams.

j :D
SPIAs can indeed be useful options.

Considering that this was the worst sequence of returns for retirees in a generation, I'm not sure why you conclude that 25x expenses is not enough. With the corrected numbers, year 2000 retirees could put their entire portfolio in TIPS and essentially guarantee that they could make it to 35 years. For a 65 year old, that's age 100. Now if you wanted to ensure that you left a large estate behind, then I can see wanting more than 25x expenses.

I agree that adjusting withdrawals should be a must for anyone with the option to do so. Seeing your portfolio drop so precipitously just a few years into retirement would probably scare just about any sane person into doing this though, I suspect.

What alternative income streams are you referring to?
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Tue Jan 09, 2018 2:37 am

HomerJ wrote:
Mon Jan 08, 2018 11:42 pm
This is a great graph, but I'd like to see the nominal values instead of the inflation-adjusted ones.

I think anyone retiring with a million dollars would be happy if they still had a million dollars 18 years, even if inflation-adjusted it was only worth $650,000
Here it is. The nominal value at the end of 2017 would be $982,518. This actually means that they could put their entire remaining portfolio in TIPS and have essentially guaranteed constant spending for almost another 17 years, well surpassing the 30 year mark. So it's a pretty safe bet to say that they 'succeeded', if success was the ability to withdraw 4% of their initial portfolio value, adjusted for inflation, for 30 years.

Image
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by WanderingDoc » Tue Jan 09, 2018 2:39 am

rgs92 wrote:
Mon Jan 08, 2018 11:14 pm
But a quick experiment Firecalc does not show a failure scenario from this period. Remember that big chunk of bonds you start out with that did extremely well provided a nice cushion. Bonds were yielding about 6% back then.
What I would really be interested in, is a hypothetical 75% crash 1 year after retirement, bear market for 5 years, then a status quo 6.5% annual return after that. How would a 4% withdrawal rate work out then? (I wanted to use a number between 90% which has happened and 50% which has been common and likely to happen in the near future)
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Tue Jan 09, 2018 2:43 am

letsgobobby wrote:
Tue Jan 09, 2018 1:40 am
PhysicianOnFIRE wrote:
Mon Jan 08, 2018 7:48 pm
I find this at least mildly reassuring. Retiring at one of the worst possible times in recent history, and the money's expected to last about 30 years in any of the calculated asset allocations from moderately conservative to very aggressive.

The data also doesn't account for any modification in spending (one would presumably adjust and spend less after losing 30% to 50% of their portfolio), and doesn't account for any new income over that time frame, such as Social Security.

I still plan on being more conservative, because I wouldn't want to cut it close, expect to have a life span of > 30 years at retirement, and would rather watch my portfolio grow than shrink, at least in terms of nominal dollars, if not inflation-adjusted dollars.

:beer
-PoF
yes, it's very much a glass half full vs glass half empty perspective.

half full: worst time in modern history to retire, and I'm probably going to make it to thirty years, as planned
Actually, I mixed up the inflation-adjusted and nominal dollars. The retirees could put their entire portfolio into TIPS now and have almost another 17 years of spending left with 0% real return.
letsgobobby wrote:
Tue Jan 09, 2018 1:40 am
half empty: with stock valuations still very high, it's entirely possible the next ten years will have a negative return. I'm taking out 9% of my portfolio this year; there is a real chance I don't make it to thirty years as planned.
The U.S. stocks in these retirees' portfolio returned essentially zero nominal for the first decade (loss in real dollars), and the international stocks only returned 2.29% (about zero real). And yet they made it. Nothing is guaranteed, but it looks like mean reversion worked yet again.
“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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