Retirees: The common sense withdrawal method

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
bertilak
Posts: 5995
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Retirees: The common sense withdrawal method

Post by bertilak » Sat Feb 17, 2018 11:02 am

I thought the purpose of a "sophisticated" withdrawal method was to achieve a consistent, reliable, long-term cash flow. If the answer is to take what you need when you need it, hope you don't run out, and scrimp if it gets close, I say that's the absence of a method. Some people have enough that they do not need a method. Getting to that point might be a goal of investing.
Last edited by bertilak on Sat Feb 17, 2018 11:17 am, edited 1 time in total.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

User avatar
bobcat2
Posts: 5215
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: Retirees: The common sense withdrawal method

Post by bobcat2 » Sat Feb 17, 2018 11:04 am

tennisplyr wrote:
Sat Feb 17, 2018 7:26 am
My point in starting this thread was that before computers or sophisticated models, my suspicion is that some people financially navigated their way through retirement.
Retirement, as we know it, is a post WWII concept. Before that most Americans didn't live that long and there wasn't Social Security. (SS benefits started on a small scale in the late 1930s.)

Before the post war era most people worked until they weren't physically able and then they were cared for at home by family members, including extended family, for the remainder of their typically short life times. Women staying at home also had physically demanding work until the late 1920s in much of America and those hard lives continued for women in most of the South and in rural areas until the 1950s. Indoor plumbing and electricity greatly eased the burdens of household work.

While there have always been a small minority of wealthy people who had something like retirement, the idea of retirement planning for the majority didn't become something that much thought was given to until the late 1970s. From the late 40s until the early 70s most navigated their post work life the best they could from SS, pensions, owning their home, and a small amount of personal savings. From the advent of applied retirement planning in the 1970s to the use of computers was a very short time and almost all "retirement planning" has been done in the age of computers.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Retirees: The common sense withdrawal method

Post by willthrill81 » Sat Feb 17, 2018 11:28 am

bertilak wrote:
Sat Feb 17, 2018 11:02 am
I thought the purpose of a "sophisticated" withdrawal method was to achieve a consistent, reliable, long-term cash flow.
I agree with the long-term aspect of that, but consistency and reliability may not be realistic and/or may come with too high of a price tag. To go our whole lives with variable income but then expect an unchanging one in retirement seems like a desirable but unrealistic goal IMHO. Further, if something like a 4% WR is used in order to maintain income stability, then on average, the retiree would have withdrawn too little (apart from a desire for a bequest). Maximizing your withdrawals comes at the expense of a consistent income.

And how many retirees from the year 2000 using a 4% WR wouldn't be reducing their withdrawals upon seeing their portfolio down by 25% in 2003 or down by nearly 40% in 2009?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
bobcat2
Posts: 5215
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: Retirees: The common sense withdrawal method

Post by bobcat2 » Sat Feb 17, 2018 11:46 am

willthrill81 wrote:
Sat Feb 17, 2018 11:28 am
bertilak wrote:
Sat Feb 17, 2018 11:02 am
I thought the purpose of a "sophisticated" withdrawal method was to achieve a consistent, reliable, long-term cash flow.
Further, if something like a 4% WR is used in order to maintain income stability, then on average, the retiree would have withdrawn too little (apart from a desire for a bequest). Maximizing your withdrawals comes at the expense of a consistent income.

And how many retirees from the year 2000 using a 4% WR wouldn't be reducing their withdrawals upon seeing their portfolio down by 25% in 2003 or down by nearly 40% in 2009?
There is nothing "sophisticated" about something like a 4% withdrawal rate and that, I believe, is one of bertilak's points. You can have a consistent reliable long-term cash flow in retirement but most of the income will have to be either annuitized or liability matched. And that is probably another of bertilak's points. :wink:

Think of consistent and reliable income in retirement as your retirement paycheck replacement.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

MnD
Posts: 3567
Joined: Mon Jan 14, 2008 12:41 pm

Re: Retirees: The common sense withdrawal method

Post by MnD » Sat Feb 17, 2018 12:28 pm

rgs92 wrote:
Fri Feb 16, 2018 12:41 pm
Mnd, was that Firecalc chart for a 60/40 constant asset allocation?

I guess the big problem with 1966 was the runaway inflation causing bonds to decline dramatically and the need for very large nominal withdrawals to cope the rising cost of living. And the energy crisis played a big part in that.

Inflation seems to be a big factor in portfolio-survival scenarios.

Thanks for the great chart. Very informative.
No it wasn't (it was the Cfiresim default of 75/25, 4% SWR, 30 year sequence).

But here is 60/40 constant allocation, 4% SWR with a 35 year sequence of returns so the 1982 retiree outcome (the highlighted outlier on the upside) includes returns through 2017. Taylor Livermore has never implied his 1982 retirement portfolio outcome and spending model was typical, but I'd caution others to avoid making the "Taylor Livermore method" a Bogleheadism, given that he is in fact a 1982 retiree. Also note the mid-1960's era retiree outcomes highlighted. All bonds did for their portfolio survival (or lack thereof) was to make things somewhat worse.

$1M portfolio start, 60/40 constant AA, 4% SWR inflation-adjusted, 35 year sequences
Image

2pedals
Posts: 471
Joined: Wed Dec 31, 2014 12:31 pm

Re: Retirees: The common sense withdrawal method

Post by 2pedals » Sat Feb 17, 2018 12:47 pm

As a person nearing retirement I find this thread very interesting thread. I have been learning a lot the past year. Lots of word of wisdom here.

I believe what works for you is based on your individual circumstances, i.e. saving for end of life, legacy, pension, expenses, personal desires, SS, health, actual return, portfolio amount, etc. A common sense withdrawal method such as the Taylor method may not make much common sense at all.
Last edited by 2pedals on Sat Feb 17, 2018 12:51 pm, edited 1 time in total.

itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Retirees: The common sense withdrawal method

Post by itstoomuch » Sat Feb 17, 2018 12:49 pm

Common Sense works for me.

Personally ( :oops: :annoyed ) , a SWR is like a New Year's Resolution, Love, and maybe the Weather. It's only accurate at the moment and less predictable the further out in time :mrgreen:
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

Mike Scott
Posts: 882
Joined: Fri Jul 19, 2013 2:45 pm

Re: Retirees: The common sense withdrawal method

Post by Mike Scott » Sat Feb 17, 2018 1:08 pm

"common sense" withdrawal is the same as any time in life... spend less than you have... most american retirees do this with zero investments and therefore don't even have to multiply by 0.04...

rgs92
Posts: 2070
Joined: Mon Mar 02, 2009 8:00 pm

Re: Retirees: The common sense withdrawal method

Post by rgs92 » Sat Feb 17, 2018 1:10 pm

Thanks again Mnd. My intuition tells me that the combination of a long bear market in both stocks and bonds is a killer scenario, especially if it happens early on in the retirement period.

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Retirees: The common sense withdrawal method

Post by willthrill81 » Sat Feb 17, 2018 1:16 pm

rgs92 wrote:
Sat Feb 17, 2018 1:10 pm
Thanks again Mnd. My intuition tells me that the combination of a long bear market in both stocks and bonds is a killer scenario, especially if it happens early on in the retirement period.
You think that times to come will be worse than the Great Depression, when the '4% rule' worked? It could happen, but I'm curious as to whether you view this as a realistic possibility and, if so, why.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Retirees: The common sense withdrawal method

Post by dbr » Sat Feb 17, 2018 1:18 pm

rgs92 wrote:
Sat Feb 17, 2018 1:10 pm
Thanks again Mnd. My intuition tells me that the combination of a long bear market in both stocks and bonds is a killer scenario, especially if it happens early on in the retirement period.
By definition a long bear market is longer than early-on in retirement. That aside, it is a killer scenario. The standing examples are 1966 for the worst and 1982 for the best, among a few others.

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Retirees: The common sense withdrawal method

Post by willthrill81 » Sat Feb 17, 2018 1:21 pm

dbr wrote:
Sat Feb 17, 2018 1:18 pm
rgs92 wrote:
Sat Feb 17, 2018 1:10 pm
Thanks again Mnd. My intuition tells me that the combination of a long bear market in both stocks and bonds is a killer scenario, especially if it happens early on in the retirement period.
By definition a long bear market is longer than early-on in retirement. That aside, it is a killer scenario. The standing examples are 1966 for the worst and 1982 for the best, among a few others.
And a 3.9% WR survived' for a 30 year retirement starting in 1966.

