Living off the interest VS Gobbling your nest egg in retrmnt

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Day9
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Living off the interest VS Gobbling your nest egg in retrmnt

Post by Day9 » Thu Jul 12, 2012 3:36 pm

Hi Bogleheads,

I understand that for many of us, the goal of retirement is to be able to live off the interest (and capital gains, and dividends) of our retirement nest egg.

However the unfortunate reality for most Americans is that they must gobble up their nest egg after they have finished sitting on it for the first 65 years of their lives like some kind of deranged cannibalistic chicken.

My question is: What rules of thumb exist for estimating how much you will need in retirement if you want security of principal versus if you are willing to gobble up your nest egg?

Here's an example. We all know the infamous 4% rule. Nowadays people aren't so naiive to think you are guaranteed to preserve principal while withdrawing 4% of your portfolio each year. But suppose you were. If you wanted a $80,000 income you would need to save $2 million.
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by looking » Thu Jul 12, 2012 3:54 pm

Day9 wrote:Hi Bogleheads,

I understand that for many of us, the goal of retirement is to be able to live off the interest (and capital gains, and dividends) of our retirement nest egg.

However the unfortunate reality for most Americans is that they must gobble up their nest egg after they have finished sitting on it for the first 65 years of their lives like some kind of deranged cannibalistic chicken.

My question is: What rules of thumb exist for estimating how much you will need in retirement if you want security of principal versus if you are willing to gobble up your nest egg?

Here's an example. We all know the infamous 4% rule. Nowadays people aren't so naiive to think you are guaranteed to preserve principal while withdrawing 4% of your portfolio each year. But suppose you were. If you wanted a $80,000 income you would need to save $2 million.

that is exactly i wanted to know if i can live off from my investment ( dividends, interest income capital gain so on --) without withdrawing from principal ,unless large amounts of money you have. there may be no such portfolios you can set up to make living without touching your principals
i just want to see how other people say

fs

Khanmots
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Khanmots » Thu Jul 12, 2012 3:57 pm

4% withdrawal rate is generally safe for 30 years of withdraw. Meaning that it'll be gobbling up your nest egg.

From my poking with firecalc, a roughly 2% withdrawl rate should provide for a perpetual withdrawl, meaning that your nest egg is staying intact, and in most scenarios growing.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Khanmots » Thu Jul 12, 2012 4:01 pm

Note that just leaving the nest egg alone isn't enough, the part you're not touching has to grow at the rate of inflation while throwing off enough extra above and beyond that for you to live on.

Should note that because of this when poking around and finding the 2% I mentioned,.i was making the assumption that you'd be maintaining a relatively equity heavy portfolio.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by looking » Thu Jul 12, 2012 4:04 pm

Khanmots wrote:4% withdrawal rate is generally safe for 30 years of withdraw. Meaning that it'll be gobbling up your nest egg.

From my poking with firecalc, a roughly 2% withdrawl rate should provide for a perpetual withdrawl, meaning that your nest egg is staying intact, and in most scenarios growing.
i know there no way i can make living on 2%

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Jerry_lee » Thu Jul 12, 2012 4:05 pm

You should set your desired withdrawal rate (you should have about 25X this amount in your portfolio) without trying to only take dividends and interest. Why? a dividend/income approach will find you emphasizing high dividend paying stocks and longer-term, lower-quality bonds which may not be the optimal mix of risk and reward.

Instead, you should diversify your equity portfolio across large/small and value/growth with little consideration for cap gains vs. dividends--but tilting to higher expected returning small and value. On the bond side, you should stick with short term high quality bonds with lower levels of income as these have greater stability and mature more frequently, providing less of a mismatch between your retirement purchasing power adjusted liabilities (longer term bonds are less sensitive to changes in spending power/inflation, and TIPS are volatile and possibly illiquid unless you can hold-till-maturity, which isn't always possible).

