Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

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willthrill81
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Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Thu Sep 05, 2019 9:59 am

Michael Kitces had an interesting post back in July about various aspects of the FIRE strategy. He begins with describing how the FIRE idea came about and then states that the '4% rule', which was originally intended to apply to 30 year retirements, should be more like 3.5% for early retirees. Interestingly, I did not know that Bengen himself authored in article back in 1996 that stated this as well.

Kitces notes that it is seemingly very difficult for most early retirees to be 'idle' for lengthy periods of time, given that their health and energy are usually still very good, which results in them earning some kind of income after declaring themselves 'FIREd' and that even relatively small incomes can greatly reduce their needed portfolio size.

He states that 3.5% withdrawals have historically been so incredibly conservative over nearly all long-term periods that retirees should strongly consider adopting flexible withdrawal rules so that they can take advantage of this upside potential. The graph below demonstrates how much upside potential there has been with 3.5% withdrawals. This is for a 60/40 AA, while the far right two columns are for an 80/20 AA; note that these numbers are not adjusted for inflation. For the 80/20 AA, 3.5% withdrawals would have left retirees with more than 14 times than original nominal portfolio balance after 45 years of withdrawals.

Image

Kitces goes on to discuss several flexible withdrawal strategies. The first is his 'ratcheting rule', where retirees increase their spending by 10% any time the portfolio grows to 150% of its original value. I personally find this strategy to be very inefficient.

The second strategy he discusses is to withdraw every year the greater of 3.5% the portfolio's current balance or last year's withdrawal plus the inflation adjustment (i.e. 'resetting' the withdrawals). This seems much better than the ratcheting rule to me, although as Kitces notes, the decreasing life expectancy of the retiree means that 3.5% may become too low.

Kitces goes on to discuss the Guyton-Klinger 'guardrail' approach, which has been discussed extensively here in other threads.

Lastly, he discusses a strategy very similar to one that I've proposed before: segment one's spending such that essential spending is covered with something like his ratcheting rule from a portion of one's portfolio and that a more dynamic withdrawal method is used with the remainder of the portfolio.

I'm interested to hear others' thoughts on all of this.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by dbr » Thu Sep 05, 2019 10:09 am

I think it has been recognized all along that SWR rules are helpful for people to plan for needs in retirement but are terrible as a protocol for actually managing retirement. I don't think there is a magic bullet to be had.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Thu Sep 05, 2019 10:16 am

dbr wrote:
Thu Sep 05, 2019 10:09 am
I think it has been recognized all along that SWR rules are helpful for people to plan for needs in retirement but are terrible as a protocol for actually managing retirement. I don't think there is a magic bullet to be had.
I agree. However, I still think that as general yardsticks for determining when one reaches financial independence that 28x (i.e. 3.5% withdrawals) or 33x (i.e. 3%) are pretty good.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Jack FFR1846 » Thu Sep 05, 2019 10:17 am

Very good points in both directions.

In FIRE forums, it's way too often stated that one can simply withdraw 4% from any AA portfolio forever and it will never be depleted. That's simply not supported anywhere, but people think it's the case.

The addition of any work indeed reduces the need to withdraw as much. But this is only if one takes that work income and reduces the withdrawal by that much. If instead, one earns $10k and determines that since he has an extra $10k, he's going to buy whatever un-needed thing he wants, then the need from the portfolio withdrawal doesn't change. It could even increase if the work is non-taxed, so he has to cough up taxes come April.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by retiringwhen » Thu Sep 05, 2019 10:21 am

After playing with ERN's SWR spreadsheet, I was stunned by the potential upside of a conservative SWR rate (using his sheet for a 40 year retirement, 3.7 to 3.8% seemed to be safe). I was amazed that there was a nearly 50% chance of dying with 8 times the initial portfolio in REAL $.

I have been playing around with longinvest's VPW work and find it to be a good middle ground to the various VPW schemes and in fact it has a core feature baked in that works like your core SWR for essentials.

When my wife and I pull the plug on our current careers, I am thinking that VPW will play a big role in planning our withdrawal strategy. A detail I am starting to work is just how to "fund" the gap years to SS since that is our only current annuity in retirement. Also, the Annuity idea for the essentials also looks more and more attractive (alternative being some form of inflation protected bond investment strategy).

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by rich126 » Thu Sep 05, 2019 10:24 am

dbr wrote:
Thu Sep 05, 2019 10:09 am
I think it has been recognized all along that SWR rules are helpful for people to plan for needs in retirement but are terrible as a protocol for actually managing retirement. I don't think there is a magic bullet to be had.
I agree.

If you look at those numbers, the odds are you will have a ton of money left on the table when you are no longer around to use it. If you retire at an early age then I would never use a fixed amount of withdrawal but look at it and adjust as needed. Depending on what you've accumulated start off a bit conservative and adjust ever few years.

The only "problem" is that as you get older you may realize you have a ton of money and may be at an age where you really can't enjoy it which sucks but I guess is better than being at an age and realize you don't have enough money. Like a lot of things in life, often you don't know the answer until it is too late.

I'm one of those people on the edge of retirement and constantly wonder whether I could just quit now (56) instead of waiting until 60. The main things holding me back are the loss of 30% of my pension if I take it now (and to get my health insurance early I'd have to accept the pension loss), and my GF not having any money except for a pension at 65. Also walking away from ~$500K in income/savings over the next 4 years is tough (assuming I keep the job). That is money I don't have to spend and/or money that adds to my retirement.

(I do enjoy reading a lot of Kitces articles.)

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by ionball » Thu Sep 05, 2019 10:37 am

"segment one's spending such that essential spending is covered with something like his ratcheting rule from a portion of one's portfolio and that a more dynamic withdrawal method is used with the remainder of the portfolio."

I like the idea of a hybrid approach with one portion ultra safe (necessities), and the other portion flexible with more risk (discretionary).

