SWR for Periodic “Re-Retirement”
SWR for Periodic “Re-Retirement”
EDIT: I changed the title from the word “occasional” to “periodic”.
A number of years ago, it occurred to me those retiring at the end of 2008, using a 4%SWR, would have much less to spend than those retiring a year earlier. This led to a discussion of the fact that the money has no memory of what it was worth in the past. The conversation evolved to me thinking that, at 4% SWR, you could “re-retire” any time your portfolio ended the year higher than at any prior year end, because money has no memory.
I think someone pointed to Larry Swedroe work (or maybe it was an older conversation) that quickly corrected me, by pointing out that if I did that, my risk of hitting a bad 30 year period would greatly increase. That this would greatly increase the odds of “re-retiring” into a period like/worse than 1929 or a 1966, with “drawdown stress” exemplified by those periods.
I’ve been thinking more about this lately. Here is my question: what IS the SWR to do it my way? If your portfolio goes down, the next year you take the prior year’s amount plus inflation. But in years where the year end number is higher than ever before, you “re-retire”, taking X% SWR from the new higher number. Apparently 4% is too risky if you keep “re-retiring”, even though it’s not too risky if you only retire once. What is the number that allows an increasing spend glidepath with either an inflation kicker OR new X% of the larger portfolio, whichever is greater?
A number of years ago, it occurred to me those retiring at the end of 2008, using a 4%SWR, would have much less to spend than those retiring a year earlier. This led to a discussion of the fact that the money has no memory of what it was worth in the past. The conversation evolved to me thinking that, at 4% SWR, you could “re-retire” any time your portfolio ended the year higher than at any prior year end, because money has no memory.
I think someone pointed to Larry Swedroe work (or maybe it was an older conversation) that quickly corrected me, by pointing out that if I did that, my risk of hitting a bad 30 year period would greatly increase. That this would greatly increase the odds of “re-retiring” into a period like/worse than 1929 or a 1966, with “drawdown stress” exemplified by those periods.
I’ve been thinking more about this lately. Here is my question: what IS the SWR to do it my way? If your portfolio goes down, the next year you take the prior year’s amount plus inflation. But in years where the year end number is higher than ever before, you “re-retire”, taking X% SWR from the new higher number. Apparently 4% is too risky if you keep “re-retiring”, even though it’s not too risky if you only retire once. What is the number that allows an increasing spend glidepath with either an inflation kicker OR new X% of the larger portfolio, whichever is greater?
Last edited by Leesbro63 on Mon May 30, 2022 6:59 am, edited 2 times in total.
Re: SWR for Occasional “Re-Retirement”
The duration drops.
If you use cFIREsim you can get a new SWR calculation for your remaining duration…
Your risk of hitting a bad sequence doesn’t matter since SWR assumes you hit it…
And finally…it’s essentially just doing 4% constant percentage. You can compare the results of 4% SWR vs 4% constant percentage in many retirement calculators…your risk is in a bad sequence your annual withdrawal may not meet your minimum expenses because you overspent in the good early years in comparison to constant dollar SWR.
If you use cFIREsim you can get a new SWR calculation for your remaining duration…
Your risk of hitting a bad sequence doesn’t matter since SWR assumes you hit it…
And finally…it’s essentially just doing 4% constant percentage. You can compare the results of 4% SWR vs 4% constant percentage in many retirement calculators…your risk is in a bad sequence your annual withdrawal may not meet your minimum expenses because you overspent in the good early years in comparison to constant dollar SWR.
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Re: SWR for Occasional “Re-Retirement”
Correct. If you "re-retire" at 4% then that's just changing the paradigm from constant-dollar to constant-percentage.nigel_ht wrote: ↑Sat May 28, 2022 8:36 pm And finally…it’s essentially just doing 4% constant percentage. You can compare the results of 4% SWR vs 4% constant percentage in many retirement calculators…your risk is in a bad sequence your annual withdrawal may not meet your minimum expenses because you overspent in the good early years in comparison to constant dollar SWR.
Besides, you lose one important aspect of SWR that constant-percentage doesn't have: stable withdrawals via CPI adjustments. You don't have that in constant-percentage.
Re: SWR for Occasional “Re-Retirement”
I think this is a fine idea. I don't see how it is worse than the scheme SWR withdrawal methods describe since yes, you are just theoretically joining another cohort of people using that scheme (presumably it is an ok scheme for them) but your horizon is shorter than theirs, which makes it even less risky.
But I don't think it's the same as constant percentage because of this
But I don't think it's the same as constant percentage because of this
So if you start off with a bunch of down / high-inflations years, your first year is withdrawal is 4%, but then maybe it's 5%, 6%, whatever, and would stay elevated until things recover, which could be a while.
