5% Withdrawal Rate Recommended by US News Columnist

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DanMahowny
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by DanMahowny » Tue Sep 10, 2019 5:55 pm

willthrill81 wrote:
Tue Sep 10, 2019 5:50 pm
DanMahowny wrote:
Tue Sep 10, 2019 5:47 pm
Dave Ramsey would ponder why so low? He recommends 12% or some crap.
He's a lot more conservative than that. He says that 8% is safe. :twisted:
Thanks man, you're right.
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CurlyDave
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by CurlyDave » Tue Sep 10, 2019 6:12 pm

delamer wrote:
Tue Sep 10, 2019 3:54 pm

...I didn’t know about the 7-8% recommendation in the original study.

But the article never refers to either 4% (inflation adjusted) or 7% (not adjusted) of the initial portfolio value.

The references are to “each year” which can be easily interpreted as the current year.

Again, very misleading.
TaKing 7% of the current portfolio value is actually reasonably conservative.

There are only two possible cases.

1.) Portfolio has decreased, so 7% of the smaller portfolio is smaller than the assumed withdrawal in the updated study. Clearly more conservative.

2.) Portfolio has increased. At first 7% of the current portfolio would appear to be too risky, but compare this to a new retiree with an exactly equal portfolio. The man with one year of retirement already in only needs a portfolio life of 29 years, not 30, and has just as much investment as the new retiree, so he is actually being conservative by only increasing his withdrawals to 7% of the new amount.

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willthrill81
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Tue Sep 10, 2019 6:29 pm

CurlyDave wrote:
Tue Sep 10, 2019 6:12 pm
delamer wrote:
Tue Sep 10, 2019 3:54 pm

...I didn’t know about the 7-8% recommendation in the original study.

But the article never refers to either 4% (inflation adjusted) or 7% (not adjusted) of the initial portfolio value.

The references are to “each year” which can be easily interpreted as the current year.

Again, very misleading.
TaKing 7% of the current portfolio value is actually reasonably conservative.

There are only two possible cases.

1.) Portfolio has decreased, so 7% of the smaller portfolio is smaller than the assumed withdrawal in the updated study. Clearly more conservative.

2.) Portfolio has increased. At first 7% of the current portfolio would appear to be too risky, but compare this to a new retiree with an exactly equal portfolio. The man with one year of retirement already in only needs a portfolio life of 29 years, not 30, and has just as much investment as the new retiree, so he is actually being conservative by only increasing his withdrawals to 7% of the new amount.
Had a year 2000 retiree with a 60/40 (all U.S.) portfolio done that, they would now have only 51% of their inflation-adjusted portfolio still intact. That also means that their withdrawals would have shrunk by basically half.
“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

CurlyDave
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by CurlyDave » Tue Sep 10, 2019 7:20 pm

willthrill81 wrote:
Tue Sep 10, 2019 6:29 pm

...Had a year 2000 retiree with a 60/40 (all U.S.) portfolio done that, they would now have only 51% of their inflation-adjusted portfolio still intact. That also means that their withdrawals would have shrunk by basically half.
I am not convinced that using a non-adjusted withdrawal scheme and then calculating on an inflation-adjusted basis is valid. But, if I choose to play that game, your year 2000 retiree only has 11 more years to go. If we go back to the updated study, the minimum time available in the tables is 15 years, but from table 1 a 75% stock/25% bond portfolio can withstand a 10% withdrawal rate for 15 years. So, lets just guess that it could do 11% for 11 years.

Now we take the 51% of the original inflation-adjusted portfolio and de-adjust for inflation. Cumulative inflation was 52% from January 2000 to July 2019. So in non-adjusted dollars the retiree has 77.5% of his original portfolio. He should be able to take 11% of 77.5% annually, which is about 8.5% of his original portfolio each year. So, it works.

The real key is that if I choose to accept a non-adjusted withdrawal scheme, I must be willing to live with that.

There are ways to inflation-proof a withdrawal scheme. For instance, I own a house and some multi-family rental properties. I have 4 mortgages in retirement. All are fixed-rate so I know the mortgage payments will not increase. The part of my spending that covers these mortgage payments does not have to be inflation-adjusted. Now other parts of my spending are subject to inflation, but I budget these within my SS and rental income which are inflation-adjusted.

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by iamlucky13 » Tue Sep 10, 2019 8:10 pm

mptfan wrote:
Tue Sep 10, 2019 2:54 pm
CurlyDave wrote:
Tue Sep 10, 2019 12:34 pm
Before we get into too much of an uproar, I suggest everyone who doubts the 5% withdrawal number should go back and actually read the Trinity Study update.
Good advice. Here is a quote from the study...

"We conclude that if 75 percent or better portfolio success rates form the feasible set of portfolio success rates, clients could plan to withdraw a fixed amount of 7 percent of the initial value of portfolios composed of at least 50 percent large-company common stocks. For shorter payout periods of 15 or 20 years, the sustainable withdrawal rate with 75 percent success or better is as much as 8 percent for portfolios of 50 percent or more large-company common stocks. The sample data suggest that clients who plan to make annual inflation adjustments to withdrawals should also plan lower initial withdrawal rates in the 4 percent to 5 percent range, again, from portfolios of 50 percent or more large-company common stocks, in order to accommodate future increases in withdrawals."

So a fixed amount of 7-8% is recommended, and an inflation adjusted amount of 4-5% is recommended.
Is a fixed withdrawal practical in an inflationary economy? I supposed I could see declining physical condition leading to less spending on activities, but I've always assumed that is typically offset by increased medical and other care costs.

One thing I've observed playing with Porfolio Visualizer's Monte Carlo tool, however, is the range of potential outcomes is really, really wide. I actually just checked Portfolio Visualizer for the Trinity update scenario you describe: 50/50 US stocks/bonds, 30 year drawdown, 7% fixed, the 25th percentile result forecast a lot of savings left.

Even an inflation-adjusted 8% withdrawal reported a nearly 25% chance of success - I wouldn't plan on that, but it's better than I expected.

The more sane inflation-adjusted 4% withdrawal estimates a 98% chance of success. What caught my attention more sharply is not the fact that a 4% inflation-adjusted withdrawal rate has a very high chance of success. It's that it has a fairly high chance of wild over-savings. At the 50th percentile, again adjusting for inflation, what started out as 25x withdrawals grew to nearly 50x withdrawals.

It's hard to come up with an optimal spending strategy. I guess this is part of where annuities come in: establish a comfortable worst case, then breathe a little more easily about a higher withdrawal rate for the rest.

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willthrill81
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Tue Sep 10, 2019 8:37 pm

CurlyDave wrote:
Tue Sep 10, 2019 7:20 pm
willthrill81 wrote:
Tue Sep 10, 2019 6:29 pm

...Had a year 2000 retiree with a 60/40 (all U.S.) portfolio done that, they would now have only 51% of their inflation-adjusted portfolio still intact. That also means that their withdrawals would have shrunk by basically half.
I am not convinced that using a non-adjusted withdrawal scheme and then calculating on an inflation-adjusted basis is valid. But, if I choose to play that game, your year 2000 retiree only has 11 more years to go. If we go back to the updated study, the minimum time available in the tables is 15 years, but from table 1 a 75% stock/25% bond portfolio can withstand a 10% withdrawal rate for 15 years. So, lets just guess that it could do 11% for 11 years.
I am not arguing for a SWR approach, nor am I against a percentage of portfolio approach. I was merely pointing out that in a recent period, withdrawing 7% of the portfolio each year would have resulted in the real withdrawals being cut in half after 19 years. That's something that most retirees would be less than happy with.

