Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

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

Post by dcabler » Mon May 14, 2018 6:37 am

AlohaJoe wrote:
Sun May 13, 2018 11:15 pm
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
This is a keeper. Thinking about so many posts here and then looking at this post I notice that nowhere in it does it say.
1) Tilting to SCV is/isn't any good
2) I should/should not add international
3) The 3 fund portfolio is/is not the only one anybody should ever use.
4) Factors are/are not useful in a portfolio
5) I should/should not have a 100% stock portfolio

Eliminate those 5 topics which come up pretty often and I'm not sure there would be much traffic here. :D

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

Post by siamond » Mon May 14, 2018 7:37 am

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.
AlohaJoe wrote:
Sun May 13, 2018 9:28 pm
Yes, ERN's post is clearly a response to the FIRE community, not to the Boglehead community!
I had not realized that, good point. I still think the general "myth busting" approach is terribly counter-productive (naive readers will conclude that withdrawal methods should be avoided like the plague) and that the author keeps missing the boat when discussing variable methods (his silly views about Guyton-Klinger as another case in point), but... thank you for the clarification, this does provide context.

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

Post by EnjoyIt » Mon May 14, 2018 10:29 am

randomguy wrote:
Mon May 14, 2018 12:26 am
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.
Never in history has that been necessary. Also, if there is a fraction of a percent that we will have a worse scenario than the worst that has ever occurred it is without a doubt not worth 3 years of my freedom to try and cover. What if your house burns down, your financial institution is hacked and loses all your money and you are unable to talk due to a stroke? See I can think of an even worse scenario. I think maybe I should work till I die because you never know.

In addition, our fixed/mandatory expenses once our mortgage is fully paid off will be about 40% of all our expenses. A large chunk of it being property tax. The goal is to have a small foot print so that even in the worst of worst case scenarios we will be fine. The goal shouldn't be to keep blindly saving just to try and reach 100% security which is completely impossible.

Unfortunately we are emotional and fearful creatures. Many times those fears and emotions dictate our choices. We talk about removing emotion from our investing decisions and stick with math/statistics. There is no reason why this decision should be any different.

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

Post by wrongfunds » Mon May 14, 2018 11:02 am

The best thing is to have your expenses match the social security. This way you will NEVER have to worry about running out of your portfolio even when the market goes down 100% over your retirement duration. Would that be safe enough for some of you?

Oh, and just to be safe, the social security calculations should NOT be done with the couple's social security but rather with the only one receiving it.

Anything else am I missing?

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

Post by Random Poster » Mon May 14, 2018 11:08 am

wrongfunds wrote:
Mon May 14, 2018 11:02 am
The best thing is to have your expenses match the social security. This way you will NEVER have to worry about running out of your portfolio even when the market goes down 100% over your retirement duration. Would that be safe enough for some of you?

Oh, and just to be safe, the social security calculations should NOT be done with the couple's social security but rather with the only one receiving it.

Anything else am I missing?
It might be prudent to account for the possibility that one's social security benefits will get reduced or eliminated.

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

Post by wrongfunds » Mon May 14, 2018 11:22 am

BH rules don't allow to speculate on that but individuals are welcome to keep that in mind.

Any other ideas to make the retirement expenses 100% secure and never ever seeing portfolio going down?

I am wondering what do I really have to do keep portfolio going up even when the markets are going down?

I am now very worried!

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

Post by randomguy » Mon May 14, 2018 11:51 am

EnjoyIt wrote:
Mon May 14, 2018 10:29 am


Never in history has that been necessary. Also, if there is a fraction of a percent that we will have a worse scenario than the worst that has ever occurred it is without a doubt not worth 3 years of my freedom to try and cover. What if your house burns down, your financial institution is hacked and loses all your money and you are unable to talk due to a stroke? See I can think of an even worse scenario. I think maybe I should work till I die because you never know.

In addition, our fixed/mandatory expenses once our mortgage is fully paid off will be about 40% of all our expenses. A large chunk of it being property tax. The goal is to have a small foot print so that even in the worst of worst case scenarios we will be fine. The goal shouldn't be to keep blindly saving just to try and reach 100% security which is completely impossible.

Unfortunately we are emotional and fearful creatures. Many times those fears and emotions dictate our choices. We talk about removing emotion from our investing decisions and stick with math/statistics. There is no reason why this decision should be any different.
Depends on your exact definition of history and periods of distress. The 1966 and 1929 retirees had 15+ years. International SWRs of 2.5% are somewhat common.

If my house burns down, I have insurance. My assets are spread across multiple accounts, and I have health insurance.

The problem is that as a math problem the range of outcomes is huge. Your SWR is likely to be in the 2.5 to 7% range for a 50 year retirement.

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

Post by MnD » Mon May 14, 2018 11:53 am

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.
The mean and median legacy (ending portfolio) of a 5% annual portfolio withdrawal (with a 3% inflation adjusted floor) over 40 years is $958K and $775K REAL per $1M original portfolio. After 40 years of inflation that's a legacy of several million dollars in nominal terms. Absolute worst case historical sequence of returns still leaves a legacy after 40 years, albeit a small one.

It's not necessary to adopt a 1.6% SWR strategy to provide a meaningful legacy.
Last edited by MnD on Mon May 14, 2018 2:34 pm, edited 1 time in total.

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

Post by Hyperborea » Mon May 14, 2018 2:20 pm

wrongfunds wrote:
Mon May 14, 2018 11:02 am
Anything else am I missing?
Zombie apocalypse, alien invasion, takeover by the Shriner's in midget cars, any of which means we need a bunker, gold, and canned beans.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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

Post by willthrill81 » Mon May 14, 2018 2:55 pm

wrongfunds wrote:
Mon May 14, 2018 11:22 am
BH rules don't allow to speculate on that but individuals are welcome to keep that in mind.
Actually, theorizing that SS benefits will remain the same indefinitely is speculation. According to the SS Administration and under current law, benefits will be reduced by approximately one-quarter by 2034.
After 2021, interest income and redemption of trust fund asset reserves from the General Fund of the Treasury will provide the resources needed to offset Social Security's annual deficits until 2034, when the OASDI reserves will be depleted. Thereafter, scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2091.
https://www.ssa.gov/oact/trsum/

All roads carry risk. The desire for certainty is a common one, yet it is unattainable. My father is struggling with this fear as well.
Last edited by willthrill81 on Mon May 14, 2018 3:02 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 » Mon May 14, 2018 2:59 pm

randomguy wrote:
Mon May 14, 2018 11:51 am
EnjoyIt wrote:
Mon May 14, 2018 10:29 am


Never in history has that been necessary. Also, if there is a fraction of a percent that we will have a worse scenario than the worst that has ever occurred it is without a doubt not worth 3 years of my freedom to try and cover. What if your house burns down, your financial institution is hacked and loses all your money and you are unable to talk due to a stroke? See I can think of an even worse scenario. I think maybe I should work till I die because you never know.