Re: SWR for Occasional “Re-Retirement”
You both are missing the part that you only "re-retire" when the number is greater than the existing number. In down markets you are not decreasing spending so you do have stable withdrawals. This scheme has nothing in common with constant-percentage.Marseille07 wrote: ↑Sat May 28, 2022 8:43 pmCorrect. If you "re-retire" at 4% then that's just changing the paradigm from constant-dollar to constant-percentage.nigel_ht wrote: ↑Sat May 28, 2022 8:36 pm And finally…it’s essentially just doing 4% constant percentage. You can compare the results of 4% SWR vs 4% constant percentage in many retirement calculators…your risk is in a bad sequence your annual withdrawal may not meet your minimum expenses because you overspent in the good early years in comparison to constant dollar SWR.
Besides, you lose one important aspect of SWR that constant-percentage doesn't have: stable withdrawals via CPI adjustments. You don't have that in constant-percentage.
You would need a SWR with 0% failure rate. Historically that has been about 3.7% for 30 years and will slowly rise as your retirement duration decreases. That last year you can take out 100%.
It should also be pointed out that "money" does have memory. We normally ignore it but if you calculate your withdrawals off max portfolio value instead of current when you retire, you would have been fine historically. You can find the papers that talk about adjusting SWR based on valuations which is another way of looking at it.
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Re: SWR for Occasional “Re-Retirement”
I'm not missing anything. This idea is called "ratcheting" and it has been discussed several times before. I don't mean any disrespect but it isn't a new idea.randomguy wrote: ↑Sat May 28, 2022 9:11 pm You both are missing the part that you only "re-retire" when the number is greater than the existing number. In down markets you are not decreasing spending so you do have stable withdrawals. This scheme has nothing in common with constant-percentage.
You would need a SWR with 0% failure rate. Historically that has been about 3.7% for 30 years and will slowly rise as your retirement duration decreases. That last year you can take out 100%.
It should also be pointed out that "money" does have memory. We normally ignore it but if you calculate your withdrawals off max portfolio value instead of current when you retire, you would have been fine historically. You can find the papers that talk about adjusting SWR based on valuations which is another way of looking at it.
Re: SWR for Occasional “Re-Retirement”
What is riskier:jjj_22 wrote: ↑Sat May 28, 2022 9:09 pm I think this is a fine idea. I don't see how it is worse than the scheme SWR withdrawal methods describe since yes, you are just theoretically joining another cohort of people using that scheme (presumably it is an ok scheme for them) but your horizon is shorter than theirs, which makes it even less risky.
1) making 1 95% bet
or
2) Making a 95% bet and then a 97% bet?
Making that second bet gives you a second chance to be a loser. Or to put it simply in the old scheme the 1964 and 1965 succeed and the 1966 goes broke. With this new scheme all 3 go broke. By resetting you have gone from success to failure.
Now in the real world you might be failing 3x as often but the failures are getting milder. Instead of running out of money in year 27, you are doing it in year 28 or 29...
Re: SWR for Occasional “Re-Retirement”
Umm then why did you write this:Marseille07 wrote: ↑Sat May 28, 2022 9:13 pm
I'm not missing anything. This idea is called "ratcheting" and it has been discussed several times before. I don't mean any disrespect but it isn't a new idea.
this scheme has stable withdrawals that increase with CPI. And yes this scheme isn't new.Besides, you lose one important aspect of SWR that constant-percentage doesn't have: stable withdrawals via CPI adjustments. You don't have that in constant-percentage.
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Re: SWR for Occasional “Re-Retirement”
My mistake. Ratcheting is actually a decent idea, the only downside is it elevates your risk of failure when you retire in 1965 (1966 is the worst year) because you end up elevating spending before a terrible sequence hits in 1966 and later. And of course, you don't know ahead of time in 1965 that 1966 and beyond would bring a terrible sequence of returns.randomguy wrote: ↑Sat May 28, 2022 9:28 pm Umm then why did you write this:this scheme has stable withdrawals that increase with CPI. And yes this scheme isn't new.Besides, you lose one important aspect of SWR that constant-percentage doesn't have: stable withdrawals via CPI adjustments. You don't have that in constant-percentage.
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Re: SWR for Occasional “Re-Retirement”
Calculations done by William Bengen indicated that an initial withdrawal rate of 4.0%, with later withdrawal amounts adjusted for inflation, did not deplete 50:50 and 75:25 stock:bond portfolios in less than 30 years for all of the starting years for which he had data. An initial withdrawal rate of 4% has not been risky if one "re-retired".