Again, the future could look worse, but I'm curious as to whether and why people think it realistically could be.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

DrGoogle2017
Posts: 1322
Joined: Mon Aug 14, 2017 12:31 pm

Re: Retirees: The common sense withdrawal method

Post by DrGoogle2017 » Sat Feb 17, 2018 1:41 pm

For me, the 4% SWR is for planning to see if you have enough to retire yet. But when I planned for my retirement, I didn’t know anything about 4% SWR, I knew nothing about Firecalc, I think I ran it wrong even. I have a liability matching portfolio( but I didn’t know it was called that even). Maybe the savings grace is that I built in a huge buffer in everything when I planned. Most of the common retirement saving calculators like the ones from Fidelity and TRowePrice indicated I was 100% successful(whatever that means, Prince Charles here, haha). But I know I could cut back on spending significantly and will be alright. I would say I have a black belt in frugality when I need to use it, but have no plan to use it. Or to put it another words, I have confident in maintain my spending without any withdrawal from my savings. So that’s the plan.

dpc
Posts: 396
Joined: Sat Aug 27, 2011 1:41 pm

Re: Retirees: The common sense withdrawal method

Post by dpc » Sat Feb 17, 2018 1:44 pm

It's good keep in mind that there is a powerful selection bias at work at Bogleheads.org. Most people on this forum are generally frugal and perhaps overly concerned with their finances. "Common sense" works when we have generally have not had a problem in our working life with overspending, excessive debt, etc.

I've been basically retired for two years. I've taken a rough look at spending to get a sense of how we're doing. But in general, we don't adhere to a monthly or even annual budget. We never did. I don't even balance my checkbook - (the horror!). I plan to defer SS until 70, but I'm open to changing my mind if circumstances or finances change.

So, we're following Taylor's spending approach - probably because we're not capable of doing anything more structured. It's good to have a plan, but even better to live your life. If there is something you really need or want - probably you should buy it. For most people reading this, it will all work out. When the balances take a big dip, you'll inherently spend less.

Cheers,

Dave - lapsed Bogelhead.
"Worrying is like paying interest on a debt that you might never owe" -- Will Rogers

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Retirees: The common sense withdrawal method

Post by dbr » Sat Feb 17, 2018 2:01 pm

It would be common sense with respect to anything that you understand something about what you are doing, that you pay attention, that you apply some logic and critical thinking to what you read and hear, and that you don't do things that are stupid. Common sense in retirement does not mean that you do whatever you want without regard to consequences. In fact common sense might be summed up as paying attention to consequences when you do things.

User avatar
Orion
Posts: 509
Joined: Mon Feb 19, 2007 11:52 pm

Re: Retirees: The common sense withdrawal method

Post by Orion » Sat Feb 17, 2018 2:46 pm

tennisplyr wrote:
Sat Feb 17, 2018 7:26 am
My point in starting this thread was that before computers or sophisticated models, my suspicion is that some people financially navigated their way through retirement. Was wondering if some, like me, are doing that. My mom did. I'm not implying that I spend whatever I want, whenever.
I could point to a number of people who have done this - though all the ones that I can think of pretty much live(d) off social security and pensions. If your retirement is all, or mostly, defined by a lump of money under your control, and if that lump is not obviously huge relative to your spending, then SWRs are much more interesting. They are also more interesting to people who retire young and can't count on even social security for a long time. I can think of a number of financial successes and failures among retired people I know.

TN_Boy
Posts: 348
Joined: Sat Jan 17, 2009 12:51 pm

Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Sat Feb 17, 2018 2:47 pm

dbr wrote:
Fri Feb 16, 2018 9:42 am
tennisplyr wrote:
Fri Feb 16, 2018 8:16 am
Obviously, there are endless discussions here about withdrawal methods usually involving some kind of formulae or calculations. I was wondering if there are people like me who just use common sense...they take out what they need, when they need it. Please share your story.
Sure. I do that with the caveat that I keep track of the overall rate of withdrawal and asset balance to anticipate if withdrawals are getting dangerously out of hand. I know my spending can bounce around enough that I have spent twice as much in one year as in another year. To try to spend an even budget every year would be silly. I doubt Mr. Larrimore ever literally spend "whatever he wanted." People are going to have common sense. Also an aside is that if you retire in a really good year, of which 1982 was one, the safe withdrawal rate for that year really is up around 8% or so. Of course you only find that out after going along for awhile, maybe most of the while before you are sure.

I know a guy who died with $8M and refused for years to let his wife ever have a new car instead of an old Camry. I guess that is also a withdrawal method.
I get that some (many?) people look at the various discussions on complex withdrawals methods and go "what the heck???" I do not plan on being super complicated in my withdrawal process, and in fact will try and use some "common sense."

But the problem with "common sense" is that it needs to be backed with some basic math. I know what my spouse and I have spent for the last 10 years. And I know what sort of taxes will need to be paid on withdrawals to support that level of spending, which is my target retirement spending. And I have ways to deal with health insurance in retirement. While the "4% rule" is more for planning, I also know that 4% from the portfolio supports my desired level of spending. Thus I might use the "common sense" approach within that framework. Certainly I will track, exactly, the total withdrawals from the portfolio. This appears to be what dbr is doing.

But just "I kinda spend what I think I need" strikes me as potentially catastrophic. What if your "needs" amount to more than the portfolio can support? Or also bad, what if you really would like to spend a little more, but since you haven't done the math, you are unsure you can spend more safely? Should you hoard your money, or take a risk you don't understand because you haven't done the math?

The (too frequently quoted) "Taylor approach" has to be taken with a large grain of salt. When you retire with the equivalent of 2.5M dollars on the eve of the greatest bull market in US history .... it's sort of like chewing gum and walking at the same time. It's not a big challenge. (Okay, one disclaimer is that we did not have the research then establishing some parameters around withdrawal rate ... but 1982 was a really good time to retire either way .. we came out of a recession, the stock market boomed, interest rates dropped .... it was a bull market in bonds as well as stocks. Financially, it was all good).

I also see a bit of recency in some posts -- newer retirees saying they are doing the "common sense thing." Well, the last few years have been quite good (five year return of total stock market 14.43% rate). Common sense is easy when the market is going up 14% a year! The much more interesting questions will come when the next protracted bear market hits. Then how much can you withdraw based solely on "common sense?"

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Retirees: The common sense withdrawal method

Post by dbr » Sat Feb 17, 2018 3:25 pm

TN_Boy wrote:
Sat Feb 17, 2018 2:47 pm
dbr wrote:
Fri Feb 16, 2018 9:42 am
tennisplyr wrote:
Fri Feb 16, 2018 8:16 am
Obviously, there are endless discussions here about withdrawal methods usually involving some kind of formulae or calculations. I was wondering if there are people like me who just use common sense...they take out what they need, when they need it. Please share your story.
Sure. I do that with the caveat that I keep track of the overall rate of withdrawal and asset balance to anticipate if withdrawals are getting dangerously out of hand. I know my spending can bounce around enough that I have spent twice as much in one year as in another year. To try to spend an even budget every year would be silly. I doubt Mr. Larrimore ever literally spend "whatever he wanted." People are going to have common sense. Also an aside is that if you retire in a really good year, of which 1982 was one, the safe withdrawal rate for that year really is up around 8% or so. Of course you only find that out after going along for awhile, maybe most of the while before you are sure.

I know a guy who died with $8M and refused for years to let his wife ever have a new car instead of an old Camry. I guess that is also a withdrawal method.
I get that some (many?) people look at the various discussions on complex withdrawals methods and go "what the heck???" I do not plan on being super complicated in my withdrawal process, and in fact will try and use some "common sense."

But the problem with "common sense" is that it needs to be backed with some basic math. I know what my spouse and I have spent for the last 10 years. And I know what sort of taxes will need to be paid on withdrawals to support that level of spending, which is my target retirement spending. And I have ways to deal with health insurance in retirement. While the "4% rule" is more for planning, I also know that 4% from the portfolio supports my desired level of spending. Thus I might use the "common sense" approach within that framework. Certainly I will track, exactly, the total withdrawals from the portfolio. This appears to be what dbr is doing.