In addition, our fixed/mandatory expenses once our mortgage is fully paid off will be about 40% of all our expenses. A large chunk of it being property tax. The goal is to have a small foot print so that even in the worst of worst case scenarios we will be fine. The goal shouldn't be to keep blindly saving just to try and reach 100% security which is completely impossible.

Unfortunately we are emotional and fearful creatures. Many times those fears and emotions dictate our choices. We talk about removing emotion from our investing decisions and stick with math/statistics. There is no reason why this decision should be any different.
Depends on your exact definition of history and periods of distress. The 1966 and 1929 retirees had 15+ years. International SWRs of 2.5% are somewhat common.

If my house burns down, I have insurance. My assets are spread across multiple accounts, and I have health insurance.

The problem is that as a math problem the range of outcomes is huge. Your SWR is likely to be in the 2.5 to 7% range for a 50 year retirement.
Those with a desire for a bequest must ask themselves whether it's worthwhile to work potentially many years longer and/or spending far less than necessary in order to avoid something (i.e. limited bequest) that historically only occurred perhaps 5% of the time. From my perspective, that seems like a terrible bet unless you enjoy your work very much and/or truly wouldn't enjoy spending more.
“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

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

Post by smectym » Tue May 15, 2018 12:12 am

We just withdraw roughly 4% from some accounts but leave other accounts alone. Then we have a lot of savings bonds, which don’t easily fit into most SWR analyses. And CD’s...mainly just roll those over. We spend a lot of money to support one kid who’s now entering law school, but most of that expenditure is ringfenced into a 529 set up a while ago.

Safe Withdrawal Rate doesn’t register with us bc of the mechanical underlying supposition that the retiree has a unitary portfolio with a given stock-bond allocation and is trembling with trepidation that a 3.9% WR might leave too many unconsumed assets at death, while 4.1% might throw the household at the mercy of Medicaid during the last agony.

We don’t have a unitary portfolio, we don’t draw equally from all portfolios (some just are left alone), we’re not just in 60-40 or 50-50 or you name it stocks/bonds, and in short our situation is far to messy to fit the Procrustean Bed which is a precondition for any of the numerous and rapidly replicating SWR refinements to apply to us at all.

Somehow I think we’ll be OK even without a SWR calculation. However, I enjoyed Part 24 and look forward to catching up on 1-23

Smectym

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

Post by smectym » Tue May 15, 2018 12:29 am

MnD wrote:
Mon May 14, 2018 11:53 am
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.
Good for Mr. Potatohead. Those who smirkingly slap the “Spending My Kids’ Inheritance” bumpersticker on their ugly RV are thoughtless vulgarians. It is our duty, if we have means, to support our kids with meaningful legacies. Those without children of their own may wish to consider other means of materially assisting the next generation. Our kids are probably going to need all the help they can get.

Smectym

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

Post by IlliniDave » Tue May 15, 2018 3:54 am

willthrill81 wrote:
Mon May 14, 2018 2:59 pm
Those with a desire for a bequest must ask themselves whether it's worthwhile to work potentially many years longer and/or spending far less than necessary in order to avoid something (i.e. limited bequest) that historically only occurred perhaps 5% of the time. From my perspective, that seems like a terrible bet unless you enjoy your work very much and/or truly wouldn't enjoy spending more.
The real key question to me was asking myself whether it was worth working many more years in order to be able to spend a bunch of money for token enjoyment and/or to alleviate boredom. At 3% every $1K/month of additional spending requires amassing another $400K in assets to support it. That's the big trade-off. It led to a systematic effort to "test" just how much money I had to spend to optimize contentment within the range of realistic possibilities, and further to explore what truly promoted contentment. Luckily I'm a cheap date, as it were. Unknowns in the realm of medical expenses down the road drive the desire for margin which in turn drives the low withdrawal rates. I also consider I may want to spend more on an ongoing basis at some point down the road. It's not easy to predict one's day-to-day lifestyle for 25 years into the future. Where I'm at now is much different than where I was as a 29-year-old.

Playing with the numbers yields the observation that there's a decent likelihood that I'll be worth more at the end than I will be at 55 when I leave the workforce (though I don't feel that counting on history to assign numbers to that likelihood is a good idea). After all that I'm left with a decision about what to do in the event that truly, after the rubber has met the road, I have a bunch of leftover money. That's where legacy goals enter the picture--simply a choice between going on a late life spending rampage or staying the course and preserving it for other uses.
Don't do something. Just stand there!

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

Post by ryman554 » Tue May 15, 2018 8:39 am

wrongfunds wrote:
Mon May 14, 2018 11:22 am
BH rules don't allow to speculate on that but individuals are welcome to keep that in mind.

Any other ideas to make the retirement expenses 100% secure and never ever seeing portfolio going down?

I am wondering what do I really have to do keep portfolio going up even when the markets are going down?

I am now very worried!
Why do you need to have your portfolio only go up? This is a serious question, and demands a serious answer. And don't forget to adjust for inflation....

If I take you at face value and read that statement literally, well, then your choices are things like annuities and SS. These are *expensive* ways to guarantee an income floor. Cash under a mattress doesn't work, since you have to spend it. CDs pay 2% or so. Living on said interest would also be an expensive way to guarantee an income floor.

So, to answer your question: you have to be very, very rich (or have really low expenses) to satisfy your need. So rich that it would likely not matter too much if your portfolio lost value.

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

Post by wrongfunds » Tue May 15, 2018 10:10 am

Well, there are some folks here who seem to have that as their goal in retirement. For them they will not be able to cope with their portfolio being depleted as the years go by.

So the serious answer to your question; of course you are correct but as I said above, for some, it can NOT be accepted.

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

Post by willthrill81 » Tue May 15, 2018 10:20 am

wrongfunds wrote:
Tue May 15, 2018 10:10 am
Well, there are some folks here who seem to have that as their goal in retirement. For them they will not be able to cope with their portfolio being depleted as the years go by.