Someone who started with an initial withdrawal rate higher than 4.0% on a starting year that supported a higher initial withdrawal rate and later "re-retired" at that higher rate could have depleted the portfolio in less than 30 years after the original starting year. That can occur when the "re-retire" year supported an initial withdrawal rate that is sufficient less than the higher rate.
Someone who started with an initial withdrawal rate higher than 4.0% on a starting year that supported a higher initial withdrawal rate and later "re-retired" at that higher rate could have depleted the portfolio in less than 30 years after the original starting year. That can occur when the "re-retire" year supported an initial withdrawal rate that is sufficient less than the higher rate.
Re: SWR for Occasional “Re-Retirement”
This is the difference between 100% success (Bengen) and 95% success (trinity). Begen's paper had the flaws of not including 1966 (didn't have 30 years at the time of being published) and looked at yearly results (1929 had a ~30% run up before crash. Retiring in Jan versus Oct made a big difference). If you believe that 4% never fails you can ramp up at any time. If you think it has 95% success, you can go from success to failure by ramping up.FactualFran wrote: ↑Sat May 28, 2022 9:42 pm Calculations done by William Bengen indicated that an initial withdrawal rate of 4.0%, with later withdrawal amounts adjusted for inflation, did not deplete 50:50 and 75:25 stock:bond portfolios in less than 30 years for all of the starting years for which he had data. An initial withdrawal rate of 4% has not been risky if one "re-retired".
Re: SWR for Occasional “Re-Retirement”
That works if it’s a good sequence but devastating when it’s not as you have increased spend in the good years where Constant Dollar is banking the money for leaner years in the future and you have no mechanism to dial down withdrawals during those future lean years.randomguy wrote: ↑Sat May 28, 2022 9:11 pmYou both are missing the part that you only "re-retire" when the number is greater than the existing number. In down markets you are not decreasing spending so you do have stable withdrawals. This scheme has nothing in common with constant-percentage.Marseille07 wrote: ↑Sat May 28, 2022 8:43 pmCorrect. If you "re-retire" at 4% then that's just changing the paradigm from constant-dollar to constant-percentage.nigel_ht wrote: ↑Sat May 28, 2022 8:36 pm And finally…it’s essentially just doing 4% constant percentage. You can compare the results of 4% SWR vs 4% constant percentage in many retirement calculators…your risk is in a bad sequence your annual withdrawal may not meet your minimum expenses because you overspent in the good early years in comparison to constant dollar SWR.
Besides, you lose one important aspect of SWR that constant-percentage doesn't have: stable withdrawals via CPI adjustments. You don't have that in constant-percentage.
Your worst case is probably the dot com boom and bust where you pushed your WR up during the boom years, spent the gains and then crashed hard. Then was spending down at that elevated WR during the downturn.You would need a SWR with 0% failure rate. Historically that has been about 3.7% for 30 years and will slowly rise as your retirement duration decreases. That last year you can take out 100%.
It should also be pointed out that "money" does have memory. We normally ignore it but if you calculate your withdrawals off max portfolio value instead of current when you retire, you would have been fine historically. You can find the papers that talk about adjusting SWR based on valuations which is another way of looking at it.
Re: SWR for Occasional “Re-Retirement”
So far the 2000 retiree using the 4% rule looks like they will make it. The combo of low inflation and good bond returns helped a lot. But yes this the problem. A 1998 retiree would have hit 2000 up about 20% and been looking at like a 3.3% SWR versus the 4% of this scheme. Thats obviously a lot riskier. Same thing for the 1927 or 1964 retiree.
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Re: SWR for Occasional “Re-Retirement”
There's no free lunch, if you elevate spending then the risk shows up somewhere.randomguy wrote: ↑Sat May 28, 2022 10:36 pm So far the 2000 retiree using the 4% rule looks like they will make it. The combo of low inflation and good bond returns helped a lot. But yes this the problem. A 1998 retiree would have hit 2000 up about 20% and been looking at like a 3.3% SWR versus the 4% of this scheme. Thats obviously a lot riskier. Same thing for the 1927 or 1964 retiree.
That said, I don't think this is a huge risk; I'm sure people would make adjustments when ratcheting goes south. The question is if they're better off ratcheting or following the SWR verbatim the whole time.
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Re: SWR for Occasional “Re-Retirement”
https://retireearlyhomepage.com/popr may be of interest.