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by flyingaway » Thu Sep 05, 2019 10:43 am

Yes. An early retiree can use the 3.5% rule and find a part-time job that makes the additional 0.5%.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by lostdog » Thu Sep 05, 2019 10:57 am

flyingaway wrote:
Thu Sep 05, 2019 10:43 am
Yes. An early retiree can use the 3.5% rule and find a part-time job that makes the additional 0.5%.
+1

I love how simple this is. Or retire early and pull 3% with no part time job.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by sixtyforty » Thu Sep 05, 2019 10:59 am

I haven't found the Kitces ratchet to be an effective withdrawal strategy, at least through my testing and research. Using the tool below, one can compare different strategies, albeit data only goes back to 1970. In any case, my thought is if the strategy fails in this time period it would have no chance during 1966 or the great depression.

A couple highlights:
Bengen Ceiling and Floor (+20 and -15% ) supports a 40 year retirement at 4.8% withdrawal rate with 60/40. Actually you can remove the ceiling as it doesn't affect the longevity of the portfolio.

Kitces Rachet fails after 23 years with 60/40 and 4.8% WR

Guyton-Klinger survives 40 years at 4.8% WR but the reduction in spending is so significant it would not likely be feasible without other income sources.

https://portfoliocharts.com/portfolio/r ... -spending/
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by 2pedals » Thu Sep 05, 2019 11:00 am

Thanks for sharing, interesting article. I guess the important thing would be to have a plan and carefully monitor your resources. I would think that if things get really bad early after (within 10 years of FIRE) like a divorce, bad sequence of returns and/or too much spending one should be prepared to get back to work. After declaring yourself FIREed, there is no guarantee you will remain FI.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Admiral » Thu Sep 05, 2019 11:03 am

Sounds suspiciously like longinvest's VPW scheme :D

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Admiral » Thu Sep 05, 2019 11:12 am

I would also add (and this is not news) that human behavior and psychology would make it highly unlikely that a retiree with an 80/20 portfolio who went through a severe stock downturn (2008 anyone?) would continue to pull the same % from the portfolio each year--regardless of what the predictive charts say they could. People just don't act that way UNLESS one has such a huge pile that no cutbacks are needed, ever.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by dbr » Thu Sep 05, 2019 11:14 am

Admiral wrote:
Thu Sep 05, 2019 11:03 am
Sounds suspiciously like longinvest's VPW scheme :D
There have been many approaches to flexible spending rules starting right from the beginning. Even FireCalc offers the Bernicke and Clyatt suggestions as scenarios.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by dbr » Thu Sep 05, 2019 11:15 am

Admiral wrote:
Thu Sep 05, 2019 11:12 am
I would also add (and this is not news) that human behavior and psychology would make it highly unlikely that a retiree with an 80/20 portfolio who went through a severe stock downturn (2008 anyone?) would continue to pull the same % from the portfolio each year--regardless of what the predictive charts say they could. People just don't act that way UNLESS one has such a huge pile that no cutbacks are needed, ever.
Exactly so.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Random Poster » Thu Sep 05, 2019 11:22 am

Seems like the answer is to:

1) Retire when your investment portfolio balance is at least 125% more than what you think that will need;

2) Keep your investment portfolio at either a 50/50 or 60/40 allocation; and

3) Withdraw no more than 2.5% a year from the portfolio's balance without taking into consideration the portfolio's balance as determined by step 1.

If you can do the above, I think that the literature suggests that you should be okay.

(By way of illustration, and working backwards, if you want $75K a year in spending, a 2.5% withdraw rate would require a $3M investment portfolio, which when increased by 125% would result in being able to retire when the portfolio balance reaches $3.75M).

Some might feel comfortable without the 125% increase calculation, but I guess that might be an age-dependent variable. If you retire at 60, you likely don't need it. If you retire at 50, you might need it. If you retire at 40 or younger, you quite probably need it.

And although the 125% uplift essentially results in a 2% withdrawal rate from the original portfolio, by having the 25% cushion you should be okay in the event of an unfortunate market decline for several years, and you can presumably avoid all of the ratcheting, resetting, might-need-to-work-again, guardrails, and similar issues.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by smitcat » Thu Sep 05, 2019 11:23 am

Admiral wrote:
Thu Sep 05, 2019 11:12 am
I would also add (and this is not news) that human behavior and psychology would make it highly unlikely that a retiree with an 80/20 portfolio who went through a severe stock downturn (2008 anyone?) would continue to pull the same % from the portfolio each year--regardless of what the predictive charts say they could. People just don't act that way UNLESS one has such a huge pile that no cutbacks are needed, ever.
Agreed - unless the FIRED early folks 'needed' to pull 4% (or more) from their portfolio.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by smitcat » Thu Sep 05, 2019 11:30 am

Random Poster wrote:
Thu Sep 05, 2019 11:22 am
Seems like the answer is to:

1) Retire when your investment portfolio balance is at least 125% more than what you think that will need;

2) Keep your investment portfolio at either a 50/50 or 60/40 allocation; and

3) Withdraw no more than 2.5% a year from the portfolio's balance without taking into consideration the portfolio's balance as determined by step 1.

If you can do the above, I think that the literature suggests that you should be okay.

(By way of illustration, and working backwards, if you want $75K a year in spending, a 2.5% withdraw rate would require a $3M investment portfolio, which when increased by 125% would result in being able to retire when the portfolio balance reaches $3.75M).

Some might feel comfortable without the 125% increase calculation, but I guess that might be an age-dependent variable. If you retire at 60, you likely don't need it. If you retire at 50, you might need it. If you retire at 40 or younger, you quite probably need it.

And although the 125% uplift essentially results in a 2% withdrawal rate from the original portfolio, by having the 25% cushion you should be okay in the event of an unfortunate market decline for several years, and you can presumably avoid all of the ratcheting, resetting, might-need-to-work-again, guardrails, and similar issues.
Similarly - sounds like you can also safely take 5% withdrawal rate each year if you have at least 250% more than what you think you need.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by wolf359 » Thu Sep 05, 2019 11:45 am

smitcat wrote:
Thu Sep 05, 2019 11:23 am
Admiral wrote:
Thu Sep 05, 2019 11:12 am
I would also add (and this is not news) that human behavior and psychology would make it highly unlikely that a retiree with an 80/20 portfolio who went through a severe stock downturn (2008 anyone?) would continue to pull the same % from the portfolio each year--regardless of what the predictive charts say they could. People just don't act that way UNLESS one has such a huge pile that no cutbacks are needed, ever.
Agreed - unless the FIRED early folks 'needed' to pull 4% (or more) from their portfolio.
Don't forget that the FIREd folks are retiring voluntarily. They picked the expense target and chose when to retire. If they weren't being total idiots about it, then they have flexibility built into both their spending and their assets. Many are by definition younger and driven, and have the capability to earn additional money if required.