So the serious answer to your question; of course you are correct but as I said above, for some, it can NOT be accepted.
That's why we speak so much of safe withdrawal rates because these are designed, historically, to not deplete a portfolio prior to the end of a specified period (e.g. 30 years). Some are worried that the SWR going forward will be lower than those of the past and, consequently, go lower than the historic ~4%, which is fine, but some seem to be playing limbo with their withdrawal rate (e.g. lower than 2%). Keep in mind that a retiree could invest all of their portfolio in TIPS and be guaranteed to sustain at least a 3.33% withdrawal rate for 30 years and likely longer since TIPS have a small real return.

Another option is single premium immediate annuities, which can provide a lifetime income, but many shun these because they require retirees to permanently turn over the annuitized assets to an insurance company.
“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

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

Post by wrongfunds » Tue May 15, 2018 10:43 am

How many posts here start with "my expenses are covered by pension and social security payment. can I retire with portfolios of only few millions?" Some might think they are humble bragging but later you realize their agony is very real, at least in their own mind. They are worried that in a down market, they will see their portfolio going down *AND* more importantly they will not be able to periodically invest more as they were doing before the retirement.

Bottom line:- One can not assume future will be just like the past. Unfortunately, the only data we have is the past. So if anybody wants to guess the future, the only thing they have is the past to predict the future. If you believe future has no resemblance to past, there is really no point in running any analysis and saying 3.7% will work or 1.7% will break.

Investing is NOT hard science. Some people think with enough computing power, it can be turned in to one.

How else can somebody publish twenty four part paper on withdrawal rate??????????

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

Post by longinvest » Fri May 18, 2018 1:06 pm

Livesoft,
livesoft wrote:
Sun May 13, 2018 6:11 pm
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.
I'll guess that this was yet another backtest applying VPW on a high-stocks portfolio with no stable non-portfolio income (e.g. no Social Security, no pension) in a bad period for stocks (when they experienced a dramatic drop).

In real life, what matters is the sustainability and volatility of total retirement income, including both portfolio withdrawals and non-portfolio income.

I've repeatedly suggested applying VPW on a balanced portfolio along with sufficient accompanying lifelong stable non-portfolio income. Here's a good summary of what I suggest: viewtopic.php?f=2&t=120430&start=700#p3518078
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic / international) stocks / domestic (nominal / inflation-indexed) long-term bonds | VCN/VXC/VLB/ZRR

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

Post by willthrill81 » Fri May 18, 2018 3:39 pm

longinvest wrote:
Fri May 18, 2018 1:06 pm
Livesoft,
livesoft wrote:
Sun May 13, 2018 6:11 pm
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.
I'll guess that this was yet another backtest applying VPW on a high-stocks portfolio with no stable non-portfolio income (e.g. no Social Security, no pension) in a bad period for stocks (when they experienced a dramatic drop).

In real life, what matters is the sustainability and volatility of total retirement income, including both portfolio withdrawals and non-portfolio income.

I've repeatedly suggested applying VPW on a balanced portfolio along with sufficient accompanying lifelong stable non-portfolio income. Here's a good summary of what I suggest: viewtopic.php?f=2&t=120430&start=700#p3518078
To be clear, you suggest that a mixture of 'guaranteed' income from sources such as Social Security, pensions, and inflation-adjusted annuities should cover necessary expenses, leaving your portfolio to provide for your discretionary expenses?
“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

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

Post by wrongfunds » Fri May 18, 2018 4:58 pm

willthrill81 wrote:
Fri May 18, 2018 3:39 pm
To be clear, you suggest that a mixture of 'guaranteed' income from sources such as Social Security, pensions, and inflation-adjusted annuities should cover necessary expenses, leaving your portfolio to provide for your discretionary expenses?
Well, if you really want to take that idea further; the guaranteed income should be even more than the necessary expenses so that when the portfolio suffers loss instead of gain in a down year, the extra money from guaranteed income will go in to the portfolio and strengthen it further. Buying on dips and all that!

Can you guess if I am sarcastic or serious?

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

Post by longinvest » Fri May 18, 2018 5:02 pm

Willthrill81,
willthrill81 wrote:
Fri May 18, 2018 3:39 pm
longinvest wrote:
Fri May 18, 2018 1:06 pm
Livesoft,
livesoft wrote:
Sun May 13, 2018 6:11 pm
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.
I'll guess that this was yet another backtest applying VPW on a high-stocks portfolio with no stable non-portfolio income (e.g. no Social Security, no pension) in a bad period for stocks (when they experienced a dramatic drop).

In real life, what matters is the sustainability and volatility of total retirement income, including both portfolio withdrawals and non-portfolio income.

I've repeatedly suggested applying VPW on a balanced portfolio along with sufficient accompanying lifelong stable non-portfolio income. Here's a good summary of what I suggest: viewtopic.php?f=2&t=120430&start=700#p3518078
To be clear, you suggest that a mixture of 'guaranteed' income from sources such as Social Security, pensions, and inflation-adjusted annuities should cover necessary expenses, leaving your portfolio to provide for your discretionary expenses?
I didn't write that.

For one thing, it could be very expensive to buy enough non-portfolio income to do so depending on one's age and what one considers "necessary". I'm not even sure that it is possible to do this with precision, because this would assume that one was actually able to predict what his future "necessary expenses"* will be! Anyway, some "necessary" expenses, like car expenses and house maintenance expenses, can significantly vary from year to year. So, a constant inflation-adjusted income isn't the most appropriate solution to cover all "necessary" retirement expenses.

* For instance, I know that it will be necessary for me to buy cars to replace older ones, in the future, but I have no idea how much my future cars will cost. There's just such a wide range of car prices, even today.

For another, I don't prepare for the stock and bond markets to drop to zero during my lifetime. It could happen (it has happened in Russia and China) but I'll deal with that if and when it happens. Pensions and annuities would be as vulnerable in such a situation. Assuming the markets don't drop to zero, VPW withdrawals won't drop to zero, either.

Also, I'm not interested in retiring like a pauper, with minimal total income (e.g. pension + withdrawals). I want to have a very comfortable retirement with lots of room for spending on things I "want", even in (normally) bad markets. So, I won't retire before my portfolio and base income are big enough to provide this flexibility.

