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

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Marseille07
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Marseille07 »

seajay wrote: Mon May 17, 2021 8:26 am
Marseille07 wrote: Sun May 16, 2021 10:34 pmA retiree would have to adjust withdrawals after a year like 2008 and percentage-based methods would let you do just that.
4% SWR, 4% of the initial portfolio value drawn at the start for the first year spending, 96% remainder invested, where that initial $$$ value is uplifted by inflation as the amount drawn at the start of subsequent years for spending ... is a reflection of the worst case historic situation, a peak to trough 30 year period for a 60/40 that drew down to zero. Being the worst other cases (start/end) dates were better.

Why revise that downward? If anything you might start with 4% of the current, or past inflation adjusted high, whichever is the greater, and provided the outcome is within the bounds of historic worst case outcomes that would be fine.

$1M into a 60/40 US Stock/Total Bond started January 2000 with a 4% SWR

at the end of 2009 had around $610,000 in inflation adjusted value remaining and drew near $52,100 at the start of 2010 for income.

Another investor who started in January 2010 with $610K and drew $52,100 for spending, a 8.5% SWR, would as of recent be doing fine. At the end of April 2021 have $580K of the inflation adjusted $610K start date amount still available.

That can be improved if you're starting with a lump sum and half-in at year start, half-in at year end ... as that average will tend to avoid having lumped all-in at the worst possible time. It may be more appropriate to also not bother with rebalancing, just take withdrawals from either stocks or bonds to steer weightings back towards target 60/40 weightings. In which case trade costs are just one sell trade per year to provide the cash. In my case the brokerage platform levies a monthly $15 type fee, but provides a free trade as part of that, so rather than yearly withdrawals I can draw a monthly 'wage' instead for no extra cost.
I think each retiree has to choose a method, the primary ones being SWR, constant-% and 1/n (like VPW). Each approach has pros and cons. I'm very much fixated on constant-% though.
Conceptually you could uplift the SW $$$ value by inflation or to 4% of the past historic inflation adjusted high, whichever were the greater. If you just stick with classic SWR and uplift by inflation then typically over time the SWR $$$ value tends to become a smaller percentage amount of the portfolio value, perhaps 2% for instance. As such it more often/broadly tends to become safer over time. But not always, in a bad case for instance, such as since 2000, that risk reduction over time has been absent.
This is actually true for constant-% method as well, practically speaking. The simulation I posted earlier showed a withdrawal of 71K for 2020. This means they *can* spend that much, but in practice they won't, which makes the effective WR lower than 4%.
dbr
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by dbr »

namajones wrote: Mon May 17, 2021 8:49 am
willthrill81 wrote: Sun May 02, 2021 9:39 am

But in truth, it shouldn't really matter if the historic odds were 95% or 100%. Nobody is going to determine on day 1 of retirement how much they will withdraw from their portfolio every year, in inflation-adjusted dollars, every year for the next three decades without any regard for the performance of their portfolio. That would be certifiably insane. The point of the '4% rule' is whether it's a good starting point for those planning for a 30 year retirement, and it still seems perfectly fine when used in that regard. This is even more the case if the retiree will have significant discretionary spending baked into their planned spending, which could be reduced if necessary. And as goblue100 pointed out, few 65 year olds will make it to 95. About 20% of American men aged 65 won't even survive to age 74.
This is what I always assumed. My own spreadsheet has my 401(k) lasting to infinity, or well beyond the years that I calculated it (or will be on this planet), so I'm always a bit puzzled when people talk about "how long" a portfolio will last.
Open up FireCalc and plug in some example. The output to observe is the chart of a hundred and more lines which are the portfolio values by year for retiring on the specified conditions in actual historical years using the actual returns and inflation from that year on. The point is to see the examples that have grown and are not going to exhausted and the examples where the portfolio declines to the zero line, meaning the portfolio is exhausted.

There are many starting conditions where there are not portfolios that are exhausted in a certain time, but you can get some by increasing the spending, lengthening the time, or by specifying a less than optimum asset allocation, usually too little in stocks.

Since these are examples drawn from actual historic data they are real in every sense.

An example would be to put in $1M portfolio, $50k spending, 30 years, and the default portfolio. You would find failed portfolios from the following starting years: 1969 1968 1966 1967 1970 1965 1973 1972 1971 1964 1962 1963 1937 1906 1907 1929 1899 1909 1961 1960 1912 1911 1916 1910 1902 1913 1905 1959 1901 1930 1903 1914 with the earliest transition to zero portfolio 18 years out in both 1969 and 1973 starting years.

If you put in spending of $35k there are no failures, but if you extend the duration to 40 years you get three failures, for the investor who started in 1965, 1966, or 1969. The worst case is 1966 which fails 33 years in.

Again these runs use actual data and not hypothesized returns.
seajay
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by seajay »

Marseille07 wrote: Mon May 17, 2021 9:00 amI think each retiree has to choose a method, the primary ones being SWR, constant-% and 1/n (like VPW). Each approach has pros and cons. I'm very much fixated on constant-% though.
I early retired back in 2005 in my mid 40's. Back then 4% SWR was a useful guide as to 'did I have enough'. Nowadays I have no particular withdrawal strategy, just draw what/when I need from a considerably higher inflation adjusted portfolio value than when I retired. Down at 2% type withdrawal levels I guess, but not something that I particular track anymore. I top up my current/spending account periodically, when that's running low I access my brokerage account and sell holdings and transfer the proceeds to my current/spending account. Having recently turned 60 I now get a occupational pension on top, and in another 6.5 years will also have the state pension as well on top of that, both inflation linked and combined those two would be enough, at least for basic living expenses.

With Covid having induced a bank-of-dad for two mid 20's situation and now a pension having kicked in I presently view the portfolio being more for heirs and personal 'fun' money. Mentally putting home value aside as potential late life care costs cover.
Marseille07
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Marseille07 »

seajay wrote: Mon May 17, 2021 9:22 am
Marseille07 wrote: Mon May 17, 2021 9:00 amI think each retiree has to choose a method, the primary ones being SWR, constant-% and 1/n (like VPW). Each approach has pros and cons. I'm very much fixated on constant-% though.
I early retired back in 2005 in my mid 40's. Back then 4% SWR was a useful guide as to 'did I have enough'. Nowadays I have no particular withdrawal strategy, just draw what/when I need from a considerably higher inflation adjusted portfolio value than when I retired. Down at 2% type withdrawal levels I guess, but not something that I particular track anymore. I top up my current/spending account periodically, when that's running low I access my brokerage account and sell holdings and transfer the proceeds to my current/spending account. Having recently turned 60 I now get a occupational pension on top, and in another 6.5 years will also have the state pension as well on top of that, both inflation linked and combined those two would be enough, at least for basic living expenses.

With Covid having induced a bank-of-dad for two mid 20's situation and now a pension having kicked in I presently view the portfolio being more for heirs and personal 'fun' money. Mentally putting home value aside as potential late life care costs cover.
I'm still accumulating but my approach would be similar to yours. I'd have some EF, and when EF runs low I'll just replenish from AA. If EF has enough in it then I'd skip the month, which lowers my effective WR.
59Gibson
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by 59Gibson »

ryman554 wrote: Mon May 17, 2021 8:34 am
TN_Boy wrote: Mon May 17, 2021 8:21 am
59Gibson wrote: Mon May 17, 2021 7:22 am
Derpalator wrote: Mon May 17, 2021 5:34 am
goblue100 wrote: Sat May 01, 2021 8:11 pm

The quote in my tag line speaks to this issue.
Agreed that this point is mostly overlooked on this forum. Actuaries do incorporate this. We bogleheads don't, but should.
+1 It certainly does seem to be brushed aside here, many believe they'll be living well into their 90s. Some will, most won't.
I completely agree that as medical science stands now, a good BHer at age 65 is pretty unlikely to have a 30 year retirement. That said, if one is married, the odds are higher that one of the couple will make it that long. So people worry about their spouse.

However, I believe the main reason it gets brushed aside is

1) population statistics are not that useful when dealing with a single person (or couple) and most importantly,
2) if you start running out of money at age 90+, it's not like you are going to have a lot of income producing options.
Exactly. Insurance companies rely on statistics and the central limit theorem... They care not that some folks live forever, it's already baked into their model. Now if a whole cohort manage to live longer, say because of a new miracle drug which doubled life expectancy, then they would have a big problem.

For you, a retiree, you have a sample of 1, and have not much information to determine where on the death bell curve you're gonna land on. So you've got two options: prepare for a long retirement and save a lot of money, or don't. There are legitimate tradeoffs either way and have been discussed to death (pardon the pun), but as folks here tend conservative, most end up accumulating more than they will need on the (slight/slim/even) chance of living long.
As willthrill81 mentioned above, hitting 85 and healthy(especially if 2) one really needs to consider annuitizing a sizeable portion of what's left, assuming the portfolio run off is happening faster than planned
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Independent George »

I'd add that not only is it completely unrealistic for people to keep withdrawing 4% during a crash, it's also pretty unrealistic for withdrawals to keep matching CPI over 30 years. In actual practice*, people typically just kept withdrawing the original 4% for years without inflation adjustments until they can't - and then they increase it by less than CPI. Then, as they get older, CPI adjustments matter less because consumption drops like a rock.

My Mom retired in 2005 - she has a nurse's pension, so while withdrawal rate really isn't really relevant, CPI very much is. In practice, her pension/SocSec income has outpaced her spending dramatically. Even before they stopped traveling due to my Dad's health (roughly 2016-ish), they were were gradually netting more and more money every year. Today, they net a surplus of around $3k per month.