Re: SWR for Occasional “Re-Retirement”
It is just a variation on variable withdrawal. Nothing special. As with any variable withdrawal, it has to match your variable spending. One way is to manage spending to match the controlled withdrawal. In my case, because I am not close to the abyss I do it in reverse. I manage the withdrawal to match the variable spending.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: SWR for Occasional “Re-Retirement”
Do what’s the number that avoids failure? SWR of 3.75%?randomguy wrote: ↑Sat May 28, 2022 9:58 pmThis is the difference between 100% success (Bengen) and 95% success (trinity). Begen's paper had the flaws of not including 1966 (didn't have 30 years at the time of being published) and looked at yearly results (1929 had a ~30% run up before crash. Retiring in Jan versus Oct made a big difference). If you believe that 4% never fails you can ramp up at any time. If you think it has 95% success, you can go from success to failure by ramping up.FactualFran wrote: ↑Sat May 28, 2022 9:42 pm Calculations done by William Bengen indicated that an initial withdrawal rate of 4.0%, with later withdrawal amounts adjusted for inflation, did not deplete 50:50 and 75:25 stock:bond portfolios in less than 30 years for all of the starting years for which he had data. An initial withdrawal rate of 4% has not been risky if one "re-retired".
Re: SWR for Occasional “Re-Retirement”
It's a bit complicated, as the answer varies a lot by portfolio. But you can calculate it directly using this Retirement Spending tool. It models the retirement experience of every investor (since 1970) using just about any portfolio and spending strategy you can think of.Leesbro63 wrote: ↑Sat May 28, 2022 8:09 pm I’ve been thinking more about this lately. Here is my question: what IS the SWR to do it my way? If your portfolio goes down, the next year you take the prior year’s amount plus inflation. But in years where the year end number is higher than ever before, you “re-retire”, taking X% SWR from the new higher number. Apparently 4% is too risky if you keep “re-retiring”, even though it’s not too risky if you only retire once. What is the number that allows an increasing spend glidepath with either an inflation kicker OR new X% of the larger portfolio, whichever is greater?
For reference, your proposal is most similar to the "Clyatt 95% Rule" outlined in the notes. But where he allows a 5% spending reduction in down years, you would simply change that setting to zero.
Re: SWR for Occasional “Re-Retirement”
That's not my strategy at all. In down years, even if there are a series of down years, my strategy allows for an inflation INCREASE. The goal is to never lower my standard of living whatsoever and to even have "boosts" after a good year. The cost of the strategy is that I'll have to start retirement with a lower withdrawal rate to begin with. (All of that being said, I am sure, as many have noted, that I won't exactly do any of this at all. But the gameplan serves as a good guide. The goal is to insure, as much as possible, that retirement has a steady (non-declining) standard of living with possible boosts if things are good.)Tyler9000 wrote: ↑Sun May 29, 2022 9:55 amIt's a bit complicated, as the answer varies a lot by portfolio. But you can calculate it directly using this Retirement Spending tool. It models the retirement experience of every investor (since 1970) using just about any portfolio and spending strategy you can think of.Leesbro63 wrote: ↑Sat May 28, 2022 8:09 pm I’ve been thinking more about this lately. Here is my question: what IS the SWR to do it my way? If your portfolio goes down, the next year you take the prior year’s amount plus inflation. But in years where the year end number is higher than ever before, you “re-retire”, taking X% SWR from the new higher number. Apparently 4% is too risky if you keep “re-retiring”, even though it’s not too risky if you only retire once. What is the number that allows an increasing spend glidepath with either an inflation kicker OR new X% of the larger portfolio, whichever is greater?
For reference, your proposal is most similar to the "Clyatt 95% Rule" outlined in the notes. But where he allows a 5% spending reduction in down years, you would simply change that setting to zero.
Re: SWR for Occasional “Re-Retirement”
That's exactly what the tool models. All numbers are adjusted for inflation to track constant purchasing power. So a "0% change" in the settings means that the withdrawal did not change in real terms even if it did change in nominal terms.
Re: SWR for Occasional “Re-Retirement”
Ok, I think I've got it now. Thank you. I guess I misunderstood. I'll play with this calculator.
Re: SWR for Occasional “Re-Retirement”
I am the original poster. So it seems that if 4% has a 95% chance of success, but you keep doing it over and over ("re-retiring" good year after good year), your overall chance of success is much lower. Best summed as retiring in 1963 and again in 1964 and again in 1965, but then re-retiring yet again in 1966 and failing.
So again I ask, what IS the math number that works? I would think that it's the highest SWR number that has shown a 100% success rate in prior years. Because a zero percent chance of failure, over and over, is still zero. I do get it that the future may not look like the past, etc and that there is no such thing as a guarantee.
But what is the math number to start SWRs at that, 100% IN THE PAST, survived "re-retirement" in any year that the portfolio ended higher than in any prior year end value?