They probably don't "need" 4%. They can cut back on expenses or increase income if required.

It's those who are trying to retire at a traditional age or later who have less flexibility. They may lose their ability to stay employed and in the workforce before they have accumulated enough assets to retire. They're the ones who might just barely make it to 25X expenses without any slack.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by smitcat » Thu Sep 05, 2019 12:12 pm

wolf359 wrote:
Thu Sep 05, 2019 11:45 am
smitcat wrote:
Thu Sep 05, 2019 11:23 am
Admiral wrote:
Thu Sep 05, 2019 11:12 am
I would also add (and this is not news) that human behavior and psychology would make it highly unlikely that a retiree with an 80/20 portfolio who went through a severe stock downturn (2008 anyone?) would continue to pull the same % from the portfolio each year--regardless of what the predictive charts say they could. People just don't act that way UNLESS one has such a huge pile that no cutbacks are needed, ever.
Agreed - unless the FIRED early folks 'needed' to pull 4% (or more) from their portfolio.
Don't forget that the FIREd folks are retiring voluntarily. They picked the expense target and chose when to retire. If they weren't being total idiots about it, then they have flexibility built into both their spending and their assets. Many are by definition younger and driven, and have the capability to earn additional money if required.

They probably don't "need" 4%. They can cut back on expenses or increase income if required.

It's those who are trying to retire at a traditional age or later who have less flexibility. They may lose their ability to stay employed and in the workforce before they have accumulated enough assets to retire. They're the ones who might just barely make it to 25X expenses without any slack.
Perhaps - if they are younger and do not know what expenses will come up later and their career replacement could be challenged at any time.
Younger and driven sounds like they would be FI but not RE.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by MikeG62 » Thu Sep 05, 2019 12:38 pm

sixtyforty wrote:
Thu Sep 05, 2019 10:59 am
I haven't found the Kitces ratchet to be an effective withdrawal strategy, at least through my testing and research. Using the tool below, one can compare different strategies, albeit data only goes back to 1970. In any case, my thought is if the strategy fails in this time period it would have no chance during 1966 or the great depression.

A couple highlights:
Bengen Ceiling and Floor (+20 and -15% ) supports a 40 year retirement at 4.8% withdrawal rate with 60/40. Actually you can remove the ceiling as it doesn't affect the longevity of the portfolio.

Kitces Rachet fails after 23 years with 60/40 and 4.8% WR

Guyton-Klinger survives 40 years at 4.8% WR but the reduction in spending is so significant it would not likely be feasible without other income sources.

https://portfoliocharts.com/portfolio/r ... -spending/
What if you run these scenario's using an initial WD rate of 4.0%, 3.5% and 3.0% instead of 4.8% (which is admittedly high), and see what result you get?

FWIW, DW and I are following Guyton & Klinger's withdrawal decision rules, but at an initial WD rate closer to 3.0% (guardrails customized off this lower starting level). We retired 4 years ago (I was 53 and DW was 51 at the time) and are modeling a 45 year retirement period. To ensure that our purchasing power is reasonably maintained throughout our retirement period, our plan provides that our future year's AWD $ amount should not be lower in real terms (i.e., on an inflation adjusted basis) than 85% of the initial AWD $ amount. This should address the concern about reductions in spending being profoundly impactful.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Chip » Thu Sep 05, 2019 12:44 pm

The second strategy he discusses is to withdraw every year the greater of 3.5% the portfolio's current balance or last year's withdrawal plus the inflation adjustment (i.e. 'resetting' the withdrawals). This seems much better than the ratcheting rule to me, although as Kitces notes, the decreasing life expectancy of the retiree means that 3.5% may become too low.
I invented this ratcheting rule upon retirement 18 years ago after noting the paradoxes associated with the "4%+" rule. Kitces stole it from me. :D

But we have always spent what we wanted. The "rule" was merely a checkpoint after each year to see if spending was generally under control. Since we've generally been reasonably frugal it hasn't been an issue.

We are also ratcheting up the withdrawal rate from our original 3.6% as we approach the age where a 30 year or less retirement becomes much more likely.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by wolf359 » Thu Sep 05, 2019 12:50 pm

smitcat wrote:
Thu Sep 05, 2019 12:12 pm
wolf359 wrote:
Thu Sep 05, 2019 11:45 am
smitcat wrote:
Thu Sep 05, 2019 11:23 am
Admiral wrote:
Thu Sep 05, 2019 11:12 am
I would also add (and this is not news) that human behavior and psychology would make it highly unlikely that a retiree with an 80/20 portfolio who went through a severe stock downturn (2008 anyone?) would continue to pull the same % from the portfolio each year--regardless of what the predictive charts say they could. People just don't act that way UNLESS one has such a huge pile that no cutbacks are needed, ever.
Agreed - unless the FIRED early folks 'needed' to pull 4% (or more) from their portfolio.
Don't forget that the FIREd folks are retiring voluntarily. They picked the expense target and chose when to retire. If they weren't being total idiots about it, then they have flexibility built into both their spending and their assets. Many are by definition younger and driven, and have the capability to earn additional money if required.

They probably don't "need" 4%. They can cut back on expenses or increase income if required.

It's those who are trying to retire at a traditional age or later who have less flexibility. They may lose their ability to stay employed and in the workforce before they have accumulated enough assets to retire. They're the ones who might just barely make it to 25X expenses without any slack.
Perhaps - if they are younger and do not know what expenses will come up later and their career replacement could be challenged at any time.
Younger and driven sounds like they would be FI but not RE.
The original statement is that a retiree with an 80/20 portfolio is unlikely to continue pulling the same % from the portfolio regardless of what the markets do.