*There was a Michael Kitces(?) article on this with far more detail, but it evades my Googling skills.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by HomerJ »

Independent George wrote: Mon May 17, 2021 10:12 am I'd add that not only is it completely unrealistic for people to keep withdrawing 4% during a crash, it's also pretty unrealistic for withdrawals to keep matching CPI over 30 years. In actual practice*, people typically just kept withdrawing the original 4% for years without inflation adjustments until they can't - and then they increase it by less than CPI.
This is almost certainly true.

If I'm pulling $80,000 a year from $2 million... I'm not going to look up CPI numbers each year, and pull $81,600 the next year, and $83,232 the next year...

I'll probably just keep pulling $80,000 a year for the first 3-5 years, and then really, probably, look at my remaining balance and decide what to do from there...

If I'm up to $2.3 million, I'll probably bump my withdrawals to $90,000 (basically restarting the whole 4% sequence again).

If I'm down to $1.8 million, I'll stick with the $80,000 for a few years longer, and just get less for my money because of inflation (so one less trip a year, or replace an expensive trip with a cheaper trip)
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by EnjoyIt »

HomerJ wrote: Mon May 17, 2021 10:40 am
Independent George wrote: Mon May 17, 2021 10:12 am I'd add that not only is it completely unrealistic for people to keep withdrawing 4% during a crash, it's also pretty unrealistic for withdrawals to keep matching CPI over 30 years. In actual practice*, people typically just kept withdrawing the original 4% for years without inflation adjustments until they can't - and then they increase it by less than CPI.
This is almost certainly true.

If I'm pulling $80,000 a year from $2 million... I'm not going to look up CPI numbers each year, and pull $81,600 the next year, and $83,232 the next year...

I'll probably just keep pulling $80,000 a year for the first 3-5 years, and then really, probably, look at my remaining balance and decide what to do from there...

If I'm up to $2.3 million, I'll probably bump my withdrawals to $90,000 (basically restarting the whole 4% sequence again).

If I'm down to $1.8 million, I'll stick with the $80,000 for a few years longer, and just get less for my money because of inflation (so one less trip a year, or replace an expensive trip with a cheaper trip)
We have tracked our spending for almost 10 years now and I agree, CPI has not influenced our spending exactly. Some years we spent less than projected, other years we spent close to it. When our wealth has increased, we were more comfortable spending more and have done so. In 2017 when we had a correction, we happened to have spent a bit less. In 2020 when we had a recession, we happened to spend a bit less.

That is human nature and what most rational people will do. I am 100% confident that if we hit another recession, our discretionary expenses will drop once again. Hopefully that won’t be permanent. If it is, we will be just fine. What’s interesting is that if we cut our expenses low enough, we would also qualify for subsidized healthcare cutting our expenses even lower.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Independent George »

HomerJ wrote: Mon May 17, 2021 10:40 am This is almost certainly true.

If I'm pulling $80,000 a year from $2 million... I'm not going to look up CPI numbers each year, and pull $81,600 the next year, and $83,232 the next year...

I'll probably just keep pulling $80,000 a year for the first 3-5 years, and then really, probably, look at my remaining balance and decide what to do from there...

If I'm up to $2.3 million, I'll probably bump my withdrawals to $90,000 (basically restarting the whole 4% sequence again).

If I'm down to $1.8 million, I'll stick with the $80,000 for a few years longer, and just get less for my money because of inflation (so one less trip a year, or replace an expensive trip with a cheaper trip)
BHs might be nerdy enough to look up CPI numbers, but then ignore it and keep drawing the same dollar amount. Or reduce it even more because, well... Bogleheads.

Looking back at my own history, the GPI (George Price Index) showed a noticeable uptick in grocery expenses in 2020-2021... so I reduced my discretionary spending to keep the same $3,600 monthly budget. I estimate my monthly budget in 2007 (just before I bought my condo) was $3,000/month. I earn roughly 50% more today (nominal dollars) than I did back then.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by HUEY316 »

How would this scenario play out with 10 years of withdrawals secured in ultra low risk/reward options within the bond allocation? Only withdrawing from the equities side at the end of a green year and pulling from the cash/bond side at the end of red years. Replenishing the 10 year allocation during strong market performance.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Leesbro63 »

Independent George wrote: Mon May 17, 2021 10:55 am
HomerJ wrote: Mon May 17, 2021 10:40 am This is almost certainly true.

If I'm pulling $80,000 a year from $2 million... I'm not going to look up CPI numbers each year, and pull $81,600 the next year, and $83,232 the next year...

I'll probably just keep pulling $80,000 a year for the first 3-5 years, and then really, probably, look at my remaining balance and decide what to do from there...

If I'm up to $2.3 million, I'll probably bump my withdrawals to $90,000 (basically restarting the whole 4% sequence again).

If I'm down to $1.8 million, I'll stick with the $80,000 for a few years longer, and just get less for my money because of inflation (so one less trip a year, or replace an expensive trip with a cheaper trip)
BHs might be nerdy enough to look up CPI numbers, but then ignore it and keep drawing the same dollar amount. Or reduce it even more because, well... Bogleheads.

Looking back at my own history, the GPI (George Price Index) showed a noticeable uptick in grocery expenses in 2020-2021... so I reduced my discretionary spending to keep the same $3,600 monthly budget. I estimate my monthly budget in 2007 (just before I bought my condo) was $3,000/month. I earn roughly 50% more today (nominal dollars) than I did back then.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 »

HUEY316 wrote: Mon May 17, 2021 10:56 am How would this scenario play out with 10 years of withdrawals secured in ultra low risk/reward options within the bond allocation? Only withdrawing from the equities side at the end of a green year and pulling from the cash/bond side at the end of red years. Replenishing the 10 year allocation during strong market performance.
Welcome to the forum!

What you're describing sounds a lot like McClung's Prime Harvesting strategy. Karsten from Early Retirement Now did an analysis of it here, including some improvements.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by NearlyRetired »

HomerJ wrote: Mon May 17, 2021 10:40 am
Independent George wrote: Mon May 17, 2021 10:12 am I'd add that not only is it completely unrealistic for people to keep withdrawing 4% during a crash, it's also pretty unrealistic for withdrawals to keep matching CPI over 30 years. In actual practice*, people typically just kept withdrawing the original 4% for years without inflation adjustments until they can't - and then they increase it by less than CPI.
This is almost certainly true.

If I'm pulling $80,000 a year from $2 million... I'm not going to look up CPI numbers each year, and pull $81,600 the next year, and $83,232 the next year...

I'll probably just keep pulling $80,000 a year for the first 3-5 years, and then really, probably, look at my remaining balance and decide what to do from there...

If I'm up to $2.3 million, I'll probably bump my withdrawals to $90,000 (basically restarting the whole 4% sequence again).

If I'm down to $1.8 million, I'll stick with the $80,000 for a few years longer, and just get less for my money because of inflation (so one less trip a year, or replace an expensive trip with a cheaper trip)
I think you are right - for myself I have an amount that I take every month for essential expenses. If is more than I need (not by much) but enough that I am able to absorb annual changes in utility bills, rates etc without having to increase my withdrawal. At some point when the increases across all the items get to the point that there is little left on a monthly basis, I do a thorough go through looking for new providers in order to reduce costs (which I have been able to do for the last decade or so) and this usually balances out so that the monthly withdrawal still does what is needed with some flex in there. Very occasionally I have had to change/increase the withdrawal amount as I can't make enough savings, but I have probably only done this once or twice in the past 15 years or so.

I would not be surprised if the majority of BH's do something similar.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by TN_Boy »

Marseille07 wrote: Mon May 17, 2021 9:30 am
seajay wrote: Mon May 17, 2021 9:22 am
Marseille07 wrote: Mon May 17, 2021 9:00 amI think each retiree has to choose a method, the primary ones being SWR, constant-% and 1/n (like VPW). Each approach has pros and cons. I'm very much fixated on constant-% though.
I early retired back in 2005 in my mid 40's. Back then 4% SWR was a useful guide as to 'did I have enough'. Nowadays I have no particular withdrawal strategy, just draw what/when I need from a considerably higher inflation adjusted portfolio value than when I retired. Down at 2% type withdrawal levels I guess, but not something that I particular track anymore. I top up my current/spending account periodically, when that's running low I access my brokerage account and sell holdings and transfer the proceeds to my current/spending account. Having recently turned 60 I now get a occupational pension on top, and in another 6.5 years will also have the state pension as well on top of that, both inflation linked and combined those two would be enough, at least for basic living expenses.

With Covid having induced a bank-of-dad for two mid 20's situation and now a pension having kicked in I presently view the portfolio being more for heirs and personal 'fun' money. Mentally putting home value aside as potential late life care costs cover.
I'm still accumulating but my approach would be similar to yours. I'd have some EF, and when EF runs low I'll just replenish from AA. If EF has enough in it then I'd skip the month, which lowers my effective WR.
I confess to not understanding the point of an EF during retirement. I consider the whole portfolio a big EF.

Or put another way, if my asset allocation is 60% stocks, 40% bonds, (or 70/30 or 80/20 etc) the bonds are what I'd be pulling from during a downturn. A separate cash bucket/allocation doesn't seem to add much beyond a bit of complexity.