This total return approach gives you the highest probability to generate real spending growth during your lifetime and earn a return above income needs for leaving an inheritance if you so desire (if not, you can increase your withdrawal rate by 1% to 2%).
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by hand » Thu Jul 12, 2012 4:09 pm

Day9 wrote:Hi Bogleheads,

However the unfortunate reality for most Americans is that they must gobble up their nest egg after they have finished sitting on it for the first 65 years of their lives like some kind of deranged cannibalistic chicken.
I would like to nominate your sentence about the "deranged cannibalistic chicken" for best turn of phrase in 2012.

Regarding your question, my quick guess would be that withdrawing at the S&P's current dividend yield of 2% would preserve inflation adjusted capital over the long term. If you wanted 80k/yr while preserving capital, you would therefore need $4M.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Day9 » Thu Jul 12, 2012 4:22 pm

So from these replies it is looking like a rule of thumb is that you need about double the nest egg to be able to live off the same amount but preserving capital instead of gobbling the nest egg? Does that sound about right?
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by CaliJim » Thu Jul 12, 2012 4:27 pm

If you think only of protecting the nominal value of your principal, you ignore the effects of inflation eroding the utility (value) of that amount. So to approach this from the correct point of view, you must think of protecting the real value of your principal.

If you want to protect your inflation adjusted principal, you will need your Total Return to be equal to, or greater than, Inflation + Withdrawal Rate

If your withdrawal rate is low enough that you can live off the real returns of long term TIPS (~0.5%), then it can be done with safety with TIPS.

So it is darn impossible to earn enough to cover both Inflation + Withdrawal Rate without taking some risk.

I think the best way to think about this is in terms of keeping your withdrawal rate low, with the risk dialed in to what you can handle.
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by cheese_breath » Thu Jul 12, 2012 4:28 pm

I don’t have a problem gobbling at the trough so long as I don’t gobble it all up before heading to that big turkey run in the sky, and I don’t pay any attention to withdrawal percentages. I spend what I need to maintain my lifestyle and leave the rest invested. My goal is for the investments to last until both my wife and I pass 90 years of age. (She’s younger than me.) To make sure we remain on track I maintain an Excel spreadsheet projecting our spending and expenses that far into the future. I update it at the end of each month with that month’s data, and it recalculates the projections. If we live longer than 90 years and have to take up residence in the poor house, we’ll probably both be too demented to know what’s going on anyway.
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Khanmots » Thu Jul 12, 2012 4:40 pm

Jerry_lee wrote:You should set your desired withdrawal rate (you should have about 25X this amount in your portfolio) without trying to only take dividends and interest.
This 4% withdraw rate is only "safe" for a period of 30 years, and will almost certainly result in a drawdown of principle at the end of those 30 years (and perhaps all the way down to zero).

This is important to keep in mind because not everyone is planning to only be retired for 30 years or less; personally I'm hoping for 40-50.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Sam I Am » Thu Jul 12, 2012 5:02 pm

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by looking » Thu Jul 12, 2012 5:44 pm

some time i just wonder to see if there is portfolio to be constructed making living off preserving capital

fs

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Jerry_lee » Thu Jul 12, 2012 6:05 pm

Khanmots wrote:
Jerry_lee wrote:You should set your desired withdrawal rate (you should have about 25X this amount in your portfolio) without trying to only take dividends and interest.
This 4% withdraw rate is only "safe" for a period of 30 years, and will almost certainly result in a drawdown of principle at the end of those 30 years (and perhaps all the way down to zero).

This is important to keep in mind because not everyone is planning to only be retired for 30 years or less; personally I'm hoping for 40-50.
Maybe, but you are probably overstating the odds. I started a thread a week or two ago in which I ran a monte carlo on a 60/40 portfolio using historical returns and risk dating back to 1928 assuming a 4% withdrawal rate adjusted for inflation and found that you ran out of money about 6% of the time. If I run that same simulation for a 40 year period, I find the odds of running out of money goes up to 9%. And another 9% of the time, you die with between $0 and your original principal value (adj for inflation).