I think that 5% may be a more realistic starting point for those using this approach unless a retiree is willing and able to to take on the risk, namely the potential for significantly lower future withdrawals, associated with higher withdrawal rates.

Personally, I prefer using the time value of money formula to determine withdrawals.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Tue Sep 10, 2019 8:45 pm

iamlucky13 wrote:
Tue Sep 10, 2019 8:10 pm
It's hard to come up with an optimal spending strategy.
It depends greatly on what the retiree is trying to optimize.

If they desire a stable income above all else, then annuitization is probably best, with the SWR approach coming in second.

If they want to spend as much of their assets as they can while still alive, annuitization again is probably best, with the 'time value of money' approach or its VPW derivative coming in second.

If they want upside spending potential, then some type of percentage of portfolio approach is probably best (e.g. 'time value of money', VPW, fixed percentage), with the SWR combined with some kind of upside ratcheting rule (e.g. Guyton-Klinger, 'resetting' the SWR when the portfolio grows) coming in second.

But many, perhaps most, retirees seem to want some combination of all of these features, and that's where things can get messy. Some choose a single approach for the entirety of their portfolio, while others use different approaches for segments of their portfolio (e.g. income flooring essential spending).
“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

delamer
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by delamer » Tue Sep 10, 2019 9:18 pm

CurlyDave wrote:
Tue Sep 10, 2019 6:12 pm
delamer wrote:
Tue Sep 10, 2019 3:54 pm

...I didn’t know about the 7-8% recommendation in the original study.

But the article never refers to either 4% (inflation adjusted) or 7% (not adjusted) of the initial portfolio value.

The references are to “each year” which can be easily interpreted as the current year.

Again, very misleading.
TaKing 7% of the current portfolio value is actually reasonably conservative.

There are only two possible cases.

1.) Portfolio has decreased, so 7% of the smaller portfolio is smaller than the assumed withdrawal in the updated study. Clearly more conservative.

2.) Portfolio has increased. At first 7% of the current portfolio would appear to be too risky, but compare this to a new retiree with an exactly equal portfolio. The man with one year of retirement already in only needs a portfolio life of 29 years, not 30, and has just as much investment as the new retiree, so he is actually being conservative by only increasing his withdrawals to 7% of the new amount.
Withdrawing more or less than your initial dollar withdrawal — based on the current account balance — doesn’t mean it is a conservative approach. You could call a 25% withdrawal rate conservative under your analysis above.

And it also is possible that you won’t be able to pay your bills due to a combination of fluctuating account balances and inflation if you determine your withdrawal based on the current account balance.

A lot of the issues that you raise regarding inflation proofing are really another way of saying “minimize your dependence on withdrawing from your savings to cover your expenses.” Which is a good idea for everyone.
Last edited by delamer on Tue Sep 10, 2019 9:24 pm, edited 1 time in total.

bhsince87
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by bhsince87 » Tue Sep 10, 2019 9:22 pm

I've yet to see the other elephant in the room mentioned in this thread.

Even if you retire early, at say age 55, you have less than a 50% likelihood of living long enough to need a 30 year "success rate" with your investments.

At age 65, you're down in the 20 year range.

I'm basing this on these numbers, assuming they are in the ballpark.

https://www.annuityadvantage.com/resour ... cy-tables/
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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willthrill81
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Tue Sep 10, 2019 9:38 pm

bhsince87 wrote:
Tue Sep 10, 2019 9:22 pm
I've yet to see the other elephant in the room mentioned in this thread.

Even if you retire early, at say age 55, you have less than a 50% likelihood of living long enough to need a 30 year "success rate" with your investments.

At age 65, you're down in the 20 year range.

I'm basing this on these numbers, assuming they are in the ballpark.

https://www.annuityadvantage.com/resour ... cy-tables/
That sounds about right, but it gets more complicated when we're talking about two people (e.g. spouses). According to the SSA life expectancy tables, there's a 42% chance that at least one of two opposite sex spouses aged 65 will survive to at least age 90 and a 16% chance that at least one will survive to age 95. This wouldn't concern me much though because once one of the spouses is gone, the other is likely to spend significantly less.
“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

CurlyDave
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by CurlyDave » Tue Sep 10, 2019 11:50 pm

delamer wrote:
Tue Sep 10, 2019 9:18 pm

...Withdrawing more or less than your initial dollar withdrawal — based on the current account balance — doesn’t mean it is a conservative approach. You could call a 25% withdrawal rate conservative under your analysis above.

And it also is possible that you won’t be able to pay your bills due to a combination of fluctuating account balances and inflation if you determine your withdrawal based on the current account balance.

A lot of the issues that you raise regarding inflation proofing are really another way of saying “minimize your dependence on withdrawing from your savings to cover your expenses.” Which is a good idea for everyone.
I can't read the updated Trinity study and call a 25% withdrawal conservative. Their tables clearly indicate that ~7% is a good guideline.

I think you are missing my point on inflation proofing, which is that obligations in fixed nominal dollars can be balanced by a fixed income. If the obligations produce a lump sum of cash, that cash can be invested to produce income which may be inflation protected.

JoeRetire
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by JoeRetire » Wed Sep 11, 2019 7:25 am

smitcat wrote:
Tue Sep 10, 2019 5:15 pm
JoeRetire wrote:
Tue Sep 10, 2019 3:47 pm
smitcat wrote:
Tue Sep 10, 2019 8:24 am
JoeRetire wrote:
Tue Sep 10, 2019 6:17 am
Stoic9 wrote:
Mon Sep 09, 2019 2:22 pm
I can always pull back and live off SS in old old age.
Can you? I couldn't.
My neighbor is 91, thought she'd live to 80, ran out of money at 87. Now she lives on SS and is fine, she can get a ride to the senior center and play cards etc for free.
I guess I'm expecting to do more than ride the senior center bus and play cards all day.

But if you are willing to settle for that in your old age, then you could be fine.
"Can you? I couldn't."
What level of SS are you utilizing to compare the expenses to?
I'm not exactly sure what "what level" means in this context.

We aren't collecting SS yet. When I reach 70, I'll start.
Together, my wife and I will be getting about $70k/year from SS. Our expenses will run about $100k/year.
"Together, my wife and I will be getting about $70k/year from SS. Our expenses will run about $100k/year."
$70 out of $100 not to bad at all.
I have no intention of living on 70% of what I need. That's why I worked and planned all those years.

Your mileage may vary. You can choose to ride the senior bus and play cards all day. I won't be doing that. And I won't be subjecting my wife to that lifestyle when I'm gone.

smitcat
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by smitcat » Wed Sep 11, 2019 7:51 am

JoeRetire wrote:
Wed Sep 11, 2019 7:25 am
smitcat wrote:
Tue Sep 10, 2019 5:15 pm
JoeRetire wrote:
Tue Sep 10, 2019 3:47 pm
smitcat wrote:
Tue Sep 10, 2019 8:24 am
JoeRetire wrote:
Tue Sep 10, 2019 6:17 am

Can you? I couldn't.


I guess I'm expecting to do more than ride the senior center bus and play cards all day.

But if you are willing to settle for that in your old age, then you could be fine.
"Can you? I couldn't."
What level of SS are you utilizing to compare the expenses to?
I'm not exactly sure what "what level" means in this context.

We aren't collecting SS yet. When I reach 70, I'll start.
Together, my wife and I will be getting about $70k/year from SS. Our expenses will run about $100k/year.
"Together, my wife and I will be getting about $70k/year from SS. Our expenses will run about $100k/year."
$70 out of $100 not to bad at all.
I have no intention of living on 70% of what I need. That's why I worked and planned all those years.