If you have a really really high stock allocation you could put some money into a cash bucket (say 5% of your total assets) for an "EF," but that just means your true asset allocation is 95% stocks, 5% cash.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Marseille07 »

TN_Boy wrote: Mon May 17, 2021 12:10 pm If you have a really really high stock allocation you could put some money into a cash bucket (say 5% of your total assets) for an "EF," but that just means your true asset allocation is 95% stocks, 5% cash.
This is my situation. It's actually 100/0 + 3% EF because that's how I calculate it; if my AA is 2M, my EF is 60K. This is slightly different than 1.94M of equities and 60K of cash totaling 2M, though I agree it's very close to 97/3.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by TN_Boy »

Marseille07 wrote: Mon May 17, 2021 12:16 pm
TN_Boy wrote: Mon May 17, 2021 12:10 pm If you have a really really high stock allocation you could put some money into a cash bucket (say 5% of your total assets) for an "EF," but that just means your true asset allocation is 95% stocks, 5% cash.
This is my situation. It's actually 100/0 + 3% EF because that's how I calculate it; if my AA is 2M, my EF is 60K. This is slightly different than 1.94M of equities and 60K of cash totaling 2M, though I agree it's very close to 97/3.
Okay. So a longer bear market (like 2000 - 2003) will leave you pulling from the stocks, but you are okay with that.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Marseille07 »

TN_Boy wrote: Mon May 17, 2021 12:32 pm
Marseille07 wrote: Mon May 17, 2021 12:16 pm
TN_Boy wrote: Mon May 17, 2021 12:10 pm If you have a really really high stock allocation you could put some money into a cash bucket (say 5% of your total assets) for an "EF," but that just means your true asset allocation is 95% stocks, 5% cash.
This is my situation. It's actually 100/0 + 3% EF because that's how I calculate it; if my AA is 2M, my EF is 60K. This is slightly different than 1.94M of equities and 60K of cash totaling 2M, though I agree it's very close to 97/3.
Okay. So a longer bear market (like 2000 - 2003) will leave you pulling from the stocks, but you are okay with that.
Actually I'd be pulling from the stocks at all times, just by a fixed percentage point. The amount varies and I'm ok with that. People should include plenty of discretionary spending, anyway.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by TN_Boy »

Marseille07 wrote: Mon May 17, 2021 12:39 pm
TN_Boy wrote: Mon May 17, 2021 12:32 pm
Marseille07 wrote: Mon May 17, 2021 12:16 pm
TN_Boy wrote: Mon May 17, 2021 12:10 pm If you have a really really high stock allocation you could put some money into a cash bucket (say 5% of your total assets) for an "EF," but that just means your true asset allocation is 95% stocks, 5% cash.
This is my situation. It's actually 100/0 + 3% EF because that's how I calculate it; if my AA is 2M, my EF is 60K. This is slightly different than 1.94M of equities and 60K of cash totaling 2M, though I agree it's very close to 97/3.
Okay. So a longer bear market (like 2000 - 2003) will leave you pulling from the stocks, but you are okay with that.
Actually I'd be pulling from the stocks at all times, just by a fixed percentage point. The amount varies and I'm ok with that. People should include plenty of discretionary spending, anyway.
Yeah, fixed percentage of portfolio is too variable for my taste (as per the various comments in this thread). If the portfolio is very large in comparison to your spending needs that can work.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Marseille07 »

TN_Boy wrote: Mon May 17, 2021 12:45 pm
Marseille07 wrote: Mon May 17, 2021 12:39 pm
TN_Boy wrote: Mon May 17, 2021 12:32 pm
Marseille07 wrote: Mon May 17, 2021 12:16 pm
TN_Boy wrote: Mon May 17, 2021 12:10 pm If you have a really really high stock allocation you could put some money into a cash bucket (say 5% of your total assets) for an "EF," but that just means your true asset allocation is 95% stocks, 5% cash.
This is my situation. It's actually 100/0 + 3% EF because that's how I calculate it; if my AA is 2M, my EF is 60K. This is slightly different than 1.94M of equities and 60K of cash totaling 2M, though I agree it's very close to 97/3.
Okay. So a longer bear market (like 2000 - 2003) will leave you pulling from the stocks, but you are okay with that.
Actually I'd be pulling from the stocks at all times, just by a fixed percentage point. The amount varies and I'm ok with that. People should include plenty of discretionary spending, anyway.
Yeah, fixed percentage of portfolio is too variable for my taste (as per the various comments in this thread). If the portfolio is very large in comparison to your spending needs that can work.
Well, that's why I flip it around and make it EF-driven. I would have 100K of cash out and replenish with 3% withdrawals. This way, my cash access isn't too variable - I always have 100K out for all kinds of spending needs, emergency or otherwise.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by TN_Boy »

Marseille07 wrote: Mon May 17, 2021 12:51 pm
TN_Boy wrote: Mon May 17, 2021 12:45 pm
Marseille07 wrote: Mon May 17, 2021 12:39 pm
TN_Boy wrote: Mon May 17, 2021 12:32 pm
Marseille07 wrote: Mon May 17, 2021 12:16 pm

This is my situation. It's actually 100/0 + 3% EF because that's how I calculate it; if my AA is 2M, my EF is 60K. This is slightly different than 1.94M of equities and 60K of cash totaling 2M, though I agree it's very close to 97/3.
Okay. So a longer bear market (like 2000 - 2003) will leave you pulling from the stocks, but you are okay with that.
Actually I'd be pulling from the stocks at all times, just by a fixed percentage point. The amount varies and I'm ok with that. People should include plenty of discretionary spending, anyway.
Yeah, fixed percentage of portfolio is too variable for my taste (as per the various comments in this thread). If the portfolio is very large in comparison to your spending needs that can work.
Well, that's why I flip it around and make it EF-driven. I would have 100K of cash out and replenish with 3% withdrawals. This way, my cash access isn't too variable - I always have 100K out for all kinds of spending needs, emergency or otherwise.
In the "need to take risk" spectrum, we don't need to take a whole lot of risk, so I prefer a much less aggressive portfolio, whereupon the fixed income can handle "emergency" needs. And be used to re-balance equity if desired. During down years all the money will come from the bonds.

Historically the high equity percentages have done well .. though a massive bear market early in retirement puts that approach at risk a bit.

... your approach as described in the last paragraph is basically having a fixed income bucket (here cash) to cover anything that might not be covered by a constant percent draw from the volatile equities ..... but it still implies that you are going to take the amount you *really* want from the overall cash + stock portfolio so I'm not certain your mental model is doing anything different than just having a high stock percent with cash instead of bonds for fixed income. No matter how you think about it, you have X dollars and you are pulling a certain amount out yearly from your total assets. As I read your comment.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 »

TN_Boy wrote: Mon May 17, 2021 1:41 pm
Marseille07 wrote: Mon May 17, 2021 12:51 pm
TN_Boy wrote: Mon May 17, 2021 12:45 pm
Marseille07 wrote: Mon May 17, 2021 12:39 pm
TN_Boy wrote: Mon May 17, 2021 12:32 pm

Okay. So a longer bear market (like 2000 - 2003) will leave you pulling from the stocks, but you are okay with that.
Actually I'd be pulling from the stocks at all times, just by a fixed percentage point. The amount varies and I'm ok with that. People should include plenty of discretionary spending, anyway.
Yeah, fixed percentage of portfolio is too variable for my taste (as per the various comments in this thread). If the portfolio is very large in comparison to your spending needs that can work.
Well, that's why I flip it around and make it EF-driven. I would have 100K of cash out and replenish with 3% withdrawals. This way, my cash access isn't too variable - I always have 100K out for all kinds of spending needs, emergency or otherwise.
In the "need to take risk" spectrum, we don't need to take a whole lot of risk, so I prefer a much less aggressive portfolio, whereupon the fixed income can handle "emergency" needs. And be used to re-balance equity if desired. During down years all the money will come from the bonds.

Historically the high equity percentages have done well .. though a massive bear market early in retirement puts that approach at risk a bit.

... your approach as described in the last paragraph is basically having a fixed income bucket (here cash) to cover anything that might not be covered by a constant percent draw from the volatile equities ..... but it still implies that you are going to take the amount you *really* want from the overall cash + stock portfolio so I'm not certain your mental model is doing anything different than just having a high stock percent with cash instead of bonds for fixed income. No matter how you think about it, you have X dollars and you are pulling a certain amount out yearly from your total assets. As I read your comment.
That's been my take from previous discussions with Marseille07 about this. No matter how you do it, if you're withdrawing X from a portfolio with a value of Y, your withdrawal rate is X/Y, and the asset class that you pull it from doesn't really matter when the portfolio is nearly all stocks. And if you have a portfolio of Y, that includes your EF. Bucket approaches don't materially improve retirees' ability to smooth withdrawals.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by HUEY316 »

willthrill81 wrote: Mon May 17, 2021 11:37 am
HUEY316 wrote: Mon May 17, 2021 10:56 am How would this scenario play out with 10 years of withdrawals secured in ultra low risk/reward options within the bond allocation? Only withdrawing from the equities side at the end of a green year and pulling from the cash/bond side at the end of red years. Replenishing the 10 year allocation during strong market performance.
Welcome to the forum!

What you're describing sounds a lot like McClung's Prime Harvesting strategy. Karsten from Early Retirement Now did an analysis of it here, including some improvements.
Thanks Will, I'm here to learn and have alot of work ahead of me.

I have read some 2 Bucket/Barbell strategies that made it sound simple, after reading Karsten's article it clearly it's a little more complicated. But it seems to me if you have an ample amount of cash to cover withdrawals for even the worst bear market periods (like a decade) and still have 60-70% in equities then sequence risk should be marginal. Especially if the withdrawal percentage is only based on amount invested in equities. Hopefully one day bonds will come back online and add more potential for income on the safe side. But today cash is king.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 »

HUEY316 wrote: Mon May 17, 2021 1:48 pm
willthrill81 wrote: Mon May 17, 2021 11:37 am
HUEY316 wrote: Mon May 17, 2021 10:56 am How would this scenario play out with 10 years of withdrawals secured in ultra low risk/reward options within the bond allocation? Only withdrawing from the equities side at the end of a green year and pulling from the cash/bond side at the end of red years. Replenishing the 10 year allocation during strong market performance.
Welcome to the forum!

