Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
nooneofnote
Posts: 24
Joined: Wed Feb 01, 2017 12:41 pm

Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by nooneofnote »

Big Ern's series continues to deliver: https://earlyretirementnow.com/2018/05/ ... s-reality/
IlliniDave
Posts: 2388
Joined: Fri May 17, 2013 7:09 am

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by IlliniDave »

I just gave the article a bit more than a skimming. My takeaway was that for the time periods (historical) he looked at the ability to go for extended periods down at about a 2.5% WR seemed to be the smoothest way to survive. 50 years is a long time, longer than I'll be retired, but it is looking like I'll start at baseline WR of ~1.7% so even with the expected occasional excursion up to 3%-3.5% I could have weathered membership in those cohorts. I know I seem weird in my degree of financial conservatism, and I'm currently in those "extra 1-2 years" the writer mentions, but it is hard to envision much regret on my part to being too financially prepared.

I assume in prior parts (or maybe in the future) looking at simply going from 4% down to 3% or whatever as a "fixed" withdrawal might have achieved similar results. I guess that is similar to increasing the initial stash by 20% or so.

If I'm recalling correctly, the first edition of the Boglehead's Guide mentioned 2.5% as a reasonable target for a retiree in her/his 40s (roughly looking at a possible 50-year horizon). I believe Dr. Bernstein has offered similar numbers, both of which sort of support the idea it might be prudent to at least consider the ramifications of retreating to 2.5% for extended periods if sequence-of-returns risk falls in one's lap when looking at retiring significantly early.
Don't do something. Just stand there!
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 »

I really like the work that ERN has done in this field. Nevertheless, I think his analysis here is overly pessimistic. It's widely known that the '4% rule' was tailored for 30 year retirements, and longer periods than 30 years need a lower starting withdrawal rate. Most of those who have done any research in this field say that a 3.0-3.5% withdrawal rate is appropriate for a longer retirement, out to something like 50 years. A 3% WR with the 80/20 AA that ERN analyzed would have survived both of the periods where 4% would have failed, and 3.5% would have only failed for the 1929 cohort and only then after at least 40 years of withdrawals. So to the extent that the future resembles the past, what's the likelihood that you'll live long enough to outlive a 3.5% and have insufficient income from something like Social Security to prevent financial ruin? Essentially zero.

I believe that if your absolutely non-discretionary expenses can be brought down to just 2% of your portfolio, leaving another 2% (or even 3%) for discretionary spending, making for a 4-5% starting withdrawal rate, retirees' portfolio will be about as close to 'bulletproof' as is prudent. If they need to cut their withdrawals in half, this strategy would allow them to do so and still have enough for their non-discretionary expenses. And if Social Security would be in addition to this, even if at some point in the future, that makes this strategy even more resilient.
The Sensible Steward
ryman554
Posts: 1635
Joined: Sun Jan 12, 2014 8:44 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by ryman554 »

willthrill81 wrote: Thu May 10, 2018 8:20 pm I really like the work that ERN has done in this field. Nevertheless, I think his analysis here is overly pessimistic. It's widely known that the '4% rule' was tailored for 30 year retirements, and longer periods than 30 years need a lower starting withdrawal rate. Most of those who have done any research in this field say that a 3.0-3.5% withdrawal rate is appropriate for a longer retirement, out to something like 50 years. A 3% WR with the 80/20 AA that ERN analyzed would have survived both of the periods where 4% would have failed, and 3.5% would have only failed for the 1929 cohort and only then after at least 40 years of withdrawals. So to the extent that the future resembles the past, what's the likelihood that you'll live long enough to outlive a 3.5% and have insufficient income from something like Social Security to prevent financial ruin? Essentially zero.

I believe that if your absolutely non-discretionary expenses can be brought down to just 2% of your portfolio, leaving another 2% (or even 3%) for discretionary spending, making for a 4-5% starting withdrawal rate, retirees' portfolio will be about as close to 'bulletproof' as is prudent. If they need to cut their withdrawals in half, this strategy would allow them to do so and still have enough for their non-discretionary expenses. And if Social Security would be in addition to this, even if at some point in the future, that makes this strategy even more resilient.
That's my plan.
I've got a target of 3.5% necessary expenses, including SS (and TIPS bridge to it) and taxes. This is my "If I had to quit, I'll be OK" target.
Then I've got a target of what we'll politely call "I'm outta here" money, which is 2% necessary and 2% discretionary (ala 4%).
User avatar
220volt
Posts: 204
Joined: Tue Jan 30, 2018 9:33 pm
Location: USA

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by 220volt »

I like Big Ern, especially when he is guests on Podcasts, but I am having a hard time getting through his lengthy posts, but that's probably just me. However, Germans do like to over-complicate things.

One can analyze, then reanalyze, over calculate every possible scenario of "what if" and in the end never retire or retire way too late.
Both wife and I have decided early on, that once we hit 25 years worth of savings, we're out. Simple as that. No fear. No matter what. No matter what the market is doing and what the political situation in the world is. We'll hopefully have some brains left to deal with problems as they arise. Besides there's a whole world out there as economically diverse as one can wish it to be, so opportunities to be flexible are endless.

I really like Taylor Larimore's method described in this thread. Simple and effective.
viewtopic.php?f=2&t=139155
One of the great mysteries to me are the Great Debates over Safe Withdrawal Rates (SWR).

I put Safe Withdrawal Rates into Google and it came up with more than 16,000 hits. One wonders how people managed to retire without knowing their "SWR."

Mathematicians love numbers. Fortunately for them, the stock and bond markets spew-out millions of numbers every day which are carefully preserved and available for them to analyze. Unfortunately for us, past performance numbers do not predict future performance.

I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

This is what most people do and it works.
"If I had only followed the advice of financial analysts in 2008, I'd have a million dollars today, provided I started with a hundred million dollars" - Jon Stewart
Shamb3
Posts: 82
Joined: Mon Apr 09, 2018 8:58 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by Shamb3 »

Starting with more money / lower withdrawal rate by working 2 more years is good advice.

The premise of being 80% stock / 20% bond at the date of retirement is a bad idea due to sequence of returns. I didn't hear anything about re-balancing or spending the bonds when the market is down etc. I assume the model just spent the same proportion from both assets.

I will be closer to 60% stock / 40% bond at retirement and just maintain that 10 years expenses in bonds. If markets perform at the long term average this bucket will shrink to 10% of the portfolio in ~20 years.

Depending on the return I am getting on the bonds, I would consider using up to half of that money to DCA into the market during crashes and restore it on the recoveries.
AlohaJoe
Posts: 6609
Joined: Mon Nov 26, 2007 1:00 pm
Location: Saigon, Vietnam

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by AlohaJoe »

Shamb3 wrote: Sat May 12, 2018 7:17 am The premise of being 80% stock / 20% bond at the date of retirement is a bad idea due to sequence of returns. I didn't hear anything about re-balancing or spending the bonds when the market is down etc. I assume the model just spent the same proportion from both assets.
The title of the post is Part 24. Did you read the previous 23 parts? There's nothing wrong with 80/20 and no reason he'd bring up rebalancing in a post titled "Flexibility Myths vs Reality".
Ron
Posts: 6972
Joined: Fri Feb 23, 2007 6:46 pm
Location: Allentown–Bethlehem–Easton, PA-NJ Metropolitan Statistical Area

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by Ron »

In Taylor's case, that $1M was worth (adjusting for inflation) $2,582,948.45 today, in addition to a pension and retirement benefits at the time of retirement.