Just because someone FIREd young doesn't mean that they would do so. In fact, they're more likely to have planned ahead or set up additional options. If they failed to predict their expenses correctly, then they're much more likely to simply return to the workforce or increase their income, not keep withdrawing at 4% until the portfolio fails.

Changing their label from RE to FI doesn't change their likely behavior. In fact, it's the retiree who gets to decide what to call themselves. We don't get a vote. Nor does it change Admiral's point.

If the market drops precipitiously, most people will cut back their spending if they are depending upon market-based assets for their income. It's a retirement plan, not a suicide pact. Those people completely living off of Social Security, pension, dividend, and/or annuity income are more likely to continue spending at the same rate regardless of what the market does. That type of income doesn't describe the typical FIRE folks.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by EddyB » Thu Sep 05, 2019 12:56 pm

Random Poster wrote:
Thu Sep 05, 2019 11:22 am
Seems like the answer is to:

1) Retire when your investment portfolio balance is at least 125% more than what you think that will need;

2) Keep your investment portfolio at either a 50/50 or 60/40 allocation; and

3) Withdraw no more than 2.5% a year from the portfolio's balance without taking into consideration the portfolio's balance as determined by step 1.

If you can do the above, I think that the literature suggests that you should be okay.

(By way of illustration, and working backwards, if you want $75K a year in spending, a 2.5% withdraw rate would require a $3M investment portfolio, which when increased by 125% would result in being able to retire when the portfolio balance reaches $3.75M).

Some might feel comfortable without the 125% increase calculation, but I guess that might be an age-dependent variable. If you retire at 60, you likely don't need it. If you retire at 50, you might need it. If you retire at 40 or younger, you quite probably need it.

And although the 125% uplift essentially results in a 2% withdrawal rate from the original portfolio, by having the 25% cushion you should be okay in the event of an unfortunate market decline for several years, and you can presumably avoid all of the ratcheting, resetting, might-need-to-work-again, guardrails, and similar issues.
If you think this is "the answer," I'd like to know what you thought the question was. The initial 2% withdrawal rate seems to needlessly delay retirement vs. the scenarios described in willthrill81's précis, and the relatively conservative allocation has in the past given up considerable upside while also negatively affecting the 5th percentile outcome.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by smitcat » Thu Sep 05, 2019 1:11 pm

wolf359 wrote:
Thu Sep 05, 2019 12:50 pm
smitcat wrote:
Thu Sep 05, 2019 12:12 pm
wolf359 wrote:
Thu Sep 05, 2019 11:45 am
smitcat wrote:
Thu Sep 05, 2019 11:23 am
Admiral wrote:
Thu Sep 05, 2019 11:12 am
I would also add (and this is not news) that human behavior and psychology would make it highly unlikely that a retiree with an 80/20 portfolio who went through a severe stock downturn (2008 anyone?) would continue to pull the same % from the portfolio each year--regardless of what the predictive charts say they could. People just don't act that way UNLESS one has such a huge pile that no cutbacks are needed, ever.
Agreed - unless the FIRED early folks 'needed' to pull 4% (or more) from their portfolio.
Don't forget that the FIREd folks are retiring voluntarily. They picked the expense target and chose when to retire. If they weren't being total idiots about it, then they have flexibility built into both their spending and their assets. Many are by definition younger and driven, and have the capability to earn additional money if required.

They probably don't "need" 4%. They can cut back on expenses or increase income if required.

It's those who are trying to retire at a traditional age or later who have less flexibility. They may lose their ability to stay employed and in the workforce before they have accumulated enough assets to retire. They're the ones who might just barely make it to 25X expenses without any slack.
Perhaps - if they are younger and do not know what expenses will come up later and their career replacement could be challenged at any time.
Younger and driven sounds like they would be FI but not RE.
The original statement is that a retiree with an 80/20 portfolio is unlikely to continue pulling the same % from the portfolio regardless of what the markets do.

Just because someone FIREd young doesn't mean that they would do so. In fact, they're more likely to have planned ahead or set up additional options. If they failed to predict their expenses correctly, then they're much more likely to simply return to the workforce or increase their income, not keep withdrawing at 4% until the portfolio fails.

Changing their label from RE to FI doesn't change their likely behavior. In fact, it's the retiree who gets to decide what to call themselves. We don't get a vote. Nor does it change Admiral's point.

If the market drops precipitiously, most people will cut back their spending if they are depending upon market-based assets for their income. It's a retirement plan, not a suicide pact. Those people completely living off of Social Security, pension, dividend, and/or annuity income are more likely to continue spending at the same rate regardless of what the market does. That type of income doesn't describe the typical FIRE folks.
So your thoughts are that all of the younger FIRE crowd will avoid all of these issues...
- experienced a market other than the last 11 year runup
- have more funds then most conventional folks would secure
- be able to return to the workforce
- be able to earn significant income if they return
- have planned for costs with future events and family
- predicted the market and tax futures within reasonable accuracy

That is fine - I believe you are looking at an extremely small % of folks for whatever that is worth. I have read about many FIRE folks whom are planning to survive the future on extremely low funds - and a host of other assumptions. These are not typically represented on Bogleheads but there are a few here as well.
FWIW - this is not the first FIRE decade , just the first one that has a whole bunch of data available to everyone due to the internet.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Random Poster » Thu Sep 05, 2019 1:48 pm

EddyB wrote:
Thu Sep 05, 2019 12:56 pm
If you think this is "the answer," I'd like to know what you thought the question was.
What are some reasonable methodologies to ensure that a FIRE'd portfolio adapts to whatever markets may bring.
EddyB wrote:
Thu Sep 05, 2019 12:56 pm
The initial 2% withdrawal rate seems to needlessly delay retirement vs. the scenarios described in willthrill81's précis, and the relatively conservative allocation has in the past given up considerable upside while also negatively affecting the 5th percentile outcome.
Upside potential may be "nice to have," but I suspect that everyone would agree that it is more important not to run out of money.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Thu Sep 05, 2019 2:10 pm

ionball wrote:
Thu Sep 05, 2019 10:37 am
"segment one's spending such that essential spending is covered with something like his ratcheting rule from a portion of one's portfolio and that a more dynamic withdrawal method is used with the remainder of the portfolio."