What you're describing sounds a lot like McClung's Prime Harvesting strategy. Karsten from Early Retirement Now did an analysis of it here, including some improvements.
Thanks Will, I'm here to learn and have alot of work ahead of me.

I have read some 2 Bucket/Barbell strategies that made it sound simple, after reading Karsten's article it clearly it's a little more complicated. But it seems to me if you have an ample amount of cash to cover withdrawals for even the worst bear market periods (like a decade) and still have 60-70% in equities then sequence risk should be marginal. Especially if the withdrawal percentage is only based on amount invested in equities. Hopefully one day bonds will come back online and add more potential for income on the safe side. But today cash is king.
Sequence of returns risk is only 'marginal' if your portfolio is so diversified (i.e., not only exposed to market beta and bond returns) as to not be impacted much by a bear market and/or if your withdrawal rate is very low (i.e., about 3% or smaller). Cash buckets have not consistently reduced sequence of returns risk.

If you are basing your withdrawal percentage on only 60-70% of your portfolio, then it means that you have effectively reduced your withdrawal rate by 30-40%, which is a huge reduction in the withdrawal rate. It would mean dropping a 4% withdrawal rate to about 3%, which has been close to the historic perpetual withdrawal rate (i.e., would have at least maintained the inflation-adjusted starting capital over the long-term in the worst historic periods).
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” 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 marcopolo »

HUEY316 wrote: Mon May 17, 2021 1:48 pm
willthrill81 wrote: Mon May 17, 2021 11:37 am
HUEY316 wrote: Mon May 17, 2021 10:56 am How would this scenario play out with 10 years of withdrawals secured in ultra low risk/reward options within the bond allocation? Only withdrawing from the equities side at the end of a green year and pulling from the cash/bond side at the end of red years. Replenishing the 10 year allocation during strong market performance.
Welcome to the forum!

What you're describing sounds a lot like McClung's Prime Harvesting strategy. Karsten from Early Retirement Now did an analysis of it here, including some improvements.
Thanks Will, I'm here to learn and have alot of work ahead of me.

I have read some 2 Bucket/Barbell strategies that made it sound simple, after reading Karsten's article it clearly it's a little more complicated. But it seems to me if you have an ample amount of cash to cover withdrawals for even the worst bear market periods (like a decade) and still have 60-70% in equities then sequence risk should be marginal. Especially if the withdrawal percentage is only based on amount invested in equities. Hopefully one day bonds will come back online and add more potential for income on the safe side. But today cash is king.
I have never heard of basing the withdrawal percentage on just the equity portion. But, i guess if you did that you would be pretty safe. But, that is because you would have a really low withdrawal rate (relative to your entire portfolio), and would not matter much if you spent from bonds during draw downs, or just maintained your asset allocation and re-balanced.

If you have 70% of your portfolio in equities, and use a 4% WR based just on the equity portion, that works out to a 2.8% WR out of your entire portfolio, with about 10.7 years worth of expenses in fixed income and 25 years worth in equities. With a 2.8% WR, it would not matter much how you managed your withdrawals, that is not what makes the plan work.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Marseille07 »

willthrill81 wrote: Mon May 17, 2021 1:47 pm That's been my take from previous discussions with Marseille07 about this. No matter how you do it, if you're withdrawing X from a portfolio with a value of Y, your withdrawal rate is X/Y, and the asset class that you pull it from doesn't really matter when the portfolio is nearly all stocks. And if you have a portfolio of Y, that includes your EF. Bucket approaches don't materially improve retirees' ability to smooth withdrawals.
I'm not trying to smooth withdrawals. I'm also not trying to withdraw X where X is some fixed number. If this were my intent, I'd be better served by constant-dollar, not constant-percentage.

The benefit of my approach is I have lots of visibility & warning signs if I see troubles ahead. If monthly withdrawals become so low and I don't have enough to replenish the EF fully, I know I have to cut back my discretionary budget.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by namajones »

Independent George wrote: Mon May 17, 2021 10:12 am I'd add that not only is it completely unrealistic for people to keep withdrawing 4% during a crash
This is why I have a substantial emergency fund going into retirement. I hear people say they have no emergency fund in retirement, and I don't understand why.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 »

namajones wrote: Mon May 17, 2021 2:53 pm
Independent George wrote: Mon May 17, 2021 10:12 am I'd add that not only is it completely unrealistic for people to keep withdrawing 4% during a crash
This is why I have a substantial emergency fund going into retirement. I hear people say they have no emergency fund in retirement, and I don't understand why.
Because when you're in retirement, your entire portfolio is your emergency fund.

Many brilliant minds have examined this issue from seemingly every conceivable angle, and the result is the same: a bucket of money called an emergency fund doesn't provide retirees with a consistently better financial outcome. Maybe it helps some sleep better at night, but that's about all that it might do.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Marseille07 »

willthrill81 wrote: Mon May 17, 2021 2:59 pm
namajones wrote: Mon May 17, 2021 2:53 pm
Independent George wrote: Mon May 17, 2021 10:12 am I'd add that not only is it completely unrealistic for people to keep withdrawing 4% during a crash
This is why I have a substantial emergency fund going into retirement. I hear people say they have no emergency fund in retirement, and I don't understand why.
Because when you're in retirement, your entire portfolio is your emergency fund.

Many brilliant minds have examined this issue from seemingly every conceivable angle, and the result is the same: a bucket of money called an emergency fund doesn't provide retirees with a consistently better financial outcome. Maybe it helps some sleep better at night, but that's about all that it might do.
I've clarified that what I'm doing is basically 97/3 with a twist. It's not the EF which provides a better financial outcome, it is the aggressive AA.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by tadamsmar »

Maybe this has been covered in this long thread, not sure, but hear goes.

I don't doubt that some retirees retired with the exact number that their plan said they needed in 2000 ($1M in the case of then OP example).

But, I don't think this is likely a Boglehead that remained employed and stuck with his savings/spending/investment plan during the 1990's. He would end up with more than $1M. He would have to cut back on his savings or have a period where he could not save (unemployment/underemployment) or some big unexpected living expenses (uninsured losses). So, he already had some risks come home to roost before 2000. Or the person just cut back on savings to start having more fun before retirement since he had made his number.

Or it could be a Boglehead who decided to retire the day that he saved $1M. (This is a person who did not plan a retirement date years in advance or did not stick to that plan.) Not sure there is any Boglehead rule against doing that even in a bear market. Perhaps there should be a rule on this move that might be viewed as making the 4% rule riskier.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by TN_Boy »

Marseille07 wrote: Mon May 17, 2021 3:28 pm
willthrill81 wrote: Mon May 17, 2021 2:59 pm
namajones wrote: Mon May 17, 2021 2:53 pm
Independent George wrote: Mon May 17, 2021 10:12 am I'd add that not only is it completely unrealistic for people to keep withdrawing 4% during a crash
This is why I have a substantial emergency fund going into retirement. I hear people say they have no emergency fund in retirement, and I don't understand why.
Because when you're in retirement, your entire portfolio is your emergency fund.

Many brilliant minds have examined this issue from seemingly every conceivable angle, and the result is the same: a bucket of money called an emergency fund doesn't provide retirees with a consistently better financial outcome. Maybe it helps some sleep better at night, but that's about all that it might do.
I've clarified that what I'm doing is basically 97/3 with a twist. It's not the EF which provides a better financial outcome, it is the aggressive AA.
I don't understand "the twist." You take a constant % from the equity. You take some amount from the EF, if the constant % from the equity isn't good enough.

If the amount from the EF is enough to maintain spending levels, then this is just a constant $$ withdraw. If the amount pulled from the EF is not enough to maintain the desired spending (don't know what rules you are thinking of using here), then it is simply a variable $$ withdraw with an aggressive asset allocation. And a cash bucket, which is withdrawn from, has to be refilled, etc. It will perform like any asset allocation with a high equity percent and a small fixed income percent -- high expected returns, guaranteed high portfolio volatility (which I hasten to add is not necessarily a bad thing, though I don't like it during retirement).

But this subthread may not be really on-topic to the main thread, which is simply how an investor using the 4% "rule" would have fared retiring in 2000.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Thesaints »

HomerJ wrote: Mon May 17, 2021 10:40 am This is almost certainly true.

If I'm pulling $80,000 a year from $2 million... I'm not going to look up CPI numbers each year, and pull $81,600 the next year, and $83,232 the next year...

I'll probably just keep pulling $80,000 a year for the first 3-5 years, and then really, probably, look at my remaining balance and decide what to do from there...

If I'm up to $2.3 million, I'll probably bump my withdrawals to $90,000 (basically restarting the whole 4% sequence again).

If I'm down to $1.8 million, I'll stick with the $80,000 for a few years longer, and just get less for my money because of inflation (so one less trip a year, or replace an expensive trip with a cheaper trip)
That's a great example of why planning for a comfortable retirement is a lot safer than planning to retire frugally !
Since HomerJ is living large, so to speak, he does not care to exactly track inflation; a $1,000-2,000 more or less per year makes no difference.
That withdrawal plan is also safe because he has the flexibility of waiting 10 years, see how it is going and adjust withdrawals even by as much as $10,000.

