Which FI number in the face of market fluctuations

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MiddleOfTheRoad
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Which FI number in the face of market fluctuations

Post by MiddleOfTheRoad » Wed Aug 29, 2018 10:58 am

Consider the following scenarios:

1. You hit your FI of 1M and retire. Less than a week later the market crashed and you have 900k. Which number do you use for your withdrawal rate?

2. You hit your FI number of 900k. A week later it is 1M due to irrational exuberance. Which number so you use?

I err towards the lower number but given the short time between the starting and current values of these two scenarios I understand there is a lot of grey. Are you cup half full or empty?

PFInterest
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Re: Which FI number in the face of market fluctuations

Post by PFInterest » Wed Aug 29, 2018 11:25 am

you use the SWR based on the portfolio when you retired. thats the point.

megabad
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Re: Which FI number in the face of market fluctuations

Post by megabad » Wed Aug 29, 2018 11:58 am

Well, if you are truly in retirement, your withdrawal rate should be your expenses (or your legally required RMD). If you are planning you could alternatively use Variable Percentage Withdrawal method which would modulate withdrawals with the market and time remaining (on this earth). This would help you figure out how much you might get from withdrawals in the future.

https://www.bogleheads.org/wiki/Variabl ... withdrawal

Topic Author
MiddleOfTheRoad
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Re: Which FI number in the face of market fluctuations

Post by MiddleOfTheRoad » Wed Aug 29, 2018 12:08 pm

PFInterest wrote:
Wed Aug 29, 2018 11:25 am
you use the SWR based on the portfolio when you retired. thats the point.
I agree and am aware that is how it should be. But I am not sure I have the nerve of steel to stick with it. I have read all of Earlyretirementnow.com SWR series as well. I guess I am just a cup half empty kind of person. :|

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Phineas J. Whoopee
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Re: Which FI number in the face of market fluctuations

Post by Phineas J. Whoopee » Wed Aug 29, 2018 12:17 pm

MiddleOfTheRoad wrote:
Wed Aug 29, 2018 10:58 am
Consider the following scenarios:

1. You hit your FI of 1M and retire. Less than a week later the market crashed and you have 900k. Which number do you use for your withdrawal rate?

2. You hit your FI number of 900k. A week later it is 1M due to irrational exuberance. Which number so you use?

I err towards the lower number but given the short time between the starting and current values of these two scenarios I understand there is a lot of grey. Are you cup half full or empty?
If a retirement is expected to last for years and years, one-week fluctuations shouldn't make a huge difference. That's the reason to mix risky assets (like equities) with less-risky ones (like fixed income).

All of this sustainable withdrawal rate stuff is very approximate. If that level of fluctuation, which is not unexpected, makes a practical difference for you, one million dollars isn't really your financial independence number.

PJW

PFInterest
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Re: Which FI number in the face of market fluctuations

Post by PFInterest » Wed Aug 29, 2018 12:26 pm

MiddleOfTheRoad wrote:
Wed Aug 29, 2018 12:08 pm
PFInterest wrote:
Wed Aug 29, 2018 11:25 am
you use the SWR based on the portfolio when you retired. thats the point.
I agree and am aware that is how it should be. But I am not sure I have the nerve of steel to stick with it. I have read all of Earlyretirementnow.com SWR series as well. I guess I am just a cup half empty kind of person. :|
well its not set in stone. its an exercise to see with what confidence you can last a set period of time. i doubt many people religiously will follow it. variable withdrawal rates are what everyone does inherently. make more, spend more. lose more, spend ..... less.

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munemaker
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Re: Which FI number in the face of market fluctuations

Post by munemaker » Thu Aug 30, 2018 11:53 am

PFInterest wrote:
Wed Aug 29, 2018 11:25 am
you use the SWR based on the portfolio when you retired. that's the point.
+1 -->
Yes, that's the point!

But hey, it is a free country, kind of, so you can do whatever you want.

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bligh
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Re: Which FI number in the face of market fluctuations

Post by bligh » Thu Aug 30, 2018 12:05 pm

Be comfortable just "being in the ball park" by having a safety margin built into the equation.

Be willing to say "Close enough!" and step into your retirement.