Finally, I'm a financially flexible person. All of my life, I've adapted my expenses to my income. That's what most people do; it's nothing unusual. People with high income tend to spend more than people with low income. So, if really bad markets happen during my retirement, I'll revisit my lifestyle to adapt it to whatever my total retirement income allows for.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic / international) stocks / domestic (nominal / inflation-indexed) long-term bonds | VCN/VXC/VLB/ZRR

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

Post by Top99% » Sun May 20, 2018 8:46 am

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 think withdrawal rates, asset allocation and valuations all matter a great deal. Just check out the real life examples on http://www.retireearlyhomepage.com/reallife18.html Starting conditions (1994 Vs 1999 valuations) and asset allocation all make a big difference, the latter especially when valuations are high. My plan mirrors a few other posters: minimize non-discretionary expenses + use VPW.
Adapt or perish

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

Post by nooneofnote » Thu May 24, 2018 12:06 am


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

Post by willthrill81 » Thu May 24, 2018 12:16 am

In part 25, ERN demonstrates that having a relatively small cash cushion (i.e. bucket strategy) actually worked very well in the two worst-case scenarios for retirees (1929 and 1966).
What I assume here is that the cash bucket doesn’t reduce the stock/bond investment but it’s in addition to the $1m portfolio. Notice that we did a very similar calculation in the post two weeks ago: How much do we have to scale up the entire portfolio to make sure it doesn’t run out after 23 years (1929 cohort) or 28 years (1966 cohort). We needed about $226k of additional savings in 1929 to make the portfolio last the entire 50 years, and $146k in 1966. But for today’s exercise, let’s assume the money is not invested in the same 80/20 portfolio but instead held as cash in a money market account (returning just the 3-month T-Bill interest rate). Also, assume that we only withdraw from that cash cushion if the investment portfolio goes more than 20% underwater. Once the cash cushion is exhausted we tap the investment portfolio and we never replenish the cash account it again. So, think of the cash cushion strictly as an insurance policy against Sequence Risk for the first few years after retirement.

How much extra money do we need to make ends meet? Not that much! Only about $100k to $115k in the two worst-case scenarios! Much less than what I calculated two weeks ago. Makes sense because if the portfolio goes down so will the additional savings if they are invested in an 80/20 stock/bond portfolio. But letting the cash sit on the side we are not exposed to that initial drop, which was particularly brutal in 1929. So, for the record, let me state that this cash bucket strategy seems to work pretty well, despite my previous doubts! It’s relatively inexpensive insurance against Sequence Risk! Think of it as a mini-glidepath during the first few years of retirement! And it “only” takes the flexibility of getting to 27.5x instead of 25x annual spending!
While he characterizes the cash bucket as being in addition to the 80/20 portfolio, the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort. So maybe there's something to the bucket strategy after all!
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by ryman554 » Thu May 24, 2018 8:33 am

longinvest wrote:
Fri May 18, 2018 5:02 pm
Finally, I'm a financially flexible person. All of my life, I've adapted my expenses to my income. That's what most people do; it's nothing unusual. People with high income tend to spend more than people with low income. So, if really bad markets happen during my retirement, I'll revisit my lifestyle to adapt it to whatever my total retirement income allows for.
I think you're right -- everybody does this. But isn't there a limit to how much you can revisit your lifestyle? Taking it to an extreme, 100% reduction in your initial withdrawal will *certainly* create a problem. But that's just being pedantic. Assessing the *floor* properly, however, is a crucial question, which to me is the crux of why "SWR" keeps cropping up.

If your floor is 50% of your initial withdrawal (half is need, half is want), then I posit that your withdrawal strategy is mostly irrelevant as long as you are paying attention and don't go buy a yacht or two.
If your floor is 100% of your initial withdrawal, you're retiring (or most likely forced to retire) on the bleeding edge. I certainly wouldn't want to do that, but in this case, variable withdrawal can't work for you. I would not want to be in this position, not because I didn't trust a simple SWR to be correct, but because of the immense difficulty in predicting future expenses.

It is this difficulty of predicting future expenses that gives me pause for spending too much when times are good, I'd like to understand how the various variable withdrawal strategies, VPW in this case, handles that.

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

Post by GAAP » Thu May 24, 2018 9:51 am

willthrill81 wrote:
Thu May 24, 2018 12:16 am
In part 25, ERN demonstrates that having a relatively small cash cushion (i.e. bucket strategy) actually worked very well in the two worst-case scenarios for retirees (1929 and 1966).
What I assume here is that the cash bucket doesn’t reduce the stock/bond investment but it’s in addition to the $1m portfolio. Notice that we did a very similar calculation in the post two weeks ago: How much do we have to scale up the entire portfolio to make sure it doesn’t run out after 23 years (1929 cohort) or 28 years (1966 cohort). We needed about $226k of additional savings in 1929 to make the portfolio last the entire 50 years, and $146k in 1966. But for today’s exercise, let’s assume the money is not invested in the same 80/20 portfolio but instead held as cash in a money market account (returning just the 3-month T-Bill interest rate). Also, assume that we only withdraw from that cash cushion if the investment portfolio goes more than 20% underwater. Once the cash cushion is exhausted we tap the investment portfolio and we never replenish the cash account it again. So, think of the cash cushion strictly as an insurance policy against Sequence Risk for the first few years after retirement.

How much extra money do we need to make ends meet? Not that much! Only about $100k to $115k in the two worst-case scenarios! Much less than what I calculated two weeks ago. Makes sense because if the portfolio goes down so will the additional savings if they are invested in an 80/20 stock/bond portfolio. But letting the cash sit on the side we are not exposed to that initial drop, which was particularly brutal in 1929. So, for the record, let me state that this cash bucket strategy seems to work pretty well, despite my previous doubts! It’s relatively inexpensive insurance against Sequence Risk! Think of it as a mini-glidepath during the first few years of retirement! And it “only” takes the flexibility of getting to 27.5x instead of 25x annual spending!
While he characterizes the cash bucket as being in addition to the 80/20 portfolio, the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort. So maybe there's something to the bucket strategy after all!
I'm more inclined to use a HECM LOC for this purpose -- and then only if my choice of variable withdrawal methods hits a limit. For most people, saying the cash bucket is outside the portfolio means a reduced portfolio in the first place. I would rather invest for the long run and insure for the worst case.

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

Post by longinvest » Thu May 24, 2018 10:04 am

ryman554 wrote:
Thu May 24, 2018 8:33 am
It is this difficulty of predicting future expenses that gives me pause for spending too much when times are good
I have difficulty predicting future expenses, too. I also have difficulty predicting future income. Should I spend less because I might lose my job next year due to an unanticipated deep financial crisis and never find a new one? Should I spend more because I'll keep working and get salary increases for many years to come? I just don't know. I have to make a judgement call and live with the consequences of my decision. As a result, I manage to spend and save reasonably.