I would say that he certainly has/had more flexibility than most in his withdrawals over the years, when compared to today's retiree who is lucky to retire with "only" $1M and has to watch his/her pennies over their retirement journey.

FWIW,

- Ron
Shamb3
Posts: 82
Joined: Mon Apr 09, 2018 8:58 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by Shamb3 »

AlohaJoe wrote: Sat May 12, 2018 7:28 am
Shamb3 wrote: Sat May 12, 2018 7:17 am The premise of being 80% stock / 20% bond at the date of retirement is a bad idea due to sequence of returns. I didn't hear anything about re-balancing or spending the bonds when the market is down etc. I assume the model just spent the same proportion from both assets.
The title of the post is Part 24. Did you read the previous 23 parts? There's nothing wrong with 80/20 and no reason he'd bring up rebalancing in a post titled "Flexibility Myths vs Reality".
Kind of rude, but yes I have read all of them, we can all come away with different lessons after reading the same material.

Reading these blogs is why I know what a beast the sequence of returns really is. It is a real large threat at the early part of retirement that decreases over time as your assets increase. If you read the glide path articles they talk about the reverse glide path, increasing equities in retirement. Taking these two ideas together, it makes sense to have much more than 20% in bonds for early retires at the retirement date, and then to reduce that position over time as the risk disappears.
MnD
Posts: 5194
Joined: Mon Jan 14, 2008 11:41 am

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by MnD »

50 years is a bridge too far for me for any sort of realistic scenario but I'll bite on 40 years.
5% of portfolio balance with a 3% inflation adjusted floor for 40 years does just fine and will be our starting model in a few months.

Yes the hapless 1965-66 retirees spend almost all of the time on the 3% floor as there is no magic formula to fix bad stock and bond returns.
Hopefully they annuitized in the early 1980's. But the average and median retiree spends around 5% real over the decades, while about 1/2 do better than that, up to nearly 10% real.

Unless spending money just makes you ill, which I firmly belief is the case for a fair segment of the community, I don't see why one would fix at 3% or lower. I see 1.7% in this thread - possibly a new low low for BH's!That's just awarding yourself a worst-case outcome for retirement income from a lifetime of saving and investing. Kids will be thrilled no doubt. :mrgreen:

40 years, $1M, 70/30 AA, 5% of portfolio balance, 3% inflation-adjusted floor, ER 0.11
Image
Image
Image
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
heyyou
Posts: 4461
Joined: Tue Feb 20, 2007 3:58 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by heyyou »

In Taylor's case, that $1M was worth (adjusting for inflation) $2,582,948.45 today, in addition to a pension and retirement benefits at the time of retirement.
The Small Business Administration is a federal agency. Wouldn't there also be an inflation protected pension and wasn't Taylor L. the head of the Florida offices, a high level position?
User avatar
Taylor Larimore
Posts: 32842
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by Taylor Larimore »

heyyou wrote: Sat May 12, 2018 10:14 am
Wasn't Taylor L. the head of the Florida offices, a high level position?
heyyou:

I was head of the South Florida Financial Division of SBA.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 »

Shamb3 wrote: Sat May 12, 2018 8:32 am
AlohaJoe wrote: Sat May 12, 2018 7:28 am
Shamb3 wrote: Sat May 12, 2018 7:17 am The premise of being 80% stock / 20% bond at the date of retirement is a bad idea due to sequence of returns. I didn't hear anything about re-balancing or spending the bonds when the market is down etc. I assume the model just spent the same proportion from both assets.
The title of the post is Part 24. Did you read the previous 23 parts? There's nothing wrong with 80/20 and no reason he'd bring up rebalancing in a post titled "Flexibility Myths vs Reality".
Kind of rude, but yes I have read all of them, we can all come away with different lessons after reading the same material.

Reading these blogs is why I know what a beast the sequence of returns really is. It is a real large threat at the early part of retirement that decreases over time as your assets increase. If you read the glide path articles they talk about the reverse glide path, increasing equities in retirement. Taking these two ideas together, it makes sense to have much more than 20% in bonds for early retires at the retirement date, and then to reduce that position over time as the risk disappears.
According to analysis by Kitces and Pfau, they found that the optimum strategy, based on Monte Carlo analysis of historic returns, was to start a 30 year retirement with a 30/70 AA, then slowly increase stock exposure so that after 30 years, the AA would be 70/30. I believe that the results would be similar for those with 40 or 50 year retirements.

Here's a summary of their idea from the linked blog post.
Yet recent research shows that despite the contrary nature of the strategy – allowing equity exposure to increase during retirement when conventional wisdom suggests it should decline as clients age – it turns out that a “rising equity glidepath” actually does improve retirement outcomes! If market returns are bad in the early years, a rising equity glidepath ensures that clients will dollar cost average into markets at cheaper and cheaper valuations; and if markets are good… well, clients won’t have a lot to worry about in retirement anyway (except perhaps how much excess money will be left over at the end of their life).
The Sensible Steward
User avatar
Clever_Username
Posts: 1915
Joined: Sun Jul 15, 2012 12:24 am
Location: Southern California

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by Clever_Username »

willthrill81 wrote: Thu May 10, 2018 8:20 pm I believe that if your absolutely non-discretionary expenses can be brought down to just 2% of your portfolio, leaving another 2% (or even 3%) for discretionary spending, making for a 4-5% starting withdrawal rate, retirees' portfolio will be about as close to 'bulletproof' as is prudent. If they need to cut their withdrawals in half, this strategy would allow them to do so and still have enough for their non-discretionary expenses. And if Social Security would be in addition to this, even if at some point in the future, that makes this strategy even more resilient.
I'm surprised this point isn't made more often. We talk about variable withdrawal rates, but it's clear to me (as a mid-30s not-ready-to-retire) that having enough to very-very-certainly fund necessities and then a likely-safe-withdrawal for the rest of the desired expenditures is a good way to go.

Especially since it fits so nicely with the beginner-finance 50-30-20 plan; if 4% is very likely safe, and 2% is almost certainly safe, and 2% is 50% of 4%... and also 3.2% is very very likely safe, and that's 80% (50+30) of 4%... maybe I'm over thinking this relation.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
michaeljc70
Posts: 10843
Joined: Thu Oct 15, 2015 3:53 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by michaeljc70 »

MnD wrote: Sat May 12, 2018 9:20 am 50 years is a bridge too far for me for any sort of realistic scenario but I'll bite on 40 years.
5% of portfolio balance with a 3% inflation adjusted floor for 40 years does just fine and will be our starting model in a few months.

Yes the hapless 1965-66 retirees spend almost all of the time on the 3% floor as there is no magic formula to fix bad stock and bond returns.
Hopefully they annuitized in the early 1980's. But the average and median retiree spends around 5% real over the decades, while about 1/2 do better than that, up to nearly 10% real.