Your mileage may vary. You can choose to ride the senior bus and play cards all day. I won't be doing that. And I won't be subjecting my wife to that lifestyle when I'm gone.
"I have no intention of living on 70% of what I need. That's why I worked and planned all those years."
My only point was that $70K is not to bad tp live on when retired.

"Your mileage may vary. You can choose to ride the senior bus and play cards all day"
I do not think that $70k puts anyone on the senior bus … as far as our mileage we have a larger SS and overall budgets for our use.

JoeRetire
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by JoeRetire » Wed Sep 11, 2019 7:57 am

smitcat wrote:
Wed Sep 11, 2019 7:51 am
JoeRetire wrote:
Wed Sep 11, 2019 7:25 am
smitcat wrote:
Tue Sep 10, 2019 5:15 pm
JoeRetire wrote:
Tue Sep 10, 2019 3:47 pm
smitcat wrote:
Tue Sep 10, 2019 8:24 am


"Can you? I couldn't."
What level of SS are you utilizing to compare the expenses to?
I'm not exactly sure what "what level" means in this context.

We aren't collecting SS yet. When I reach 70, I'll start.
Together, my wife and I will be getting about $70k/year from SS. Our expenses will run about $100k/year.
"Together, my wife and I will be getting about $70k/year from SS. Our expenses will run about $100k/year."
$70 out of $100 not to bad at all.
I have no intention of living on 70% of what I need. That's why I worked and planned all those years.

Your mileage may vary. You can choose to ride the senior bus and play cards all day. I won't be doing that. And I won't be subjecting my wife to that lifestyle when I'm gone.
"I have no intention of living on 70% of what I need. That's why I worked and planned all those years."
My only point was that $70K is not to bad tp live on when retired.

"Your mileage may vary. You can choose to ride the senior bus and play cards all day"
I do not think that $70k puts anyone on the senior bus … as far as our mileage we have a larger SS and overall budgets for our use.
It's only $70k while we are both alive.

smitcat
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by smitcat » Wed Sep 11, 2019 7:59 am

JoeRetire wrote:
Wed Sep 11, 2019 7:57 am
smitcat wrote:
Wed Sep 11, 2019 7:51 am
JoeRetire wrote:
Wed Sep 11, 2019 7:25 am
smitcat wrote:
Tue Sep 10, 2019 5:15 pm
JoeRetire wrote:
Tue Sep 10, 2019 3:47 pm


I'm not exactly sure what "what level" means in this context.

We aren't collecting SS yet. When I reach 70, I'll start.
Together, my wife and I will be getting about $70k/year from SS. Our expenses will run about $100k/year.
"Together, my wife and I will be getting about $70k/year from SS. Our expenses will run about $100k/year."
$70 out of $100 not to bad at all.
I have no intention of living on 70% of what I need. That's why I worked and planned all those years.

Your mileage may vary. You can choose to ride the senior bus and play cards all day. I won't be doing that. And I won't be subjecting my wife to that lifestyle when I'm gone.
"I have no intention of living on 70% of what I need. That's why I worked and planned all those years."
My only point was that $70K is not to bad tp live on when retired.

"Your mileage may vary. You can choose to ride the senior bus and play cards all day"
I do not think that $70k puts anyone on the senior bus … as far as our mileage we have a larger SS and overall budgets for our use.
It's only $70k while we are both alive.

Yes - and $45K when one spouse passes, that is why we have other funds.

randomguy
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by randomguy » Wed Sep 11, 2019 8:37 am

bhsince87 wrote:
Tue Sep 10, 2019 9:22 pm
I've yet to see the other elephant in the room mentioned in this thread.

Even if you retire early, at say age 55, you have less than a 50% likelihood of living long enough to need a 30 year "success rate" with your investments.

At age 65, you're down in the 20 year range.

I'm basing this on these numbers, assuming they are in the ballpark.

https://www.annuityadvantage.com/resour ... cy-tables/
Those tables apply to just about nobody. They are averages of a populations of which few people are average. A college educated nonsmoking male who isn't obese has a life expectancy of 90 not low 80s. You odds of making to 85 are up around 75% not 50%. Obviously you can do the reverse for the unhealthy population. A 55 year old 2 pack/day, obese, diabiatic smoker who has had a heart attack has a life expectancy of 68 and only a 25% chance of making it to 72. If you are 55 years old, you need to decide which boat you are in and not use the average one.

I am pretty confidant that I will not be living much past 100 without major medical break throughs of which we have had basically none so far. But given 30-45 years of medical advances, I wouldn't be shocked to learn that my actually life expectancy isn't 90 but more like 95.

delamer
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by delamer » Wed Sep 11, 2019 9:11 am

CurlyDave wrote:
Tue Sep 10, 2019 11:50 pm
delamer wrote:
Tue Sep 10, 2019 9:18 pm

...Withdrawing more or less than your initial dollar withdrawal — based on the current account balance — doesn’t mean it is a conservative approach. You could call a 25% withdrawal rate conservative under your analysis above.

And it also is possible that you won’t be able to pay your bills due to a combination of fluctuating account balances and inflation if you determine your withdrawal based on the current account balance.

A lot of the issues that you raise regarding inflation proofing are really another way of saying “minimize your dependence on withdrawing from your savings to cover your expenses.” Which is a good idea for everyone.
I can't read the updated Trinity study and call a 25% withdrawal conservative. Their tables clearly indicate that ~7% is a good guideline.

I think you are missing my point on inflation proofing, which is that obligations in fixed nominal dollars can be balanced by a fixed income. If the obligations produce a lump sum of cash, that cash can be invested to produce income which may be inflation protected.
How can “obligations produce a lump sum of cash?”

mptfan
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by mptfan » Wed Sep 11, 2019 9:33 am

randomguy wrote:
Wed Sep 11, 2019 8:37 am
A college educated nonsmoking male who isn't obese has a life expectancy of 90 not low 80s. You odds of making to 85 are up around 75% not 50%.
I don't doubt you, but do you have a cite for that?

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by Katietsu » Wed Sep 11, 2019 10:23 am

Quirkz wrote:
Mon Sep 09, 2019 3:51 pm
I remember the first time I ran through a retirement plan, maybe a year or two after college, I figured a 5% rate was a good baseline. Of course, that's what CDs were paying back then, so it was an interest-only system.
I must be older than you. Shortly after college, I inherited a 5 year CD with a year left on the term with a 14% interest rate! They told me I could withdraw it due to death of the primary owner. I said, No, I will wait until the term is up!

CurlyDave
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by CurlyDave » Wed Sep 11, 2019 11:18 am

delamer wrote:
Wed Sep 11, 2019 9:11 am
CurlyDave wrote:
Tue Sep 10, 2019 11:50 pm
delamer wrote:
Tue Sep 10, 2019 9:18 pm

...Withdrawing more or less than your initial dollar withdrawal — based on the current account balance — doesn’t mean it is a conservative approach. You could call a 25% withdrawal rate conservative under your analysis above.

And it also is possible that you won’t be able to pay your bills due to a combination of fluctuating account balances and inflation if you determine your withdrawal based on the current account balance.

A lot of the issues that you raise regarding inflation proofing are really another way of saying “minimize your dependence on withdrawing from your savings to cover your expenses.” Which is a good idea for everyone.
I can't read the updated Trinity study and call a 25% withdrawal conservative. Their tables clearly indicate that ~7% is a good guideline.