So long as you have a balanced portfolio, the odds of running out of money the longer you live don't grow exponentially. Basically, there are a few scenarios whereby dying in 30 years saved you as you were on the way to going broke, where living another 10 years would have put you over the edge. But its not a huge occurrence--maybe 5% of the time.

Now, maybe you disagree with monte carlo, don't like the inputs, etc. but from a baseline of "you are OK for 30 years", another 10 won't change the outcome much regardless of how you stress test it. The first 10 years are the most important no matter what time horizon you are looking at.
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Beagler » Thu Jul 12, 2012 6:24 pm

Day9 wrote: However the unfortunate reality for most Americans is that they must gobble up their nest egg after they have finished sitting on it for the first 65 years of their lives like some kind of deranged cannibalistic chicken.
Since a cannibal is any animal that eats its own kind, we must assume you are addressing those members of Gallus gallus domesticus who are investing for their future. Given the truncated lives, however, typical of that species, long-term investment planning is often unnecessary. Or are you referring only to the subgroup of deranged (disordered, insane) members of G. gallus domesticus?
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by 1210sda » Thu Jul 12, 2012 6:45 pm

Jerry_lee wrote:
Now, maybe you disagree with monte carlo, don't like the inputs, etc. but from a baseline of "you are OK for 30 years", another 10 won't change the outcome much regardless of how you stress test it. The first 10 years are the most important no matter what time horizon you are looking at.
Jerry_lee, I'd like to run my own MCS. Would you mind sharing your inputs on your 60/40 portfolio with me ??

In particular, annualized return, standard deviation and inflation. (Could you also include the arithmetic return you used ??, although, I can probably estimate it using the standard deviation.)

Thanks fellow Boglehead.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by sscritic » Thu Jul 12, 2012 6:57 pm

Khanmots wrote: This 4% withdraw rate is only "safe" for a period of 30 years, and will almost certainly result in a drawdown of principle at the end of those 30 years (and perhaps all the way down to zero).
Read this (admittedly posted later):
Jerry_lee wrote: I started a thread a week or two ago in which I ran a monte carlo on a 60/40 portfolio using historical returns and risk dating back to 1928 assuming a 4% withdrawal rate adjusted for inflation and found that you ran out of money about 6% of the time. If I run that same simulation for a 40 year period, I find the odds of running out of money goes up to 9%. And another 9% of the time, you die with between $0 and your original principal value (adj for inflation).
If you totally run out of money 9% of the time in a 40 year period and die with between $0 and your original principal another 9% of the time, that means there is a 82% chance of ending up with more money than you started. And the claim is that this is not just nominally more, but an inflation adjusted more.

Perhaps Jerry_lee can give us the chance of ending up with more than you start with in nominal terms, twice what you start with, or even five times what you start with. From graphs I have seen on the dispersion of returns over a long period, there are a large number of paths that lead to very large sums, as well as paths that lead to very small sums. I don't believe that a drawdown of principal is an "almost certainty."

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by umfundi » Thu Jul 12, 2012 7:57 pm

What rules of thumb exist for estimating how much you will need in retirement if you want security of principal versus if you are willing to gobble up your nest egg?
Huh?
If you want security of principal your withdrawal rate is zero. Except, spend a few hundred dollars on a bigger mattress to put the money under.

Or, spend all your money on an SPIA, and get 7% for the rest of your life. Zero when you die.

The answer must be somewhere in between.

"How much you need" vs. "security of principal" is a question that makes no sense.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by LH » Thu Jul 12, 2012 8:04 pm

Khanmots wrote:
Jerry_lee wrote:You should set your desired withdrawal rate (you should have about 25X this amount in your portfolio) without trying to only take dividends and interest.
This 4% withdraw rate is only "safe" for a period of 30 years, and will almost certainly result in a drawdown of principle at the end of those 30 years (and perhaps all the way down to zero).