In my case I am doing it via three things .

1) Ignoring Social Security and a small pension in my numbers.
2) Setting up a conservative withdrawal rate range of 3-3.33%.
3) Knowing what my base expenses are and what my discretionary expenses are.. so that I know I can pull back on my expenses in lean times.

Also, if you are close to retiring you may want to have a significant chunk of your portfolio in bonds, which would make such volatility less likely.

So my answer to your question is, pick either number, but I'd go with the more conservative one (ie. $900K)

Topic Author
MiddleOfTheRoad
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Re: Which FI number in the face of market fluctuations

Post by MiddleOfTheRoad » Thu Aug 30, 2018 12:06 pm

munemaker wrote:
Thu Aug 30, 2018 11:53 am
PFInterest wrote:
Wed Aug 29, 2018 11:25 am
you use the SWR based on the portfolio when you retired. that's the point.
+1 -->
Yes, that's the point!

But hey, it is a free country, kind of, so you can do whatever you want.
You tough guys lol. I think I can see myself suffering from OMY syndrome when I get there

Topic Author
MiddleOfTheRoad
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Re: Which FI number in the face of market fluctuations

Post by MiddleOfTheRoad » Thu Aug 30, 2018 12:22 pm

bligh wrote:
Thu Aug 30, 2018 12:05 pm
Be comfortable just "being in the ball park" by having a safety margin built into the equation.

Be willing to say "Close enough!" and step into your retirement.

In my case I am doing it via three things .

1) Ignoring Social Security and a small pension in my numbers.
2) Setting up a conservative withdrawal rate range of 3-3.33%.
3) Knowing what my base expenses are and what my discretionary expenses are.. so that I know I can pull back on my expenses in lean times.

Also, if you are close to retiring you may want to have a significant chunk of your portfolio in bonds, which would make such volatility less likely.

So my answer to your question is, pick either number, but I'd go with the more conservative one (ie. $900K)
Thanks. This is the kind of tricks I need. :D

MotoTrojan
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Re: Which FI number in the face of market fluctuations

Post by MotoTrojan » Thu Aug 30, 2018 12:28 pm

Interesting thought. I wouldn't redo your number on the downside unless you had a very low margin SWR (4-4.5%). But given that the SWR is based off a worst-case sequence, I would think it would be reasonable to increase your withdrawal set-point for any upward movement, after accounting for inflation.

Perhaps split the difference and allow half the growth to reset into a new SWR.

What is missing from my logic? Someone who retired with $1M in 2009 that now has $2M due to the market rebound shouldn't require half the withdrawal amount today of someone that just retired with $2M. If anything, the 2009 person is further along into their retirement so they could potentially take more depending on age.

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MiddleOfTheRoad
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Re: Which FI number in the face of market fluctuations

Post by MiddleOfTheRoad » Thu Aug 30, 2018 12:43 pm

MotoTrojan wrote:
Thu Aug 30, 2018 12:28 pm
Interesting thought. I wouldn't redo your number on the downside unless you had a very low margin SWR (4-4.5%). But given that the SWR is based off a worst-case sequence, I would think it would be reasonable to increase your withdrawal set-point for any upward movement, after accounting for inflation.

Perhaps split the difference and allow half the growth to reset into a new SWR.

What is missing from my logic? Someone who retired with $1M in 2009 that now has $2M due to the market rebound shouldn't require half the withdrawal amount today of someone that just retired with $2M. If anything, the 2009 person is further along into their retirement so they could potentially take more depending on age.
So perhaps a rolling retirement start date, but only on the up side. For example, if the market is doing really well, reset the retirement start date to year one. Don’t do it when the market is down and stick with the traditional SWR way. But by resetting you expose yourself to sequence of return every time.

MotoTrojan
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Re: Which FI number in the face of market fluctuations

Post by MotoTrojan » Thu Aug 30, 2018 12:55 pm

MiddleOfTheRoad wrote:
Thu Aug 30, 2018 12:43 pm
MotoTrojan wrote:
Thu Aug 30, 2018 12:28 pm
Interesting thought. I wouldn't redo your number on the downside unless you had a very low margin SWR (4-4.5%). But given that the SWR is based off a worst-case sequence, I would think it would be reasonable to increase your withdrawal set-point for any upward movement, after accounting for inflation.