Unless spending money just makes you ill, which I firmly belief is the case for a fair segment of the community, I don't see why one would fix at 3% or lower. I see 1.7% in this thread - possibly a new low low for BH's!That's just awarding yourself a worst-case outcome for retirement income from a lifetime of saving and investing. Kids will be thrilled no doubt. :mrgreen:

40 years, $1M, 70/30 AA, 5% of portfolio balance, 3% inflation-adjusted floor, ER 0.11
Image
Image
Image
I agree with most of that. Playing with FireCalc, a 40 year retirement using 4% SWR, 75/25 and with my SS input (20 years away), I get a 100% chance of success. The interesting thing is that I also get a 57% chance that I can withdraw 50% more than the 4%. That means 6%. Obviously, I am not going to start drawing 6% and hope for the best, but if things go well the first 5 or so years, I will probably withdraw more going forward.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 »

Clever_Username wrote: Sat May 12, 2018 3:44 pm
willthrill81 wrote: Thu May 10, 2018 8:20 pm I believe that if your absolutely non-discretionary expenses can be brought down to just 2% of your portfolio, leaving another 2% (or even 3%) for discretionary spending, making for a 4-5% starting withdrawal rate, retirees' portfolio will be about as close to 'bulletproof' as is prudent. If they need to cut their withdrawals in half, this strategy would allow them to do so and still have enough for their non-discretionary expenses. And if Social Security would be in addition to this, even if at some point in the future, that makes this strategy even more resilient.
I'm surprised this point isn't made more often. We talk about variable withdrawal rates, but it's clear to me (as a mid-30s not-ready-to-retire) that having enough to very-very-certainly fund necessities and then a likely-safe-withdrawal for the rest of the desired expenditures is a good way to go.

Especially since it fits so nicely with the beginner-finance 50-30-20 plan; if 4% is very likely safe, and 2% is almost certainly safe, and 2% is 50% of 4%... and also 3.2% is very very likely safe, and that's 80% (50+30) of 4%... maybe I'm over thinking this relation.
I agree. It seems to me that there are two options at the extremes here.

Option #1: Build your portfolio up to the point that a 2.5% starting withdrawal rate will cover all of your non-discretionary and discretionary spending (over a presumed 50 year retirement). By its very nature, the 2.5% WR is substantially more conservative than is historically necessary in the overwhelming majority of instances.

Option #2: Build your portfolio up to the point that a 2% starting withdrawal rate will cover all of your non-discretionary spending, and an additional 1-3% will cover your discretionary spending. When your portfolio's returns are poor, reduce or eliminate your discretionary spending as needed.

The difference in the starting portfolio sizes may be very large. A 2.5% WR means your portfolio is 40X annual expenses, whereas a 4% WR is 25X annual expenses. Ignoring contributions, it could easily take an additional decade of investing to build your portfolio from 25X to 40X. Is it really worth that decade of waiting to offset the historically very unlikely risk that it would be necessary, just to cover both what you need to spend as well as what you want to spend?

It seems to me that one of the keys to getting this to work well is learning how to lower your non-discretionary spending in retirement as much as you can.
The Sensible Steward
1nv35t
Posts: 113
Joined: Wed Dec 13, 2017 2:37 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by 1nv35t »

willthrill81 wrote: Sat May 12, 2018 2:27 pm According to analysis by Kitces and Pfau, they found that the optimum strategy, based on Monte Carlo analysis of historic returns, was to start a 30 year retirement with a 30/70 AA, then slowly increase stock exposure so that after 30 years, the AA would be 70/30. I believe that the results would be similar for those with 40 or 50 year retirements.
Sounds like a long duration bucket style approach - drawing bonds first.

Rather than a fixed SWR across all periods, would it not be more appropriate to use a variable fixed rate i.e. fixing the SWR at the start to whatever T-Bill yields were at the time. Conceptually if you were starting when yields were low your assets value up to that point would have tended to grow a larger (above average) amount/value due to that recent historical trend of high to lower yield transition up to that point, so it would be reasonable to expect a lower (rising yield trend) going forward from that point and hence lower SWR.

Or you might level the start date value. Perhaps 4% average for a 4% SWR figure, so if you had $2M and were starting when yields were 2% adjust that $2M to a conceptual 2%/4% x $2M = $1M and assume 4% income from that $1M ($40K) as being the safe withdrawal rate. Similarly if you had $500K when yields were 8% = 8%/4% = 2 x 500K = $1M and 4% SWR applied to that = $40K income provision. I very much suspect that average SWR would be higher than the historic worst case 4% type figure, perhaps even 6%, maybe more. But where you weren't applying that equally across all start dates no matter what the valuations at that time, but were instead adjusting it according to the conditions apparent at the start.
MrPotatoHead
Posts: 429
Joined: Sat Oct 14, 2017 10:41 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by MrPotatoHead »

IlliniDave wrote: Thu May 10, 2018 3:45 am I just gave the article a bit more than a skimming. My takeaway was that for the time periods (historical) he looked at the ability to go for extended periods down at about a 2.5% WR seemed to be the smoothest way to survive. 50 years is a long time, longer than I'll be retired, but it is looking like I'll start at baseline WR of ~1.7% so even with the expected occasional excursion up to 3%-3.5% I could have weathered membership in those cohorts. I know I seem weird in my degree of financial conservatism, and I'm currently in those "extra 1-2 years" the writer mentions, but it is hard to envision much regret on my part to being too financially prepared.
I don't think you are weird and I share you sentiment. My current target is 1.6% But I have a goal of leaving a legacy.

And even though the little woman is older than I, based on her mother, grandmother, great grand mother, I think planning for 50 years plus in retirement is reasonable. Heck her mother is in her 90s, lives alone and still drives,cooks,cleans,and shops. Grandmother and great grandmother lived into their hundreds.

All three worried endlessly about money...sad, as i have told her mother I have her covered...but there is a pride thing involves which I understand.

So, under various circumstances, I think safety and security is warranted. especailly if it leads to a cessation of worry.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 »

1nv35t wrote: Sat May 12, 2018 6:45 pm
willthrill81 wrote: Sat May 12, 2018 2:27 pm According to analysis by Kitces and Pfau, they found that the optimum strategy, based on Monte Carlo analysis of historic returns, was to start a 30 year retirement with a 30/70 AA, then slowly increase stock exposure so that after 30 years, the AA would be 70/30. I believe that the results would be similar for those with 40 or 50 year retirements.
Sounds like a long duration bucket style approach - drawing bonds first.
No, a traditional or, in this case, a reverse glidepath does not necessarily involve a bucketed approach, which often specifies where money will be drawn from and under what conditions. That's not at all what Kitces and Pfau's strategy involves.
1nv35t wrote: Sat May 12, 2018 6:45 pmRather than a fixed SWR across all periods, would it not be more appropriate to use a variable fixed rate i.e. fixing the SWR at the start to whatever T-Bill yields were at the time.
I'm not sure what T-bill yields have to do with anything (prior research has not found that to be a strong predictor of what the SWR going forward will be), but yes, virtually everyone agrees that flexible WRs are generally superior for those whose spending is flexible. There are a myriad of ways that this flexibility can be manifested.
1nv35t wrote: Sat May 12, 2018 6:45 pm I very much suspect that average SWR would be higher than the historic worst case 4% type figure, perhaps even 6%, maybe more.
Yes, the average WR that wouldn't run out of money over a 30 year period over the last 90+ years has been over 6%. So 4% is already adjusting for the worst case scenarios; many are under the mistaken belief that 4% was the average, but that's completely false. Those claiming that we should go even lower are saying that there's a strong enough possibility that the future will be worse than anything in the past, including the Great Depression, WW2, the 1970s' stagflation, etc. such that one should start with an ever lower WR. That could be, but it seems like a bit of a stretch to me.