But just "I kinda spend what I think I need" strikes me as potentially catastrophic. What if your "needs" amount to more than the portfolio can support? Or also bad, what if you really would like to spend a little more, but since you haven't done the math, you are unsure you can spend more safely? Should you hoard your money, or take a risk you don't understand because you haven't done the math?

The (too frequently quoted) "Taylor approach" has to be taken with a large grain of salt. When you retire with the equivalent of 2.5M dollars on the eve of the greatest bull market in US history .... it's sort of like chewing gum and walking at the same time. It's not a big challenge. (Okay, one disclaimer is that we did not have the research then establishing some parameters around withdrawal rate ... but 1982 was a really good time to retire either way .. we came out of a recession, the stock market boomed, interest rates dropped .... it was a bull market in bonds as well as stocks. Financially, it was all good).

I also see a bit of recency in some posts -- newer retirees saying they are doing the "common sense thing." Well, the last few years have been quite good (five year return of total stock market 14.43% rate). Common sense is easy when the market is going up 14% a year! The much more interesting questions will come when the next protracted bear market hits. Then how much can you withdraw based solely on "common sense?"
That sentence in my reply " I do that with the caveat that I keep track of the overall rate of withdrawal and asset balance to anticipate if withdrawals are getting dangerously out of hand." involves a certain amount of quantitative analysis I didn't write about, including checking with retirement withdrawal models and keeping an analysis of expected spending. I have seen several replies that some of my posts might have given some readers the wrong impression. I tried to correct that by referring to "informed common sense." What I am not enthusiastic for is thinking retirement can be engineered like building a bridge or an airplane. There is huge danger of false precision.

User avatar
Leif
Posts: 2442
Joined: Wed Sep 19, 2007 4:15 pm

Re: Retirees: The common sense withdrawal method

Post by Leif » Sat Feb 17, 2018 3:48 pm

Usually you read different methods to determine your maximum SWR. They have various advantages and disadvantages.

I'm lucky enough to not need to withdraw at a high rate (such as 4-5%). I just try to keep enough in my checking to handle ongoing expenses, with an eye on my cash flow. I replenish as necessary from my "high yield" savings. Or transfer money back to HY if I have extra.

I keep track of transfers between the checking accounts and other (Investment) accounts. Maybe about 15-20 per year. Most are dividends and CG I have automatically go into my checking. This record gives me an ongoing calculation of my withdrawal rate. As long as I'm below a long term annualized 5% I'm satisifed. Years involving a large purchase, such as car, I may exceed my upper limit goal during that year. I base my calculation on my beginning year investment value. Not much budgeting required, which I probably would not keep up in any case.
Last edited by Leif on Sat Feb 17, 2018 11:15 pm, edited 3 times in total.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

TN_Boy
Posts: 348
Joined: Sat Jan 17, 2009 12:51 pm

Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Sat Feb 17, 2018 4:16 pm

dbr wrote:
Sat Feb 17, 2018 3:25 pm
That sentence in my reply " I do that with the caveat that I keep track of the overall rate of withdrawal and asset balance to anticipate if withdrawals are getting dangerously out of hand." involves a certain amount of quantitative analysis I didn't write about, including checking with retirement withdrawal models and keeping an analysis of expected spending. I have seen several replies that some of my posts might have given some readers the wrong impression. I tried to correct that by referring to "informed common sense." What I am not enthusiastic for is thinking retirement can be engineered like building a bridge or an airplane. There is huge danger of false precision.
Oh, sorry. I might have given the wrong impression; my comment was unclear. I was pretty sure based on your various posts you had done some analysis, including looking at withdrawal methods. My plan is actually pretty much like yours -- understand the withdrawal methods, and then ... do something reasonable. My point of course was that understanding withdrawal methods and reasonable withdrawal amounts is pretty important.

I also agree that arguing "over the next 35 years can I withdraw 4% annually or is it actually 3.877% or perhaps 4.145% because of (fill in your favorite reason or magic withdrawal method)" is probably marginally useful.

DrGoogle2017
Posts: 1322
Joined: Mon Aug 14, 2017 12:31 pm

Re: Retirees: The common sense withdrawal method

Post by DrGoogle2017 » Sat Feb 17, 2018 5:58 pm

I just spend what I need comment depends on your own situation and your sources of income. Don’t forget a lot of us don’t depend on our portfolio. If you retire early like in your early 50s, of course you need to be cautious, 4% in your gage. But for some of us, our portfolio is like a bonus. Even though our fixed income is quite generous already. It’s how you structure your retirement income.

Ron Scott
Posts: 644
Joined: Tue Apr 05, 2016 5:38 am

Re: Retirees: The common sense withdrawal method

Post by Ron Scott » Sat Feb 17, 2018 6:41 pm

wolf359 wrote:
Fri Feb 16, 2018 12:07 pm
I'm not currently retired, but I have been mulling over a question for those who are. I intend to use the 4% rule to get me into the ballpark, but use common sense for the actual withdrawal method. I'd benchmark the withdrawals against the 4% number so I'd know roughly if I'm getting out of hand or not.

I have noticed that when running simulations of the times that the 4% rule failed, or came close to failing, you can tell within the first 5-10 years. If the portfolio balance in years 5-10 is equal to or lower than the starting balance, then you have to be cautious and reduce expenses or take steps to add money/income (get a job, downsize the home to replenish the portfolio, annuitize the bond portion, etc)

For someone following the common sense withdrawal method, this might be a quick non-math method to see if you're in trouble.

What do the experienced hands think?
Most retirement research people rely on is based on historical data from the United States reflecting its ups and downs during a period in which it eventually became the leading economic superpower of all time. Because there were wars and a depression during this period, people think it covers the worst of times and believe if they structure a retirement program around it they are safe.

We cannot predict the future and relying on historical economic datasets of the world's amazing gem does not seem like a reasonable thing to do IMO.

If you're planning a 30 year retirement it seems reasonable to me to assume you can, on average, invest in a way that allows you to keep pace with inflation. That would give you a withdrawal rate of ~3.33%. If you'd like to be conservative you can go with 3%.

There are 2 bad things to do and they're related:

1. NEED 4% to live.
2. NEED to sell stocks in a downmarket, or NEED to sell stocks sometime during the next 5 years, to live.

Watch your back.

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Retirees: The common sense withdrawal method

Post by willthrill81 » Sat Feb 17, 2018 6:57 pm

Ron Scott wrote:
Sat Feb 17, 2018 6:41 pm
Most retirement research people rely on is based on historical data from the United States reflecting its ups and downs during a period in which it eventually became the leading economic superpower of all time. Because there were wars and a depression during this period, people think it covers the worst of times and believe if they structure a retirement program around it they are safe.

We cannot predict the future and relying on historical economic datasets of the world's amazing gem does not seem like a reasonable thing to do IMO.
Remember that safe withdrawal rate research has actually focused on the worst periods to retire, not the average periods where 5-6% would have worked fine. That being said, a 4% fixed plus inflation WR would not have worked in most countries; per Wade Pfau's research, a globally cap-weighted portfolio would have supported a 3.5% fixed plus inflation WR for 30 years. One could 'guarantee' a 30 year retirement by buying nothing but TIPS and annuitizing the portfolio at a 3.33% WR (and certainly somewhat higher since TIPS do have a small real return). Alternatively, one could buy a SPIA and essentially achieve a significantly higher WR, albeit at the cost of leaving no bequest.
Ron Scott wrote:
Sat Feb 17, 2018 6:41 pm
There are 2 bad things to do and they're related:

1. NEED 4% to live.
If anyone needs 4% to literally survive, then what will the millions of retirees who have virtually no retirement savings and no pension do? The answer is simple: Social Security, working instead of retiring, and charity. Relying on those options is definitely 'sub-optimal' for most of us, but survival isn't really at stake here for most.
Ron Scott wrote:
Sat Feb 17, 2018 6:41 pm
2. NEED to sell stocks in a downmarket, or NEED to sell stocks sometime during the next 5 years, to live.
How do you define selling stocks in a "downturn?" Since we are not currently at market highs, does right now qualify? If you paid $100k for your stocks that are now worth $400k but were once worth $600k, does that qualify?