So again I ask, what IS the math number that works? I would think that it's the highest SWR number that has shown a 100% success rate in prior years. Because a zero percent chance of failure, over and over, is still zero. I do get it that the future may not look like the past, etc and that there is no such thing as a guarantee.
But what is the math number to start SWRs at that, 100% IN THE PAST, survived "re-retirement" in any year that the portfolio ended higher than in any prior year end value?
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Re: SWR for Occasional “Re-Retirement”
I don't think we have an answer, unless someone performs analysis of ratcheting like ERN did on SWR in 2015 or whenever it was.
But here is some food for thought. As we pointed out, years like 1963~1965 pose threat to ratcheting because spending is elevated before a terrible year (1966). So "safe withdrawal rate" is necessarily going to be lower than 4%, perhaps something like 3.25% let's say.
And you do the ratcheting at 3.25% and go higher...after 23% of ratcheting, your withdrawal rate is back at 4%. So the question is...have you really gained anything by ratcheting?
Re: SWR for Occasional “Re-Retirement”
I'm not sure I understand your question. But I get your point that using a lower initial number might end up being the same or similar as to just using a standard 4%SWR and adjusting for inflation, with no ratchet-ups ever.Marseille07 wrote: ↑Sun May 29, 2022 11:09 amI don't think we have an answer, unless someone performs analysis of ratcheting like ERN did on SWR in 2015 or whenever it was.
But here is some food for thought. As we pointed out, years like 1963~1965 pose threat to ratcheting because spending is elevated before a terrible year (1966). So "safe withdrawal rate" is necessarily going to be lower than 4%, perhaps something like 3.25% let's say.
And you do the ratcheting at 3.25% and go higher...after 23% of ratcheting, your withdrawal rate is back at 4%. So the question is...have you really gained anything by ratcheting?
I still want to now "the number". But I get it that in the real world, most people would just do arbitrary "resets" from time to time after big changes. If you retired on 4% (with annual inflation kickers) at the end of 2008, and you're now half way through retirement, it's probably a good idea to "re-retire" on 4% of the new, much larger value, to prevent becoming the richest person in the cemetery. And if you retired at the end of 2021, you might want to "re-retire" on a 10-20% lower portfolio right now, because it's looking like you retired at the peak of a possible bubble.
But there still has to be an SWR percentage number that works for occasional "re-retirements" after every "new high" year.
Re: SWR for Occasional “Re-Retirement”
How to treat the remaining period of life when re-retiring and re-calculating the SWR?
Option 1) Decrease the period at each re-retirement. E.g.,
Retire in 1964, SWR is for a 30 year period.
Re-retire in 1965, SWR is for a 29 year period.
Re-retire in 1966, SWR is for a 28 year period.
Re-retire in 1967, SWR is for a 27 year period.
Option 2) Start over with a new 30 year period.
OP- which option are you interested in?
Option 1) Decrease the period at each re-retirement. E.g.,
Retire in 1964, SWR is for a 30 year period.
Re-retire in 1965, SWR is for a 29 year period.
Re-retire in 1966, SWR is for a 28 year period.
Re-retire in 1967, SWR is for a 27 year period.
Option 2) Start over with a new 30 year period.
OP- which option are you interested in?
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Re: SWR for Occasional “Re-Retirement”
Bengen included 1966 as a starting year. Because he had historical data up to 1992, he used the average of the historical data for the final few years with 1966 as the starting year. The results were marginally better using later known data than using the average data that Bengen used.randomguy wrote: ↑Sat May 28, 2022 9:58 pm This is the difference between 100% success (Bengen) and 95% success (trinity). Begen's paper had the flaws of not including 1966 (didn't have 30 years at the time of being published) and looked at yearly results (1929 had a ~30% run up before crash. Retiring in Jan versus Oct made a big difference). If you believe that 4% never fails you can ramp up at any time. If you think it has 95% success, you can go from success to failure by ramping up.
Using monthly withdrawals, starting in Jan. 1929 a 50:50 stock:bond portfolio that Bengen used supported 360 month of inflation-adjusted withdrawals when using an initial withdrawal rate of 5.5%, expressed as an annual rate. When starting in Oct. 1929 the supported initial withdrawal rate was 4.8%.
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Re: SWR for Occasional “Re-Retirement”
Well, as I said someone has to analyze ratcheting to find "the number." It exists, we just don't know what it is.Leesbro63 wrote: ↑Sun May 29, 2022 11:15 am I'm not sure I understand your question. But I get your point that using a lower initial number might end up being the same or similar as to just using a standard 4%SWR and adjusting for inflation, with no ratchet-ups ever.