Certainly the worst starting year for retirees since the early 1970s was the year 2000. Those who retired then and used the '4% rule' for making withdrawals (i.e. 4% of starting balance initially, then that nominal dollar amount is adjusted upward for inflation every year thereafter) are in good shape today.
The Sensible Steward
heyyou
Posts: 4461
Joined: Tue Feb 20, 2007 3:58 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by heyyou »

On adjusting the allocation at and during retirement, McClung suggests starting near 50/50 allocation and withdrawing from bonds first, which would progressively increase your stock exposure, thus different authors with the same conclusion. That spending may not feel comfortable, but the logic of letting the equity funds grow longer seems solid.

For those who are wondering, McClung rebalances when the equity portion is up by 20%.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 »

heyyou wrote: Sat May 12, 2018 10:47 pm On adjusting the allocation at and during retirement, McClung suggests starting near 50/50 allocation and withdrawing from bonds first, which would progressively increase your stock exposure, thus different authors with the same conclusion.
I'm not familiar with McClung. So he's advocating that all of retirees' spending come from the bonds in a starting 50/50 AA? Is the AA intended then just to move to 100/0 in a matter of 12-ish years then (assuming 4% annual spending), or does it merely float up to something like 70-80% stocks and remain there?
The Sensible Steward
AlohaJoe
Posts: 6609
Joined: Mon Nov 26, 2007 1:00 pm
Location: Saigon, Vietnam

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by AlohaJoe »

willthrill81 wrote: Sat May 12, 2018 11:38 pm
heyyou wrote: Sat May 12, 2018 10:47 pm On adjusting the allocation at and during retirement, McClung suggests starting near 50/50 allocation and withdrawing from bonds first, which would progressively increase your stock exposure, thus different authors with the same conclusion.
I'm not familiar with McClung. So he's advocating that all of retirees' spending come from the bonds in a starting 50/50 AA? Is the AA intended then just to move to 100/0 in a matter of 12-ish years then (assuming 4% annual spending), or does it merely float up to something like 70-80% stocks and remain there?
He advocates you spend from the bond part of your portfolio. If the equity side of your portfolio ever reaches +20% (inflation-adjusted) where you started out, then you sell 20% of your equities and buy bonds. This replenishes the bonds (when it happens). In practice this means that during the worst market sequences you could end up at 100% stocks. In "normal" market conditions you'll generally be between 40-60% bonds, though. McClung spends some effort to try to convince readers that volatility due to high equity asset allocations is not what retirees should be worried about. But that is definitely a minority position.
User avatar
randomizer
Posts: 1547
Joined: Sun Jul 06, 2014 3:46 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by randomizer »

Great series.
87.5:12.5, EM tilt — HODL the course!
IlliniDave
Posts: 2388
Joined: Fri May 17, 2013 7:09 am

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by IlliniDave »

MrPotatoHead wrote: Sat May 12, 2018 7:41 pm I don't think you are weird and I share you sentiment. My current target is 1.6% But I have a goal of leaving a legacy.

And even though the little woman is older than I, based on her mother, grandmother, great grand mother, I think planning for 50 years plus in retirement is reasonable. Heck her mother is in her 90s, lives alone and still drives,cooks,cleans,and shops. Grandmother and great grandmother lived into their hundreds.

All three worried endlessly about money...sad, as i have told her mother I have her covered...but there is a pride thing involves which I understand.

So, under various circumstances, I think safety and security is warranted. especailly if it leads to a cessation of worry.
I should probably have mentioned that I have legacy goals as well. And even though my dad has a pretty respectable pension, not having much in the way of a financial cushion has caused an amount of worry. I'm glad I'm not the only one who figures a very low withdrawal rate is okay. I know it means I "could" spend more, but spending for the sake of using up money doesn't have a lot of appeal for me.
Don't do something. Just stand there!
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by Dandy »

I really like Taylor Larimore's method described in this thread. Simple and effective.
All you have to do is go back in time to 1982. :oops: You can then book a 30 year? bull market in bonds and a fantastic growth in equities. I do like the idea of trying to keep the assets you need at minimum risk and adjusting you withdrawals in bad times and giving immediate annuities a look see when well into retirement.

No investment or withdrawal plan is a guarantee or can likely be implemented without change over a 30 year or so retirement. I think the basic issue is withdrawal needs vs maximum "safe" withdrawals. If you don't have enough for needs - you need to keep earning. If you can withdraw more than needs the "safe" amount extra you can withdraw is an educated guess. So, don't set it and forget it -- set it and be prepared to adjust it.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 »

Dandy wrote: Sun May 13, 2018 8:40 am
I really like Taylor Larimore's method described in this thread. Simple and effective.
All you have to do is go back in time to 1982. :oops: You can then book a 30 year? bull market in bonds and a fantastic growth in equities.
1982 was a great time to retire and begin making portfolio withdrawals. A 60/40 portfolio would have supported a 6.4% starting withdrawal rate then adjusted upward for inflation and still leave the retiree with the same inflation-adjusted portfolio today as when they started.
The Sensible Steward
MrPotatoHead
Posts: 429
Joined: Sat Oct 14, 2017 10:41 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by MrPotatoHead »

IlliniDave wrote: Sun May 13, 2018 5:25 am
I should probably have mentioned that I have legacy goals as well. And even though my dad has a pretty respectable pension, not having much in the way of a financial cushion has caused an amount of worry. I'm glad I'm not the only one who figures a very low withdrawal rate is okay. I know it means I "could" spend more, but spending for the sake of using up money doesn't have a lot of appeal for me.
Interesting(at least to me) that what we witnessed in our parents gave us both pause.

In my family, having money, was considered a good thing, but, it also made you suspect, in terms of character. There was always a follow up comment like, "well, you worked for your money not like some" or some other sort of qualifier. But my parents were depression era and WWII vintage so they had a nuanced view of money, work, and how you earned it.

I suspect both us will sleep better realizing our targeted withdraw rate is below thee average dividend rate for the total stock market. Though, it gives me pause to realize how much the dividend rate has declined over the years, from 4% plus to less than 2% today. Psychologically I am not a fan of the create your own dividend. In my case, it is clearly some sort of psychological thing with me.

Well I hope you hit your numbers. I did already, but...I am lingering on for some reason I have yet to fathom.

Take care...
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 »

MrPotatoHead wrote: Sun May 13, 2018 9:53 am
IlliniDave wrote: Sun May 13, 2018 5:25 am
I should probably have mentioned that I have legacy goals as well. And even though my dad has a pretty respectable pension, not having much in the way of a financial cushion has caused an amount of worry. I'm glad I'm not the only one who figures a very low withdrawal rate is okay. I know it means I "could" spend more, but spending for the sake of using up money doesn't have a lot of appeal for me.
Interesting(at least to me) that what we witnessed in our parents gave us both pause.