Why is it automatically a problem to need to sell stocks in the next five years? Most bear markets don't last nearly that long, though some certainly have (and longer).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

AlohaJoe
Posts: 3553
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Retirees: The common sense withdrawal method

Post by AlohaJoe » Sat Feb 17, 2018 8:41 pm

tennisplyr wrote:
Sat Feb 17, 2018 7:26 am
My point in starting this thread was that before computers or sophisticated models, my suspicion is that some people financially navigated their way through retirement. Was wondering if some, like me, are doing that. My mom did. I'm not implying that I spend whatever I want, whenever.
Before computers and sophisticated models most people living off of portfolios were income investors. (Read some Jane Austen to see how pervasive it was. Nobody says, "He's a millionaire". They say "his annual income (from investments) is several thousand pounds"!)

People bought utility stock and blue chips that had high-yields. (There's a reason for the stereotype of the window living off of AT&T dividends.)

Richer people would buy municipal bonds and live off of the interest from those.

That's how people navigated their way through retirement if they had a portfolio.

They generally didn't consume anything that even resembled the principle.

Over the past 2-3 decades, at the same time as the rise of more sophisticated retirement planning, there have been other shifts in investing: businesses (especially the tech companies that increasingly seem to form the future of business in America) are less enamoured of paying out dividends; the old, traditional, blue chip stocks are seen as less safe; yields on everything has gone down; many financial educators have made a strong case for "total returns" investing over "income investing"; and so on.

People still reach for yield. People still rely on income investing; high-dividend funds, Dividend Aristocrats, and so on are extremely popular funds. People still don't like touching principle. But systematic withdrawal plans provide some guidance for people that take a different path.

itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Retirees: The common sense withdrawal method

Post by itstoomuch » Sat Feb 17, 2018 10:44 pm

itstoomuch wrote:
Fri Feb 16, 2018 12:17 pm
YMMV. YvehiclesMV.
We use a FundingRatio (FR).
Expenses = Income.
Our Income is determined what the vehicle provides:
Recurring: SS pays something. Pension pays something. None asset based.
Mostly Recurring, Discounted: Rental Income. About 3-6% ROI depending on vacancies.
To Be Recurring and Mostly Recurring: Deferred GLWB annuities (8 annuities in time and . I have started and stopped withdrawals to extend guaranteed period and to manage Income. Currently, Income Value=Accumulation_Liquidation Value.
Discretionary: Remaining Discretionary Accts are mostly in IRA. I expect that we don't need to take RMD withdrawals until we are 75-78. There is a glitch in RDM requirements when using annuities for RMD.

what retirement vehicles you use can determine withdrawal amounts.
YMMV
The simpler version:
We bought 6-deferred VA annuities that were Market sensitive as Long Straddle options and 2-deferred Interest sensitive annuities as deeper Long Straddle options. Combined they made a Strangle option.
We bought Income producing Rentals.
Now only <10% is directly exposed to the Markets and that <10% is purely Discretionary and mostly in cash or individual stocks.

Even Simpler:
We sold off Risk to those who wanted Risk.

YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

User avatar
Watty
Posts: 13466
Joined: Wed Oct 10, 2007 3:55 pm

Re: Retirees: The common sense withdrawal method

Post by Watty » Sun Feb 18, 2018 12:15 am

From the Pirates of Caribbean when talking about "Pirates Code"
And thirdly, the code is more what you'd call "guidelines" than actual rules. Welcome aboard the Black Pearl, Miss Turner
There are no real rules only guidelines and reality checks which is all the 4% SWR was ever intended for.

rj49
Posts: 420
Joined: Wed Feb 23, 2011 12:22 am

Re: Retirees: The common sense withdrawal method

Post by rj49 » Sun Feb 18, 2018 12:31 am

Here's a timely post on the failings of a 4% rule, by a retired AOL exec named Dirk Cotton. Like Bill Bernstein, he replaced a lucrative first career with investment research and writing, and I've found his blog posts interesting and well-informed. Unlike other retirement withdrawal writers (Pfau, Kitces, etc.), he's not promoting financial services or annuity sales, and as an early retiree, he's living retirement withdrawal strategies first-hand, so he writes about realistic spending in retirement, making money last, and various threats to a secure retirement.

http://www.theretirementcafe.com/

Ron Scott
Posts: 644
Joined: Tue Apr 05, 2016 5:38 am

Re: Retirees: The common sense withdrawal method

Post by Ron Scott » Sun Feb 18, 2018 12:38 am

bobcat2 wrote:
Sat Feb 17, 2018 11:04 am
Retirement, as we know it, is a post WWII concept. Before that most Americans didn't live that long and there wasn't Social Security. (SS benefits started on a small scale in the late 1930s.)

Before the post war era most people worked until they weren't physically able and then they were cared for at home by family members, including extended family, for the remainder of their typically short life times. Women staying at home also had physically demanding work until the late 1920s in much of America and those hard lives continued for women in most of the South and in rural areas until the 1950s. Indoor plumbing and electricity greatly eased the burdens of household work.

While there have always been a small minority of wealthy people who had something like retirement, the idea of retirement planning for the majority didn't become something that much thought was given to until the late 1970s. From the late 40s until the early 70s most navigated their post work life the best they could from SS, pensions, owning their home, and a small amount of personal savings. From the advent of applied retirement planning in the 1970s to the use of computers was a very short time and almost all "retirement planning" has been done in the age of computers.
Good post.

I'll add that by the mid-late 50s, when the Dow had finally recouped it's losses from 1929 only about 5% of Americans owned stocks. Not only is modern retirement a new animal, investing as we know it today is as well. So we can talk all we want about 150 years of back-testing US market returns to determine a SWR, but keep in mind we're doing that against long periods of time in which no one really invested like we do today. The dynamics of investing have changed dramatically, and predicting the future of the market using these data is like predicting a return of shows like Leave It To Beaver on TV.

Why do people use that data to predict the future? Like the old joke about dogs, "because they can".

AlohaJoe
Posts: 3553
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Retirees: The common sense withdrawal method

Post by AlohaJoe » Sun Feb 18, 2018 12:44 am

rj49 wrote:
Sun Feb 18, 2018 12:31 am
Unlike other retirement withdrawal writers (Pfau, Kitces, etc.), he's not promoting financial services or annuity sales, and as an early retiree, he's living retirement withdrawal strategies first-hand
I don't think this is accurate. He's not retired and he does promote financial services (to the same extent as, say, Kitces does). He works as a financial planner at JDC Planning.

User avatar
willthrill81
Posts: 5007
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Retirees: The common sense withdrawal method

Post by willthrill81 » Sun Feb 18, 2018 12:59 am

rj49 wrote:
Sun Feb 18, 2018 12:31 am
Here's a timely post on the failings of a 4% rule, by a retired AOL exec named Dirk Cotton. Like Bill Bernstein, he replaced a lucrative first career with investment research and writing, and I've found his blog posts interesting and well-informed. Unlike other retirement withdrawal writers (Pfau, Kitces, etc.), he's not promoting financial services or annuity sales, and as an early retiree, he's living retirement withdrawal strategies first-hand, so he writes about realistic spending in retirement, making money last, and various threats to a secure retirement.

http://www.theretirementcafe.com/
Here's a quote from that post.
With all due respect to Bengen, whose research exposed sequence risk — an important contribution — I consider this strategy irrational and believe that it probably makes sense only for households with so much savings that they don’t need it. The idea that we can spend an amount calculated at the beginning of retirement and continue spending it regardless of what happens to our financial situation over perhaps 30 years is not only risky but irrational.
Like many others, he is taking Bengen's and others' work far too literally. I've not heard of a single retiree on this forum who has literally implemented the '4% rule' with no deviations. Virtually any sane person is going to adjust their spending, both upward and downward, depending on market conditions, their health, personal situation, life expectancy, bequest desires, etc. In reality, essentially everyone is going to use a variable spending strategy in retirement.