I like the idea of a hybrid approach with one portion ultra safe (necessities), and the other portion flexible with more risk (discretionary).
When I brought up such a strategy here a year ago, it was not very well received.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Thu Sep 05, 2019 2:16 pm

Random Poster wrote:
Thu Sep 05, 2019 1:48 pm
EddyB wrote:
Thu Sep 05, 2019 12:56 pm
The initial 2% withdrawal rate seems to needlessly delay retirement vs. the scenarios described in willthrill81's précis, and the relatively conservative allocation has in the past given up considerable upside while also negatively affecting the 5th percentile outcome.
Upside potential may be "nice to have," but I suspect that everyone would agree that it is more important not to run out of money.
You seem to be assuming that a 50/50 AA is more likely to result in "success" than 80/20. That's not borne out by the data.

According to FIRECalc, a 3.5% fixed withdrawal rate had a 94.9% success rate for a 50 year retirement with an 80/20 AA. The success rate dropped to 85.9% for a 50/50 AA. A more conservative AA does not necessarily mean a greater chance of achieving one's objectives. Sometimes it's just trading one risk (e.g. volatility) for another (e.g. low portfolio growth).

Unless one has a ridiculously low withdrawal rate, the longer someone is retired, the more they have historically needed the growth of stocks in order to succeed.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by wolf359 » Thu Sep 05, 2019 2:24 pm

smitcat wrote:
Thu Sep 05, 2019 1:11 pm
wolf359 wrote:
Thu Sep 05, 2019 12:50 pm
smitcat wrote:
Thu Sep 05, 2019 12:12 pm
wolf359 wrote:
Thu Sep 05, 2019 11:45 am
smitcat wrote:
Thu Sep 05, 2019 11:23 am


Agreed - unless the FIRED early folks 'needed' to pull 4% (or more) from their portfolio.
Don't forget that the FIREd folks are retiring voluntarily. They picked the expense target and chose when to retire. If they weren't being total idiots about it, then they have flexibility built into both their spending and their assets. Many are by definition younger and driven, and have the capability to earn additional money if required.

They probably don't "need" 4%. They can cut back on expenses or increase income if required.

It's those who are trying to retire at a traditional age or later who have less flexibility. They may lose their ability to stay employed and in the workforce before they have accumulated enough assets to retire. They're the ones who might just barely make it to 25X expenses without any slack.
Perhaps - if they are younger and do not know what expenses will come up later and their career replacement could be challenged at any time.
Younger and driven sounds like they would be FI but not RE.
The original statement is that a retiree with an 80/20 portfolio is unlikely to continue pulling the same % from the portfolio regardless of what the markets do.

Just because someone FIREd young doesn't mean that they would do so. In fact, they're more likely to have planned ahead or set up additional options. If they failed to predict their expenses correctly, then they're much more likely to simply return to the workforce or increase their income, not keep withdrawing at 4% until the portfolio fails.

Changing their label from RE to FI doesn't change their likely behavior. In fact, it's the retiree who gets to decide what to call themselves. We don't get a vote. Nor does it change Admiral's point.

If the market drops precipitiously, most people will cut back their spending if they are depending upon market-based assets for their income. It's a retirement plan, not a suicide pact. Those people completely living off of Social Security, pension, dividend, and/or annuity income are more likely to continue spending at the same rate regardless of what the market does. That type of income doesn't describe the typical FIRE folks.
So your thoughts are that all of the younger FIRE crowd will avoid all of these issues...
- experienced a market other than the last 11 year runup
- have more funds then most conventional folks would secure
- be able to return to the workforce
- be able to earn significant income if they return
- have planned for costs with future events and family
- predicted the market and tax futures within reasonable accuracy

That is fine - I believe you are looking at an extremely small % of folks for whatever that is worth. I have read about many FIRE folks whom are planning to survive the future on extremely low funds - and a host of other assumptions. These are not typically represented on Bogleheads but there are a few here as well.
FWIW - this is not the first FIRE decade , just the first one that has a whole bunch of data available to everyone due to the internet.
I think we're just talking past each other at this point, so I'll stop.

You apparently aren't supporting the position I had understood you to make, and I'm certainly not saying any of the things you're saying for me. So, let's just leave it here.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by trueblueky » Thu Sep 05, 2019 2:37 pm

For those retiring early, start by withdrawing 3.5% annually.
When you get to 30 years from expiration date, raise that to 4%.
Done!

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Chip » Thu Sep 05, 2019 2:46 pm

trueblueky wrote:
Thu Sep 05, 2019 2:37 pm
For those retiring early, start by withdrawing 3.5% annually.
When you get to 30 years from expiration date, raise that to 4%.
Done!
If I had done that (and not ratcheted) my current "allowable" spend would be 44% lower than it is with ratcheting. I guess heirs would be happy about that. :D

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by randomguy » Thu Sep 05, 2019 3:11 pm

lostdog wrote:
Thu Sep 05, 2019 10:57 am
flyingaway wrote:
Thu Sep 05, 2019 10:43 am
Yes. An early retiree can use the 3.5% rule and find a part-time job that makes the additional 0.5%.
+1

I love how simple this is. Or retire early and pull 3% with no part time job.
Take out 5% and if your get a bottom 25% outcome, get a job that pays 2.5%+ for a half dozen years😀 And don't forget SS in 20-30 years takes a lot of stress off the portfolio. The early retiree has lots of options that the normal retiree doesn't because of age.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by countmein » Thu Sep 05, 2019 3:11 pm

Unless I'm using it wrong, according to the Monte Carlo tool on PV, the FIRE SWR is more like 1.8%, not 3 - 3.5 %.

Assumptions:
- 50 year horizon
- 60/40 portfolio with 2.5% real expected return*
- 9% volatility
- non-variable withdrawals
- no forced worst case scenario sequence of returns

90% success happens at 2% withdrawal, 95% happens at 1.8% withdrawal.

https://tinyurl.com/y48s8xba

*On lastest podcast Rick F and Larry S agree on a 4.5% nominal expected return forecast for 60/40. Subtract 2% assumed inflation.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Thu Sep 05, 2019 3:23 pm

countmein wrote:
Thu Sep 05, 2019 3:11 pm
Unless I'm using it wrong, according to the Monte Carlo tool on PV, the FIRE SWR is more like 1.8%, not 3 - 3.5 %.