Imagine the situation of the frugal retiree, instead. They have carefully planned expenses: so many dollars for gas, so many for cable (but not premium cable!). For such a person $2,000 is a very consequential amount. If they had to reduce expenses by that much, there goes cable service. Reducing expenses by $10,000 is outright unimaginable.
Last edited by Thesaints on Tue May 18, 2021 6:58 pm, edited 1 time in total.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy »

HUEY316 wrote: Mon May 17, 2021 1:48 pm Thanks Will, I'm here to learn and have alot of work ahead of me.

I have read some 2 Bucket/Barbell strategies that made it sound simple, after reading Karsten's article it clearly it's a little more complicated. But it seems to me if you have an ample amount of cash to cover withdrawals for even the worst bear market periods (like a decade) and still have 60-70% in equities then sequence risk should be marginal. Especially if the withdrawal percentage is only based on amount invested in equities. Hopefully one day bonds will come back online and add more potential for income on the safe side. But today cash is king.

When you plot up your scheme for 1966-1981 how does it differ from just taking out 4% and rebalancing constantly? I think you will find the dominate factor in poor sequence of returns isn't the volatility. It is the poor returns. Making a constant 0%/year for 15 years might be better than averaging 0%/year for 15 years with swings, but the real problem is you are making 0%/year for 15 years. Maybe you squeak out a few tenths from market timing/rebalancing but that isn't going to be enough to handle the problem of poor returns.

Everyone when they first hear that bear markets last like 3-5 years goes, well I can just hold cash and ride them out. It is part of what makes the bucket systems so appealing. The problem is that getting back to even isn't enough. After 5 years, you would expect your accounts to be up like 30%+. When you have 25 years of money that you need to last 30 years, at some point you need returns.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Independent George »

Thesaints wrote: Tue May 18, 2021 11:53 am
HomerJ wrote: Mon May 17, 2021 10:40 am This is almost certainly true.

If I'm pulling $80,000 a year from $2 million... I'm not going to look up CPI numbers each year, and pull $81,600 the next year, and $83,232 the next year...

I'll probably just keep pulling $80,000 a year for the first 3-5 years, and then really, probably, look at my remaining balance and decide what to do from there...

If I'm up to $2.3 million, I'll probably bump my withdrawals to $90,000 (basically restarting the whole 4% sequence again).

If I'm down to $1.8 million, I'll stick with the $80,000 for a few years longer, and just get less for my money because of inflation (so one less trip a year, or replace an expensive trip with a cheaper trip)
That's a great example of why planning for a comfortable retirement is a lot safer than planning to retire frugally !
Since HomerJ is living large, so to speak, he does not care to exactly track inflation; a $1,000-2,000 more or less per year make no difference.
That withdrawal plan is also safe because he has the flexibility of waiting 10 years, see how it is going and adjust withdrawals even by as much as $10,000.

Imagine the situation of the frugal retiree, instead. They have carefully planned expenses: so many dollars for gas, so many for cable (but not premium cable!). For such a person $2,000 are a very consequential amount. If they had to reduce expenses by that much, there goes cable service. Reducing expenses by $10,000 is outright unimaginable.
I'm not following - if a 2.5% inflation adjustment (the Fed's historical inflation target) results in a $10k difference, that means their annual withdrawal rate was $400,000. Under the 4% rule, that implies a $10M starting balance. For a frugal retiree who planned on a $30k withdrawal, a 2.5% inflation adjustment is $750.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 »

randomguy wrote: Tue May 18, 2021 2:17 pm
HUEY316 wrote: Mon May 17, 2021 1:48 pm Thanks Will, I'm here to learn and have alot of work ahead of me.

I have read some 2 Bucket/Barbell strategies that made it sound simple, after reading Karsten's article it clearly it's a little more complicated. But it seems to me if you have an ample amount of cash to cover withdrawals for even the worst bear market periods (like a decade) and still have 60-70% in equities then sequence risk should be marginal. Especially if the withdrawal percentage is only based on amount invested in equities. Hopefully one day bonds will come back online and add more potential for income on the safe side. But today cash is king.

When you plot up your scheme for 1966-1981 how does it differ from just taking out 4% and rebalancing constantly? I think you will find the dominate factor in poor sequence of returns isn't the volatility. It is the poor returns. Making a constant 0%/year for 15 years might be better than averaging 0%/year for 15 years with swings, but the real problem is you are making 0%/year for 15 years. Maybe you squeak out a few tenths from market timing/rebalancing but that isn't going to be enough to handle the problem of poor returns.

Everyone when they first hear that bear markets last like 3-5 years goes, well I can just hold cash and ride them out. It is part of what makes the bucket systems so appealing. The problem is that getting back to even isn't enough. After 5 years, you would expect your accounts to be up like 30%+. When you have 25 years of money that you need to last 30 years, at some point you need returns.
If 3-5 years of poor returns were the worst that we had to prepare for, withdrawal strategies would be easy to manage. But the big problem, as you have noted, is 10-15 years of bad returns, especially very poor returns in the first few years. That's why I focused this thread on year 2000 retirees; they had the worst sequence of returns of any retirement cohort since the 1970s. U.S. stocks had negative real returns from 2000-2009, something that's difficult for many of those who have only been investing for the last ~10 years to fully grasp.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” 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 Thesaints »

Independent George wrote: Tue May 18, 2021 2:23 pm
Thesaints wrote: Tue May 18, 2021 11:53 am
HomerJ wrote: Mon May 17, 2021 10:40 am This is almost certainly true.

If I'm pulling $80,000 a year from $2 million... I'm not going to look up CPI numbers each year, and pull $81,600 the next year, and $83,232 the next year...

I'll probably just keep pulling $80,000 a year for the first 3-5 years, and then really, probably, look at my remaining balance and decide what to do from there...

If I'm up to $2.3 million, I'll probably bump my withdrawals to $90,000 (basically restarting the whole 4% sequence again).

If I'm down to $1.8 million, I'll stick with the $80,000 for a few years longer, and just get less for my money because of inflation (so one less trip a year, or replace an expensive trip with a cheaper trip)
That's a great example of why planning for a comfortable retirement is a lot safer than planning to retire frugally !
Since HomerJ is living large, so to speak, he does not care to exactly track inflation; a $1,000-2,000 more or less per year make no difference.
That withdrawal plan is also safe because he has the flexibility of waiting 10 years, see how it is going and adjust withdrawals even by as much as $10,000.

Imagine the situation of the frugal retiree, instead. They have carefully planned expenses: so many dollars for gas, so many for cable (but not premium cable!). For such a person $2,000 are a very consequential amount. If they had to reduce expenses by that much, there goes cable service. Reducing expenses by $10,000 is outright unimaginable.
I'm not following - if a 2.5% inflation adjustment (the Fed's historical inflation target) results in a $10k difference, that means their annual withdrawal rate was $400,000. Under the 4% rule, that implies a $10M starting balance. For a frugal retiree who planned on a $30k withdrawal, a 2.5% inflation adjustment is $750.
The 10k adjustment is after 10 years. 2.5% inflation corresponds to a ∆ of 10k after ten years for a 892k portfolio.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by seajay »

willthrill81 wrote: Tue May 18, 2021 2:27 pm If 3-5 years of poor returns were the worst that we had to prepare for, withdrawal strategies would be easy to manage. But the big problem, as you have noted, is 10-15 years of bad returns, especially very poor returns in the first few years. That's why I focused this thread on year 2000 retirees; they had the worst sequence of returns of any retirement cohort since the 1970s. U.S. stocks had negative real returns from 2000-2009, something that's difficult for many of those who have only been investing for the last ~10 years to fully grasp.
Historically at times all assets have lost 50% in real (after inflation) terms at around the same time over a decade long period, primarily due to high inflation, suppressed interest rates. Inflation bonds were introduced to address such risk and conceptually a long dated inflation bond would see large price increases in the event of low interest rates/high unexpected inflation. Presently however there's a cost for such 'insurance' such as mildly/modest negative real yields that compound over time. Another factor is that they're untested as such, it could very well turn out that when they were most needed might be the time that through some form of manipulation that they didn't pay out to the degree expected, perhaps by high/increased taxation. Gold is suggested as a possible hedge, but whilst that helped during the 1970's it didn't help in other earlier historic cases. Being a relatively small market value it could potentially be manipulated, or like in the 1930's US situation made 'illegal', or perhaps again having punitive taxation policies applied.

For those in accumulation, 50% real (after inflation) drops could prove beneficial, seeing more new money (savings) added at relative lows. It's primarily a risk factor for those in drawdown/retirement, a 50% haircut along with drawing income on top could drop the portfolio value to critical levels over a relatively short period of time, 5 to 10 years perhaps might see portfolio value decline to unsustainable/failure levels.

Proponents of cash, bonds or gold providing insurance fail to recognise that if all assets decline a lot in real terms, then you're still pretty much stuffed. A type of situation to which I'm referring is where interest rates are kept low such as via the state printing to buy bonds, that pushes most asset prices higher to where investors opine that they feel relatively rich and opt to retire early, but then inflation spikes periodically perhaps into double digits one year, maybe drops back down again the next, only to double digit again the next, such that cash interest, bonds, stocks etc. all lose out in real terms. Pretty much a scenario that we're potentially close to nowadays, but I suspect where gold is yet to be 'locked' in one way or another (perhaps addressing both physical gold and crypto at the same time via taxation or laws/rules).

Debt doesn't help either, as whilst you may see the debt eroded by inflation, the assets the loan is invested into sustains declines. Neither may shorting help, as nominal asset prices may still rise, just much less so than inflation.