I think that it is best to simply accept that there will always be financial uncertainty in life and move on. The consequences of bad outcomes can be dampened by accumulating a sizable portfolio (its volatility can be dampened with bonds) as well as lifelong non-portfolio income promises (pension, Social Security). When necessary, lifelong non-portfolio income can be bought; it's called inflation-indexed Single Premium Immediate Annuity. But, it's relatively expensive before age 80. Specific choices heavily depend on personal circumstances.

What's most important is to devise a sensible plan that one will stick to in good and bad markets. Personal preferences are important.
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Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by michaeljc70 » Thu May 24, 2018 11:33 am

Though not ideal to tap, I view the equity in my home as an emergency"bucket". I have no plans to tap it, but if one of the worst outcomes were to hit me, it is a backup. That could take the form of selling, a home equity loan or reverse mortgage.

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

Post by marcopolo » Thu May 24, 2018 11:44 am

willthrill81 wrote:
Thu May 24, 2018 12:16 am

While he characterizes the cash bucket as being in addition to the 80/20 portfolio, the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort. So maybe there's something to the bucket strategy after all!
I am not sure that is so surprising. With the extra 10% cash that is "not part of the portfolio", that 80/20 portfolio is now really at about 73/27. Since most of the problems come from large (real) losses in equities, the lower allocation probably accounts for the difference in SWR.

I still really don't get the point of all the mental gymnastics of the cash buckets, or non-portfolio TIPS ladders, etc. You really have just one portfolio, right? If you want a lower equity allocation (by having more CDs, TIPS, bonds, or cash under a mattress, etc.), I think all that really does is change the balance in your asset allocation. From there you need a withdrawal strategy to take income from that portfolio. There does not seem to be any magic to be gained from mentally compartmentalizing your portfolio. Am I missing something?
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Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 » Thu May 24, 2018 12:05 pm

marcopolo wrote:
Thu May 24, 2018 11:44 am
willthrill81 wrote:
Thu May 24, 2018 12:16 am

While he characterizes the cash bucket as being in addition to the 80/20 portfolio, the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort. So maybe there's something to the bucket strategy after all!
I am not sure that is so surprising. With the extra 10% cash that is "not part of the portfolio", that 80/20 portfolio is now really at about 73/27. Since most of the problems come from large (real) losses in equities, the lower allocation probably accounts for the difference in SWR.

I still really don't get the point of all the mental gymnastics of the cash buckets, or non-portfolio TIPS ladders, etc. You really have just one portfolio, right? If you want a lower equity allocation (by having more CDs, TIPS, bonds, or cash under a mattress, etc.), I think all that really does is change the balance in your asset allocation. From there you need a withdrawal strategy to take income from that portfolio. There does not seem to be any magic to be gained from mentally compartmentalizing your portfolio. Am I missing something?
It's not really accurate to say that the portfolio would be 73/27 because if the cash was spent early on (which it would have been in both 1929 and 1966), it would not be replenished. This is not a situation where a cash bucket can be equated to a traditional AA, and it's not just a mental exercise for this reason either.
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Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by marcopolo » Thu May 24, 2018 12:18 pm

willthrill81 wrote:
Thu May 24, 2018 12:05 pm
marcopolo wrote:
Thu May 24, 2018 11:44 am
willthrill81 wrote:
Thu May 24, 2018 12:16 am

While he characterizes the cash bucket as being in addition to the 80/20 portfolio, the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort. So maybe there's something to the bucket strategy after all!
I am not sure that is so surprising. With the extra 10% cash that is "not part of the portfolio", that 80/20 portfolio is now really at about 73/27. Since most of the problems come from large (real) losses in equities, the lower allocation probably accounts for the difference in SWR.

I still really don't get the point of all the mental gymnastics of the cash buckets, or non-portfolio TIPS ladders, etc. You really have just one portfolio, right? If you want a lower equity allocation (by having more CDs, TIPS, bonds, or cash under a mattress, etc.), I think all that really does is change the balance in your asset allocation. From there you need a withdrawal strategy to take income from that portfolio. There does not seem to be any magic to be gained from mentally compartmentalizing your portfolio. Am I missing something?
It's not really accurate to say that the portfolio would be 73/27 because if the cash was spent early on (which it would have been in both 1929 and 1966), it would not be replenished. This is not a situation where a cash bucket can be equated to a traditional AA, and it's not just a mental exercise for this reason either.
Well, it is 73/27 at the beginning. Then it is the chosen withdrawal method one needs to think about. Withdrawal methods don't necessarily maintain a constant AA. This would be more akin to a rising glide path, or maybe more accurately some thing like "spend bonds (fixed-income) first" withdrawal strategy. But, the fact that you started with a lower equity allocation at the start of the decline in stocks is likely to improve SWR regardless of withdrawal strategy. Still not seeing how it is not just a mental exercise. Does doing so create separate portfolios that somehow perform differently than a single portfolio with the same aggregate composition?
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Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 » Thu May 24, 2018 2:52 pm

marcopolo wrote:
Thu May 24, 2018 12:18 pm
willthrill81 wrote:
Thu May 24, 2018 12:05 pm
marcopolo wrote:
Thu May 24, 2018 11:44 am
willthrill81 wrote:
Thu May 24, 2018 12:16 am

While he characterizes the cash bucket as being in addition to the 80/20 portfolio, the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort. So maybe there's something to the bucket strategy after all!
I am not sure that is so surprising. With the extra 10% cash that is "not part of the portfolio", that 80/20 portfolio is now really at about 73/27. Since most of the problems come from large (real) losses in equities, the lower allocation probably accounts for the difference in SWR.