Assumptions:
- 50 year horizon
- 60/40 portfolio with 2.5% real expected return*
- 9% volatility
- non-variable withdrawals
- no forced worst case scenario sequence of returns

90% success happens at 2% withdrawal, 95% happens at 1.8% withdrawal.

https://tinyurl.com/y48s8xba

*On lastest podcast Rick F and Larry S agree on a 4.5% nominal expected return forecast for 60/40. Subtract 2% assumed inflation.
Those are some extremely pessimistic assumptions. For the SWR to be 1.8%, that implies negative real returns over a 50 year period. Retirees could do better putting everything in TIPS and spending 2% of their portfolio every year for 50 years.

Ferri's and Swedroe's forecasts are only for the next decade, not the next 50 years.

Further, you probably didn't specify a minimum block length of years. This means that some of the simulated results are based on 2008's returns being followed by 2000's, then 2001's, etc., to produce some truly horrific sequences that we just haven't seen materialize in the historic record. This is a known problem with many of the Monte Carlo simulations out there: unless some type of mean reversion parameter is included, they produce 'fat tails' (i.e. much lower lows and higher highs than the historic record says they should).

Portfolio Charts' withdrawal rates calculator may be better for this purpose. Using data going back to 1970, the perpetual withdrawal rate over 26 year or longer periods (i.e. you would always have had at least your inflation-adjusted starting capital after 26 years or longer) has been right at 3.5%.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by countmein » Thu Sep 05, 2019 3:49 pm

Those are some extremely pessimistic assumptions. For the SWR to be 1.8%, that implies negative real returns over a 50 year period. Retirees could do better putting everything in TIPS and spending 2% of their portfolio every year for 50 years.
True, but that's the risk you take investing in stocks-- wider distribution of outcomes.
Ferri's and Swedroe's forecasts are only for the next decade, not the next 50 years.
They didn't specify 10 years and the conversation was in the context of retirement planning (Larry's 4 horsemen of the retirement apocalypse), so I assume it was for long term (30+ years) which Rick is known for anyway. Furthermore, this number is close to Rick's last 30 year forecasts which were a few years ago (at lower valuations). So it stands to reason they meant very long term, but perhaps they will chime in to clarify.
Further, you probably didn't specify a minimum block length of years. This means that some of the simulated results are based on 2008's returns being followed by 2000's, then 2001's, etc., to produce some truly horrific sequences that we just haven't seen materialize in the historic record. This is a known problem with many of the Monte Carlo simulations out there: unless some type of mean reversion parameter is included, they produce 'fat tails' (i.e. much lower lows and higher highs than the historic record says they should).
Can you provide links to this problem? I don't know what the model in use looks like. Perhaps it is overly simplistic to the point of being "problematic" but at face value I don't find the argument about the necessity of mean reversion convincing.
Portfolio Charts' withdrawal rates calculator may be better for this purpose. Using data going back to 1970, the perpetual withdrawal rate over 26 year or longer periods (i.e. you would always have had at least your inflation-adjusted starting capital after 26 years or longer) has been right at 3.5%.
Historical data to 1970 is unusable. That's zero fifty year periods. Regardless, based on structural reasons Larry and others cite, the consensus on future expected returns is that they should be muted compared to history. IMO, this, combined with a dearth of historical data, makes synthetic models compelling.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Thu Sep 05, 2019 4:02 pm

countmein wrote:
Thu Sep 05, 2019 3:49 pm
They didn't specify 10 years and the conversation was in the context of retirement planning (Larry's 4 horsemen of the retirement apocalypse), so I assume it was for long term (30+ years) which Rick is known for anyway. Furthermore, this number is close to Rick's last 30 year forecasts which were a few years ago (at lower valuations). So it stands to reason they meant very long term, but perhaps they will chime in to clarify.
I can almost guarantee you that neither of them are going to make any prediction for stock or bond returns beyond the next decade. You can PM Larry to verify this.
countmein wrote:
Thu Sep 05, 2019 3:49 pm
Can you provide links to this problem? I don't know what the model in use looks like. Perhaps it is overly simplistic to the point of being "problematic" but at face value I don't find the argument about the necessity of mean reversion convincing.
Derek Tharp discussed it on Michael Kitces' blog. Failure to incorporate mean reversion is a serious problem.
countmein wrote:
Thu Sep 05, 2019 3:49 pm
Historical data to 1970 is unusable. That's zero fifty year periods.
We don't need 50 year periods in order to draw some meaningful conclusions. Based on the good data we have, at the end of any period longer than 26 years, retirees would have always had at least their inflation-adjusted starting capital, which carries the direct implication that they could do so again and again and again, etc. That's the whole idea behind a perpetual withdrawal rate, and it's very relevant for early retirees. Over periods longer than about 40 years, there's been almost no difference between safe withdrawal rates, which can 'burn through' starting capital', and perpetual withdrawal rates, which cannot.
countmein wrote:
Thu Sep 05, 2019 3:49 pm
Regardless, based on structural reasons Larry and others cite, the consensus on future expected returns is that they should be muted compared to history. IMO, this, combined with a dearth of historical data, makes synthetic models compelling.
With all due respect to Larry, his predictive accuracy hasn't been great. And even if returns are muted compared to history, that doesn't matter because the 3.5% number Kitces mentioned included some periods with very poor returns and/or sequences of returns. It's certainly possible that the future will look worse than anything we've seen so far, but going so far as to say that we need starting withdrawal rates under 2% is, IMHO, utterly ridiculous.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by countmein » Thu Sep 05, 2019 4:13 pm

willthrill81 wrote:
Thu Sep 05, 2019 4:02 pm

I can almost guarantee you that neither of them are going to make any prediction for stock or bond returns beyond the next decade. You can PM Larry to verify this.
I'll PM Larry. As for Rick:

https://www.etf.com/sections/index-inve ... nopaging=1

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Seasonal » Thu Sep 05, 2019 4:19 pm

willthrill81 wrote:
Thu Sep 05, 2019 4:02 pm
countmein wrote:
Thu Sep 05, 2019 3:49 pm
Historical data to 1970 is unusable. That's zero fifty year periods.
We don't need 50 year periods in order to draw some meaningful conclusions. Based on the good data we have, at the end of any period longer than 26 years, retirees would have always had at least their inflation-adjusted starting capital, which carries the direct implication that they could do so again and again and again, etc. That's the whole idea behind a perpetual withdrawal rate, and it's very relevant for early retirees. Over periods longer than about 40 years, there's been almost no difference between safe withdrawal rates, which can 'burn through' starting capital', and perpetual withdrawal rates, which cannot.
If you're going to use historical data to forecast the future, 50 years of historical data certainly seems relevant for 50 year predictions.