Where concepts like the '4% rule' come into play is by giving us an idea of what would have historically been a safe strategy, no more and no less. As others have pointed out, it is merely a guideline and not a hard-and-fast strategy to be clung to come what may. It gives us both an approximation of how big a portfolio we need and how much income we can safely take from a portfolio. One of the principle benefits of the SWR line of research was to point out that prior assumptions regarding withdrawal strategies (e.g. 7% withdrawals) were far too ambitious to last for a reasonably long retirement. Only Dave Ramsey is still espousing withdrawal rates that high.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

vested1
Posts: 1519
Joined: Wed Jan 04, 2012 4:20 pm

Re: Retirees: The common sense withdrawal method

Post by vested1 » Sun Feb 18, 2018 10:33 am

I see very little differentiation in the comments here that separate needs from wants. This may be a reflection of living where we live, our parentage, or a lifetime of being able to spend enough to avoid living on the edge. We are fortunate in that by some accident we arrive at a place where we have options. Some will never have those options.

The "Spend what you need" argument relies on common sense out of necessity. I'm beginning to lose count of acquaintances from my previous employment at Megacorp who blew through their retirement savings and had to return to work because they confused needs with wants. Some of these had their pay cut in half and found themselves out of work at an advanced age when they realized they were merely a number to their employer.

In a way, their failures stemmed from the same source. They were unrealistic in their expectations. Their overly optimistic outlook didn't include a budget, and a lack of planning became their personal black swan.

A recent conversation with a friend who had previously worked alongside me highlighted different withdrawal methods in our ongoing retirement, different viewpoints on the delay of SS, and different bequest goals. Although both were starkly different, both have very little possibility of failure. What was the difference in our success as opposed to others who arrived at the same start line? The simple answer: We envisioned the finish line, planning with an eye to budget and an acknowledgement of the difference between needs and wants.

My 2000 GMC Sierra is running great and has only 106,000 miles on it. My wife's 2007 Rav4 is running great, and has only 118,000 miles on it. Both of us want new vehicles, but will drive these until the wheels fall off or until income jumps significantly at my age 70. Long road trips kayak fishing, and vacations in Hawaii, Florida, or anywhere we can afford keep the dreams alive. Having grandkids helps to keep us humble.

It also helps to take a step back sometimes and remind ourselves how truly fortunate we are, as compared to others who never had our opportunities, or who squandered them through lack of planning. A realistic withdrawal rate is essential to that plan.

longinvest
Posts: 2905
Joined: Sat Aug 11, 2012 8:44 am

Re: Retirees: The common sense withdrawal method

Post by longinvest » Sun Feb 18, 2018 12:26 pm

To me, simplicity and flexibility are key.

I don't consider flying by the seat of my pants as reasonable. It would make me anxious. I don't want financial anxiety during retirement.

That's why my retirement plan is to combine stable lifelong non-portfolio income with flexible portfolio withdrawals guided by our wiki's VPW tables. The beauty of this approach is its simplicity and flexibility. The simplicity is that all I need to do, once a year, is simply multiply a percentage by my portfolio balance on that date to make a withdrawal. The flexibility becomes obvious when I consider that if I receive a windfall or must assume an unexpected one-time expense during retirement, future portfolio withdrawals will naturally adapt accordingly after the event (that's another side-effect of VPW's simplicity).

Between retirement and the start of non-portfolio income, the gap in payments can be funded by simply putting enough money aside* in a savings account with an interest rate matching inflation. Of course, I wouldn't take this money into account in the annual VPW withdrawal calculation.

* Total to put aside = number of missing payments X payment amount

Finally, at age 80, I'll reassess the situation. I might liquidate part of the remaining portfolio to buy enough additional inflation-indexed lifelong non-portfolio income so as to completely eliminate longevity risk. At age 80, the payout rate of an inflation-indexed Single Premium Immediate Annuity (SPIA) is competitive with the VPW table percentage. If I ever live long enough to survive my portfolio (e.g. age 105 or 110), I want to have enough income still coming in to live comfortably. Ending up bankrupt and eating cat food under a bridge is just not an option, regardless of how long I live.
Last edited by longinvest on Mon Feb 19, 2018 7:41 am, edited 1 time in total.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

User avatar
WoodSpinner
Posts: 516
Joined: Mon Feb 27, 2017 1:15 pm

Re: Retirees: The common sense withdrawal method

Post by WoodSpinner » Sun Feb 18, 2018 8:31 pm

bobcat2 wrote:
Sat Feb 17, 2018 10:15 am
Sandtrap wrote:
Fri Feb 16, 2018 9:08 pm
From "simple Bogle Basics" to Bob's "Funded Ratio", there comes a point where, yes, to those that are aware and informed (most on the forum) things become intuitive and seem like "common sense".
j :D
I don't believe using the funded ratio for retirement planning is something that is intuitive for most people on the Bogleheads forum. In fact, I don't believe most people on the forum have any idea what a funded ratio is. At best they know that it has something to do with assessing how well a pension plan is funded.
Well, your posts sure taught me a great deal about it! So thanks!

It’s now one of my common sense metrics I am using for funding my Retirement.

Much appreciated!

WoodSpinner

TN_Boy
Posts: 348
Joined: Sat Jan 17, 2009 12:51 pm

Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Mon Feb 19, 2018 9:35 am

longinvest wrote:
Sun Feb 18, 2018 12:26 pm
To me, simplicity and flexibility are key.

I don't consider flying by the seat of my pants as reasonable. It would make me anxious. I don't want financial anxiety during retirement.

That's why my retirement plan is to combine stable lifelong non-portfolio income with flexible portfolio withdrawals guided by our wiki's VPW tables. The beauty of this approach is its simplicity and flexibility. The simplicity is that all I need to do, once a year, is simply multiply a percentage by my portfolio balance on that date to make a withdrawal. The flexibility becomes obvious when I consider that if I receive a windfall or must assume an unexpected one-time expense during retirement, future portfolio withdrawals will naturally adapt accordingly after the event (that's another side-effect of VPW's simplicity).

Between retirement and the start of non-portfolio income, the gap in payments can be funded by simply putting enough money aside* in a savings account with an interest rate matching inflation. Of course, I wouldn't take this money into account in the annual VPW withdrawal calculation.

* Total to put aside = number of missing payments X payment amount

Finally, at age 80, I'll reassess the situation. I might liquidate part of the remaining portfolio to buy enough additional inflation-indexed lifelong non-portfolio income so as to completely eliminate longevity risk. At age 80, the payout rate of an inflation-indexed Single Premium Immediate Annuity (SPIA) is competitive with the VPW table percentage. If I ever live long enough to survive my portfolio (e.g. age 105 or 110), I want to have enough income still coming in to live comfortably. Ending up bankrupt and eating cat food under a bridge is just not an option, regardless of how long I live.
I'm sorry, I should go and read carefully the wiki, but this comment puzzles me:

"Between retirement and the start of non-portfolio income, the gap in payments can be funded by simply putting enough money aside* in a savings account with an interest rate matching inflation. Of course, I wouldn't take this money into account in the annual VPW withdrawal calculation."

So if I retired at 60, and planned on taking SS at 70, I should put aside 10 years of expenses in cash (and a slight tangent, finding a savings account that will yield 2% is a bit of a chore .... though perhaps you would include CDs, etc.).

Any solution that would require putting aside multiples of six figures into low yielding investments seems to need a little fine tuning. Perhaps I am not understanding the part I quoted?

longinvest
Posts: 2905
Joined: Sat Aug 11, 2012 8:44 am

Re: Retirees: The common sense withdrawal method

Post by longinvest » Mon Feb 19, 2018 9:39 am

TN_Boy wrote:
Mon Feb 19, 2018 9:35 am
longinvest wrote:
Sun Feb 18, 2018 12:26 pm
To me, simplicity and flexibility are key.

I don't consider flying by the seat of my pants as reasonable. It would make me anxious. I don't want financial anxiety during retirement.

That's why my retirement plan is to combine stable lifelong non-portfolio income with flexible portfolio withdrawals guided by our wiki's VPW tables. The beauty of this approach is its simplicity and flexibility. The simplicity is that all I need to do, once a year, is simply multiply a percentage by my portfolio balance on that date to make a withdrawal. The flexibility becomes obvious when I consider that if I receive a windfall or must assume an unexpected one-time expense during retirement, future portfolio withdrawals will naturally adapt accordingly after the event (that's another side-effect of VPW's simplicity).

Between retirement and the start of non-portfolio income, the gap in payments can be funded by simply putting enough money aside* in a savings account with an interest rate matching inflation. Of course, I wouldn't take this money into account in the annual VPW withdrawal calculation.