I think you are missing my point on inflation proofing, which is that obligations in fixed nominal dollars can be balanced by a fixed income. If the obligations produce a lump sum of cash, that cash can be invested to produce income which may be inflation protected.
How can “obligations produce a lump sum of cash?”
A mortgage is an obligation. Mortgage company gives me a lump sum of cash, and in return I have an obligation to repay it over time. If it is a fixed-rate mortgage and I have a pension which pays a greater fixed amount per month I have no worries about paying it no matter what inflation we see.

JoeRetire
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by JoeRetire » Wed Sep 11, 2019 4:00 pm

smitcat wrote:
Wed Sep 11, 2019 7:59 am

Yes - and $45K when one spouse passes, that is why we have other funds.
Same here. And that's why we won't ever be limited to riding the senior bus and playing cards all day.

JoeRetire
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by JoeRetire » Wed Sep 11, 2019 4:05 pm

mptfan wrote:
Wed Sep 11, 2019 9:33 am
randomguy wrote:
Wed Sep 11, 2019 8:37 am
A college educated nonsmoking male who isn't obese has a life expectancy of 90 not low 80s. You odds of making to 85 are up around 75% not 50%.
I don't doubt you, but do you have a cite for that?
https://www.blueprintincome.com/tools/l ... ill-i-live

michaeljc70
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by michaeljc70 » Wed Sep 11, 2019 8:09 pm

mptfan wrote:
Tue Sep 10, 2019 2:54 pm
CurlyDave wrote:
Tue Sep 10, 2019 12:34 pm
Before we get into too much of an uproar, I suggest everyone who doubts the 5% withdrawal number should go back and actually read the Trinity Study update.
Good advice. Here is a quote from the study...

"We conclude that if 75 percent or better portfolio success rates form the feasible set of portfolio success rates, clients could plan to withdraw a fixed amount of 7 percent of the initial value of portfolios composed of at least 50 percent large-company common stocks. For shorter payout periods of 15 or 20 years, the sustainable withdrawal rate with 75 percent success or better is as much as 8 percent for portfolios of 50 percent or more large-company common stocks. The sample data suggest that clients who plan to make annual inflation adjustments to withdrawals should also plan lower initial withdrawal rates in the 4 percent to 5 percent range, again, from portfolios of 50 percent or more large-company common stocks, in order to accommodate future increases in withdrawals."

So a fixed amount of 7-8% is recommended, and an inflation adjusted amount of 4-5% is recommended.
This is interesting (the fixed amount). I could withdraw way more (7% vs. 4%) safely it seems, the caveat being if the market tanks, what I can spend tanks. However, I calculated that with 75/25 if the market tanks 40% the 7% will still be quite a bit higher than the inflation adjusted 4% (assuming it tanks in the near future...not 20 years out). I am worried about sequence of return risk since I recently retired and am trying to watch my spending for the first 5 or so years so I am not going to be pulling 7% though at this point. I have 18 years to FRA for social security.

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Wed Sep 11, 2019 8:17 pm

michaeljc70 wrote:
Wed Sep 11, 2019 8:09 pm
mptfan wrote:
Tue Sep 10, 2019 2:54 pm
CurlyDave wrote:
Tue Sep 10, 2019 12:34 pm
Before we get into too much of an uproar, I suggest everyone who doubts the 5% withdrawal number should go back and actually read the Trinity Study update.
Good advice. Here is a quote from the study...

"We conclude that if 75 percent or better portfolio success rates form the feasible set of portfolio success rates, clients could plan to withdraw a fixed amount of 7 percent of the initial value of portfolios composed of at least 50 percent large-company common stocks. For shorter payout periods of 15 or 20 years, the sustainable withdrawal rate with 75 percent success or better is as much as 8 percent for portfolios of 50 percent or more large-company common stocks. The sample data suggest that clients who plan to make annual inflation adjustments to withdrawals should also plan lower initial withdrawal rates in the 4 percent to 5 percent range, again, from portfolios of 50 percent or more large-company common stocks, in order to accommodate future increases in withdrawals."

So a fixed amount of 7-8% is recommended, and an inflation adjusted amount of 4-5% is recommended.
This is interesting (the fixed amount). I could withdraw way more (7% vs. 4%) safely it seems, the caveat being if the market tanks, what I can spend tanks. However, I calculated that with 75/25 if the market tanks 40% the 7% will still be quite a bit higher than the inflation adjusted 4% (assuming it tanks in the near future...not 20 years out). I am worried about sequence of return risk since I recently retired and am trying to watch my spending for the first 5 or so years so I am not going to be pulling 7% though at this point. I have 18 years to FRA for social security.
Percentage of portfolio approaches do not experience sequence of returns risk as it relates to your portfolio (i.e. your portfolio's ending balance will be the same regardless of the sequence of returns). However, the sequence of returns does impact the amount of your withdrawals, leading to what some have called sequence of income risk.
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by MP123 » Wed Sep 11, 2019 8:24 pm

JoeRetire wrote:
Wed Sep 11, 2019 4:05 pm
mptfan wrote:
Wed Sep 11, 2019 9:33 am
randomguy wrote:
Wed Sep 11, 2019 8:37 am
A college educated nonsmoking male who isn't obese has a life expectancy of 90 not low 80s. You odds of making to 85 are up around 75% not 50%.
I don't doubt you, but do you have a cite for that?
https://www.blueprintincome.com/tools/l ... ill-i-live
Hmmm...

First it says I'll live to 91 and then it offers to sell me an annuity. :happy

I'll agree there are different life expectancies in different cohorts though.

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Wed Sep 11, 2019 8:32 pm

MP123 wrote:
Wed Sep 11, 2019 8:24 pm
JoeRetire wrote:
Wed Sep 11, 2019 4:05 pm
mptfan wrote:
Wed Sep 11, 2019 9:33 am
randomguy wrote:
Wed Sep 11, 2019 8:37 am
A college educated nonsmoking male who isn't obese has a life expectancy of 90 not low 80s. You odds of making to 85 are up around 75% not 50%.
I don't doubt you, but do you have a cite for that?
https://www.blueprintincome.com/tools/l ... ill-i-live
Hmmm...

First it says I'll live to 91 and then it offers to sell me an annuity. :happy

I'll agree there are different life expectancies in different cohorts though.
That calculator gives the highest estimated life expectancy of any I've tried (101). Most of the others range from 92-97. It definitely seems that there may be a conflict of interest.
“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: 5% Withdrawal Rate Recommended by US News Columnist

Post by MP123 » Wed Sep 11, 2019 8:41 pm

willthrill81 wrote:
Wed Sep 11, 2019 8:32 pm
MP123 wrote:
Wed Sep 11, 2019 8:24 pm
JoeRetire wrote:
Wed Sep 11, 2019 4:05 pm
mptfan wrote:
Wed Sep 11, 2019 9:33 am
randomguy wrote:
Wed Sep 11, 2019 8:37 am
A college educated nonsmoking male who isn't obese has a life expectancy of 90 not low 80s. You odds of making to 85 are up around 75% not 50%.
I don't doubt you, but do you have a cite for that?
https://www.blueprintincome.com/tools/l ... ill-i-live
Hmmm...

First it says I'll live to 91 and then it offers to sell me an annuity. :happy

I'll agree there are different life expectancies in different cohorts though.
That calculator gives the highest estimated life expectancy of any I've tried (101). Most of the others range from 92-97. It definitely seems that there may be a conflict of interest.
And meanwhile Social Security and the Society of Actuaries are somewhere in the low to mid-80s.