26 years? We don't even have two independent 26 year periods since 1970. That's not many data points, especially if we're implicitly assuming that the future will look just like the past periods we're relying on for forecasts.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Thu Sep 05, 2019 4:19 pm

countmein wrote:
Thu Sep 05, 2019 4:13 pm
willthrill81 wrote:
Thu Sep 05, 2019 4:02 pm

I can almost guarantee you that neither of them are going to make any prediction for stock or bond returns beyond the next decade. You can PM Larry to verify this.
I'll PM Larry. As for Rick:

https://www.etf.com/sections/index-inve ... nopaging=1
Well, you were right. My respect for Rick has gone down another notch.

I don't see how you were getting 2.5% real returns expected from a 60/40 portfolio. Rick is forecasting 1.9% real for 10 year Treasuries and 5% real for U.S. large-cap and higher returns for all other equity asset classes. That would work out to at least a 3.76% expected real return for a 60/40 AA, which is a lot better than 2.5%.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Thu Sep 05, 2019 4:21 pm

Seasonal wrote:
Thu Sep 05, 2019 4:19 pm
willthrill81 wrote:
Thu Sep 05, 2019 4:02 pm
countmein wrote:
Thu Sep 05, 2019 3:49 pm
Historical data to 1970 is unusable. That's zero fifty year periods.
We don't need 50 year periods in order to draw some meaningful conclusions. Based on the good data we have, at the end of any period longer than 26 years, retirees would have always had at least their inflation-adjusted starting capital, which carries the direct implication that they could do so again and again and again, etc. That's the whole idea behind a perpetual withdrawal rate, and it's very relevant for early retirees. Over periods longer than about 40 years, there's been almost no difference between safe withdrawal rates, which can 'burn through' starting capital', and perpetual withdrawal rates, which cannot.
If you're going to use historical data to forecast the future, 50 years of historical data certainly seems relevant for 50 year predictions.

26 years? We don't even have two independent 26 year periods since 1970. That's not many data points, especially if we're implicitly assuming that the future will look just like the past periods we're relying on for forecasts.
"If you go down the path of craving independent periods of data, forever will it dominate your destiny! Consume you it will."

We do the best we can with the data we have. And I personally lend far greater credence to actual data than so-called 'expert predictions'. YMMV.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by retiringwhen » Thu Sep 05, 2019 4:27 pm

willthrill81 wrote:
Thu Sep 05, 2019 4:21 pm
"If you go down the path of craving independent periods of data, forever will it dominate your destiny! Consume you it will."

We do the best we can with the data we have. And I personally lend far greater credence to actual data than so-called 'expert predictions'. YMMV.
For real historical data, ERN's sheet is about as good and easy to play with as any:
https://earlyretirementnow.com/2018/08/ ... s-part-28/
https://docs.google.com/spreadsheets/d/ ... sp=sharing

Bonus is it uses reasonable data back to 1871 (for what they are worth.)

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Thu Sep 05, 2019 4:29 pm

retiringwhen wrote:
Thu Sep 05, 2019 4:27 pm
willthrill81 wrote:
Thu Sep 05, 2019 4:21 pm
"If you go down the path of craving independent periods of data, forever will it dominate your destiny! Consume you it will."

We do the best we can with the data we have. And I personally lend far greater credence to actual data than so-called 'expert predictions'. YMMV.
For real historical data, ERN's sheet is about as good and easy to play with as any:
https://earlyretirementnow.com/2018/08/ ... s-part-28/
https://docs.google.com/spreadsheets/d/ ... sp=sharing

Bonus is it uses reasonable data back to 1871 (for what they are worth.)
Kitces has used the same data as well and reached the same conclusion as Bengen did back in 1996: 3.5% was the safe withdrawal rate for 50 year retirements.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by jebmke » Thu Sep 05, 2019 4:32 pm

dbr wrote:
Thu Sep 05, 2019 11:14 am
Admiral wrote:
Thu Sep 05, 2019 11:03 am
Sounds suspiciously like longinvest's VPW scheme :D
There have been many approaches to flexible spending rules starting right from the beginning. Even FireCalc offers the Bernicke and Clyatt suggestions as scenarios.
Most people I know have variable spending. When things get dicey they cut back and spend a little more when things are OK. I think this goes back to the big bang.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by countmein » Thu Sep 05, 2019 4:35 pm

willthrill81 wrote:
Thu Sep 05, 2019 4:19 pm

https://www.etf.com/sections/index-inve ... nopaging=1

Well, you were right. My respect for Rick has gone down another notch.

I don't see how you were getting 2.5% real returns expected from a 60/40 portfolio. Rick is forecasting 1.9% real for 10 year Treasuries and 5% real for U.S. large-cap and higher returns for all other equity asset classes. That would work out to at least a 3.76% expected real return for a 60/40 AA, which is a lot better than 2.5%.
I was using their stated 4.5% from the podcast and subtracted 2% for inflation. Could use Rick's old 30 year forecast but you've got to set the bond side to 0 real. Stocks are 5% so that's 3% real for the portfolio. The PV model at 3% real expected return gives you an SWR of 2.0.