* Total to put aside = number of missing payments X payment amount

Finally, at age 80, I'll reassess the situation. I might liquidate part of the remaining portfolio to buy enough additional inflation-indexed lifelong non-portfolio income so as to completely eliminate longevity risk. At age 80, the payout rate of an inflation-indexed Single Premium Immediate Annuity (SPIA) is competitive with the VPW table percentage. If I ever live long enough to survive my portfolio (e.g. age 105 or 110), I want to have enough income still coming in to live comfortably. Ending up bankrupt and eating cat food under a bridge is just not an option, regardless of how long I live.
I'm sorry, I should go and read carefully the wiki, but this comment puzzles me:

"Between retirement and the start of non-portfolio income, the gap in payments can be funded by simply putting enough money aside* in a savings account with an interest rate matching inflation. Of course, I wouldn't take this money into account in the annual VPW withdrawal calculation."

So if I retired at 60, and planned on taking SS at 70, I should put aside 10 years of expenses in cash (and a slight tangent, finding a savings account that will yield 2% is a bit of a chore .... though perhaps you would include CDs, etc.).

Any solution that would require putting aside multiples of six figures into low yielding investments seems to need a little fine tuning. Perhaps I am not understanding the part I quoted?
Two links: Example. If I was 60, I had a $1,500,000 50/50 stocks/bonds portfolio, and I expected to get $35,000 annually by delaying Social Security to age 70, I would do the following:
  • I would put $350,000 into a savings account (part of it could be invested into a non-rolling CD ladder, the goal being to match inflation for the next 10 years)
  • I would take an inflation-indexed $35,000 out of that savings account annually for 10 years, until the inflation-indexed annual $35,000 Social Security payments start
  • I would apply VPW on the remaining portfolio
In other words, at age 60, I would put $350,000 in a savings account and immediately take out $35,000 for spending during the year. I would be left with a ($1,500,000 - $350,000) = $1,150,000 50/50 stocks/bonds portfolio. Looking up the percentage for age 60 with a 50/50 portfolio into the VPW tables, I get to multiply 4.5% by $1,150,000 and then withdraw $51,750 from the portfolio. This gives me a total of ($51,750 + $35,000) = $86,750 in pre-tax income at age 60.

At age 61, the portfolio will have fluctuated. I would take out an inflation-indexed $35,000 out of the savings account and withdraw 4.6% of the portfolio balance, as indicated for age 61 and a 50/50 portfolio in the VPW table.

At age 70, the savings account would be depleted, but I would receive and inflation-indexed $35,000 from Social Security and withdraw 5.3% of the portfolio balance, as indicated for age 70 and a 50/50 portfolio in the VPW table.

At age 80, I would consider liquidating a part of the remaining portfolio to increase my lifelong stable inflation-indexed income to insure me sufficient income to live comfortably for the remaining of my life, independently from portfolio withdrawals, eliminating longevity risk.

It's simple and flexible.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

longinvest
Posts: 2905
Joined: Sat Aug 11, 2012 8:44 am

Re: Retirees: The common sense withdrawal method

Post by longinvest » Mon Feb 19, 2018 11:05 am

Let's put this to a test. Let's assume that the stock market drops 50% during the first retirement year, at age 60. What's the impact on total pre-tax retirement income at age 61?
longinvest wrote:
Mon Feb 19, 2018 9:39 am
In other words, at age 60, I would put $350,000 in a savings account and immediately take out $35,000 for spending during the year. I would be left with a ($1,500,000 - $350,000) = $1,150,000 50/50 stocks/bonds portfolio. Looking up the percentage for age 60 with a 50/50 portfolio into the VPW tables, I get to multiply 4.5% by $1,150,000 and then withdraw $51,750 from the portfolio. This gives me a total of ($51,750 + $35,000) = $86,750 in pre-tax income at age 60.

At age 61, the portfolio will have fluctuated. I would take out an inflation-indexed $35,000 out of the savings account and withdraw 4.6% of the portfolio balance, as indicated for age 61 and a 50/50 portfolio in the VPW table.
Given a 50/50 portfolio, and assuming a 0% real return for bonds and 50% real loss for stocks, and, just for fun, a -1% lag of the savings account, relative to inflation.

Here are the initial balances at the beginning of the year, after withdrawal, at age 60:
  • Savings account: $315,000
  • Portfolio: $1,098,250 divided as
    • Stocks: $549,125
    • Bonds: $549,125
At the beginning of the following year, before withdrawal, here are the balances in inflation-indexed dollars:
  • Savings account: $311,000 (a loss of 1% real)
  • Portfolio: $823,688 divided as
    • Stocks: $274,563 (a loss of 50% real)
    • Bonds: $549,125 (a return of 0% real)
I would withdraw 1/9 of the savings account, $34,650 (1% less than $35,000). I would also withdraw $37,890 from the portfolio (4.6% of $823,688), proceeding as follows:
  • I would sell $156,226 in bonds
  • I would use $118,336 of the proceeds to buy stocks.
  • This would leave me with $37,890 a withdrawal and a rebalanced portfolio.


Total pre-tax retirement income, at age 61, would thus be ($34,650 + $37,890) = $72,540, a mere reduction of 16% relative to the previous year in a scenario where stocks lost half their value and cash wasn't even able to match inflation.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

rixer
Posts: 602
Joined: Tue Sep 11, 2012 4:18 pm

Re: Retirees: The common sense withdrawal method

Post by rixer » Mon Feb 19, 2018 11:26 am

I've just withdrawn for two years now since being retired. Just to have a starting place we used the 4% rule and this year we did the same with added cola. For us, we like to withdraw a certain amount for the entire year and make do on it. This way, we'll keep a handle on our spending and we'll know if something is wrong within one year which will give us time to reorganize.

We can cut our expenses if need be but that won't be today. :beer

User avatar
bobcat2
Posts: 5215
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: Retirees: The common sense withdrawal method

Post by bobcat2 » Mon Feb 19, 2018 11:52 am

longinvest wrote:
Mon Feb 19, 2018 9:39 am
Example. If I was 60, I had a $1,500,000 50/50 stocks/bonds portfolio, and I expected to get $35,000 annually by delaying Social Security to age 70, I would do the following:
Very few people who expect to get $35,000 from Social Security by delaying benefits to age 70 have portfolios of $1,500,000 or more at age 60. How is this commonsense advice? That sized portfolio at age 60 couldn't apply to more than 5% of the population who expect to get $35,000/yr from SS at age 70. It's very difficult for most Americans to have enough financial resources to delay SS benefits more than two or three years from when they retire.

For the small minority that could do this TIPS funds or a TIPS ladder either duration matched to the needed ten years of income makes much more sense than a savings account that may or may not match inflation.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

longinvest
Posts: 2905
Joined: Sat Aug 11, 2012 8:44 am

Re: Retirees: The common sense withdrawal method

Post by longinvest » Mon Feb 19, 2018 12:04 pm

Bob,
bobcat2 wrote:
Mon Feb 19, 2018 11:52 am
longinvest wrote:
Mon Feb 19, 2018 9:39 am
Example. If I was 60, I had a $1,500,000 50/50 stocks/bonds portfolio, and I expected to get $35,000 annually by delaying Social Security to age 70, I would do the following:
Very few people who expect to get $35,000 from Social Security by delaying benefits to age 70 have portfolios of $1,500,000 or more at age 60. How is this commonsense advice? That sized portfolio at age 60 couldn't apply to more than 5% of the population who expect to get $35,000/yr from SS at age 70. It's very difficult for most Americans to have enough financial resources to delay SS benefits more than two or three years from when they retire.

BobK
First: I used age 60, in my example, as I was replying to a question about that specific retirement age. Please see TN_Boy's post:
TN_Boy wrote:
Mon Feb 19, 2018 9:35 am
So if I retired at 60, and planned on taking SS at 70, I should put aside 10 years of expenses in cash (and a slight tangent, finding a savings account that will yield 2% is a bit of a chore .... though perhaps you would include CDs, etc.).
Second: What would the average Social Security benefit be, if delayed to age 70? Wouldn't it be something like $25,000? If so, someone retiring at age 65 would need to put aside $125,000 into a savings account to fill the 5-year delay gap.