In my family, having money, was considered a good thing, but, it also made you suspect, in terms of character. There was always a follow up comment like, "well, you worked for your money not like some" or some other sort of qualifier. But my parents were depression era and WWII vintage so they had a nuanced view of money, work, and how you earned it.

I suspect both us will sleep better realizing our targeted withdraw rate is below thee average dividend rate for the total stock market. Though, it gives me pause to realize how much the dividend rate has declined over the years, from 4% plus to less than 2% today. Psychologically I am not a fan of the create your own dividend. In my case, it is clearly some sort of psychological thing with me.

Well I hope you hit your numbers. I did already, but...I am lingering on for some reason I have yet to fathom.

Take care...
I hope you both have prepared your heirs and your estates to properly deal with the former inheriting so much without it destroying their lives. I too have bequest desires, but this is something that very much concerns me.
The Sensible Steward
mariezzz
Posts: 1026
Joined: Mon Oct 02, 2017 11:02 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by mariezzz »

willthrill81 wrote: Sun May 13, 2018 9:18 am
Dandy wrote: Sun May 13, 2018 8:40 am
I really like Taylor Larimore's method described in this thread. Simple and effective.
All you have to do is go back in time to 1982. :oops: You can then book a 30 year? bull market in bonds and a fantastic growth in equities.
1982 was a great time to retire and begin making portfolio withdrawals. A 60/40 portfolio would have supported a 6.4% starting withdrawal rate then adjusted upward for inflation and still leave the retiree with the same inflation-adjusted portfolio today as when they started.
Most people retire with far less than a million dollar portfolio and still do ok. They're not rich, but they have their house paid off, & get something in social security, and some have some savings beyond that. In the past, many had a small pension of sorts, but these days, you can't count on that (which means people do need to save more than in the past).

It all depends on what you want in life. What constitutes 'enough'. What the balance for you is between working (and for some, being miserable in a job) vs. having more freedom (albeit less income). What you need in terms of spending to feel like you are doing 'ok'.

For many, having even a few hundred thousand in a retirement account is doing quite well, considering their earnings throughout their life (and for some, this would be impossible - they're already living about as frugally as they can, and far more frugally than the vast majority on BH). It's been said before: many here are not in the 'bottom 99%' in terms of earnings; the vast majority here are not in the bottom 90%.

One thing having more assets does is allow you to worry more. What if the market performance over the next 40 years is in the bottom 5% of possibilities? Safe withdrawal rate projections plan for the very unlikely, worst possibilities - as has been discussed elsewhere, many here have seen their portfolios grow in retirement. People with fewer assets simply cannot worry about these things, so they skip all that anxiety & extreme planning that some with the requisite assets use to manage such anxieties.

I'm all for living frugally, and saving. That approach gives you options when times get tough; a job gets miserable, etc. (For those with minor kids, it helps ensure you meet your fundamental responsibilities towards the kids: food, shelter, clothing, medical care.)

But most people can only dream of retiring with a million dollar portfolio now, or in 1982. (A million dollars in 1982 was a lot more money than it is today. I'm pretty sure I won't have a million dollar portfolio when I retire (and the market post retirement likely won't be as good as it was in the 20 years post 1982). I'm not in despair over that. I'm guessing even with a smaller portfolio, I'll likely see it grow in retirement (perhaps not by a lot, but I suspect it won't shrink). Maybe I'm too much an optimist (although people who know me would not accuse me of being an optimist).
mariezzz
Posts: 1026
Joined: Mon Oct 02, 2017 11:02 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by mariezzz »

MrPotatoHead wrote: Sun May 13, 2018 9:53 am I suspect both us will sleep better realizing our targeted withdraw rate is below thee average dividend rate for the total stock market. Though, it gives me pause to realize how much the dividend rate has declined over the years, from 4% plus to less than 2% today.
You can't discuss 'dividend rates' in a vacuum. They have to be interpreted in the context of the greater economy. Right now inflation is still very low historically. A 2 percent dividend rate in the context of 2 percent inflation doesn't seem bad to me. Plus, when dividends are issued, they affect the value of a stock - so you can't ignore that trade-off, either.
DaufuskieNate
Posts: 605
Joined: Wed May 28, 2014 11:53 am

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by DaufuskieNate »

mariezzz wrote: Sun May 13, 2018 10:43 am A million dollars in 1982 was a lot more money than it is today.
Very true. Just to build on that thought, while it is very common to inflation-adjust numbers, it is less common to adjust retirement nest eggs based on valuation. On January 1, 1982, the S&P 500 CAPE was 7.39. Eighteen years later, on January 1, 2000, the S&P 500 CAPE was 43.77. In 1982, a $100 investment in the S&P 500 gave you ownership of $13.53 of the earnings power of 500 of the largest U.S. public companies. In 2000, a $100 investment gave you ownership of only $2.28 of earnings power.

Starting valuations matter when looking at the adequacy of savings at the beginning of retirement.
User avatar
aj76er
Posts: 1179
Joined: Tue Dec 01, 2015 10:34 pm
Location: Austin, TX

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by aj76er »

Using the VPW as a guide, consider these inputs:

AA: 70/30 Stock/Bond
Retire at age 44 in yr 2020
Withdraw from portfolio until age 110 in yr 2086
Real future stock returns: 4%
Real future bond returns: 0.5%

This gives a starting withdrawal rate of around 3.3% of portfolio balance. In fact, the SWR stays below 4% until age 67. Thus, a ~3.5% SWR for the duration of "early-retirement" years seems just fine considering the *very* conservative numbers used above for both asset returns and longevity (66yr retirement!).

With a 70/30 portfolio, assume the max draw down is 35%, so one would need their non-discretionary spending level to be covered by 3.5% x (1-0.35) = 2.275% of starting balance.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
jaj2276
Posts: 581
Joined: Sat Apr 16, 2011 5:13 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by jaj2276 »

I'm anywhere from 8 - 20 years to retirement. I was planning on using VPW to try and maximize my withdrawals as I'm conservative in nature and would likely leave a huge pot of money when I finally kick the bucket. What I found interesting about the article was how two other methods I'm not familiar with (Constant 4% of previous month's balance and Guyton-Klinger) came out with effectively identical results as VPW. I'm going to go over to the VPW thread and see if longinvest has an opinion on the differences between the three.

Thanks for the link to the article!
heyyou
Posts: 4461
Joined: Tue Feb 20, 2007 3:58 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by heyyou »

Starting valuations matter when looking at the adequacy of savings at the beginning of retirement.
These days, we can see how retirement spending suggestions have progressed from the early days of Peter Lynch's 7% annually from a 100% dividend stock portfolio based on only the previous 20 years, which was followed by Bengen's 4% real. Recent research includes considering valuations when choosing an initial spending rate. Kitces, Pfau, McClung, and Big ERN have all written about that.