Primarily its a greatest risk to those who retire at the worst possible time. For those 5 or 10 years ahead then likely good gains might have seen a 4% initial SWR value having declined to being perhaps 3% or 2% of the ongoing portfolio value. Or if retirement starts after/at the lows then also likely they'll be OK. It's a low probability risk, affects relatively few, but if you're one of those few that's no help. The risk is perhaps above average at present levels/circumstances. 2000 could have been a relatively mild taster of worse to come, but equally forward time might reject that.

The answer is to have more capital at times of high valuations before opting to retire early. For someone drawing/spending 2% (SWR) then if valuations halve then that in effect rises to 4% to 6% and might continue along OK. Note that the likes of the Trinity Study tend to exclude such bad times/periods so potentially overstate the degree of apparent safety.

For many, they'll never have enough or would rather not have to work longer and just take their chances. Some opt to include their home value as part of their portfolio as a means to uplift the capital base (reduce the SWR %). Averaging is yet another means to reduce the risk, gradual retirement to avoid having gone all-in at the worst possible time.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Marseille07 »

How to prepare for the downturns after retirement is a very tricky issue.

I know Kitces talks about a rising glidepath, but even this isn't really perfect for a 2000 retiree. They might drop it down to 60/40 in 2000, raise it over the course of 7 years...then get hit by 2008.

In my opinion the best approach is to simply have enough buffer in your expense planning, and slash discretionary spending during the downturns.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 »

seajay wrote: Tue May 18, 2021 6:21 pm The answer is to have more capital at times of high valuations before opting to retire early. For someone drawing/spending 2% (SWR) then if valuations halve then that in effect rises to 4% to 6% and might continue along OK. Note that the likes of the Trinity Study tend to exclude such bad times/periods so potentially overstate the degree of apparent safety.
What 'bad times' did the Trinity study exclude from their analysis? IIRC, they found that the '4% rule' worked in about 95% of historic cases. They didn't ignore the remaining 5%.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
HUEY316
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by HUEY316 »

randomguy wrote: Tue May 18, 2021 2:17 pm
HUEY316 wrote: Mon May 17, 2021 1:48 pm Thanks Will, I'm here to learn and have alot of work ahead of me.

I have read some 2 Bucket/Barbell strategies that made it sound simple, after reading Karsten's article it clearly it's a little more complicated. But it seems to me if you have an ample amount of cash to cover withdrawals for even the worst bear market periods (like a decade) and still have 60-70% in equities then sequence risk should be marginal. Especially if the withdrawal percentage is only based on amount invested in equities. Hopefully one day bonds will come back online and add more potential for income on the safe side. But today cash is king.

When you plot up your scheme for 1966-1981 how does it differ from just taking out 4% and rebalancing constantly? I think you will find the dominate factor in poor sequence of returns isn't the volatility. It is the poor returns. Making a constant 0%/year for 15 years might be better than averaging 0%/year for 15 years with swings, but the real problem is you are making 0%/year for 15 years. Maybe you squeak out a few tenths from market timing/rebalancing but that isn't going to be enough to handle the problem of poor returns.

Everyone when they first hear that bear markets last like 3-5 years goes, well I can just hold cash and ride them out. It is part of what makes the bucket systems so appealing. The problem is that getting back to even isn't enough. After 5 years, you would expect your accounts to be up like 30%+. When you have 25 years of money that you need to last 30 years, at some point you need returns.

That was my question in my original post. How would it all play out during the very worst periods? Starting with a much larger(10year)cash/bond allocation. Drawing from that in the red years. And only touching the stocks in green years or when there is no longer any alternative. And ultimately as it was pointed out to me using a lower withdrawal rate since I was thinking I would only base my 4% WR on the stock side of the portfolio.

Say you start with1.4m. 400k in TSP G and 1m in VG VTI. Starting WR 40k a year. Which would do better? Frequent rebalancing? Or withdrawing from the selected funds at the end of the year and only selling stocks to reallocate bonds (or buy food) when the market has recovered or you have burned the 10 years of cash?

I'm no where near smart enough to plot this out. I was just curious if the OP had considered anything like this when he ran his original scenario which was super helpful. The bottom line is ultimately I was applying a greatly reduced WR which makes a huge difference.

Thanks for your input. This is a great place for folks like me to learn a little.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy »

HUEY316 wrote: Tue May 18, 2021 7:23 pm

That was my question in my original post. How would it all play out during the very worst periods? Starting with a much larger(10year)cash/bond allocation. Drawing from that in the red years. And only touching the stocks in green years or when there is no longer any alternative. And ultimately as it was pointed out to me using a lower withdrawal rate since I was thinking I would only base my 4% WR on the stock side of the portfolio.

Say you start with1.4m. 400k in TSP G and 1m in VG VTI. Starting WR 40k a year. Which would do better? Frequent rebalancing? Or withdrawing from the selected funds at the end of the year and only selling stocks to reallocate bonds (or buy food) when the market has recovered or you have burned the 10 years of cash?

I'm no where near smart enough to plot this out. I was just curious if the OP had considered anything like this when he ran his original scenario which was super helpful. The bottom line is ultimately I was applying a greatly reduced WR which makes a huge difference.

Thanks for your input. This is a great place for folks like me to learn a little.
First off a <3% SWR is insanely conservative. Just about anything works when you are that far off into super conservative land. And yes SWR is a much bigger driver of success than AA or any fancy withdrawal scheme we come up with. Realistically the way to deal with SOR is to be cutting spending if you end up on a bad path but in general we are talking pretty large cuts (i.e. we aren't talking about skipping a vacation. We are talking skipping a vacation/year for a decade) to make a difference.

But how would it work if you retire with that in say 1966? This is just a rough approximation and would depend on your exact rebalancing rules.

From 1966 to 1972 you would have a ~0% return (your stocks would be up slightly, bonds down a bit). So you end with 400k in G and 720 in Stocks from replenishing the bonds and spending.

From 1973-1981 stocks are down and bonds are slightly down: So we end with 40k in G and 720k in stocks

1981-1994 we have a nice bull market and over time you will slowly rebuild your portfolio. But can you imagine being 15 years into retirement and holding a 95/5 portfolio? Seems pretty a stressful case to me. Easy to say now it works. Saying the same in 1978 or 1981 isn't remotely as easy.

what would have happened if you held the same approximate 70/30 starting allocation? About the same. You wouldn't be buying stocks at the bottom but you also wouldn't be rebalancing out of stocks before the big bull market. There would be a few tenths of difference from rebalancing bonus's or penalties.

Lets look at the 2000-2009 because while it wasn't remotely as bad, we can us our calculators to give real numbers. Your stocks are pretty much down from day 1. You start with 1 million and end up with 758k. bonds actually had nice return. You would have had ~110k left at the end of the decade. So you end up with 868k. If you had just held 70/30? 935k. You would have gotten a nice rebalancing bonus from buying stocks in 2000-2 and selling them from 2003-7 and then buying them in 2007-9. It doesn't always workout that way.

Realistically I don't expect anyone to spend down their bonds that much. That 2000 retire would have been selling depressed stocks in 2005/6 replenish some of the funds. But I think you get the general idea. Tons of papers having looked at this and things like buckets, bond tents, rising equity glide paths, and so on don't do much to change your sequence of return risk. They do give different volatility profiles and you might prefer one to another.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by TN_Boy »

willthrill81 wrote: Tue May 18, 2021 7:21 pm
seajay wrote: Tue May 18, 2021 6:21 pm The answer is to have more capital at times of high valuations before opting to retire early. For someone drawing/spending 2% (SWR) then if valuations halve then that in effect rises to 4% to 6% and might continue along OK. Note that the likes of the Trinity Study tend to exclude such bad times/periods so potentially overstate the degree of apparent safety.
What 'bad times' did the Trinity study exclude from their analysis? IIRC, they found that the '4% rule' worked in about 95% of historic cases. They didn't ignore the remaining 5%.
I believe seajay is misinformed. The studies using historical data use .... all the historical data.

The apparent safety is exactly as stated for the historical periods studied using the study parameters.

One should read the fine print.

The Trinity study used the S&P 500 and corporate bonds*. Their results did not include taxes or transaction costs; which is completely reasonable since taxes depend on a lot of things ... it just means a real person has to include taxes as part of the expenses covered by the 4% withdrawal.

*different studies will sometimes slip in different bond selections ...
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by TN_Boy »

Marseille07 wrote: Tue May 18, 2021 6:29 pm How to prepare for the downturns after retirement is a very tricky issue.

I know Kitces talks about a rising glidepath, but even this isn't really perfect for a 2000 retiree. They might drop it down to 60/40 in 2000, raise it over the course of 7 years...then get hit by 2008.

In my opinion the best approach is to simply have enough buffer in your expense planning, and slash discretionary spending during the downturns.
Yeah but the 2000 retiree has eight less years to live in 2008.

I personally like the bond tent, but not everybody does. It's not clear that it really makes you safer. But, I like the idea of protecting part of your money early in retirement.

A low withdrawal rate is always the best defense.

Or dying young, but that's not much fun.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 »

TN_Boy wrote: Tue May 18, 2021 8:57 pm
willthrill81 wrote: Tue May 18, 2021 7:21 pm
seajay wrote: Tue May 18, 2021 6:21 pm The answer is to have more capital at times of high valuations before opting to retire early. For someone drawing/spending 2% (SWR) then if valuations halve then that in effect rises to 4% to 6% and might continue along OK. Note that the likes of the Trinity Study tend to exclude such bad times/periods so potentially overstate the degree of apparent safety.
What 'bad times' did the Trinity study exclude from their analysis? IIRC, they found that the '4% rule' worked in about 95% of historic cases. They didn't ignore the remaining 5%.
I believe seajay is misinformed. The studies using historical data use .... all the historical data.