Who knows?

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Wed Sep 11, 2019 8:47 pm

MP123 wrote:
Wed Sep 11, 2019 8:41 pm
willthrill81 wrote:
Wed Sep 11, 2019 8:32 pm
MP123 wrote:
Wed Sep 11, 2019 8:24 pm
JoeRetire wrote:
Wed Sep 11, 2019 4:05 pm
mptfan wrote:
Wed Sep 11, 2019 9:33 am

I don't doubt you, but do you have a cite for that?
https://www.blueprintincome.com/tools/l ... ill-i-live
Hmmm...

First it says I'll live to 91 and then it offers to sell me an annuity. :happy

I'll agree there are different life expectancies in different cohorts though.
That calculator gives the highest estimated life expectancy of any I've tried (101). Most of the others range from 92-97. It definitely seems that there may be a conflict of interest.
And meanwhile Social Security and the Society of Actuaries are somewhere in the low to mid-80s.

Who knows?
The problem with the SSA data is that it only differentiates by age and gender. Many other factors are known to be associated with longevity, such as ethnicity, education, wealth, health, and lifestyle.
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by JoeRetire » Thu Sep 12, 2019 12:57 pm

MP123 wrote:
Wed Sep 11, 2019 8:41 pm
And meanwhile Social Security and the Society of Actuaries are somewhere in the low to mid-80s.

Who knows?
The more personal attributes you include, the better idea on potential longevity you can get.

Social Security uses 2, the calculator uses 14.
I have no idea how many the Society of Actuaries uses.

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by Ckprocker » Thu Sep 12, 2019 1:41 pm

Interesting article from Wade Pfau that goes along with this discussion:

https://retirementresearcher.com/differ ... -spending/

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by michaeljc70 » Fri Sep 13, 2019 8:42 pm

CurlyDave wrote:
Tue Sep 10, 2019 12:34 pm
Before we get into too much of an uproar, I suggest everyone who doubts the 5% withdrawal number should go back and actually read the Trinity Study update. Try this link: https://www.onefpa.org/journal/Pages/Po ... 0Line.aspx . Try reading the black words on the white page -- do not insert your own prejudices or beliefs. And, read the whole thing, not just the parts you agree with.

The bottom line is that 4% inflation-adjusted is about right, but 7% non-adjusted is also just as good.

Somehow we all get fixated on the 4%, ignoring and criticizing the 7% advice, even though it is the very same study and authors.

Personally, I see a lot of advantages in the 7% non-adjusted plan. And, it is every bit as valid and tested as the 4% plan.
Is table 1 in that link incorrectly labeled? It says percent of initial portfolio value and not % of current portfolio value.

The other thing is, with a fixed % of portfolio withdrawal it is hard to run out of money but you may be getting $300 to live on for the year. Failure should probably be defined as a function of how low the withdrawals might be. It would be interesting to see the % of years the withdrawal was less than if you used a 4% SWR or whatever your essentials expenses are.

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Fri Sep 13, 2019 9:13 pm

michaeljc70 wrote:
Fri Sep 13, 2019 8:42 pm
CurlyDave wrote:
Tue Sep 10, 2019 12:34 pm
Before we get into too much of an uproar, I suggest everyone who doubts the 5% withdrawal number should go back and actually read the Trinity Study update. Try this link: https://www.onefpa.org/journal/Pages/Po ... 0Line.aspx . Try reading the black words on the white page -- do not insert your own prejudices or beliefs. And, read the whole thing, not just the parts you agree with.

The bottom line is that 4% inflation-adjusted is about right, but 7% non-adjusted is also just as good.

Somehow we all get fixated on the 4%, ignoring and criticizing the 7% advice, even though it is the very same study and authors.

Personally, I see a lot of advantages in the 7% non-adjusted plan. And, it is every bit as valid and tested as the 4% plan.
Is table 1 in that link incorrectly labeled? It says percent of initial portfolio value and not % of current portfolio value.

The other thing is, with a fixed % of portfolio withdrawal it is hard to run out of money but you may be getting $300 to live on for the year. Failure should probably be defined as a function of how low the withdrawals might be. It would be interesting to see the % of years the withdrawal was less than if you used a 4% SWR or whatever your essentials expenses are.
Portfolio Charts' retirement spending calculator will let you model that in addition to limits to how much you increase/decrease annual withdrawals and income floors and ceilings. However, the data used only go back to 1970. Below are the results of a 60/40 AA (stock split between U.S. and ex-U.S.) with withdrawals beginning at 5% of the portfolio balance, spending cuts limited to -10% per year (e.g. no matter how much the portfolio dropped, annual spending would not drop by more than 10% in a single year from the prior year), and a floor of 4% of the starting inflation-adjusted balance.

Image

Image
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by iamblessed » Fri Sep 13, 2019 9:37 pm

Here is % Withdrawal on the Wellington https://www.youtube.com/watch?v=m3UuOLT1YZs

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by michaeljc70 » Fri Sep 13, 2019 9:48 pm

willthrill81 wrote:
Fri Sep 13, 2019 9:13 pm
michaeljc70 wrote:
Fri Sep 13, 2019 8:42 pm
CurlyDave wrote:
Tue Sep 10, 2019 12:34 pm
Before we get into too much of an uproar, I suggest everyone who doubts the 5% withdrawal number should go back and actually read the Trinity Study update. Try this link: https://www.onefpa.org/journal/Pages/Po ... 0Line.aspx . Try reading the black words on the white page -- do not insert your own prejudices or beliefs. And, read the whole thing, not just the parts you agree with.

The bottom line is that 4% inflation-adjusted is about right, but 7% non-adjusted is also just as good.

Somehow we all get fixated on the 4%, ignoring and criticizing the 7% advice, even though it is the very same study and authors.

Personally, I see a lot of advantages in the 7% non-adjusted plan. And, it is every bit as valid and tested as the 4% plan.
Is table 1 in that link incorrectly labeled? It says percent of initial portfolio value and not % of current portfolio value.

The other thing is, with a fixed % of portfolio withdrawal it is hard to run out of money but you may be getting $300 to live on for the year. Failure should probably be defined as a function of how low the withdrawals might be. It would be interesting to see the % of years the withdrawal was less than if you used a 4% SWR or whatever your essentials expenses are.
Portfolio Charts' retirement spending calculator will let you model that in addition to limits to how much you increase/decrease annual withdrawals and income floors and ceilings. However, the data used only go back to 1970. Below are the results of a 60/40 AA (stock split between U.S. and ex-U.S.) with withdrawals beginning at 5% of the portfolio balance, spending cuts limited to -10% per year (e.g. no matter how much the portfolio dropped, annual spending would not drop by more than 10% in a single year from the prior year), and a floor of 4% of the starting inflation-adjusted balance.

Image

Image
Thanks. I haven't used that calculator before. How did you get it to put a 40k floor? I only see a place for % reduction in the "Withdrawal Limit" column.

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Fri Sep 13, 2019 9:51 pm

michaeljc70 wrote:
Fri Sep 13, 2019 9:48 pm
Thanks. I haven't used that calculator before. How did you get it to put a 40k floor? I only see a place for % reduction in the "Withdrawal Limit" column.
By putting a -20% limit on the withdrawal limit (i.e. 5% - 20% = 4%).
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by abuss368 » Fri Sep 13, 2019 10:25 pm

BluesH wrote:
Mon Sep 09, 2019 2:09 pm
Have any of you seen this article from US News & World Report columnist Masood Vojdani?

https://money.usnews.com/money/blogs/th ... retirement

A 5% withdrawal rate seems pretty out there in today's environment, especially in light of recent discussions from people advocating 3.5%, 3%, or even 2%. But the article goes on:

"If you don't have children or other beneficiaries and want to spend your hard-earned money, consider withdrawing more. Some people are adamant that they want to spend most of their money before they pass away, and then distribute whatever is left to their favorite charitable causes.