Expecting certainty about spending for 30 years is the fallacy. As usual, those who adapt easily will do better than those who don't. Some authors suggest having enough steady income that the variable income from portfolio holdings is used mostly for discretionary spending.
User avatar
siamond
Posts: 6010
Joined: Mon May 28, 2012 5:50 am

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by siamond »

The author is obviously a smart guy, with a solid ability to crunch numbers and to write about his findings. Some of his writings are truly excellent. And yet, every time he discusses variable withdrawal methods, he seems to get stuck in "SWR thinking mode" and "myth busting", and just never goes to the real point.

Case in point, he's making a big deal of the fact that a flexible withdrawal method would have led to a prolonged belt tightening for the worst possible retirement cycles (e.g. starting in 1929 or 1966). That's true, actually. Well, yes, duh, those WERE the worst possible retirement cycles, there is no myth here, and there is no magic.

And yet this totally misses the boat. The SWR number for those 1929/66 cycles (less than the fabled 4%) can only be established in HINDSIGHT. While a sensible variable method adjusts itself WITHOUT hindsight. If tomorrow the mother of bad cycles starts, and would end at 3% SWR (in hindsight), anybody using the 4% rule (without hindsight) will end up mid-way in bankruptcy, while somebody using a sensible variable method will have to severely tighten the belt, but will survive for the entire retirement period. Such adaptiveness is a crucial property.

Furthermore, only looking at the worst cases (what the SWR folks typically do) is just really bad financial planning. Overwhelming odds are that a specific retirement cycle will be better than the worst possible (past) case. An SWR approach will NOT be able to take advantage of such upside. While a sensible variable method will. Again, adaptiveness is a crucial property.

Variable withdrawal methods have plenty of challenges for sure, but one really should start by acknowledging the key problem it solves, which is to deal with downsides and upsides fairly effectively, without acting in hindsight. Then and only then can we discuss pitfalls of one method or another, and try to find ways to mitigate them. Forget the so-called 'myth busting'. Think constructive...
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 »

siamond wrote: Sun May 13, 2018 4:47 pm The author is obviously a smart guy, with a solid ability to crunch numbers and to write about his findings. Some of his writings are truly excellent. And yet, every time he discusses variable withdrawal methods, he seems to get stuck in "SWR thinking mode", and just never goes to the real point.

Case in point, he's making a big deal of the fact that a flexible withdrawal method would have led to a prolonged belt tightening for the worst possible retirement cycles (e.g. starting in 1929 or 1966). That's true, actually. Well, yes, duh, those WERE the worst possible retirement cycles, there is no myth here, and there is no magic.

And yet this totally misses the boat. The SWR number for those 1929/66 cycles (less than the fabled 4%) can only be established in HINDSIGHT. While a sensible variable method adjusts itself WITHOUT hindsight. If tomorrow the mother of bad cycles starts, and would end at 3% SWR (in hindsight), anybody using the 4% rule (without hindsight) will end up mid-way in bankruptcy, while somebody using a sensible variable method will have to severely tighten the belt, but will survive for the entire retirement period. Such adaptiveness is a crucial property.

Furthermore, only looking at the worst cases (what the SWR folks typically do) is just really bad financial planning. Overwhelming odds are that a specific retirement cycle will be better than the worst possible (past) case. An SWR approach will NOT be able to take advantage of such upside. While a sensible variable method will. Again, adaptiveness is a crucial property.

Variable withdrawal methods have plenty of challenges for sure, but one really should start by acknowledging the key problem it solves, which is to deal with downsides and upsides fairly effectively, without acting in hindsight. Then and only then can we discuss pitfalls of one method or another, and try to find ways to mitigate them. Forget the so-called 'myth busting'. Think constructive...
:thumbsup :thumbsup :thumbsup

Outstanding summary of what's really going on here! I'm not really sure why ERN is so focused in this series about picking apart the constant sum withdrawal approaches. It's a classic straw man argument. I've not heard anyone actually suggest that anyone rigidly follow the '4% rule' or any other constant sum method; we all intuitively understand the need to cut back in the bad times and the ability to loosen our belts during the good times.

The only thing I would add as another advantage of variable withdrawal methods is that, by the very nature of most such methods, do a much better job of matching your withdrawals to your portfolio's performance. I know someone might say 'Well duh,' but hear me out. If someone uses any fixed dollar amount of percentage, they have been historically likely to either (1) run out of money or (2) have a lot of money left over at the end of the period examined, with not a lot of middle ground between those extremes. The longer the retirement period in question (e.g. early retirement, possible 50+ years in length), the more exaggerated these extremes have become.

Most of the variable approaches are able to adjust spending for both poor portfolio performance as well as excellent portfolio performance, hence, they can help your portfolio to provide an income for as long as you need it while also prevent you from leaving behind a huge pile of unspent cash. Remember that you spending money is equivalent here to giving it away, and I'd rather prudently give away as much as I can before I die).
The Sensible Steward
stlutz
Posts: 5585
Joined: Fri Jan 02, 2009 12:08 am

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by stlutz »

To me one of the myths that ERN's results demonstrate is that high (80%) equity allocations can provide for stable withdrawals across time. Of course he doesn't list that as a myth because, well, he's a proponent of high equity allocations. :D

That said, I think the "myths" he is referring to are more ones he reads on various early retirement blogs as opposed to what we read on Bogleheads. Mr. Money Mustache once argued that if you had 25x a minimal level of expenses saved then you could retire in your 30s (e.g. https://www.mrmoneymustache.com/2012/05 ... etirement/). If things don't go well you can cut a few expenses and pick up a little part-time income here and there--problem solved. If you read ERN's mythbusting against the MMM post, I think ERN is doing a great service.

Bogheheads tends to be a very cautious forum, so I don't know that we need encouragement to take a conservative approach! One of longinvest's big points in promoting VPW is too many people are excessively cautious. A variable approach allows you to spend money when you have it and not to spend it when you don't. However, if one is thinking about early retirement and following a VPW approach, your first year withdrawal amount had better be quite a bit above what your minimum level of expenses (including heath care), actually is. Again, most people here get that. Not everybody out there in internet-land does.
livesoft
Posts: 86077
Joined: Thu Mar 01, 2007 7:00 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by livesoft »

The ERN piece does look at Bogleheads VPW in those worst-case years. I read it a while ago, but I think that even VPW required one to spend 75% less than the starting amount in order for the portfolio to survive. Who can cut spending by 75%? Answer: Somebody who doesn't need to worry about SWR.
Wiki This signature message sponsored by sscritic: Learn to fish.
skjoldur
Posts: 178
Joined: Thu Sep 25, 2014 3:11 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by skjoldur »

siamond wrote: Sun May 13, 2018 4:47 pm The author is obviously a smart guy, with a solid ability to crunch numbers and to write about his findings. Some of his writings are truly excellent. And yet, every time he discusses variable withdrawal methods, he seems to get stuck in "SWR thinking mode" and "myth busting", and just never goes to the real point.

Case in point, he's making a big deal of the fact that a flexible withdrawal method would have led to a prolonged belt tightening for the worst possible retirement cycles (e.g. starting in 1929 or 1966). That's true, actually. Well, yes, duh, those WERE the worst possible retirement cycles, there is no myth here, and there is no magic.

