Fixed Withdrawal Rate - 5 or 6%?

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vineviz
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by vineviz »

Marseille07 wrote: Wed Sep 28, 2022 6:23 pm $X/3 is a huge cut (-66%), bigger than 2008. VPW assumes -50% on 100/0.
It is, which is why I think we need to be careful not to blithely ignore the impact of SORR.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Marseille07
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Marseille07 »

vineviz wrote: Wed Sep 28, 2022 6:26 pm It is, which is why I think we need to be careful not to blithely ignore the impact of SORR.
Do you advise your clients to prepare for -66% when you plan their finances? I think VPW's required flexibility (-50% on 100/0, -30% on 60/40) is very reasonable.

Just to put it in some context, if you need 50K/year and have to prepare for -66% at 4% WR, you'd need to advise them to accumulate 3.75M.
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goodenyou
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by goodenyou »

If you are that concerned about a market crash of that magnitude, you'd be much better off buying a SPIA, so you can sleep at night without anxiety pills.
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nigel_ht
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by nigel_ht »

Marseille07 wrote: Wed Sep 28, 2022 6:23 pm
nigel_ht wrote: Wed Sep 28, 2022 6:18 pm
vineviz wrote: Wed Sep 28, 2022 5:45 pm
Marseille07 wrote: Wed Sep 28, 2022 2:48 pm
Cutting back spending via FWR, while not ideal, is not "the other very real harm." I'm puzzled why you think so.
If your living expenses are $X and a bad sequence of returns pushes your retirement income down to $X/3, that's a "very real harm".
Some variable withdrawal rate proponents don’t seem to believe this.
$X/3 is a huge cut (-66%), bigger than 2008. VPW assumes -50% on 100/0.
Factor in a little inflation…which isn’t part of that -50% test…

We repeat 2008 with the current inflation rate and it won’t be pretty.
Marseille07
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Marseille07 »

nigel_ht wrote: Wed Sep 28, 2022 6:41 pm Factor in a little inflation…which isn’t part of that -50% test…

We repeat 2008 with the current inflation rate and it won’t be pretty.
No need to worry. You have plenty of time to adjust your spending as you recalculate your newly required flexibility.
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vineviz
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by vineviz »

Marseille07 wrote: Wed Sep 28, 2022 6:29 pm
Do you advise your clients to prepare for -66% when you plan their finances?
I can't think of a client who uses a fixed withdrawal rate.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Marseille07 »

vineviz wrote: Wed Sep 28, 2022 7:01 pm
Marseille07 wrote: Wed Sep 28, 2022 6:29 pm
Do you advise your clients to prepare for -66% when you plan their finances?
I can't think of a client who uses a fixed withdrawal rate.
Maybe they know what they're doing and don't need to consult the professionals ;-)
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vineviz
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by vineviz »

Marseille07 wrote: Wed Sep 28, 2022 7:05 pm
vineviz wrote: Wed Sep 28, 2022 7:01 pm
Marseille07 wrote: Wed Sep 28, 2022 6:29 pm
Do you advise your clients to prepare for -66% when you plan their finances?
I can't think of a client who uses a fixed withdrawal rate.
Maybe they know what they're doing and don't need to consult the professionals ;-)
Or they know what they're doing because they listen to me . . . .
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Marseille07
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Marseille07 »

vineviz wrote: Thu Sep 29, 2022 6:23 am Or they know what they're doing because they listen to me . . . .
I'm not sure which withdrawal method you are recommending. FWR is not the only method but imo it is prudent to use a percentage in some way rather than constant-dollar.
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rocket354
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by rocket354 »

Timely conversation given I am on the cusp of early retirement and have spent the last few weeks going down every rabbit hole on withdrawal methods.

I've landed on FWR*. The asterisk is to reflect that I'm giving myself a floor. So I will be doing 4% FWR with a floor of 3% of the portfolio's beginning balance, adjusted for inflation. This can be modeled on cfiresim: $1mm starting portfolio, percent of portfolio, 4% yearly spend, floor of $30,000. 100% historical success rate. The worst-case scenario (1966, of course) is still ok, > 50% of starting balance remaining, and 5th- and 10th-percentile cases are just fine--87% and 99%, respectively. And I'm doing 40-year testing, to pull in all of the 1970's starting year data.