I still really don't get the point of all the mental gymnastics of the cash buckets, or non-portfolio TIPS ladders, etc. You really have just one portfolio, right? If you want a lower equity allocation (by having more CDs, TIPS, bonds, or cash under a mattress, etc.), I think all that really does is change the balance in your asset allocation. From there you need a withdrawal strategy to take income from that portfolio. There does not seem to be any magic to be gained from mentally compartmentalizing your portfolio. Am I missing something?
It's not really accurate to say that the portfolio would be 73/27 because if the cash was spent early on (which it would have been in both 1929 and 1966), it would not be replenished. This is not a situation where a cash bucket can be equated to a traditional AA, and it's not just a mental exercise for this reason either.
Well, it is 73/27 at the beginning. Then it is the chosen withdrawal method one needs to think about. Withdrawal methods don't necessarily maintain a constant AA. This would be more akin to a rising glide path, or maybe more accurately some thing like "spend bonds (fixed-income) first" withdrawal strategy. But, the fact that you started with a lower equity allocation at the start of the decline in stocks is likely to improve SWR regardless of withdrawal strategy. Still not seeing how it is not just a mental exercise. Does doing so create separate portfolios that somehow perform differently than a single portfolio with the same aggregate composition?
It is, of course, possible to convert the bucket strategy to a conventional AA, even one with a glidepath of sorts, but there's no reason to believe that examining from one perspective is superior to another. Regardless of whether one calls this a bucket strategy or a conventional AA, the point is that it worked better than a static AA.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by marcopolo » Thu May 24, 2018 6:36 pm

willthrill81 wrote:
Thu May 24, 2018 2:52 pm
Regardless of whether one calls this a bucket strategy or a conventional AA, the point is that it worked better than a static AA.
Do we know that to be the case? That is actually what i was questioning. If i understand it correctly, you are basing that on this statement:
willthrill81 wrote:
Thu May 24, 2018 2:52 pm
While he characterizes the cash bucket as being in addition to the 80/20 portfolio, the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort. So maybe there's something to the bucket strategy after all!
Assuming that is the case, the point i was trying to make (perhaps, not well) is that the 3.26% and the 3.49% that he came up with were based on a 80/20 AA (perfect foresight scenario in part 24). The 3.64% that you computed (from the 27.5x portfolio) is based on a 73/27 starting allocation. I don't think we have the analysis on what the SWR would have been for a constant 73/27 AA in those years. But, it is most likely to be better than the 80/20 case due to lower equity allocation. So, it is not clear how much of the difference is attributable to bucketing vs. lower starting equity allocation.
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Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by livesoft » Thu May 24, 2018 6:40 pm

^Don't forget that with the extra cash is extra. So just because the withdrawal rate with the extra cash is 3.64% does not match up with the earlier 3.26% SWR of the 1929 cohort. In one case, the 1929 retiree started with about a 10% higher value portfolio.

How long would it take you to increase your portfolio by another 10% before you retired? That might take longer than the proverbial OMY (one-more-year) syndrome.
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Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 » Thu May 24, 2018 8:00 pm

livesoft wrote:
Thu May 24, 2018 6:40 pm
^Don't forget that with the extra cash is extra. So just because the withdrawal rate with the extra cash is 3.64% does not match up with the earlier 3.26% SWR of the 1929 cohort. In one case, the 1929 retiree started with about a 10% higher value portfolio.
The 3.64% is computed by 1/27.5, accounting for the additional cash.
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Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 » Thu May 24, 2018 8:03 pm

marcopolo wrote:
Thu May 24, 2018 6:36 pm
willthrill81 wrote:
Thu May 24, 2018 2:52 pm
Regardless of whether one calls this a bucket strategy or a conventional AA, the point is that it worked better than a static AA.
Do we know that to be the case? That is actually what i was questioning. If i understand it correctly, you are basing that on this statement:
willthrill81 wrote:
Thu May 24, 2018 2:52 pm
While he characterizes the cash bucket as being in addition to the 80/20 portfolio, the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort. So maybe there's something to the bucket strategy after all!
Assuming that is the case, the point i was trying to make (perhaps, not well) is that the 3.26% and the 3.49% that he came up with were based on a 80/20 AA (perfect foresight scenario in part 24). The 3.64% that you computed (from the 27.5x portfolio) is based on a 73/27 starting allocation. I don't think we have the analysis on what the SWR would have been for a constant 73/27 AA in those years. But, it is most likely to be better than the 80/20 case due to lower equity allocation. So, it is not clear how much of the difference is attributable to bucketing vs. lower starting equity allocation.
Good point. You should email ERN to ask him what the SWR would have been for a 73/27 static AA rather than 80/20 for the 1929 cohort. I'm doubtful that a change in AA of only 7% would increase the SWR by nearly 12%, but perhaps it would have.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by michaeljc70 » Thu May 24, 2018 8:09 pm

There's always a lot more discussion about worst case scenarios (very unlikely) than best (or likely) case scenarios on Bogleheads. Not that you shouldn't plan for the worst, but hopefully it is an academic exercise. Of course, if you go to Mr. Moneystache and other FIRE sites, there are people have all small cap stocks and emerging market funds and think they can have a SWR of 6% or 7% :shock:

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

Post by Taylor Larimore » Thu May 24, 2018 8:18 pm

Bogleheads:

I wrote this post seven years ago: It still works.
Safe Withdrawal Rates ? Complexity vs. Simplicity
Post by Taylor Larimore » Thu Apr 21, 2011 9:31 pm

Hi Bogleheads:

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.
"There seems to be some perverse human characteristic that likes to make easy things difficult."--Warren Buffet
Best wishes.
Taylor
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Re: Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

Post by willthrill81 » Thu May 24, 2018 8:21 pm

michaeljc70 wrote:
Thu May 24, 2018 8:09 pm
There's always a lot more discussion about worst case scenarios (very unlikely) than best (or likely) case scenarios on Bogleheads. Not that you shouldn't plan for the worst, but hopefully it is an academic exercise.
I certainly hope that you're correct, but the last 100 years of world history have shown that 'worst case' scenarios have a fair likelihood of occurring over a 30-50 year retirement (e.g. stock market crashes, government confiscation of assets, hyper-inflation, etc.).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by randomguy » Thu May 24, 2018 10:37 pm

willthrill81 wrote:
Thu May 24, 2018 8:03 pm
marcopolo wrote:
Thu May 24, 2018 6:36 pm
willthrill81 wrote:
Thu May 24, 2018 2:52 pm
Regardless of whether one calls this a bucket strategy or a conventional AA, the point is that it worked better than a static AA.
Do we know that to be the case? That is actually what i was questioning. If i understand it correctly, you are basing that on this statement:
willthrill81 wrote:
Thu May 24, 2018 2:52 pm
While he characterizes the cash bucket as being in addition to the 80/20 portfolio, the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort. So maybe there's something to the bucket strategy after all!
Assuming that is the case, the point i was trying to make (perhaps, not well) is that the 3.26% and the 3.49% that he came up with were based on a 80/20 AA (perfect foresight scenario in part 24). The 3.64% that you computed (from the 27.5x portfolio) is based on a 73/27 starting allocation. I don't think we have the analysis on what the SWR would have been for a constant 73/27 AA in those years. But, it is most likely to be better than the 80/20 case due to lower equity allocation. So, it is not clear how much of the difference is attributable to bucketing vs. lower starting equity allocation.
Good point. You should email ERN to ask him what the SWR would have been for a 73/27 static AA rather than 80/20 for the 1929 cohort. I'm doubtful that a change in AA of only 7% would increase the SWR by nearly 12%, but perhaps it would have.
You are holding 30% more bonds. Does that sound like a bigger change?:) 1929 was basically perfect for this strategy as there was a huge drop followed by a really big bounce. See 1966 for an example of how it pretty much didn't change anything.