The apparent safety is exactly as stated for the historical periods studied using the study parameters.
Yes. I was just trying to see if seajay could find that out for him/herself. :wink:
TN_Boy wrote: Tue May 18, 2021 9:00 pm A low withdrawal rate is always the best defense.

Or dying young, but that's not much fun.
It depends on how you punch out. :beer
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” 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 randomguy »

TN_Boy wrote: Tue May 18, 2021 9:00 pm
Marseille07 wrote: Tue May 18, 2021 6:29 pm How to prepare for the downturns after retirement is a very tricky issue.

I know Kitces talks about a rising glidepath, but even this isn't really perfect for a 2000 retiree. They might drop it down to 60/40 in 2000, raise it over the course of 7 years...then get hit by 2008.

In my opinion the best approach is to simply have enough buffer in your expense planning, and slash discretionary spending during the downturns.
Yeah but the 2000 retiree has eight less years to live in 2008.

I personally like the bond tent, but not everybody does. It's not clear that it really makes you safer. But, I like the idea of protecting part of your money early in retirement.

A low withdrawal rate is always the best defense.

Or dying young, but that's not much fun.
The rising glide path worked brilliantly for the 2000 retire. They start the decade at 30/70 so 2000-2 are not too bad given the good bond returns and low stock exposure. Sure 2007-9 had a bit of rough volatility wise but then they the are holding like 60/40 or 70/30 and get to enjoy the huge bull market over the next decade.Just about perfect market timing. A like 9 year bond tent would have been perfect:) We can debate if you really want to be holding 70/30 when your like 75 for a long time. Mathematically it might make sense. But you might not be comfortable with that level of risk.

Not spending is always safer than spending but the cost of that is giving up years of experiences. How you value that is hard to say. But I know skipping vacations from ages 65-77 because my portfolio is down significantly isn't exactly my idea of a great retirement. And just cutting expenses by say 10% from 2000-2 isn't enough to move the needle. Given I have already picked a conservative 4% SWR (odds are my SWR will be more like 5%+. Course you will not know that for 30 years), do I really want to overreact and slash spending early on? Of course if I don't slash and we are in some 3% SWR world, I am going to half to make huge cuts later.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by HUEY316 »

randomguy wrote: Tue May 18, 2021 8:33 pm
HUEY316 wrote: Tue May 18, 2021 7:23 pm

That was my question in my original post. How would it all play out during the very worst periods? Starting with a much larger(10year)cash/bond allocation. Drawing from that in the red years. And only touching the stocks in green years or when there is no longer any alternative. And ultimately as it was pointed out to me using a lower withdrawal rate since I was thinking I would only base my 4% WR on the stock side of the portfolio.

Say you start with1.4m. 400k in TSP G and 1m in VG VTI. Starting WR 40k a year. Which would do better? Frequent rebalancing? Or withdrawing from the selected funds at the end of the year and only selling stocks to reallocate bonds (or buy food) when the market has recovered or you have burned the 10 years of cash?

I'm no where near smart enough to plot this out. I was just curious if the OP had considered anything like this when he ran his original scenario which was super helpful. The bottom line is ultimately I was applying a greatly reduced WR which makes a huge difference.

Thanks for your input. This is a great place for folks like me to learn a little.
First off a <3% SWR is insanely conservative. Just about anything works when you are that far off into super conservative land. And yes SWR is a much bigger driver of success than AA or any fancy withdrawal scheme we come up with. Realistically the way to deal with SOR is to be cutting spending if you end up on a bad path but in general we are talking pretty large cuts (i.e. we aren't talking about skipping a vacation. We are talking skipping a vacation/year for a decade) to make a difference.

But how would it work if you retire with that in say 1966? This is just a rough approximation and would depend on your exact rebalancing rules.

From 1966 to 1972 you would have a ~0% return (your stocks would be up slightly, bonds down a bit). So you end with 400k in G and 720 in Stocks from replenishing the bonds and spending.

From 1973-1981 stocks are down and bonds are slightly down: So we end with 40k in G and 720k in stocks

1981-1994 we have a nice bull market and over time you will slowly rebuild your portfolio. But can you imagine being 15 years into retirement and holding a 95/5 portfolio? Seems pretty a stressful case to me. Easy to say now it works. Saying the same in 1978 or 1981 isn't remotely as easy.

what would have happened if you held the same approximate 70/30 starting allocation? About the same. You wouldn't be buying stocks at the bottom but you also wouldn't be rebalancing out of stocks before the big bull market. There would be a few tenths of difference from rebalancing bonus's or penalties.

Lets look at the 2000-2009 because while it wasn't remotely as bad, we can us our calculators to give real numbers. Your stocks are pretty much down from day 1. You start with 1 million and end up with 758k. bonds actually had nice return. You would have had ~110k left at the end of the decade. So you end up with 868k. If you had just held 70/30? 935k. You would have gotten a nice rebalancing bonus from buying stocks in 2000-2 and selling them from 2003-7 and then buying them in 2007-9. It doesn't always workout that way.

Realistically I don't expect anyone to spend down their bonds that much. That 2000 retire would have been selling depressed stocks in 2005/6 replenish some of the funds. But I think you get the general idea. Tons of papers having looked at this and things like buckets, bond tents, rising equity glide paths, and so on don't do much to change your sequence of return risk. They do give different volatility profiles and you might prefer one to another.
You make a alot of very good points. The one that hits home the hardest and was looming in the back of my mind was the amount of discipline and commitment that would be required 7 or 8 years in when almost all of the cash is depleted and second guessing kicks in. It sounds easy at first but execution in a long bear market might prove differently. Thanks for the time you committed to making this point and you analysis
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy »

HUEY316 wrote: Tue May 18, 2021 9:53 pm
You make a alot of very good points. The one that hits home the hardest and was looming in the back of my mind was the amount of discipline and commitment that would be required 7 or 8 years in when almost all of the cash is depleted and second guessing kicks in. It sounds easy at first but execution in a long bear market might prove differently. Thanks for the time you committed to making this point and you analysis
I should make it clear that I am not against buckets, bond tents, rising glide paths, and so on. They don't really hurt and you might like their volatility profile a bit more than just holding a normal 35/65 - 65/35 retirement profile. But the idea that they isolate you from sequence of risk is just wishful thinking. The avg returns from 1966-1995 were high enough to support something like a 5.5% SWR. But because of the sequence (0% early, large late), you ended up with that ~4% SWR. If a scheme helped with SOR, your should have a 5% SWR. None of these schemes come close to being able to do that.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Marseille07 »

I'm kind of practicing a rising glidepath inadvertently. While it is probably *working* as intended, I can't help but to feel like I'm falling way behind 100/0. The market appears spooked by CPI 4.2% and it feels a bit better these days.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by seajay »

willthrill81 wrote: Tue May 18, 2021 9:09 pm
TN_Boy wrote: Tue May 18, 2021 8:57 pm
willthrill81 wrote: Tue May 18, 2021 7:21 pm
seajay wrote: Tue May 18, 2021 6:21 pm The answer is to have more capital at times of high valuations before opting to retire early. For someone drawing/spending 2% (SWR) then if valuations halve then that in effect rises to 4% to 6% and might continue along OK. Note that the likes of the Trinity Study tend to exclude such bad times/periods so potentially overstate the degree of apparent safety.
What 'bad times' did the Trinity study exclude from their analysis? IIRC, they found that the '4% rule' worked in about 95% of historic cases. They didn't ignore the remaining 5%.
I believe seajay is misinformed. The studies using historical data use .... all the historical data.

The apparent safety is exactly as stated for the historical periods studied using the study parameters.
Yes. I was just trying to see if seajay could find that out for him/herself. :wink:
TN_Boy wrote: Tue May 18, 2021 9:00 pm A low withdrawal rate is always the best defense.

Or dying young, but that's not much fun.
It depends on how you punch out. :beer
Bio-tech looks to be on the verge (generation) of a means to immortality, slowing/reversing ageing. The next-gen might need to be using Perpetual Withdrawal Rates as if biotech advances ahead of ageing 'retirement' could be very long.

The Trinity Study originally spanned 1925 to 1999 I believe and yes (my bad) did include recording failure rates. As part of due diligence I formed my own dataset, spanning from 1825 and unlike the Trinity study factored in costs/taxes assumed to be at the basic/average rate (average Joe/middle class individual). I also broadened to use a more average/global dataset as the US has been a right tail (good) case outcome over the last century+, largely benefited from being the primary reserve currency that others are seeking to replace (or widen, perhaps to use a basket of primary currencies instead).

For the US since 2000 was fortunate in the sense that there have been low cost tax efficient means to invest. Historically much less so the case and taxes have also tended to spike at the worst possible times due to the geopolitical stresses that induced relatively poor investment performance also tended to leave the state needing more tax revenues. In the UK 1960's for instance the Beatles were singing 'Taxman', 19 for you, 1 for me, in reflection of their 95% tax rates. Whilst the average investor was paying 40% taxes on their dividends. Costs were also considerably higher, those for instance that bought/sold via post might have seen the broker/market maker applying 10% or wider spreads. Yet another factor is using historic index 'average' rewards is not the actual average excepting for those that actually held that index. Dow and Jones for instance devised three indexes and only the best case choice has sustained through as the one referenced as a guide to the 'historic average' (Dow Industrial). Real time investors might have perhaps opted to diversify across all three, and as such seen their portfolio lag that Dow Industrial average.