This is important to keep in mind because not everyone is planning to only be retired for 30 years or less; personally I'm hoping for 40-50.
This is not true. RunnIng firecalc for 1 million and 40k withdraw for 30 years 4 percent swr gives the following

"FIRECalc looked at the 111 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 111 cycles. The lowest and highest portfolio balance throughout your retirement was $-400,986 to $5,679,475, with an average of $1,764,891. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 94.6%."

http://firecalc.com/

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Random Poster » Thu Jul 12, 2012 8:24 pm

Doesn't the firecalc calculation (i.e. it's success or failure) depend on the asset allocation of the starting value of the portfolio being studied and calculated?

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by 555 » Thu Jul 12, 2012 9:07 pm

Of course you spend your principal. That's why you saved it. If you choose not to spend it, you'll have that much less to spend. It's that simple.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by 1210sda » Thu Jul 12, 2012 9:17 pm

I believe all Monte Carlo simulations depend on the "inputs". Asset Allocation affects what you use for return and std dev.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by CaliJim » Thu Jul 12, 2012 9:45 pm

Those that are collectors of tax lots prefer to spend the principal, and reinvest the dividends and interest.
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by kaneohe » Thu Jul 12, 2012 11:20 pm

.............that they must gobble up their nest egg after they have finished sitting on it for the first 65 years of their lives like some kind of deranged cannibalistic chicken..........

I love the vivid imagery contained above. Not what you asked and you're not supposed count on it ........but things can seem much less intimidating if SS is still alive..........or if you have something equivalent

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Johm221122 » Fri Jul 13, 2012 1:43 am

Day9 wrote:Hi Bogleheads,

I understand that for many of us, the goal of retirement is to be able to live off the interest (and capital gains, and dividends) of our retirement nest egg.

However the unfortunate reality for most Americans is that they must gobble up their nest egg after they have finished sitting on it for the first 65 years of their lives like some kind of deranged cannibalistic chicken.

My question is: What rules of thumb exist for estimating how much you will need in retirement if you want security of principal versus if you are willing to gobble up your nest egg?

Here's an example. We all know the infamous 4% rule. Nowadays people aren't so naiive to think you are guaranteed to preserve principal while withdrawing 4% of your portfolio each year. But suppose you were. If you wanted a $80,000 income you would need to save $2 million.
If you want complete security of principal 30 year treasury and live off coupons(inflation will kill you)
Or
Think total return and invest in balanced portfolio (something like vanguard retirement income) and take chance (you may end up with more,less,nothing or the same amount)

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by cjking » Fri Jul 13, 2012 2:29 am

hand wrote:my quick guess would be that withdrawing at the S&P's current dividend yield of 2% would preserve inflation adjusted capital over the long term. If you wanted 80k/yr while preserving capital, you would therefore need $4M.
In both US and Europe it seems dividend yield is a about half earnings yield nowadays. In theory you should be able to spend the earnings yield, but if you look at the smoothed earnings yield (1/PE10) in Shillers data, then historically a withdrawal rate of just under 84%/PE10 would have been the maximum that was indefinitely sustainable.

("Indefinitely sustainable" means the median income over a 130+ year "retirement" was the same as the initial income, and the final balance in the same ballpark as the inital balance. The actual figures are $1 million initial balance in January 1881, $45,350 initial/median income, $1,013,656 final balance in March 2012, annualised income as of March 2012 £38,749. If you want final income to be the same as initial for this data, cut the withdrawal rate to about 82%/PE10.)

If dividends are about 2% and smoothed earnings yield about 4%, that would imply maximum withdrawals at the moment of just over 3%. (The actual percentage would change with future changes in valuations, the dollar amount not so much.)

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Leesbro63 » Fri Jul 13, 2012 9:02 am

Khanmots wrote:4% withdrawal rate is generally safe for 30 years of withdraw. Meaning that it'll be gobbling up your nest egg.