My take away from 1929 has always been if stocks have been up 600% or so in the previous 10 years (i.e. you have brought in your retirement day by a couple decades), you should really consider if you are approaching a market peak.:) I am not a huge valuation guy but there is a point where you have to start thinking about them. right now we are ~2x off the bottom of the last market. 1929 was 6x over 10 years. 2000 was also ~6x but over about 19 years (to lazy to look up when the bottom was). If the S&p 500 went to like 7500 over the next 5 years, I can assure I would be almost 100% cash by the time we got there:). Note Japan tells a similiar story where the last half decade before the peak was pretty crazy.

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

Post by willthrill81 » Thu May 24, 2018 10:41 pm

randomguy wrote:
Thu May 24, 2018 10:37 pm
willthrill81 wrote:
Thu May 24, 2018 8:03 pm
marcopolo wrote:
Thu May 24, 2018 6:36 pm
willthrill81 wrote:
Thu May 24, 2018 2:52 pm
Regardless of whether one calls this a bucket strategy or a conventional AA, the point is that it worked better than a static AA.
Do we know that to be the case? That is actually what i was questioning. If i understand it correctly, you are basing that on this statement:
willthrill81 wrote:
Thu May 24, 2018 2:52 pm
While he characterizes the cash bucket as being in addition to the 80/20 portfolio, the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort. So maybe there's something to the bucket strategy after all!
Assuming that is the case, the point i was trying to make (perhaps, not well) is that the 3.26% and the 3.49% that he came up with were based on a 80/20 AA (perfect foresight scenario in part 24). The 3.64% that you computed (from the 27.5x portfolio) is based on a 73/27 starting allocation. I don't think we have the analysis on what the SWR would have been for a constant 73/27 AA in those years. But, it is most likely to be better than the 80/20 case due to lower equity allocation. So, it is not clear how much of the difference is attributable to bucketing vs. lower starting equity allocation.
Good point. You should email ERN to ask him what the SWR would have been for a 73/27 static AA rather than 80/20 for the 1929 cohort. I'm doubtful that a change in AA of only 7% would increase the SWR by nearly 12%, but perhaps it would have.
You are holding 30% more bonds. Does that sound like a bigger change?:) 1929 was basically perfect for this strategy as there was a huge drop followed by a really big bounce. See 1966 for an example of how it pretty much didn't change anything.

My take away from 1929 has always been if stocks have been up 600% or so in the previous 10 years (i.e. you have brought in your retirement day by a couple decades), you should really consider if you are approaching a market peak.:) I am not a huge valuation guy but there is a point where you have to start thinking about them. right now we are ~2x off the bottom of the last market. 1929 was 6x over 10 years. 2000 was also ~6x but over about 19 years (to lazy to look up when the bottom was). If the S&p 500 went to like 7500 over the next 5 years, I can assure I would be almost 100% cash by the time we got there:). Note Japan tells a similiar story where the last half decade before the peak was pretty crazy.
Have you crossed over to the dark side (i.e. market timing)? :twisted:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by aj76er » Thu May 24, 2018 10:51 pm

randomguy wrote:
Thu May 24, 2018 10:37 pm
willthrill81 wrote:
Thu May 24, 2018 8:03 pm
marcopolo wrote:
Thu May 24, 2018 6:36 pm
willthrill81 wrote:
Thu May 24, 2018 2:52 pm
Regardless of whether one calls this a bucket strategy or a conventional AA, the point is that it worked better than a static AA.
Do we know that to be the case? That is actually what i was questioning. If i understand it correctly, you are basing that on this statement:
willthrill81 wrote:
Thu May 24, 2018 2:52 pm
While he characterizes the cash bucket as being in addition to the 80/20 portfolio, the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort. So maybe there's something to the bucket strategy after all!
Assuming that is the case, the point i was trying to make (perhaps, not well) is that the 3.26% and the 3.49% that he came up with were based on a 80/20 AA (perfect foresight scenario in part 24). The 3.64% that you computed (from the 27.5x portfolio) is based on a 73/27 starting allocation. I don't think we have the analysis on what the SWR would have been for a constant 73/27 AA in those years. But, it is most likely to be better than the 80/20 case due to lower equity allocation. So, it is not clear how much of the difference is attributable to bucketing vs. lower starting equity allocation.
Good point. You should email ERN to ask him what the SWR would have been for a 73/27 static AA rather than 80/20 for the 1929 cohort. I'm doubtful that a change in AA of only 7% would increase the SWR by nearly 12%, but perhaps it would have.
You are holding 30% more bonds. Does that sound like a bigger change?:) 1929 was basically perfect for this strategy as there was a huge drop followed by a really big bounce. See 1966 for an example of how it pretty much didn't change anything.

My take away from 1929 has always been if stocks have been up 600% or so in the previous 10 years (i.e. you have brought in your retirement day by a couple decades), you should really consider if you are approaching a market peak.:) I am not a huge valuation guy but there is a point where you have to start thinking about them. right now we are ~2x off the bottom of the last market. 1929 was 6x over 10 years. 2000 was also ~6x but over about 19 years (to lazy to look up when the bottom was). If the S&p 500 went to like 7500 over the next 5 years, I can assure I would be almost 100% cash by the time we got there:). Note Japan tells a similiar story where the last half decade before the peak was pretty crazy.
It's not just multiples of price, but multiples of earnings (e.g. P/E). If prices are 6x higher, and subsequent earnings are also 6x higher, than going to cash may be a bad idea. Backwards looking P/E can give some guidance.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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

Post by AlohaJoe » Thu May 24, 2018 11:43 pm

randomguy wrote:
Thu May 24, 2018 10:37 pm
willthrill81 wrote:
Thu May 24, 2018 8:03 pm
Good point. You should email ERN to ask him what the SWR would have been for a 73/27 static AA rather than 80/20 for the 1929 cohort. I'm doubtful that a change in AA of only 7% would increase the SWR by nearly 12%, but perhaps it would have.
You are holding 30% more bonds. Does that sound like a bigger change?:) 1929 was basically perfect for this strategy as there was a huge drop followed by a really big bounce. See 1966 for an example of how it pretty much didn't change anything.