And yet this totally misses the boat. The SWR number for those 1929/66 cycles (less than the fabled 4%) can only be established in HINDSIGHT. While a sensible variable method adjusts itself WITHOUT hindsight. If tomorrow the mother of bad cycles starts, and would end at 3% SWR (in hindsight), anybody using the 4% rule (without hindsight) will end up mid-way in bankruptcy, while somebody using a sensible variable method will have to severely tighten the belt, but will survive for the entire retirement period. Such adaptiveness is a crucial property.

Furthermore, only looking at the worst cases (what the SWR folks typically do) is just really bad financial planning. Overwhelming odds are that a specific retirement cycle will be better than the worst possible (past) case. An SWR approach will NOT be able to take advantage of such upside. While a sensible variable method will. Again, adaptiveness is a crucial property.

Variable withdrawal methods have plenty of challenges for sure, but one really should start by acknowledging the key problem it solves, which is to deal with downsides and upsides fairly effectively, without acting in hindsight. Then and only then can we discuss pitfalls of one method or another, and try to find ways to mitigate them. Forget the so-called 'myth busting'. Think constructive...
I think that Big ERN yearns to find a withdrawal method that justifies much more stable spending than the standard variable methods but that also guarantees success. He can't quite get over the tragedy that you might end up spending much less money during a down period than you could have, once your final personal trajectory is known. I understand how frustrating it is that there is no solution to this problem.

I agree with you, Siamond, that the fundamental appeal of the variable methods is that they address the challenge of the unknowable future.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 »

skjoldur wrote: Sun May 13, 2018 7:10 pmI think that Big ERN yearns to find a withdrawal method that justifies much more stable spending than the standard variable methods but that also guarantees success. He can't quite get over the tragedy that you might end up spending much less money during a down period than you could have, once your final personal trajectory is known. I understand how frustrating it is that there is no solution to this problem.

I agree with you, Siamond, that the fundamental appeal of the variable methods is that they address the challenge of the unknowable future.
The other problem with constant sum withdrawal methods (e.g. '4% rule') is that some of the historical scenarios that lasted 30 years would have had some gut wrenching periods along the way. For instance, using ERN's 80/20 portfolio, 1929 retirees using the 3.26% WR rate that ERN calculated post hoc would have still seen their portfolio drop in real dollars by around 65% by 1932. 1966 retirees would have seen their inflation-adjusted portfolio drop in value by 50% fewer than nine years into their retirement. In more recent times, year 2000 retirees with an 80/20 portfolio and using the 3.26% constant sum WR would have seen their portfolio drop by 58% of its starting value by Feb., 2009.

Can anyone honestly say that they would continue to withdraw even the same dollar amount from their portfolio during such years? I have a hard time believing that any rational individual would continue making the same withdrawals through such periods unless their personal situation was truly dire.
The Sensible Steward
AlohaJoe
Posts: 6609
Joined: Mon Nov 26, 2007 1:00 pm
Location: Saigon, Vietnam

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by AlohaJoe »

stlutz wrote: Sun May 13, 2018 6:06 pm That said, I think the "myths" he is referring to are more ones he reads on various early retirement blogs as opposed to what we read on Bogleheads. Mr. Money Mustache once argued that if you had 25x a minimal level of expenses saved then you could retire in your 30s (e.g. https://www.mrmoneymustache.com/2012/05 ... etirement/). If things don't go well you can cut a few expenses and pick up a little part-time income here and there--problem solved. If you read ERN's mythbusting against the MMM post, I think ERN is doing a great service.
Yes, ERN's post is clearly a response to the FIRE community, not to the Boglehead community! For instance compare this blog (from someone who is possibly the #2 FIRE blogger after MMM): https://www.financialsamurai.com/the-ne ... competent/ (Look at points #4, #5, and #8 in particular. (Keep in mind that this particular blogger plans to keep working until his passive income from rentals, old blogs, etc is at least $200,000 a year, so all the talk about "flexibility" is just to generate ad traffic.)
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 »

AlohaJoe wrote: Sun May 13, 2018 9:28 pm
stlutz wrote: Sun May 13, 2018 6:06 pm That said, I think the "myths" he is referring to are more ones he reads on various early retirement blogs as opposed to what we read on Bogleheads. Mr. Money Mustache once argued that if you had 25x a minimal level of expenses saved then you could retire in your 30s (e.g. https://www.mrmoneymustache.com/2012/05 ... etirement/). If things don't go well you can cut a few expenses and pick up a little part-time income here and there--problem solved. If you read ERN's mythbusting against the MMM post, I think ERN is doing a great service.
Yes, ERN's post is clearly a response to the FIRE community, not to the Boglehead community! For instance compare this blog (from someone who is possibly the #2 FIRE blogger after MMM): https://www.financialsamurai.com/the-ne ... competent/ (Look at points #4, #5, and #8 in particular. (Keep in mind that this particular blogger plans to keep working until his passive income from rentals, old blogs, etc is at least $200,000 a year, so all the talk about "flexibility" is just to generate ad traffic.)
In fairness to the FIRE community, many (most?) of them are spending far less than the typical Boglehead. We had a post here earlier today where someone isn't sure if $100k of annual portfolio income plus SS and no debt will be enough for them to retire comfortably. Many in the FIRE community are only spending $20-$40k annually (e.g. Justin at www.rootofgood.com has been spending only $30k for a family of five for years and lives very well), and it's a lot easier for them to 'hustle' for that extra cash if needed than for a Boglehead who's accustomed to spending multiples of that amount.
The Sensible Steward
User avatar
White Coat Investor
Posts: 17413
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by White Coat Investor »

I think I'm with Taylor on this one.

I'm amazed this series has hit Part 24.

I still think the optimal strategy is start somewhere around 4% and adjust as you go. The more flexibility you have to cut spending (lowest possible ratio of fixed to variable expenses), the more you can spend in most scenarios.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
AlohaJoe
Posts: 6609
Joined: Mon Nov 26, 2007 1:00 pm
Location: Saigon, Vietnam

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by AlohaJoe »

White Coat Investor wrote: Sun May 13, 2018 10:49 pm I think I'm with Taylor on this one.

I'm amazed this series has hit Part 24.
I dunno, withdrawal rates are vastly more important than asset allocation but we see way more discussions of asset allocation around here. As if the difference between 50% international and 30% international is ever going to make any difference ever.....(Your own blog had a list of 100 or so asset allocations, all of which are perfectly decent.)

If we replied to every asset allocation discussion with "just use your common sense and be flexible"....I'm not sure there'd be much left to talk about on Bogleheads!
randomguy
Posts: 11295
Joined: Wed Sep 17, 2014 9:00 am

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by randomguy »

willthrill81 wrote: Sun May 13, 2018 9:47 pm

In fairness to the FIRE community, many (most?) of them are spending far less than the typical Boglehead. We had a post here earlier today where someone isn't sure if $100k of annual portfolio income plus SS and no debt will be enough for them to retire comfortably. Many in the FIRE community are only spending $20-$40k annually (e.g. Justin at www.rootofgood.com has been spending only $30k for a family of five for years and lives very well), and it's a lot easier for them to 'hustle' for that extra cash if needed than for a Boglehead who's accustomed to spending multiples of that amount.
Yep. 10k of income from flipping burgers makes a big difference when your replacing 30k of spending. Not so much at a 100k. Same thing with SS where 2 people picking up 20k/yr pretty much means you don't need much from the portfolio. On the other hand cutting 80k is spending to 40k is a lot easier than cutting 20k to 10k.