Using a fixed percentage with a floor seems to me to be the best of both worlds. I have the comfort of the original SWR method which allows for my spending to not drop below a certain threshold, and in the cases of a booming market I get to extract value from higher spending--in fact, my median inflation-adjusted spending is over 30% higher than my starting amount, across all tested periods. And that's not counting any SS or inheritances.

Even 5.5% with a floor has a 100% success rate, although the worst case scenario only gives me an $11k remaining portfolio balance on a hypothetical $1mm starting balance. If I wanted to spend every dollar I might go that way, but the median annual spend actually doesn't increase a whole lot (an additional 10% of initial spending amount) and the mean annual spending is actually slightly lower than the 4% method! So by drawing down more each year, I earn less in the good years and that ultimately keeps my portfolio balances and therefore my withdrawals lower, on average, as time goes on.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by nigel_ht »

rocket354 wrote: Thu Sep 29, 2022 9:31 am Timely conversation given I am on the cusp of early retirement and have spent the last few weeks going down every rabbit hole on withdrawal methods.

I've landed on FWR*. The asterisk is to reflect that I'm giving myself a floor. So I will be doing 4% FWR with a floor of 3% of the portfolio's beginning balance, adjusted for inflation. This can be modeled on cfiresim: $1mm starting portfolio, percent of portfolio, 4% yearly spend, floor of $30,000. 100% historical success rate. The worst-case scenario (1966, of course) is still ok, > 50% of starting balance remaining, and 5th- and 10th-percentile cases are just fine--87% and 99%, respectively. And I'm doing 40-year testing, to pull in all of the 1970's starting year data.

Using a fixed percentage with a floor seems to me to be the best of both worlds. I have the comfort of the original SWR method which allows for my spending to not drop below a certain threshold, and in the cases of a booming market I get to extract value from higher spending--in fact, my median inflation-adjusted spending is over 30% higher than my starting amount, across all tested periods. And that's not counting any SS or inheritances.

Even 5.5% with a floor has a 100% success rate, although the worst case scenario only gives me an $11k remaining portfolio balance on a hypothetical $1mm starting balance. If I wanted to spend every dollar I might go that way, but the median annual spend actually doesn't increase a whole lot (an additional 10% of initial spending amount) and the mean annual spending is actually slightly lower than the 4% method! So by drawing down more each year, I earn less in the good years and that ultimately keeps my portfolio balances and therefore my withdrawals lower, on average, as time goes on.
Yah, after a while talking with Marseille07 I decided to move to FWR with a floor. The numbers work out for us too.

The primary flourish is we're doing is a 10% Go-Go years cut out to front load spending in the 1st 10 years on top of whatever the FWR with floor provides.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Marseille07 »

nigel_ht wrote: Thu Sep 29, 2022 12:45 pm Yah, after a while talking with Marseille07 I decided to move to FWR with a floor. The numbers work out for us too.

The primary flourish is we're doing is a 10% Go-Go years cut out to front load spending in the 1st 10 years on top of whatever the FWR with floor provides.
FWR + floor is a mirrored version of SWR + ratcheting up. In the latter, SWR becomes the floor and ratcheting up acts like FWR.

I think it's very reasonable, the only issue is that the risk of failure goes up when you walk into a situation where SWR almost fails.
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dknightd
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by dknightd »

I wish I could figure this out. I'm thinking taking RMD when I'm required. My best guess is RMD will be enough. And apparently I have no choice. It is essentially required.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
grok87
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by grok87 »

dknightd wrote: Thu Nov 24, 2022 9:48 am I wish I could figure this out. I'm thinking taking RMD when I'm required. My best guess is RMD will be enough. And apparently I have no choice. It is essentially required.
not sure what you mean. you are required to take the money out and it may cause you to pay taxes on it (depending on your tax bracket etc.) but you can always reinvest...

cheers,
grok
RIP Mr. Bogle.
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goodenyou
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by goodenyou »

grok87 wrote: Thu Nov 24, 2022 10:11 am
dknightd wrote: Thu Nov 24, 2022 9:48 am I wish I could figure this out. I'm thinking taking RMD when I'm required. My best guess is RMD will be enough. And apparently I have no choice. It is essentially required.
not sure what you mean. you are required to take the money out and it may cause you to pay taxes on it (depending on your tax bracket etc.) but you can always reinvest...

cheers,
grok
If you don't take RMDs when required , you will pay a very hefty penalty.
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