What is the greater concern for retirees is not how good the average reward case is, but rather the risk of being in the 5%/whatever failure set, and how bad that might have been. The above link for instance indicates that all-stock from 2000 with a 4% SWR was down at 26% of the inflation adjusted start date value by the end of February 2009, in effect a former 4% SWR was the equivalent of a 16% SWR at that point. That its continued to sustain is perhaps a factor of not having seen rising/high inflation prior to good/great gains having occurred since, might have been very much different. A third each US/global/bonds was better, being 50% down, the equivalent of increasing to a 8% SWR from February 2009. At 4% SWR both have pretty much stayed down. Change the start date to a 3% SWR and both have recently recovered back to portfolio values comparable to the inflation adjusted start date value.

I think with a reliance upon a 4% SWR that perhaps you should consider it as like buying a annuity, consider the money gone, capital value irrelevant - that you bought a income stream (4% of initial portfolio value uplifted by inflation). Otherwise the likes of seeing the portfolio value down at 25% of former value after a decade might be too tempting to 'save what little remained' dump the portfolio into something else such as just bonds. Considered as a DIY managed 4% portfolio value inflation adjusted annuity, a changed mindset, and you might be more inclined to stay the course in a relatively bad case situation.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by TN_Boy »

seajay wrote: Wed May 19, 2021 6:41 am
willthrill81 wrote: Tue May 18, 2021 9:09 pm
TN_Boy wrote: Tue May 18, 2021 8:57 pm
willthrill81 wrote: Tue May 18, 2021 7:21 pm
seajay wrote: Tue May 18, 2021 6:21 pm The answer is to have more capital at times of high valuations before opting to retire early. For someone drawing/spending 2% (SWR) then if valuations halve then that in effect rises to 4% to 6% and might continue along OK. Note that the likes of the Trinity Study tend to exclude such bad times/periods so potentially overstate the degree of apparent safety.
What 'bad times' did the Trinity study exclude from their analysis? IIRC, they found that the '4% rule' worked in about 95% of historic cases. They didn't ignore the remaining 5%.
I believe seajay is misinformed. The studies using historical data use .... all the historical data.

The apparent safety is exactly as stated for the historical periods studied using the study parameters.
Yes. I was just trying to see if seajay could find that out for him/herself. :wink:
TN_Boy wrote: Tue May 18, 2021 9:00 pm A low withdrawal rate is always the best defense.

Or dying young, but that's not much fun.
It depends on how you punch out. :beer
Bio-tech looks to be on the verge (generation) of a means to immortality, slowing/reversing ageing. The next-gen might need to be using Perpetual Withdrawal Rates as if biotech advances ahead of ageing 'retirement' could be very long.

The Trinity Study originally spanned 1925 to 1999 I believe and yes (my bad) did include recording failure rates. As part of due diligence I formed my own dataset, spanning from 1825 and unlike the Trinity study factored in costs/taxes assumed to be at the basic/average rate (average Joe/middle class individual). I also broadened to use a more average/global dataset as the US has been a right tail (good) case outcome over the last century+, largely benefited from being the primary reserve currency that others are seeking to replace (or widen, perhaps to use a basket of primary currencies instead).

For the US since 2000 was fortunate in the sense that there have been low cost tax efficient means to invest. Historically much less so the case and taxes have also tended to spike at the worst possible times due to the geopolitical stresses that induced relatively poor investment performance also tended to leave the state needing more tax revenues. In the UK 1960's for instance the Beatles were singing 'Taxman', 19 for you, 1 for me, in reflection of their 95% tax rates. Whilst the average investor was paying 40% taxes on their dividends. Costs were also considerably higher, those for instance that bought/sold via post might have seen the broker/market maker applying 10% or wider spreads. Yet another factor is using historic index 'average' rewards is not the actual average excepting for those that actually held that index. Dow and Jones for instance devised three indexes and only the best case choice has sustained through as the one referenced as a guide to the 'historic average' (Dow Industrial). Real time investors might have perhaps opted to diversify across all three, and as such seen their portfolio lag that Dow Industrial average.

What is the greater concern for retirees is not how good the average reward case is, but rather the risk of being in the 5%/whatever failure set, and how bad that might have been. The above link for instance indicates that all-stock from 2000 with a 4% SWR was down at 26% of the inflation adjusted start date value by the end of February 2009, in effect a former 4% SWR was the equivalent of a 16% SWR at that point. That its continued to sustain is perhaps a factor of not having seen rising/high inflation prior to good/great gains having occurred since, might have been very much different. A third each US/global/bonds was better, being 50% down, the equivalent of increasing to a 8% SWR from February 2009. At 4% SWR both have pretty much stayed down. Change the start date to a 3% SWR and both have recently recovered back to portfolio values comparable to the inflation adjusted start date value.

I think with a reliance upon a 4% SWR that perhaps you should consider it as like buying a annuity, consider the money gone, capital value irrelevant - that you bought a income stream (4% of initial portfolio value uplifted by inflation). Otherwise the likes of seeing the portfolio value down at 25% of former value after a decade might be too tempting to 'save what little remained' dump the portfolio into something else such as just bonds. Considered as a DIY managed 4% portfolio value inflation adjusted annuity, a changed mindset, and you might be more inclined to stay the course in a relatively bad case situation.
A couple of things ... many many SWR studies have been done other than the Trinity studies. The Trinity authors also updated their study a few years ago.

Most of the SWR studies wind up in a similar place -- 4%ish or a bit less for the US. The ones coming up with less tend to do things like assume 1% AUM fees, things like that. We have low cost passive investments in the US so assuming unnecessary fees is not useful. There are also studies that use Monte Carlo simulations versus historical data. Those also tend to come up a bit lower, though it is not clear that the simulations accurately reflect market behavior .... markets do tend to mean revert. Big recession, stocks plummet, economy recovers, stocks recover, etc.

International studies come up with mostly lower SWRs than the US, which has had a pretty good 100 year run. But even those studies come up with numbers more like 3.5% versus 4.0. And you have to take situations like Germany or Japan being destroyed by wars out of the picture. Everybody understands if your economy is destroyed by war (or total government mismanagement ala modern day Venezuela) that your retirement is not going to be easy.

I don't worry that much about taxes. Marginal tax rates have been very high at times. Marginal. Yes, the Beatles might well have been looking at very high tax rates. They were also looking at very very high income. This is not an argument for extremely high tax rates in 1960s UK :-) or anywhere else, just an observation that massive tax rates have been a problem for only rich people in the US. Even upper-middle class people are not suffering horribly. Not that anybody likes to pay taxes. And all studies around SWR note that expenses -- like taxes -- have to be paid out of that withdrawal.

Under current tax law in the US, you can wind up with surprisingly low effective tax rates in retirement, even with income over 100k. Yes tax laws might change.

This is a comment several posters have made in various threads "What is the greater concern for retirees is not how good the average reward case is, but rather the risk of being in the 5%/whatever failure set, and how bad that might have been." Followed by concerns that today's environment is one of those really bad times (high stock valuations, low bond returns etc).

And that might be true. It might also not be true. The most problematic period in the SWR studies has been the late sixties to early 80s, where a stagnant economy and high inflation decimated portfolios. And 4% still almost worked ......

If one is concerned about 4%, then take it down to 3.5% or a bit less, and/or use one of the variable withdrawal methods to try and be safer. If the US economy ticks along only okay, one is likely to be very safe with such a rate. I think a mixture of US and international stocks plus bonds is safest because of the greater diversification versus US only stocks and bonds (not that international has shined in recent years ....).

I understand your point about behavioral errors, but I think you have to assume for good results "reasonable" investor behavior. "Staying the course" has been very very easy for people the last 11 years or so. Many confident high equity investors are going to be really surprised the next extended bear market. But that doesn't change the math or the logic of the SWR studies. If you don't believe in such things, you either shouldn't retire, or you should become one of those 2% SWR types. I can't think of the portfolio as an annuity, but I also don't believe it is a goal that it doesn't drop in real value during retirement.

(On the biotech thing, I knew people 35 years ago that were pretty excited about biotech and its ability to extend life. We shall see.)
seajay
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by seajay »

Thanks TN_Boy
TN_Boy wrote: Wed May 19, 2021 8:55 amIf one is concerned about 4%, then take it down to 3.5% or a bit less, and/or use one of the variable withdrawal methods to try and be safer. If the US economy ticks along only okay, one is likely to be very safe with such a rate. I think a mixture of US and international stocks plus bonds is safest because of the greater diversification versus US only stocks and bonds (not that international has shined in recent years ....).
A question is whether bonds (cash and/or gold) actually help reduce risk. It seems not as the bad cases were hit near equally as badly with blends compared to all-equity. Whilst the average case when bonds were included as part of the asset allocation tended to lag all-equity. Diversifying equities can equally lower risk, whilst the individuals might all correlate their magnitudes might differ, one down -50%, another down -30% and in relative terms the less down holding buys +40% more of the deeper down.

Many stock indexes might have 10% weighting into a single stock, perhaps 20%+ in a single sector, reward wise that concentration can pull up the whole if that stock/sector does relatively well, but equally could drag the whole index down. We've seen the plus side of that more recently with tech stocks, similarly tech stocks dragged the whole down during the dot com bubble burst early 2000's.

Compare for instance all stock to that of a three way large cap, mid cap, REIT blend since 2000 with a 4% SWR and the former to recent is down more than half in real terms whilst the other is up 140%. At the 2009 lows all-stock was down -75% compared to -43% for the LC/MC/REIT asset allocation. From the yearly gain bar chart it looks like the driver of that difference were the early few years 2000 to 2002 inclusive years. Broader 'equity' diversification largely reduced that risk i.e. as of end of 2002 all-stock was down -21.3% annualised real after SWR, whilst the 3-way was down -6.4% annualised real.
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