If you set the model to "worst 5 years first", your SWR goes down to 1.4.
Last edited by countmein on Thu Sep 05, 2019 4:41 pm, edited 1 time in total.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Thu Sep 05, 2019 4:39 pm

countmein wrote:
Thu Sep 05, 2019 4:35 pm
willthrill81 wrote:
Thu Sep 05, 2019 4:19 pm

https://www.etf.com/sections/index-inve ... nopaging=1

Well, you were right. My respect for Rick has gone down another notch.

I don't see how you were getting 2.5% real returns expected from a 60/40 portfolio. Rick is forecasting 1.9% real for 10 year Treasuries and 5% real for U.S. large-cap and higher returns for all other equity asset classes. That would work out to at least a 3.76% expected real return for a 60/40 AA, which is a lot better than 2.5%.
I was using their stated 4.5% from the podcast and subtracted 2% for inflation. Could use Rick's old 30 year forecast but you've got to set the bond side to 0 real. Stocks are 5% so that's 3% real for the portfolio. The PV model at 3% real expected return gives you an SWR of 2.0.
So you really believe that bonds will have a 0% real return for the next 50 years?
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by countmein » Thu Sep 05, 2019 4:44 pm

willthrill81 wrote:
Thu Sep 05, 2019 4:39 pm
countmein wrote:
Thu Sep 05, 2019 4:35 pm
willthrill81 wrote:
Thu Sep 05, 2019 4:19 pm

https://www.etf.com/sections/index-inve ... nopaging=1

Well, you were right. My respect for Rick has gone down another notch.

I don't see how you were getting 2.5% real returns expected from a 60/40 portfolio. Rick is forecasting 1.9% real for 10 year Treasuries and 5% real for U.S. large-cap and higher returns for all other equity asset classes. That would work out to at least a 3.76% expected real return for a 60/40 AA, which is a lot better than 2.5%.
I was using their stated 4.5% from the podcast and subtracted 2% for inflation. Could use Rick's old 30 year forecast but you've got to set the bond side to 0 real. Stocks are 5% so that's 3% real for the portfolio. The PV model at 3% real expected return gives you an SWR of 2.0.
So you really believe that bonds will have a 0% real return for the next 50 years?
Yes, absolutely, that's the most reasonable forecast. Also I edited the above to include the 'worst years first' parameter, which really brings the SWR down even further (1.4% or less). Personally I'm willing to gamble a little bit on that one and will keep it near the 2.0 range but IMO SWRs in the 3+ range for very long horizons are just reckless.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Random Poster » Thu Sep 05, 2019 4:49 pm

willthrill81 wrote:
Thu Sep 05, 2019 2:16 pm
You seem to be assuming that a 50/50 AA is more likely to result in "success" than 80/20. That's not borne out by the data.

According to FIRECalc, a 3.5% fixed withdrawal rate had a 94.9% success rate for a 50 year retirement with an 80/20 AA. The success rate dropped to 85.9% for a 50/50 AA. A more conservative AA does not necessarily mean a greater chance of achieving one's objectives. Sometimes it's just trading one risk (e.g. volatility) for another (e.g. low portfolio growth).
You seem to be using a 3.5% withdrawal rate for a 50/50 portfolio, which is not what I am suggesting.

What is the success rate for a 50 year retirement with a 50/50 AA and a 2.5% withdrawal rate?

FIRECalc is showing me a 100% success rate (although I suppose that there are ways to play with the inputs to get a lower success rate). What is the calculator showing you?

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Seasonal » Thu Sep 05, 2019 4:56 pm

willthrill81 wrote:
Thu Sep 05, 2019 4:21 pm
Seasonal wrote:
Thu Sep 05, 2019 4:19 pm
willthrill81 wrote:
Thu Sep 05, 2019 4:02 pm
countmein wrote:
Thu Sep 05, 2019 3:49 pm
Historical data to 1970 is unusable. That's zero fifty year periods.
We don't need 50 year periods in order to draw some meaningful conclusions. Based on the good data we have, at the end of any period longer than 26 years, retirees would have always had at least their inflation-adjusted starting capital, which carries the direct implication that they could do so again and again and again, etc. That's the whole idea behind a perpetual withdrawal rate, and it's very relevant for early retirees. Over periods longer than about 40 years, there's been almost no difference between safe withdrawal rates, which can 'burn through' starting capital', and perpetual withdrawal rates, which cannot.
If you're going to use historical data to forecast the future, 50 years of historical data certainly seems relevant for 50 year predictions.

26 years? We don't even have two independent 26 year periods since 1970. That's not many data points, especially if we're implicitly assuming that the future will look just like the past periods we're relying on for forecasts.
"If you go down the path of craving independent periods of data, forever will it dominate your destiny! Consume you it will."

We do the best we can with the data we have. And I personally lend far greater credence to actual data than so-called 'expert predictions'. YMMV.
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countmein
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by countmein » Thu Sep 05, 2019 4:59 pm

Random Poster wrote:
Thu Sep 05, 2019 4:49 pm


FIRECalc is showing me a 100% success rate (although I suppose that there are ways to play with the inputs to get a lower success rate). What is the calculator showing you?
Yes but they're probably using 5 year treasury returns in the neighborhood of 7%. How are you gonna get that?

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willthrill81
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Thu Sep 05, 2019 5:47 pm

Random Poster wrote:
Thu Sep 05, 2019 4:49 pm
willthrill81 wrote:
Thu Sep 05, 2019 2:16 pm
You seem to be assuming that a 50/50 AA is more likely to result in "success" than 80/20. That's not borne out by the data.

According to FIRECalc, a 3.5% fixed withdrawal rate had a 94.9% success rate for a 50 year retirement with an 80/20 AA. The success rate dropped to 85.9% for a 50/50 AA. A more conservative AA does not necessarily mean a greater chance of achieving one's objectives. Sometimes it's just trading one risk (e.g. volatility) for another (e.g. low portfolio growth).
You seem to be using a 3.5% withdrawal rate for a 50/50 portfolio, which is not what I am suggesting.

What is the success rate for a 50 year retirement with a 50/50 AA and a 2.5% withdrawal rate?

FIRECalc is showing me a 100% success rate (although I suppose that there are ways to play with the inputs to get a lower success rate). What is the calculator showing you?
The success rate was 100% for both 50/50 and 80/20.
“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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