From my poking with firecalc, a roughly 2% withdrawl rate should provide for a perpetual withdrawl, meaning that your nest egg is staying intact, and in most scenarios growing.
I'm 52 and this is my goal for age 65...to be able to live on 2%. Which today is a little less than the current dividend & interest annual receipts from my 55/45 portfolio. This is back to the olden days where affluent investors bot blue chip stocks (before index funds) and bonds and never touched the "principal".

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by anhedonia » Fri Jul 13, 2012 6:44 pm

I'm sure this question has been asked and answered many times but I can't remember. Is there a traditional way to deal with house equity and retirement? Example-- Age 70, $1M portfolio, $500K home equity, 3% withdrawal rate, plan to move to independent or assisted living (monthly fee) at age 80. How does one deal with this in Monte Carlo or investment planning--try to estimate the monthly fee for housing at age 80 and how it will affect the withdrawal rate or...

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by sport » Fri Jul 13, 2012 7:28 pm

I am always surprised at the use of historical data for determining a "safe" withdrawal rate in retirement. All of the montecarlo calculations and historical research are based on past results. Why does anyone believe that future performance will have any particular relationship with past results? There is also an almost irrational insistence on a level inflation-adjusted withdrawal amount. Isn't it much more important to be certain that you will not run out of money at an advanced age, than to have a level income leading up to that possible portfolio failure? If a retiree is willing to adjust her spending according to investment results, she is guaranteed to never run out of money. This seems to be perferable to relying on some calculation that you hope is correct, based on past results that probably will not repeat in the future.

Jeff

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by umfundi » Fri Jul 13, 2012 10:30 pm

jsl11 wrote:I am always surprised at the use of historical data for determining a "safe" withdrawal rate in retirement. All of the montecarlo calculations and historical research are based on past results. Why does anyone believe that future performance will have any particular relationship with past results? There is also an almost irrational insistence on a level inflation-adjusted withdrawal amount. Isn't it much more important to be certain that you will not run out of money at an advanced age, than to have a level income leading up to that possible portfolio failure? If a retiree is willing to adjust her spending according to investment results, she is guaranteed to never run out of money. This seems to be preferable to relying on some calculation that you hope is correct, based on past results that probably will not repeat in the future.

Jeff
Exactly. And, if I think about it, it's not that hard.

Assume you are 65, making a plan if you live to 100. 4% of the original amount should do it, according to the simulations, 3% will do it if your investments have a real return of zero. Why not do something like 1/35 at age 65, 1/34 of the actual balance at age 66, etc. In other words, withdraw no more 1/(Life Expectancy) of the current balance?

The most dangerous part of your plan is now. But, you know what's going on now. It's not a prediction. The danger is, the market will tank (for a few years) and you continue to take predetermined distributions. When the market comes back, your investment in that recovery has gone.

So, look at a plan for actual withdrawals that takes into account your actual balance. If you have 25x your needs saved, so 4% sounds like a good number, that is a start. But, it is not a sound basis for a "fire and forget" plan.

By the way, my own plan is more conservative than that. I am looking 7 years in the future, and buying bonds that mature in that year, or otherwise assuring that future income. For example, assume I am 62. In 7 years I will be 69. Use 1/(100-69) = 3.2% of my current balance to buy high quality bonds maturing in 7 years.

With that kind of ladder in place, I don't care what the market does tomorrow. Also, I have a realistic 7-year projection of our spendable income.

Keith
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by scrabbler1 » Sat Jul 14, 2012 4:25 am

I am an early retiree living off interest from my investments which are about 38% stock, 62% bonds. I have different AAs for my TIRA (which I am not touching) and my taxable accounts which provide the money to cover my expenses, with any excess reinvested. My overall SWR has varied between 2.1% and 2.5%. I am 49 now but once I hit 59.5 I can tap into my reinforcemetns which include unfettered access to my TIRA, my frozen company pension, and SS. So the main part is getting to age 59.5 intact which appears extremely likely based on my spreadsheets and Fidelity's Retirement Income Planner software (I am a Fido client).