A Boglehead should be able to build a portfolio significantly bigger than $125,000 over a lifetime of living below his means and investing into low-fee broad-market stock and bond index funds. One could accumulate $125,000 by simply putting $260 per month into a savings account (or CDs) matching inflation from age 25 to age 65.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

User avatar
BTDT
Posts: 783
Joined: Sun Aug 29, 2010 10:40 am
Location: Grand Lake OK

Re: Retirees: The common sense withdrawal method

Post by BTDT » Mon Feb 19, 2018 12:20 pm

At 71 years young , Taylor Larimore's method has worked very well for me in retirement. I think of it as "common sense" and a 'keep-it-simple-stupid' (KISS) combined approach.

Bottom line- What works for me might not work for others, so I suggest the naysayers of'Taylor's method do it there way and I will continue to do it my way. :beer
If past history was all that is needed to play the game of money, the richest people would be librarians.

trueson1
Posts: 91
Joined: Mon Mar 13, 2017 11:40 am

Re: Retirees: The common sense withdrawal method

Post by trueson1 » Mon Feb 19, 2018 12:29 pm

A lot of good "common sense" discussion here. But back to the OP's original question. I guess it depends on what floats your boat. If you want to spend lots of time and effort running endless financial evaluations (which I must admit I have done from time to time), worrying about what might happen, etc - you can do that. Or just do your basic Bogelhead homework but don't forget to "live your life well", instead of living in a state of "uncommon sense" paralysis and end up with lots of money and no "well" lived life.

User avatar
bobcat2
Posts: 5215
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: Retirees: The common sense withdrawal method

Post by bobcat2 » Mon Feb 19, 2018 12:46 pm

longinvest wrote:
Mon Feb 19, 2018 12:04 pm
What would the average Social Security benefit be, if delayed to age 70? Wouldn't it be something like $25,000? If so, someone retiring at age 65 would need to put aside $125,000 into a savings account to fill the 5-year delay gap.

A Boglehead should be able to build a portfolio significantly bigger than $125,000 over a lifetime of living below his means and investing into low-fee broad-market stock and bond index funds. One could accumulate $125,000 by simply putting $260 per month into a savings account (or CDs) matching inflation from age 25 to age 65.
A more reasonable approach for most people in this situation, including BHs, would be to work until age 67, even if it's only part-time, and then fund a 2-3 year SS gap rather than attempting to fund a 5 year gap.

I write this while fully realizing that in "Boglehead land" saving more each year of work is considered saintly, while advising working longer is considered the handiwork of the devil. :D

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

The Wizard
Posts: 12010
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Retirees: The common sense withdrawal method

Post by The Wizard » Mon Feb 19, 2018 12:57 pm

bobcat2 wrote:
Mon Feb 19, 2018 11:52 am

Very few people who expect to get $35,000 from Social Security by delaying benefits to age 70 have portfolios of $1,500,000 or more at age 60. How is this commonsense advice? That sized portfolio at age 60 couldn't apply to more than 5% of the population who expect to get $35,000/yr from SS at age 70. It's very difficult for most Americans to have enough financial resources to delay SS benefits more than two or three years from when they retire...
I don't know about others, but this pretty well describes my situation as a single person.
I didn't retire at age 60, but rather at age 63 in 2013.
I did annuitize a goodly portion of my 403(b) accumulation with TIAA for a good base of lifetime monthly income.

Then from my remaining portfolio, I've been withdrawing $3000/month in lieu of SS at age 70. I am NOT a fan of setting aside a seven year pile of cash or similar to fund this gap. I withdraw pro rata from my portfolio of about 50% equities.

That $3000/month is less than 4% annualized now, but of course we've had good market returns the past five years.
Regardless, most portfolios with a 50/50 AA can easily survive a seven year period with annual withdrawal rates of 5%, 6%, or possibly more.

Additionally, my Plan B in the event of an annoying stock market crash was simply to claim SS earlier than age 70...
Attempted new signature...

TN_Boy
Posts: 348
Joined: Sat Jan 17, 2009 12:51 pm

Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Mon Feb 19, 2018 2:10 pm

BTDT wrote:
Mon Feb 19, 2018 12:20 pm
At 71 years young , Taylor Larimore's method has worked very well for me in retirement. I think of it as "common sense" and a 'keep-it-simple-stupid' (KISS) combined approach.

Bottom line- What works for me might not work for others, so I suggest the naysayers of'Taylor's method do it there way and I will continue to do it my way. :beer
Could you respond to some of the specific concerns about the "Taylor method?" I have yet to hear a convincing (well, any) response to these comments:

1) Retiring with 2.5 M at the start of the biggest bull market in US history was ..... really easy. It will not/has not been so easy for everybody.
2) What if your "common sense needs" exceed what the portfolio can support?
3) What if you decide you'd really like to spend more, but don't really know what withdrawals the portfolio can handle?
4) What exactly IS the approach anyway? How much do you cut back during a brutal bear market? Do you even need to cut back (if you are pulling say 2% from the portfolio, reducing withdrawals is just punishing yourself).

TN_Boy
Posts: 348
Joined: Sat Jan 17, 2009 12:51 pm

Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Mon Feb 19, 2018 2:17 pm

The Wizard wrote:
Mon Feb 19, 2018 12:57 pm
bobcat2 wrote:
Mon Feb 19, 2018 11:52 am

Very few people who expect to get $35,000 from Social Security by delaying benefits to age 70 have portfolios of $1,500,000 or more at age 60. How is this commonsense advice? That sized portfolio at age 60 couldn't apply to more than 5% of the population who expect to get $35,000/yr from SS at age 70. It's very difficult for most Americans to have enough financial resources to delay SS benefits more than two or three years from when they retire...
I don't know about others, but this pretty well describes my situation as a single person.
I didn't retire at age 60, but rather at age 63 in 2013.
I did annuitize a goodly portion of my 403(b) accumulation with TIAA for a good base of lifetime monthly income.

Then from my remaining portfolio, I've been withdrawing $3000/month in lieu of SS at age 70. I am NOT a fan of setting aside a seven year pile of cash or similar to fund this gap. I withdraw pro rata from my portfolio of about 50% equities.

That $3000/month is less than 4% annualized now, but of course we've had good market returns the past five years.
Regardless, most portfolios with a 50/50 AA can easily survive a seven year period with annual withdrawal rates of 5%, 6%, or possibly more.

Additionally, my Plan B in the event of an annoying stock market crash was simply to claim SS earlier than age 70...
The notion of putting aside seven, or in my question, ten years of expenses in instruments guaranteed to NOT beat inflation is a good way to ensure that you wind up with less total money (for you or your heirs) when all is said and done.

Comments like "most people won't be in the situation of being able to retire at 60 and wait to 70 for SS" are true, but that wasn't my question and I suspect a number of people on this board ARE in such a position.

User avatar
Orion
Posts: 509
Joined: Mon Feb 19, 2007 11:52 pm

Re: Retirees: The common sense withdrawal method

Post by Orion » Mon Feb 19, 2018 2:52 pm

I'm only going from memory, but I recall a bunch of surveys/polls in the early days of this forum that indicated that many here were "prodigious accumulators of wealth", so I don't think $1.5M at 60 was ridiculous in this context. I retired well before social security, and I kept a portion of my investments in very stable low-yielding assets. As a result, I did clearly give up growth, but I got to have some fun and not worry much, so it worked for me. I still have "enough" and I went from 60 lbs above my ideal weight to 10 lbs above, from pre-diabetic to measurements at the bottom of the range, etc. So definitely pluses and minuses to early retirement.

longinvest
Posts: 2905
Joined: Sat Aug 11, 2012 8:44 am

Re: Retirees: The common sense withdrawal method

Post by longinvest » Mon Feb 19, 2018 2:57 pm

TN_Boy,
TN_Boy wrote:
Mon Feb 19, 2018 2:17 pm
The notion of putting aside seven, or in my question, ten years of expenses in instruments guaranteed to NOT beat inflation is a good way to ensure that you wind up with less total money (for you or your heirs) when all is said and done.
I don't understand the problem, here.

Someone worried about inflation could use I-Bonds, which are inflation-indexed cash instruments. As for other cash instruments, I've seen CDs and even savings accounts sometimes return more than inflation (as measured by the CPI-U). We aren't discussing about keeping money into no-volatility financial instruments for a lifetime; we are only discussing using them during a short period of a few years to build a stable income bridge between retirement and the start of an annuity.