If you and your financial advisor agree that you truly have more than enough money to last for what is an increasingly long life expectancy in the United States, and you are not concerned about drawing down your portfolio's assets, you can consider increasing your annual withdrawal to 7% or even 8% based on your level of wealth, lifestyle and expenses."

7 to 8% Really? That's downright reckless - unless you're in your 80s or 90s.

Comments?

Bob
That is crazy and until I heard investment professionals such as Vanguard discuss or recommend such a strategy I would not even waste time to read it. Market noise.
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by smectym » Fri Sep 13, 2019 10:45 pm

As to deciding how much and when to withdraw, eventually, the RMD’s take quite a bit of decision-making power out of our hands. And RMD’s remind us that the government would love for us to “live it up” because that’s more tax revenue sooner for the IRS. On some level, why should we care about paying more in taxes as long as our plan is working, we “have enough” and all that? Maybe. But sometimes when the happy talk about high portfolio withdrawal rates is in full career, it seems like the tax issue is forgotten, or deliberately ignored.

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Fri Sep 13, 2019 10:55 pm

smectym wrote:
Fri Sep 13, 2019 10:45 pm
As to deciding how much and when to withdraw, eventually, the RMD’s take quite a bit of decision-making power out of our hands. And RMD’s remind us that the government would love for us to “live it up” because that’s more tax revenue sooner for the IRS. On some level, why should we care about paying more in taxes as long as our plan is working, we “have enough” and all that? Maybe. But sometimes when the happy talk about high portfolio withdrawal rates is in full career, it seems like the tax issue is forgotten, or deliberately ignored.
RMDs have nothing to do with how much you spend. After pulling an RMD from a tax-advantaged account, you can immediately reinvest as much as you like of the the proceeds in a taxable brokerage account according to your investment strategy, and I have no doubt that many here do just that.
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by michaeljc70 » Fri Sep 13, 2019 10:56 pm

smectym wrote:
Fri Sep 13, 2019 10:45 pm
As to deciding how much and when to withdraw, eventually, the RMD’s take quite a bit of decision-making power out of our hands. And RMD’s remind us that the government would love for us to “live it up” because that’s more tax revenue sooner for the IRS. On some level, why should we care about paying more in taxes as long as our plan is working, we “have enough” and all that? Maybe. But sometimes when the happy talk about high portfolio withdrawal rates is in full career, it seems like the tax issue is forgotten, or deliberately ignored.
That's assuming the money is in a tIRA and not a taxable account or Roth. Sooner or later the taxes will be paid by you or your beneficiaries if it is a tIRA. Though I cannot predict future tax rates, if I had to bet I wouldn't bet that they will be lower in 10, 20 or 30 years.

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by smectym » Fri Sep 13, 2019 11:06 pm

michaeljc70 wrote:
Fri Sep 13, 2019 10:56 pm
smectym wrote:
Fri Sep 13, 2019 10:45 pm
As to deciding how much and when to withdraw, eventually, the RMD’s take quite a bit of decision-making power out of our hands. And RMD’s remind us that the government would love for us to “live it up” because that’s more tax revenue sooner for the IRS. On some level, why should we care about paying more in taxes as long as our plan is working, we “have enough” and all that? Maybe. But sometimes when the happy talk about high portfolio withdrawal rates is in full career, it seems like the tax issue is forgotten, or deliberately ignored.
That's assuming the money is in a tIRA and not a taxable account or Roth. Sooner or later the taxes will be paid by you or your beneficiaries if it is a tIRA. Though I cannot predict future tax rates, if I had to bet I wouldn't bet that they will be lower in 10, 20 or 30 years.
Fair points. But I think the base case for the 4% rule and related withdrawal strategies is some hypothetical, unitary “nest egg”
accrued in a tax-deferred plan. The reality of many households’ portfolios is of course more complicated—and ours is, too

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by JoMoney » Fri Sep 13, 2019 11:20 pm

The way I read it, the author says
"withdrawing 5% each year"
which implies something different than the traditional SWR methodology that sets a percentage at the first year, but is the prior years fixed amount + inflation in future years.

Withdrawing a percentage of whatever the portfolio's balance is each year, which might vary widely in amount as accounts fluctuate, would last indefinitely... although it could diminish in size that 5% of the remaining portfolio is too low to be viable... but of course you can have issues with the other style SWR to. A 4% withdrawal in the first year at the top of a market peak could mean an 8% withdrawal in subsequent years after the market falls.
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by CurlyDave » Fri Sep 13, 2019 11:53 pm

michaeljc70 wrote:
Fri Sep 13, 2019 8:42 pm
CurlyDave wrote:
Tue Sep 10, 2019 12:34 pm
Before we get into too much of an uproar, I suggest everyone who doubts the 5% withdrawal number should go back and actually read the Trinity Study update. Try this link: https://www.onefpa.org/journal/Pages/Po ... 0Line.aspx . Try reading the black words on the white page -- do not insert your own prejudices or beliefs. And, read the whole thing, not just the parts you agree with.

The bottom line is that 4% inflation-adjusted is about right, but 7% non-adjusted is also just as good.

Somehow we all get fixated on the 4%, ignoring and criticizing the 7% advice, even though it is the very same study and authors.

Personally, I see a lot of advantages in the 7% non-adjusted plan. And, it is every bit as valid and tested as the 4% plan.
Is table 1 in that link incorrectly labeled? It says percent of initial portfolio value and not % of current portfolio value.

The other thing is, with a fixed % of portfolio withdrawal it is hard to run out of money but you may be getting $300 to live on for the year. Failure should probably be defined as a function of how low the withdrawals might be. It would be interesting to see the % of years the withdrawal was less than if you used a 4% SWR or whatever your essentials expenses are.
Table 1 is correctly labeled for the study they did.

Now, an interesting side note is that one can re-start his retirement at any time. So, if after one year my portfolio has changed substantially, I can re-start my withdrawals and only have 29 years left to go. I have a nagging feeling that somehow this is "trolling for a failure" but the math doesn't say that it is.

The authors of the study do address the case of the portfolio declining substantially. Essentially this is not a completely mechanical scheme. There has to be a pilot with some intelligence in control. If the portfolio falls to some fraction of its initial value, spending reductions have to be made. OTOH, all of the failures come late in the game, and there is plenty of time to make the required adjustments. So you are not going to go from vacations on the Riveria to Alpo spaghetti sauce in one year, but you may have to cut back over time if the market is bad.

Another interesting feature of the 7% of initial portfolio withdrawal plan is that for a constant 3% inflation the first 18 years of withdrawals are higher than withdrawals with a 4% increased by inflation plan. [The math is 7/4 = 1.75, and (1.03)^18 = 1.702] . Of course there is no such thing as a free lunch, and the extra money comes at the price of terminal values being lower. This spending pattern seems to be more closely aligned with my perception of my physical capabilities as I age.

* * * * * * * * * * * *

On edit: As others have pointed out, if the failure criterion is running out of money, any percentage of the current portfolio will never produce a failure. OTOH, 7% of the initial portfolio can and does produce failures which makes the comparison to an inflation adjusted 4% more fair. While I have not asked them, I suspect this is the rationale behind the choices the authors made.