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Call_Me_Op » Sat Jul 14, 2012 6:58 am

scrabbler1 wrote:I am an early retiree living off interest from my investments which are about 38% stock, 62% bonds. I have different AAs for my TIRA (which I am not touching) and my taxable accounts which provide the money to cover my expenses, with any excess reinvested. My overall SWR has varied between 2.1% and 2.5%. I am 49 now but once I hit 59.5 I can tap into my reinforcemetns which include unfettered access to my TIRA, my frozen company pension, and SS. So the main part is getting to age 59.5 intact which appears extremely likely based on my spreadsheets and Fidelity's Retirement Income Planner software (I am a Fido client).
Scrabbler, are you willing to share the size of your taxable portfolio as a multiple of annual expenses?
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by scrabbler1 » Sat Jul 14, 2012 8:15 am

Call_Me_Op wrote:
scrabbler1 wrote:I am an early retiree living off interest from my investments which are about 38% stock, 62% bonds. I have different AAs for my TIRA (which I am not touching) and my taxable accounts which provide the money to cover my expenses, with any excess reinvested. My overall SWR has varied between 2.1% and 2.5%. I am 49 now but once I hit 59.5 I can tap into my reinforcemetns which include unfettered access to my TIRA, my frozen company pension, and SS. So the main part is getting to age 59.5 intact which appears extremely likely based on my spreadsheets and Fidelity's Retirement Income Planner software (I am a Fido client).
Scrabbler, are you willing to share the size of your taxable portfolio as a multiple of annual expenses?
Taxable portfolio (only) is about 35 times annual expenses.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Leesbro63 » Sat Jul 14, 2012 4:11 pm

jenny345 wrote:
scrabbler1 wrote:
Call_Me_Op wrote:
scrabbler1 wrote:I am an early retiree living off interest from my investments which are about 38% stock, 62% bonds. I have different AAs for my TIRA (which I am not touching) and my taxable accounts which provide the money to cover my expenses, with any excess reinvested. My overall SWR has varied between 2.1% and 2.5%. I am 49 now but once I hit 59.5 I can tap into my reinforcemetns which include unfettered access to my TIRA, my frozen company pension, and SS. So the main part is getting to age 59.5 intact which appears extremely likely based on my spreadsheets and Fidelity's Retirement Income Planner software (I am a Fido client).
Scrabbler, are you willing to share the size of your taxable portfolio as a multiple of annual expenses?
Taxable portfolio (only) is about 35 times annual expenses.
Scrabbler you are one of my role models for how to pull off early retirement and LBYM. That sounds like a very secure plan.
This seems like an arbitrarily more complicated way of doing things. The question I'd ask Scrabbler is: What is your TOTAL portfolio as a multple of annual expenses. The arbitrary pieces can indeed be withdrawn in a tax efficient manner. But in the end the real issue is the total nest egg versus spending needs.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by scrabbler1 » Sat Jul 14, 2012 5:14 pm

Thank you Jenny345 :)

The ratio of my total portfolio to my total annual expenses is the reciprocal of the overall SWR (~2.3%), or about 45, give or take.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Leesbro63 » Sat Jul 14, 2012 7:08 pm

scrabbler1 wrote:Thank you Jenny345 :)