The idea, explained in Delay Social Security to age 70 and Spend more money at 62, is simply to increase one's safe lifelong income by delaying Social Security to age 70 and building a stable inflation-indexed replacement income during the gap created by the delay. Investing the bridge money into volatile markets doesn't seem like a good idea to me.
Last edited by longinvest on Mon Feb 19, 2018 5:30 pm, edited 2 times in total.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

User avatar
1210sda
Posts: 1403
Joined: Wed Feb 28, 2007 8:31 am

Re: Retirees: The common sense withdrawal method

Post by 1210sda » Mon Feb 19, 2018 3:03 pm

TN_Boy wrote:
Mon Feb 19, 2018 2:10 pm
BTDT wrote:
Mon Feb 19, 2018 12:20 pm
At 71 years young , Taylor Larimore's method has worked very well for me in retirement. I think of it as "common sense" and a 'keep-it-simple-stupid' (KISS) combined approach.

Bottom line- What works for me might not work for others, so I suggest the naysayers of'Taylor's method do it there way and I will continue to do it my way. :beer
Could you respond to some of the specific concerns about the "Taylor method?" I have yet to hear a convincing (well, any) response to these comments:

1) Retiring with 2.5 M at the start of the biggest bull market in US history was ..... really easy. It will not/has not been so easy for everybody.
2) What if your "common sense needs" exceed what the portfolio can support?
3) What if you decide you'd really like to spend more, but don't really know what withdrawals the portfolio can handle?
4) What exactly IS the approach anyway? How much do you cut back during a brutal bear market? Do you even need to cut back (if you are pulling say 2% from the portfolio, reducing withdrawals is just punishing yourself).
Thanks TN boy. I too am interested in the responses to your questions, especially the bold, underlined ones. (I guess the questions are closely related)

1210

TN_Boy
Posts: 348
Joined: Sat Jan 17, 2009 12:51 pm

Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Mon Feb 19, 2018 7:41 pm

longinvest wrote:
Mon Feb 19, 2018 2:57 pm
TN_Boy,
TN_Boy wrote:
Mon Feb 19, 2018 2:17 pm
The notion of putting aside seven, or in my question, ten years of expenses in instruments guaranteed to NOT beat inflation is a good way to ensure that you wind up with less total money (for you or your heirs) when all is said and done.
I don't understand the problem, here.

Someone worried about inflation could use I-Bonds, which are inflation-indexed cash instruments. As for other cash instruments, I've seen CDs and even savings accounts sometimes return more than inflation (as measured by the CPI-U). We aren't discussing about keeping money into no-volatility financial instruments for a lifetime; we are only discussing using them during a short period of a few years to build a stable income bridge between retirement and the start of an annuity.

The idea, explained in Delay Social Security to age 70 and Spend more money at 62, is simply to increase one's safe lifelong income by delaying Social Security to age 70 and building a stable inflation-indexed replacement income during the gap created by the delay. Investing the bridge money into volatile markets doesn't seem like a good idea to me.
My problem is that I'm not really buying that putting (in my example) a full ten years worth of spending into something equivalent to a savings account is an obviously good idea. At a high level, it seems like just a bucket strategy, and I think safe low volatility instruments will have a negative return after taxes and inflation. For example, what are I-bonds yielding, 0? .1? I would instead simply spend more from the portfolio, a portfolio which includes a generous dose of bonds, and depend upon the bonds to dampen volatility. Clearly, if you compare two portfolios, one with a large chunk in cash (the 10 years of expenses) the second without the cash drag, most of the time the second portfolio will give you more money over your lifetime.

Also not stated in my example, but a factor, in this example if somebody did retire at 60 and deferred SS until 70, I think they would be unwise to need a very high withdrawal rate from the portfolio until SS hit. Sure, maybe 5% or 6% until SS kicks in, but if you needed 8% during the 10 year gap, you probably should have worked longer. I'm guessing we all agree on my last sentence.

I think deferring SS is a good idea for many. I certainly plan to defer it until 70. But I think there are three issues entangled here, which makes analysis difficult:

1) Whether to defer SS (often a good idea)
2) How to fund a gap between retirement and starting SS (the cash bucket you suggest is not an obviously good idea to me)
3) Portfolio withdrawal strategy (4%, VPW, pick your favorite plan).

longinvest
Posts: 2905
Joined: Sat Aug 11, 2012 8:44 am

Re: Retirees: The common sense withdrawal method

Post by longinvest » Mon Feb 19, 2018 8:11 pm

TN_Boy wrote:
Mon Feb 19, 2018 7:41 pm
longinvest wrote:
Mon Feb 19, 2018 2:57 pm
TN_Boy,
TN_Boy wrote:
Mon Feb 19, 2018 2:17 pm
The notion of putting aside seven, or in my question, ten years of expenses in instruments guaranteed to NOT beat inflation is a good way to ensure that you wind up with less total money (for you or your heirs) when all is said and done.
I don't understand the problem, here.

Someone worried about inflation could use I-Bonds, which are inflation-indexed cash instruments. As for other cash instruments, I've seen CDs and even savings accounts sometimes return more than inflation (as measured by the CPI-U). We aren't discussing about keeping money into no-volatility financial instruments for a lifetime; we are only discussing using them during a short period of a few years to build a stable income bridge between retirement and the start of an annuity.

The idea, explained in Delay Social Security to age 70 and Spend more money at 62, is simply to increase one's safe lifelong income by delaying Social Security to age 70 and building a stable inflation-indexed replacement income during the gap created by the delay. Investing the bridge money into volatile markets doesn't seem like a good idea to me.
My problem is that I'm not really buying that putting (in my example) a full ten years worth of spending into something equivalent to a savings account is an obviously good idea. At a high level, it seems like just a bucket strategy, and I think safe low volatility instruments will have a negative return after taxes and inflation. For example, what are I-bonds yielding, 0? .1? I would instead simply spend more from the portfolio, a portfolio which includes a generous dose of bonds, and depend upon the bonds to dampen volatility. Clearly, if you compare two portfolios, one with a large chunk in cash (the 10 years of expenses) the second without the cash drag, most of the time the second portfolio will give you more money over your lifetime.

Also not stated in my example, but a factor, in this example if somebody did retire at 60 and deferred SS until 70, I think they would be unwise to need a very high withdrawal rate from the portfolio until SS hit. Sure, maybe 5% or 6% until SS kicks in, but if you needed 8% during the 10 year gap, you probably should have worked longer. I'm guessing we all agree on my last sentence.

I think deferring SS is a good idea for many. I certainly plan to defer it until 70. But I think there are three issues entangled here, which makes analysis difficult:

1) Whether to defer SS (often a good idea)
2) How to fund a gap between retirement and starting SS (the cash bucket you suggest is not an obviously good idea to me)
3) Portfolio withdrawal strategy (4%, VPW, pick your favorite plan).
The term "bucket" usually refers to a part of a portfolio which is regularly replenished from another one, or serves to replenish another one. That's not the case, in the examples I've shown. There is no replenishing. Let me try to explain differently.

It might be clearer if I simply stated that I would go and buy a term-certain inflation-indexed Single Premium Immediate Annuity (SPIA) to cover the missing payments between retirement and the start of Social Security payments.

This wouldn't be called a "bucket".

I am simply planning to self-build a term-certain inflation-indexed SPIA using cash instruments, keeping the same guaranteed outcome, but with the benefit of keeping control of the money (in case of premature demise), instead of paying an insurance company to do it. That's all.

As for using volatile investments, instead of a (self-built) term-certain inflation-indexed SPIA, that's up to the taste of the retiree.

I would much prefer to be able to count on a term-certain inflation-indexed SPIA followed by delayed Social Security to provide a stable lifelong inflation-indexed income basis which is unaffected by stock and bond market volatility. Others might have other tastes.

Finally, I don't plan my retirement using a probabilistic approach. My goal isn't to maximize the number of retirements where I don't end up bankrupt, living under a bridge eating cat food, over a hypothetical future 1,000 lives. I've got a single life and a single retirement to hopefully enjoy. I just can't afford to mess it up.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

Post Reply