I still want to now "the number". But I get it that in the real world, most people would just do arbitrary "resets" from time to time after big changes. If you retired on 4% (with annual inflation kickers) at the end of 2008, and you're now half way through retirement, it's probably a good idea to "re-retire" on 4% of the new, much larger value, to prevent becoming the richest person in the cemetery. And if you retired at the end of 2021, you might want to "re-retire" on a 10-20% lower portfolio right now, because it's looking like you retired at the peak of a possible bubble.
But there still has to be an SWR percentage number that works for occasional "re-retirements" after every "new high" year.
I mean, if you want to adjust upward as well as downward then you want to look at constant-percentage or 1/N method, rather than ratcheting.
Ratcheting itself isn't a bad idea. While you elevate the risk when you retire in 1963~1965, the risk is manageable in retirement.
Last edited by Marseille07 on Sun May 29, 2022 11:37 am, edited 1 time in total.
Re: SWR for Occasional “Re-Retirement”
Here are two charts from the link I mentioned that can help illustrate the difference. (My apologies for the image sizes, but they need to be pretty big to be legible). They model every retirement scenario since 1970, and they both assume that the retiree lived in the US and invested in 60% large cap blend and 40% intermediate treasuries. So the assumptions are pretty similar to most traditional retirement studies.
This first one follows the 4% rule and uses the standard withdrawal method where one simply adjusts their withdrawal by inflation every year. You can see that in the orange spending line that is perfectly flat (in real terms). Note that in the worst case, one of the green lines failed at 31 years.
The second one models the exact same portfolio but allows the withdrawal to ratchet up by an unlimited amount every year while never going down. I adjusted the initial withdrawal rate so that the worst-case retirement failed at the same 31 year mark. It worked out to 3%. Note the wide spread of withdrawal amounts and how it also tightened up the account values.
So to answer your question, a traditional 60/40 portfolio in the USA that followed a 3% withdrawal rate with unlimited upside ratcheting survived just as long (since 1970) as one that followed a 4% rule with constant spending. But tinker with any of the variables and those numbers can change.
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Re: SWR for Occasional “Re-Retirement”
This is excellent, thank you for running this.Tyler9000 wrote: ↑Sun May 29, 2022 11:37 amHere are two charts from the link I mentioned that can help illustrate the difference. (My apologies for the image sizes, but they need to be pretty big to be legible). They model every retirement scenario since 1970, and they both assume that the retiree lived in the US and invested in 60% large cap blend and 40% intermediate treasuries. So the assumptions are pretty similar to most traditional retirement studies.
This first one follows the 4% rule and uses the standard withdrawal method where one simply adjusts their withdrawal by inflation every year. You can see that in the orange spending line that is perfectly flat (in real terms). Note that in the worst case, one of the green lines failed at 31 years.
The second one models the exact same portfolio but allows the withdrawal to ratchet up by an unlimited amount every year while never going down. I adjusted the initial withdrawal rate so that the worst-case retirement failed at the same 31 year mark. It worked out to 3%. Note the wide spread of withdrawal amounts and how it also tightened up the account values.
So to answer your question, a traditional 60/40 portfolio in the USA that followed a 3% withdrawal rate with unlimited upside ratcheting survived just as long (since 1970) as one that followed a 4% rule with constant spending. But tinker with any of the variables and those numbers can change.
Re: SWR for Occasional “Re-Retirement”
This is excellent indeed. I’m smart enough to know the questions but not smart enough to run those scenarios to get the answer.Tyler9000 wrote: ↑Sun May 29, 2022 11:37 amHere are two charts from the link I mentioned that can help illustrate the difference. (My apologies for the image sizes, but they need to be pretty big to be legible). They model every retirement scenario since 1970, and they both assume that the retiree lived in the US and invested in 60% large cap blend and 40% intermediate treasuries. So the assumptions are pretty similar to most traditional retirement studies.
This first one follows the 4% rule and uses the standard withdrawal method where one simply adjusts their withdrawal by inflation every year. You can see that in the orange spending line that is perfectly flat (in real terms). Note that in the worst case, one of the green lines failed at 31 years.
The second one models the exact same portfolio but allows the withdrawal to ratchet up by an unlimited amount every year while never going down. I adjusted the initial withdrawal rate so that the worst-case retirement failed at the same 31 year mark. It worked out to 3%. Note the wide spread of withdrawal amounts and how it also tightened up the account values.
So to answer your question, a traditional 60/40 portfolio in the USA that followed a 3% withdrawal rate with unlimited upside ratcheting survived just as long (since 1970) as one that followed a 4% rule with constant spending. But tinker with any of the variables and those numbers can change.
So if I retire on 2% and re-retire in good years or take just an inflation kicker in bad years, I’ll be fine!