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by abuss368 » Sat Sep 14, 2019 7:04 am

michaeljc70 wrote:
Fri Sep 13, 2019 10:56 pm
smectym wrote:
Fri Sep 13, 2019 10:45 pm
As to deciding how much and when to withdraw, eventually, the RMD’s take quite a bit of decision-making power out of our hands. And RMD’s remind us that the government would love for us to “live it up” because that’s more tax revenue sooner for the IRS. On some level, why should we care about paying more in taxes as long as our plan is working, we “have enough” and all that? Maybe. But sometimes when the happy talk about high portfolio withdrawal rates is in full career, it seems like the tax issue is forgotten, or deliberately ignored.
That's assuming the money is in a tIRA and not a taxable account or Roth. Sooner or later the taxes will be paid by you or your beneficiaries if it is a tIRA. Though I cannot predict future tax rates, if I had to bet I wouldn't bet that they will be lower in 10, 20 or 30 years.
The tax impact is to often not considered.
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by MathIsMyWayr » Sat Sep 14, 2019 7:46 am

JoMoney wrote:
Fri Sep 13, 2019 11:20 pm
The way I read it, the author says
"withdrawing 5% each year"
which implies something different than the traditional SWR methodology that sets a percentage at the first year, but is the prior years fixed amount + inflation in future years.

Withdrawing a percentage of whatever the portfolio's balance is each year, which might vary widely in amount as accounts fluctuate, would last indefinitely... although it could diminish in size that 5% of the remaining portfolio is too low to be viable... but of course you can have issues with the other style SWR to. A 4% withdrawal in the first year at the top of a market peak could mean an 8% withdrawal in subsequent years after the market falls.
With withdrawing a FIXED percentage of whatever the portfolio's balance is each year, you eliminate SRR since there is no subtraction. As long as the withdrawal percentage is not greater than the expected long-term average return, the size of your portfolio does not shrink in the long run though that may not be what you are looking for. You may also gradually increase the withdrawal rate after IRS RMD rate.
Last edited by MathIsMyWayr on Sat Sep 14, 2019 8:43 am, edited 1 time in total.

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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by michaeljc70 » Sat Sep 14, 2019 8:32 am

CurlyDave wrote:
Fri Sep 13, 2019 11:53 pm
michaeljc70 wrote:
Fri Sep 13, 2019 8:42 pm
CurlyDave wrote:
Tue Sep 10, 2019 12:34 pm
Before we get into too much of an uproar, I suggest everyone who doubts the 5% withdrawal number should go back and actually read the Trinity Study update. Try this link: https://www.onefpa.org/journal/Pages/Po ... 0Line.aspx . Try reading the black words on the white page -- do not insert your own prejudices or beliefs. And, read the whole thing, not just the parts you agree with.

The bottom line is that 4% inflation-adjusted is about right, but 7% non-adjusted is also just as good.

Somehow we all get fixated on the 4%, ignoring and criticizing the 7% advice, even though it is the very same study and authors.

Personally, I see a lot of advantages in the 7% non-adjusted plan. And, it is every bit as valid and tested as the 4% plan.
Is table 1 in that link incorrectly labeled? It says percent of initial portfolio value and not % of current portfolio value.

The other thing is, with a fixed % of portfolio withdrawal it is hard to run out of money but you may be getting $300 to live on for the year. Failure should probably be defined as a function of how low the withdrawals might be. It would be interesting to see the % of years the withdrawal was less than if you used a 4% SWR or whatever your essentials expenses are.
Table 1 is correctly labeled for the study they did.

Now, an interesting side note is that one can re-start his retirement at any time. So, if after one year my portfolio has changed substantially, I can re-start my withdrawals and only have 29 years left to go. I have a nagging feeling that somehow this is "trolling for a failure" but the math doesn't say that it is.

The authors of the study do address the case of the portfolio declining substantially. Essentially this is not a completely mechanical scheme. There has to be a pilot with some intelligence in control. If the portfolio falls to some fraction of its initial value, spending reductions have to be made. OTOH, all of the failures come late in the game, and there is plenty of time to make the required adjustments. So you are not going to go from vacations on the Riveria to Alpo spaghetti sauce in one year, but you may have to cut back over time if the market is bad.

Another interesting feature of the 7% of initial portfolio withdrawal plan is that for a constant 3% inflation the first 18 years of withdrawals are higher than withdrawals with a 4% increased by inflation plan. [The math is 7/4 = 1.75, and (1.03)^18 = 1.702] . Of course there is no such thing as a free lunch, and the extra money comes at the price of terminal values being lower. This spending pattern seems to be more closely aligned with my perception of my physical capabilities as I age.

* * * * * * * * * * * *

On edit: As others have pointed out, if the failure criterion is running out of money, any percentage of the current portfolio will never produce a failure. OTOH, 7% of the initial portfolio can and does produce failures which makes the comparison to an inflation adjusted 4% more fair. While I have not asked them, I suspect this is the rationale behind the choices the authors made.
Seems like a bad withdrawal strategy and I'm not sure why they didn't consider the better/more common strategy of fixed % of current portfolio (also called the endowment method). Inflation will eat away at your withdrawals taking a fixed % of the starting portfolio and not adjusting it for inflation. I could see this suitable for short retirements only. After 22 years (assuming 3% inflation) you will be getting half (in real dollars) of what you started getting.

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willthrill81
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Sat Sep 14, 2019 10:11 am

MathIsMyWayr wrote:
Sat Sep 14, 2019 7:46 am
JoMoney wrote:
Fri Sep 13, 2019 11:20 pm
The way I read it, the author says
"withdrawing 5% each year"
which implies something different than the traditional SWR methodology that sets a percentage at the first year, but is the prior years fixed amount + inflation in future years.

Withdrawing a percentage of whatever the portfolio's balance is each year, which might vary widely in amount as accounts fluctuate, would last indefinitely... although it could diminish in size that 5% of the remaining portfolio is too low to be viable... but of course you can have issues with the other style SWR to. A 4% withdrawal in the first year at the top of a market peak could mean an 8% withdrawal in subsequent years after the market falls.
With withdrawing a FIXED percentage of whatever the portfolio's balance is each year, you eliminate SRR since there is no subtraction. As long as the withdrawal percentage is not greater than the expected long-term average return, the size of your portfolio does not shrink in the long run though that may not be what you are looking for. You may also gradually increase the withdrawal rate after IRS RMD rate.
Yes, a fixed percentage of portfolio approach eliminates sequence of returns risk, but it then introduces what some have referred to as sequence of income risk sine the sequence of returns impacts the size of the withdrawals (i.e. income). A SWR approach has no sequence of income risk but has sequence of returns risk. The opposite is true of a fixed percentage of portfolio approach. Strategies like the Guyton-Klinger guardrail approach are somewhere in between.
“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

michaeljc70
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by michaeljc70 » Sat Sep 14, 2019 10:24 am

willthrill81 wrote:
Sat Sep 14, 2019 10:11 am
MathIsMyWayr wrote:
Sat Sep 14, 2019 7:46 am
JoMoney wrote:
Fri Sep 13, 2019 11:20 pm
The way I read it, the author says
"withdrawing 5% each year"
which implies something different than the traditional SWR methodology that sets a percentage at the first year, but is the prior years fixed amount + inflation in future years.