My take away from 1929 has always been if stocks have been up 600% or so in the previous 10 years (i.e. you have brought in your retirement day by a couple decades), you should really consider if you are approaching a market peak.:) I am not a huge valuation guy but there is a point where you have to start thinking about them. right now we are ~2x off the bottom of the last market. 1929 was 6x over 10 years. 2000 was also ~6x but over about 19 years (to lazy to look up when the bottom was). If the S&p 500 went to like 7500 over the next 5 years, I can assure I would be almost 100% cash by the time we got there:). Note Japan tells a similiar story where the last half decade before the peak was pretty crazy.
I think this is an under-appreciated point when people do historical backtesting. Obviously US 1929 and Japan 1990 are extreme examples. But since we use those extreme examples to draw conclusions about e.g. safe withdrawal rates, safe asset allocations, whether a cash cushion works, etc...then I think we need to look harder at the full context of those periods. Sometimes that "full context" makes things look better and sometimes worse.

For instance it can make things look worse: it is one thing to talk about how an 80% stock allocation with a 4% withdrawal (or 3.8% or whatever) rate would have survived 1929 but that overlooks the on-the-ground reality of living in a society with 25% unemployment rate and people going door-to-door begging for food/work and what if you happened to be living in the Dust Bowl and your entire town evaporates and your house equity goes to $0 and you need to move across the country in the middle of the Great Depression?

Image

(Dust storm in Texas 1935)

I wrote two longer blog posts looking at Japan 1990 along with US 1929/1930/2000 where I looked at what the years leading up to the crash looked like. People saw their portfolios double between 1927 and 1929. Going from $500,000 to $1,000,000 in 24 months.

Image

The "estimated years" is how far away a person would have estimated their retirement was going to be, using "average stock return" type estimates. As you can see, in 1924 they were estimating a retirement in 1938. But stock returns were so good they were in a position to retire almost a full decade early...simply due to the bull market. In 1927 they were estimating a retirement in 1935...and yet 24 months later they had "hit their number".

And people today are worried about a few years of 10% and 15% returns....! I'm also a not big valuation guy but when you're talking about the effect of the two biggest investing bubbles of all time, you need to also think about what you would have done in the run up of the bubble. Would you really have kept your 80% stock allocation if your portfolio had doubled in two years like a Backtesting Automaton™? Or would you have shifted down to 70%?

(I thought ERN's latest entry on flexibility was a bit weak. He can do better!)

https://medium.com/@justusjp/would-you- ... a6d34b39ce
https://medium.com/@justusjp/retiring-i ... 4c526e3288

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

Post by Reb Tevye » Fri May 25, 2018 10:31 am

the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort.
Three-digit withdrawal rates?

Snort, guffaw, pshaw!

Herr Hennes, who beat into me the importance of significant digits and avoiding false precision, is rolling over in his grave.

Hmm, I sure hope *he* didn’t run out of money. That would truly be too few significant digits.
"So, what would have been so terrible if I had a small fortune?"

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

Post by randomguy » Fri May 25, 2018 2:41 pm

willthrill81 wrote:
Thu May 24, 2018 10:41 pm


Have you crossed over to the dark side (i.e. market timing)? :twisted:
Partly. But huge chunk is going from a 4% Swr to like a 1.5%. not so much market timing as need timing. in reality I am sure I would end going 85/15 time something like 40/60. Don't think I could stomache the tax hit of getting much lower.

Of course I am probably kidding myself and I would let my AA rise to 95/5 cause this time is different😁

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

Post by willthrill81 » Fri May 25, 2018 4:27 pm

Reb Tevye wrote:
Fri May 25, 2018 10:31 am
the 27.5X annual spending equates to a 3.64% withdrawal rate. But interestingly, he earlier determined that a 3.26% WR was needed for the 1929 cohort to make it, and a 3.49% WR was needed for the 1966 cohort.
Three-digit withdrawal rates?

Snort, guffaw, pshaw!

Herr Hennes, who beat into me the importance of significant digits and avoiding false precision, is rolling over in his grave.

Hmm, I sure hope *he* didn’t run out of money. That would truly be too few significant digits.
It's not false precision; that's what would have barely worked in the past. I do not now nor have I ever claimed that any specific WR would or would not work going forward because that is unknowable.

And yes, the difference between a 3.64% WR and a 3.26% WR would have made the difference between running out of money as opposed to not. That's a pretty serious situation; AARP's members rate running out of money as more fearsome than death.

The difference between a 4% withdrawal rate and a 3% withdrawal rate might not seem like much, for instance, but the latter requires 8.3 years worth of additional spending dollars than the former at the start. I'd call that substantial.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by willthrill81 » Fri May 25, 2018 4:29 pm

randomguy wrote:
Fri May 25, 2018 2:41 pm
willthrill81 wrote:
Thu May 24, 2018 10:41 pm


Have you crossed over to the dark side (i.e. market timing)? :twisted:
Partly. But huge chunk is going from a 4% Swr to like a 1.5%. not so much market timing as need timing. in reality I am sure I would end going 85/15 time something like 40/60. Don't think I could stomache the tax hit of getting much lower.

Of course I am probably kidding myself and I would let my AA rise to 95/5 cause this time is different😁
We may make a trend follower out of you yet! :sharebeer
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by randomguy » Fri May 25, 2018 5:37 pm

willthrill81 wrote:
Fri May 25, 2018 4:29 pm

We may make a trend follower out of you yet! :sharebeer
Hey lets not get crazy. I am not looking at a bunch of charts and making decisions based on if I see teapots or not:) Market timing gets a horrible name because tons of it is pure seat of the pants (i.e. market feels like it is dropping another 30% so I sell everything I own in early 2009 and now in 2018 I am wondering if I should buy back in). Realistically in retirement any AA between 60/40 and 40/60 is pretty sane for most people (assuming 3-5% SWR, 20-40 year investment horizons, no really special needs,...). Switching between that range at sane times (i.e. when stocks are down 50% is not the time to decide you should only have 40% in stocks. 5 years into a bull market deciding to go 60% stocks isn't a great idea either), isn't going to matter much. Deciding to go 100% cash or stocks is far beyond my faith in any system:) And as I said when it actually happens I have a feeling I will say screw it and go for the simplicity of holding 60/40.

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