The ratio of my total portfolio to my total annual expenses is the reciprocal of the overall SWR (~2.3%), or about 45, give or take.
I keep hearing that 2% is "bulletproof" and "golden". So you're good to go.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by Call_Me_Op » Sun Jul 15, 2012 7:52 am

scrabbler1 wrote:
Call_Me_Op wrote:
scrabbler1 wrote:I am an early retiree living off interest from my investments which are about 38% stock, 62% bonds. I have different AAs for my TIRA (which I am not touching) and my taxable accounts which provide the money to cover my expenses, with any excess reinvested. My overall SWR has varied between 2.1% and 2.5%. I am 49 now but once I hit 59.5 I can tap into my reinforcemetns which include unfettered access to my TIRA, my frozen company pension, and SS. So the main part is getting to age 59.5 intact which appears extremely likely based on my spreadsheets and Fidelity's Retirement Income Planner software (I am a Fido client).
Scrabbler, are you willing to share the size of your taxable portfolio as a multiple of annual expenses?
Taxable portfolio (only) is about 35 times annual expenses.
Thanks scrabbler. And you are 38% stocks and 62% bonds in the taxable - is that correct?
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by scrabbler1 » Sun Jul 15, 2012 8:01 am

Call_Me_Op wrote:
scrabbler1 wrote:
Call_Me_Op wrote:
scrabbler1 wrote:I am an early retiree living off interest from my investments which are about 38% stock, 62% bonds. I have different AAs for my TIRA (which I am not touching) and my taxable accounts which provide the money to cover my expenses, with any excess reinvested. My overall SWR has varied between 2.1% and 2.5%. I am 49 now but once I hit 59.5 I can tap into my reinforcemetns which include unfettered access to my TIRA, my frozen company pension, and SS. So the main part is getting to age 59.5 intact which appears extremely likely based on my spreadsheets and Fidelity's Retirement Income Planner software (I am a Fido client).
Scrabbler, are you willing to share the size of your taxable portfolio as a multiple of annual expenses?
Taxable portfolio (only) is about 35 times annual expenses.
Thanks scrabbler. And you are 38% stocks and 62% bonds in the taxable - is that correct?
Yes.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by YDNAL » Sun Jul 15, 2012 8:16 am

Day9 wrote:My question is: What rules of thumb exist for estimating how much you will need in retirement if you want security of principal versus if you are willing to gobble up your nest egg?

Here's an example. We all know the infamous 4% rule. Nowadays people aren't so naiive to think you are guaranteed to preserve principal while withdrawing 4% of your portfolio each year. But suppose you were. If you wanted a $80,000 income you would need to save $2 million.
$80K today is but $33K in 30 years at 3% Inflation. Interest rates matter. Inflation matters. The timing to retire matters. The rule of thumb would be to save much more than people normally can.
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by ks289 » Sun Jul 15, 2012 8:23 am

Leesbro63 wrote:
scrabbler1 wrote:Thank you Jenny345 :)

The ratio of my total portfolio to my total annual expenses is the reciprocal of the overall SWR (~2.3%), or about 45, give or take.
I keep hearing that 2% is "bulletproof" and "golden". So you're good to go.
I think 2% withdrawal rate would be phenomenal for not drawing down the balance of the investments like a sustainable charitable foundation or family trust fund. What an accomplishment!

In this situation, would it still be advisable to continue the boglehead AA approach of 100- age in bonds or keep some other ratio once you hit this amount?

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by walkinwood » Tue Jul 17, 2012 10:59 pm

I think the conventional SWR (ie. SWR% of portfolio in the first year and inflation adjusted equivalents in following years) is a convenient tool for academics, but has little relevance to real life.

The reality is that retirees (I am an early retiree, having retired at 48) have to be flexible in their spending. Guyton proposed a set of rules that key off portfolio performance and inflation rates. Bob Clyatt, in his Work Less, Live More uses a 4%/95% rule. I wish the academics would focus more on strategies for variable withdrawals that key off portfolio value, inflation, life expectancy - maybe even current market valuations (PE10) and interest rates.

Young (early) retirees also have to be flexible enough to go earn some money if the portfolio takes a big hit - like it did in 2008. They don't need to recapture their earning potential, but every bit done to reduce portfolio withdrawals helps in its recovery.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by umfundi » Tue Jul 17, 2012 11:21 pm

walkinwood wrote:I think the conventional SWR (ie. SWR% of portfolio in the first year and inflation adjusted equivalents in following years) is a convenient tool for academics, but has little relevance to real life.