Perhaps split the difference and allow half the growth to reset into a new SWR.

What is missing from my logic? Someone who retired with $1M in 2009 that now has $2M due to the market rebound shouldn't require half the withdrawal amount today of someone that just retired with $2M. If anything, the 2009 person is further along into their retirement so they could potentially take more depending on age.
So perhaps a rolling retirement start date, but only on the up side. For example, if the market is doing really well, reset the retirement start date to year one. Don’t do it when the market is down and stick with the traditional SWR way. But by resetting you expose yourself to sequence of return every time.
Exactly. I am a logic driven person and I can't think of any logical reason this wouldn't make sense. I'll defer to my $1M in 2009, $2M today example above if anyone cares to logically counter my statement. Is it reducing margin and increasing risk? Yes. But if you chose a SWR that you felt was comfortable for the worst case situation, then it should be safe to reset it (or partially as I suggested with the half growth concept).

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HomerJ
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Re: Which FI number in the face of market fluctuations

Post by HomerJ » Thu Aug 30, 2018 12:55 pm

MiddleOfTheRoad wrote:
Thu Aug 30, 2018 12:43 pm
MotoTrojan wrote:
Thu Aug 30, 2018 12:28 pm
Interesting thought. I wouldn't redo your number on the downside unless you had a very low margin SWR (4-4.5%). But given that the SWR is based off a worst-case sequence, I would think it would be reasonable to increase your withdrawal set-point for any upward movement, after accounting for inflation.

Perhaps split the difference and allow half the growth to reset into a new SWR.

What is missing from my logic? Someone who retired with $1M in 2009 that now has $2M due to the market rebound shouldn't require half the withdrawal amount today of someone that just retired with $2M. If anything, the 2009 person is further along into their retirement so they could potentially take more depending on age.
So perhaps a rolling retirement start date, but only on the up side. For example, if the market is doing really well, reset the retirement start date to year one. Don’t do it when the market is down and stick with the traditional SWR way. But by resetting you expose yourself to sequence of return every time.
I plan to reset my withdrawals but only on the upside, and not every year.

If I start with $1 million withdrawing 4% ($40,000) and 5 years later, my portfolio is $1.2 million, I would increase my withdrawals to $48,000.

After 5 years, inflation at 2% would have me withdrawing $44,000 anyway. but since my portfolio has grown nicely (and I need 5 less years of retirement), I would feel comfortable resetting to a higher amount, and starting over the risk of a bad sequence of returns.

(I would spend the extra money on discretionary stuff like vacations, so if a crash DID happen right after I reset, it would be easy to fall back to my original spending again).
The J stands for Jay

jclear
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Re: Which FI number in the face of market fluctuations

Post by jclear » Thu Aug 30, 2018 1:51 pm

MotoTrojan wrote:
Thu Aug 30, 2018 12:28 pm
Interesting thought. I wouldn't redo your number on the downside unless you had a very low margin SWR (4-4.5%). But given that the SWR is based off a worst-case sequence, I would think it would be reasonable to increase your withdrawal set-point for any upward movement, after accounting for inflation.

Perhaps split the difference and allow half the growth to reset into a new SWR.

What is missing from my logic? Someone who retired with $1M in 2009 that now has $2M due to the market rebound shouldn't require half the withdrawal amount today of someone that just retired with $2M. If anything, the 2009 person is further along into their retirement so they could potentially take more depending on age.
This is a pretty reasonable thing to do. Pick a proportional withdrawal rate of H%, but set a ratcheting floor of L% with COLA.

H%value = H% * current_portfolio_value
L%value = L% * max ( current_portfolio_value, last_year_L%value*(1+COLA) )
this_year_spend = max ( H%value, L%value )

It's level seeking. If you have an up market and then a crash, it finds the market top and sets your spend based on that until the market recovers. Since it's trying to find the worst time to retire, choose rather conservative L%. If you choose H% = 4.0% and L% = 3.0%, then you can go from the top to the floor in one year: a 4% spend, a 20% market drop, and a bit of inflation pulls the portfolio down to 75% of the prior year in real terms.

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