Is it worth it to work another 2 years to get a bit more safety for these bottom 5% cases? Depends how much you hate your job
User avatar
White Coat Investor
Posts: 17413
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by White Coat Investor »

AlohaJoe wrote: Sun May 13, 2018 11:02 pm
White Coat Investor wrote: Sun May 13, 2018 10:49 pm I think I'm with Taylor on this one.

I'm amazed this series has hit Part 24.
I dunno, withdrawal rates are vastly more important than asset allocation but we see way more discussions of asset allocation around here. As if the difference between 50% international and 30% international is ever going to make any difference ever.....(Your own blog had a list of 100 or so asset allocations, all of which are perfectly decent.)

If we replied to every asset allocation discussion with "just use your common sense and be flexible"....I'm not sure there'd be much left to talk about on Bogleheads!
I agree. Asset allocation doesn't matter all that much either compared to many other things. I love seeing people trying to decide if 70/30 or 80/20 is right for their 4 figure portfolio. Just doesn't matter.

Just because we like arguing about stuff, we shouldn't forget that most of this stuff doesn't matter all that much. Get the important stuff right and you can ignore or even screw up most of the rest.

Getting rich really isn't complicated:

1) Make a lot of money
2) Save a big chunk of it
3) Invest it in some reasonable manner
4) Protect it from financial catastrophes as best you can without doing anything crazy
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
AlohaJoe
Posts: 6609
Joined: Mon Nov 26, 2007 1:00 pm
Location: Saigon, Vietnam

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by AlohaJoe »

White Coat Investor wrote: Sun May 13, 2018 11:12 pm Getting rich really isn't complicated:

1) Make a lot of money
2) Save a big chunk of it
3) Invest it in some reasonable manner
4) Protect it from financial catastrophes as best you can without doing anything crazy
But how would we get to 13,280 posts and 3,148 posts respectively if we just kept it boring like that!!? :D
EnjoyIt
Posts: 8272
Joined: Sun Dec 29, 2013 7:06 pm

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by EnjoyIt »

Personally I can't imagine bringing my portfolio high enough for a 2% or less withdrawal rate. I just have no interest working another decade of my life full time. Maybe part time, but full time, is a huge "heck no." What I can imagine is making sure that our fixed/mandatory expenses are as low as possible so that if we really really have to, we can cut our spending down to 2-2.5%. The odds of a 4% withdrawal failure is pretty low to begin with. I am comfortable accepting that risk and when times are tough do the following:

Don't travel that year.
Stop watering the lawn and cut it myself.
Eliminate house cleaning services.
Be a bit more frugal on the foods we eat and don't eat out.
Drive less and maybe cut down to 1 car to eliminate insurance expense.
Decrease speed of internet for the house.
Lower the temperature settings in the winter and increase in the summer.
dry clothes outside in the sun.
No new clothes.
No upgrading electronics those years.

None of the above sound pleasant but the risk of needing all those actions is so low I am willing to accept them to buy ourselves a little extra time and freedom. I simply can't understand why some people are looking for 100% security in a world that can never guarantee 100%.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
randomguy
Posts: 11295
Joined: Wed Sep 17, 2014 9:00 am

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by randomguy »

EnjoyIt wrote: Sun May 13, 2018 11:37 pm Personally I can't imagine bringing my portfolio high enough for a 2% or less withdrawal rate. I just have no interest working another decade of my life full time. Maybe part time, but full time, is a huge "heck no." What I can imagine is making sure that our fixed/mandatory expenses are as low as possible so that if we really really have to, we can cut our spending down to 2-2.5%. The odds of a 4% withdrawal failure is pretty low to begin with. I am comfortable accepting that risk and when times are tough do the following:

Don't travel that year.
Stop watering the lawn and cut it myself.
Eliminate house cleaning services.
Be a bit more frugal on the foods we eat and don't eat out.
Drive less and maybe cut down to 1 car to eliminate insurance expense.
Decrease speed of internet for the house.
Lower the temperature settings in the winter and increase in the summer.
dry clothes outside in the sun.
No new clothes.
No upgrading electronics those years.

None of the above sound pleasant but the risk of needing all those actions is so low I am willing to accept them to buy ourselves a little extra time and freedom. I simply can't understand why some people are looking for 100% security in a world that can never guarantee 100%.
It is easy to skip that stuff for one year. How about 10 or 20? Obviously you will find a way to survive but it might make working another say 3 years to go from 4% to say 3.3 more appealing.
IlliniDave
Posts: 2388
Joined: Fri May 17, 2013 7:09 am

Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by IlliniDave »

MrPotatoHead wrote: Sun May 13, 2018 9:53 am
Interesting(at least to me) that what we witnessed in our parents gave us both pause.

In my family, having money, was considered a good thing, but, it also made you suspect, in terms of character. There was always a follow up comment like, "well, you worked for your money not like some" or some other sort of qualifier. But my parents were depression era and WWII vintage so they had a nuanced view of money, work, and how you earned it.

I suspect both us will sleep better realizing our targeted withdraw rate is below thee average dividend rate for the total stock market. Though, it gives me pause to realize how much the dividend rate has declined over the years, from 4% plus to less than 2% today. Psychologically I am not a fan of the create your own dividend. In my case, it is clearly some sort of psychological thing with me.

Well I hope you hit your numbers. I did already, but...I am lingering on for some reason I have yet to fathom.

Take care...
I never really thought about it in terms of how it compares to the dividend yield, but it's an interesting way to look at it. I'm really just working towards an age where my retirement bene's from my employer (of 31 years and counting) reach a certain level. I'm about 18 months out and the 1.7% is more where I think I'll be at that time than "the target" per se.

I think for me the key motivation is to set myself up with a ratio of assets to withdrawals that provides a reasonably content lifestyle baseline with some overhead room to withdraw more on occasion when the inevitable bumps in the road occur. I also have my own psychological quirks, and I think watching a relentless downward trend in my asset balance would begin to cause me stress, especially once I'm of an age where going back to work is impractical at best.

I know what you mean about coming from a family that views wealth with suspicion. The culture of mine is such that the tendency is to blame life's ills on "the rich guys". Despite my low withdrawal rate I won't have a ton of money by boglehead standards--having a modest pension and SS go a long way towards driving my anticipated withdrawal rate down below 2%. Still, I expect I'll have to practice a little "stealth wealth" for the sake of family harmony. Fortunately my needs are simple and I'm content with a humble lifestyle, which also contributes to a low withdrawal rate.

Good luck to you as well. My numbers already "work", and you could say I'm dwelling a year or two longer than is required. My job is reasonably enjoyable so it's not like I'm suffering at present, just trying to balance the pull of entering a new phase of life with my long-term financial well being. But at a certain point I have to recognize that 10-15 years down the road I still have some options when it comes to money if I retire on schedule, but if I work all those years instead I can't get the time back. Hopefully that realization will keep me from getting stuck in the one-more-year trap for too long. :)
Don't do something. Just stand there!
Post Reply