The reality is that retirees (I am an early retiree, having retired at 48) have to be flexible in their spending. Guyton proposed a set of rules that key off portfolio performance and inflation rates. Bob Clyatt, in his Work Less, Live More uses a 4%/95% rule. I wish the academics would focus more on strategies for variable withdrawals that key off portfolio value, inflation, life expectancy - maybe even current market valuations (PE10) and interest rates.

Young (early) retirees also have to be flexible enough to go earn some money if the portfolio takes a big hit - like it did in 2008. They don't need to recapture their earning potential, but every bit done to reduce portfolio withdrawals helps in its recovery.
+1 Keith
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Re: Living off the interest VS Gobbling your nest egg in ret

Post by 555 » Tue Jul 17, 2012 11:56 pm

You should try to understand the difference between a calculation and a strategy. Don't blame academics for your confusion.
walkinwood wrote:I think the conventional SWR (ie. SWR% of portfolio in the first year and inflation adjusted equivalents in following years) is a convenient tool for academics, but has little relevance to real life.

The reality is that retirees (I am an early retiree, having retired at 48) have to be flexible in their spending. Guyton proposed a set of rules that key off portfolio performance and inflation rates. Bob Clyatt, in his Work Less, Live More uses a 4%/95% rule. I wish the academics would focus more on strategies for variable withdrawals that key off portfolio value, inflation, life expectancy - maybe even current market valuations (PE10) and interest rates.

Young (early) retirees also have to be flexible enough to go earn some money if the portfolio takes a big hit - like it did in 2008. They don't need to recapture their earning potential, but every bit done to reduce portfolio withdrawals helps in its recovery.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by grayfox » Wed Jul 18, 2012 3:52 am

Day9 wrote:
My question is: What rules of thumb exist for estimating how much you will need in retirement if you want security of principal versus if you are willing to gobble up your nest egg?
You are asking about two different cases:
1. Maximum Withdrawal Rate: gobble up nest egg, i.e. deplete portfolio to zero over some period, say N years. [MWR(N)]
2. Sustainable Withdrawal Rate: maintain reals real value of portfolio indefinitely, [SWR]

SWR will always be less than MWR, but as N -> infinity, MWR -> SWR.

There is an exact formula for MWR(N). See Maximum Withdrawal Rate in Retirement. Here is the formula:

MWR = 1/MagicSum = 1/(I1/G1 + I2/G2 + I3/G3 + … + IN/GN)

where IN is the Inflation Factor for each year
and GN is the Cumulative Gain Factor over successive years

Unfortunately, the formula requires the exact sequence of nominal portfolio returns and annual inflation rates. For most portfolios, these sequences are UNKNOWN for future years. Therefore MWR is known for past periods, but UNKNOWABLE for the future.

I think that is why so much has been written about the subject, because everyone is debating what is ultimately unknowable. Everyone is trying to answer a question that, ex ante, has no answer. :idea:

On the other hand, determining Sustainable Withdrawal Rate, SWR, is a much more manageable problem. For example, if you bought 30-year TIPS at par, you could just spend the coupon payment and at the end of 30 years you would still have the same exact principle. Not so hard to figure that out. With stocks, things are less certain, but you can still get a reasonably good estimate of how much to withdraw and still maintain the principle.

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Re: Living off the interest VS Gobbling your nest egg in ret

Post by CaliJim » Wed Jul 18, 2012 1:21 pm

grayfox wrote:For example, if you bought 30-year TIPS at par, you could just spend the coupon payment and at the end of 30 years you would still have the same exact principle.
So true, in a tax free environment. Anywhere else, taxes take a bite from the inflation adjustment. So, outside of a Roth, you need to take some risk to keep up with inflation, or spend less than the TIP coupon and reinvest. Sigh.
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