Re: SWR for Occasional “Re-Retirement”
You prob do not need 2%. It may work at 2.5 or 2.6%. Depends on how long you intend to live and/or how much of a legacy to leave behind.Leesbro63 wrote: ↑Sun May 29, 2022 11:44 amThis is excellent indeed. I’m smart enough to know the questions but not smart enough to run those scenarios to get the answer.Tyler9000 wrote: ↑Sun May 29, 2022 11:37 amHere are two charts from the link I mentioned that can help illustrate the difference. (My apologies for the image sizes, but they need to be pretty big to be legible). They model every retirement scenario since 1970, and they both assume that the retiree lived in the US and invested in 60% large cap blend and 40% intermediate treasuries. So the assumptions are pretty similar to most traditional retirement studies.
This first one follows the 4% rule and uses the standard withdrawal method where one simply adjusts their withdrawal by inflation every year. You can see that in the orange spending line that is perfectly flat (in real terms). Note that in the worst case, one of the green lines failed at 31 years.
The second one models the exact same portfolio but allows the withdrawal to ratchet up by an unlimited amount every year while never going down. I adjusted the initial withdrawal rate so that the worst-case retirement failed at the same 31 year mark. It worked out to 3%. Note the wide spread of withdrawal amounts and how it also tightened up the account values.
So to answer your question, a traditional 60/40 portfolio in the USA that followed a 3% withdrawal rate with unlimited upside ratcheting survived just as long (since 1970) as one that followed a 4% rule with constant spending. But tinker with any of the variables and those numbers can change.
So if I retire on 2% and re-retire in good years or take just an inflation kicker in bad years, I’ll be fine!
Re: SWR for Occasional “Re-Retirement”
It seems that the VPW method described in the WIKI Sticky might get to what it seems you may be trying to accomplish...but without a fixed number.Leesbro63 wrote: ↑Sat May 28, 2022 8:09 pm A number of years ago, it occurred to me those retiring at the end of 2008, using a 4%SWR, would have much less to spend than those retiring a year earlier. This led to a discussion of the fact that the money has no memory of what it was worth in the past. The conversation evolved to me thinking that, at 4% SWR, you could “re-retire” any time your portfolio ended the year higher than at any prior year end, because money has no memory.
I think someone pointed to Larry Swedroe work (or maybe it was an older conversation) that quickly corrected me, by pointing out that if I did that, my risk of hitting a bad 30 year period would greatly increase. That this would greatly increase the odds of “re-retiring” into a period like/worse than 1929 or a 1966, with “drawdown stress” exemplified by those periods.
I’ve been thinking more about this lately. Here is my question: what IS the SWR to do it my way? If your portfolio goes down, the next year you take the prior year’s amount plus inflation. But in years where the year end number is higher than ever before, you “re-retire”, taking X% SWR from the new higher number. Apparently 4% is too risky if you keep “re-retiring”, even though it’s not too risky if you only retire once. What is the number that allows an increasing spend glidepath with either an inflation kicker OR new X% of the larger portfolio, whichever is greater?
"Variable percentage withdrawal (VPW) is a method which adapts portfolio withdrawal amounts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio."
Re: SWR for Occasional “Re-Retirement”
No. For VPW the amount he gets per year may drop. The method he would like would go up but not down. In bad years he just wants to take the COLA and not increase.Jeepergeo wrote: ↑Sun May 29, 2022 12:55 pmIt seems that the VPW method described in the WIKI Sticky might get to what it seems you may be trying to accomplish...but without a fixed number.Leesbro63 wrote: ↑Sat May 28, 2022 8:09 pm A number of years ago, it occurred to me those retiring at the end of 2008, using a 4%SWR, would have much less to spend than those retiring a year earlier. This led to a discussion of the fact that the money has no memory of what it was worth in the past. The conversation evolved to me thinking that, at 4% SWR, you could “re-retire” any time your portfolio ended the year higher than at any prior year end, because money has no memory.
I think someone pointed to Larry Swedroe work (or maybe it was an older conversation) that quickly corrected me, by pointing out that if I did that, my risk of hitting a bad 30 year period would greatly increase. That this would greatly increase the odds of “re-retiring” into a period like/worse than 1929 or a 1966, with “drawdown stress” exemplified by those periods.
I’ve been thinking more about this lately. Here is my question: what IS the SWR to do it my way? If your portfolio goes down, the next year you take the prior year’s amount plus inflation. But in years where the year end number is higher than ever before, you “re-retire”, taking X% SWR from the new higher number. Apparently 4% is too risky if you keep “re-retiring”, even though it’s not too risky if you only retire once. What is the number that allows an increasing spend glidepath with either an inflation kicker OR new X% of the larger portfolio, whichever is greater?