Withdrawing a percentage of whatever the portfolio's balance is each year, which might vary widely in amount as accounts fluctuate, would last indefinitely... although it could diminish in size that 5% of the remaining portfolio is too low to be viable... but of course you can have issues with the other style SWR to. A 4% withdrawal in the first year at the top of a market peak could mean an 8% withdrawal in subsequent years after the market falls.
With withdrawing a FIXED percentage of whatever the portfolio's balance is each year, you eliminate SRR since there is no subtraction. As long as the withdrawal percentage is not greater than the expected long-term average return, the size of your portfolio does not shrink in the long run though that may not be what you are looking for. You may also gradually increase the withdrawal rate after IRS RMD rate.
Yes, a fixed percentage of portfolio approach eliminates sequence of returns risk, but it then introduces what some have referred to as sequence of income risk sine the sequence of returns impacts the size of the withdrawals (i.e. income). A SWR approach has no sequence of income risk but has sequence of returns risk. The opposite is true of a fixed percentage of portfolio approach. Strategies like the Guyton-Klinger guardrail approach are somewhere in between.
I think you are narrowly defining sequence of returns risk. As I view it, it isn't strictly about portfolio balance.

One definition is:
"The risk of receiving lower or negative returns early in a period when withdrawals are made from an investment
portfolio is known as sequence of return risk. "

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willthrill81
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Sat Sep 14, 2019 10:30 am

michaeljc70 wrote:
Sat Sep 14, 2019 10:24 am
willthrill81 wrote:
Sat Sep 14, 2019 10:11 am
MathIsMyWayr wrote:
Sat Sep 14, 2019 7:46 am
JoMoney wrote:
Fri Sep 13, 2019 11:20 pm
The way I read it, the author says
"withdrawing 5% each year"
which implies something different than the traditional SWR methodology that sets a percentage at the first year, but is the prior years fixed amount + inflation in future years.

Withdrawing a percentage of whatever the portfolio's balance is each year, which might vary widely in amount as accounts fluctuate, would last indefinitely... although it could diminish in size that 5% of the remaining portfolio is too low to be viable... but of course you can have issues with the other style SWR to. A 4% withdrawal in the first year at the top of a market peak could mean an 8% withdrawal in subsequent years after the market falls.
With withdrawing a FIXED percentage of whatever the portfolio's balance is each year, you eliminate SRR since there is no subtraction. As long as the withdrawal percentage is not greater than the expected long-term average return, the size of your portfolio does not shrink in the long run though that may not be what you are looking for. You may also gradually increase the withdrawal rate after IRS RMD rate.
Yes, a fixed percentage of portfolio approach eliminates sequence of returns risk, but it then introduces what some have referred to as sequence of income risk sine the sequence of returns impacts the size of the withdrawals (i.e. income). A SWR approach has no sequence of income risk but has sequence of returns risk. The opposite is true of a fixed percentage of portfolio approach. Strategies like the Guyton-Klinger guardrail approach are somewhere in between.
I think you are narrowly defining sequence of returns risk. As I view it, it isn't strictly about portfolio balance.

One definition is:
"The risk of receiving lower or negative returns early in a period when withdrawals are made from an investment
portfolio is known as sequence of return risk. "
Traditionally, sequence of returns risk has been discussed in terms of its impact on a portfolio balance since if one is using a SWR approach, the income is the same unless the portfolio is depleted.
“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

marcopolo
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by marcopolo » Sat Sep 14, 2019 11:59 am

willthrill81 wrote:
Sat Sep 14, 2019 10:30 am
michaeljc70 wrote:
Sat Sep 14, 2019 10:24 am
willthrill81 wrote:
Sat Sep 14, 2019 10:11 am
MathIsMyWayr wrote:
Sat Sep 14, 2019 7:46 am
JoMoney wrote:
Fri Sep 13, 2019 11:20 pm
The way I read it, the author says
"withdrawing 5% each year"
which implies something different than the traditional SWR methodology that sets a percentage at the first year, but is the prior years fixed amount + inflation in future years.

Withdrawing a percentage of whatever the portfolio's balance is each year, which might vary widely in amount as accounts fluctuate, would last indefinitely... although it could diminish in size that 5% of the remaining portfolio is too low to be viable... but of course you can have issues with the other style SWR to. A 4% withdrawal in the first year at the top of a market peak could mean an 8% withdrawal in subsequent years after the market falls.
With withdrawing a FIXED percentage of whatever the portfolio's balance is each year, you eliminate SRR since there is no subtraction. As long as the withdrawal percentage is not greater than the expected long-term average return, the size of your portfolio does not shrink in the long run though that may not be what you are looking for. You may also gradually increase the withdrawal rate after IRS RMD rate.
Yes, a fixed percentage of portfolio approach eliminates sequence of returns risk, but it then introduces what some have referred to as sequence of income risk sine the sequence of returns impacts the size of the withdrawals (i.e. income). A SWR approach has no sequence of income risk but has sequence of returns risk. The opposite is true of a fixed percentage of portfolio approach. Strategies like the Guyton-Klinger guardrail approach are somewhere in between.
I think you are narrowly defining sequence of returns risk. As I view it, it isn't strictly about portfolio balance.

One definition is:
"The risk of receiving lower or negative returns early in a period when withdrawals are made from an investment
portfolio is known as sequence of return risk. "
Traditionally, sequence of returns risk has been discussed in terms of its impact on a portfolio balance since if one is using a SWR approach, the income is the same unless the portfolio is depleted.
The risk is still due to sequence of returns. How it affects your life when the risk shows up is dependent on the withdrawal method. With SWR, you portfolio balance is negatively impacted, with fixed percentage, your income is negatively impacted. Either result is still due to the risk of bad sequence of returns.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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willthrill81
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Re: 5% Withdrawal Rate Recommended by US News Columnist

Post by willthrill81 » Sat Sep 14, 2019 12:01 pm

marcopolo wrote:
Sat Sep 14, 2019 11:59 am
willthrill81 wrote:
Sat Sep 14, 2019 10:30 am
michaeljc70 wrote:
Sat Sep 14, 2019 10:24 am
willthrill81 wrote:
Sat Sep 14, 2019 10:11 am
MathIsMyWayr wrote:
Sat Sep 14, 2019 7:46 am

With withdrawing a FIXED percentage of whatever the portfolio's balance is each year, you eliminate SRR since there is no subtraction. As long as the withdrawal percentage is not greater than the expected long-term average return, the size of your portfolio does not shrink in the long run though that may not be what you are looking for. You may also gradually increase the withdrawal rate after IRS RMD rate.
Yes, a fixed percentage of portfolio approach eliminates sequence of returns risk, but it then introduces what some have referred to as sequence of income risk sine the sequence of returns impacts the size of the withdrawals (i.e. income). A SWR approach has no sequence of income risk but has sequence of returns risk. The opposite is true of a fixed percentage of portfolio approach. Strategies like the Guyton-Klinger guardrail approach are somewhere in between.
I think you are narrowly defining sequence of returns risk. As I view it, it isn't strictly about portfolio balance.

One definition is:
"The risk of receiving lower or negative returns early in a period when withdrawals are made from an investment
portfolio is known as sequence of return risk. "
Traditionally, sequence of returns risk has been discussed in terms of its impact on a portfolio balance since if one is using a SWR approach, the income is the same unless the portfolio is depleted.
The risk is still due to sequence of returns. How it affects your life when the risk shows up is dependent on the withdrawal method. With SWR, you portfolio balance is negatively impacted, with fixed percentage, your income is negatively impacted. Either result is still due to the risk of bad sequence of returns.
Yes, but some here have suggested that we should differentiate between whether the portfolio or withdrawals are impacted for the sake of clarification.
“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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