"Variable percentage withdrawal (VPW) is a method which adapts portfolio withdrawal amounts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio."
Tyler's analysis and tool provides him with a starting number around 2.5% and he can continue to ramp up in good years without needing any flexibility to drop below the initial lifestyle. So long as we don't see an outcome worse than historical then the likelihood of success is high.
That said, if you use that same 2.5% or 2.6% as a floor for VPW it might work out anyway except that any lifestyle inflation would have to be given up to go back to that initial retirement budget. I don't believe that a floor is part of the VPW worksheet but the FICalc (and others) lets you set one.
Re: SWR for Occasional “Re-Retirement”
Tyler9000 wrote: ↑Sun May 29, 2022 11:37 am
So to answer your question, a traditional 60/40 portfolio in the USA that followed a 3% withdrawal rate with unlimited upside ratcheting survived just as long (since 1970) as one that followed a 4% rule with constant spending. But tinker with any of the variables and those numbers can change.
Can you explain why this answer makes sense? Since the person ratcheting up is never spending more than a 4% person (of either from a prior year or this year), why are they failing when the group who started with the same withdrawal and same portfolio size doesn't? Maybe with deflation I can see how this happens depending on how you account for that but there was basically none of that over this time period.
If you put in 4%, real spending rises in every case after ~6 years. That doesn't seem remotely correct. The 1973 retiree stocks would have been off about 30% real and didn't get back to breakeven til 84. Bonds were off about 25% over that time period. And the nominal withdrawals should be less than real ones from prior years. It seems to me very unlikely that you should have had any spending increase. I am wondering if something slightly different than the this rule is being used or if somehow real and nominal dollars are getting mixed up somewhere.
Re: SWR for Occasional “Re-Retirement”
Ah -- very good point.randomguy wrote: ↑Sun May 29, 2022 6:24 pmTyler9000 wrote: ↑Sun May 29, 2022 11:37 am
So to answer your question, a traditional 60/40 portfolio in the USA that followed a 3% withdrawal rate with unlimited upside ratcheting survived just as long (since 1970) as one that followed a 4% rule with constant spending. But tinker with any of the variables and those numbers can change.
Can you explain why this answer makes sense? Since the person ratcheting up is never spending more than a 4% person (of either from a prior year or this year), why are they failing when the group who started with the same withdrawal and same portfolio size doesn't? Maybe with deflation I can see how this happens depending on how you account for that but there was basically none of that over this time period.
If you put in 4%, real spending rises in every case after ~6 years. That doesn't seem remotely correct. The 1973 retiree stocks would have been off about 30% real and didn't get back to breakeven til 84. Bonds were off about 25% over that time period. And the nominal withdrawals should be less than real ones from prior years. It seems to me very unlikely that you should have had any spending increase. I am wondering if something slightly different than the this rule is being used or if somehow real and nominal dollars are getting mixed up somewhere.
The short story is that I misinterpreted the OP's scenario.
The ratcheting chart I showed allowed a spending increase any time the portfolio went up, regardless of the portfolio value. It could be down 30% and have one positive year of +10% and still ratchet up that 10%. What he really wanted (and what you described) is for the spending to ratchet up only if the portfolio was at a new all-time high. That is definitely more conservative and makes a lot more sense.
Here's a corrected chart with the proper settings to model that:
As you can see, the initial 4% withdrawal rate applies to both spending methods. For the unluckiest retiree, spending tracked sideways with a simple inflation adjustment before failing at the same 31-year mark that one would expect with no ratcheting. And for everyone else, it increased as portfolio values rose.
Good catch. Thank you!
Re: SWR for Occasional “Re-Retirement”
That makes sense. For fun, run it with a 4.5% withdrawal so you get some failures before 30 years. If I did it right you go from 4 failures(1 before 30 years) to 20 (5 before 30 years) failures. This is basically exactly what I would expect as 1973 fails in either case but with ratcheting up 1970,1971,1972 (and 1 random year. ) probably also fail. When you look at the charts most of the income lines rise sharply and then go flat. If I had to guess that is year 2000 where once that is hit, portfolios will never increase. And it should be pointed out that some of these "failure" cases are spending 3x of the starting value. Thats a lot of lifestyle creep....Tyler9000 wrote: ↑Sun May 29, 2022 9:18 pm
Ah -- very good point.
The short story is that I misinterpreted the OP's scenario.
The ratcheting chart I showed allowed a spending increase any time the portfolio went up, regardless of the portfolio value. It could be down 30% and have one positive year of +10% and still ratchet up that 10%. What he really wanted (and what you described) is for the spending to ratchet up only if the portfolio was at a new all-time high. That is definitely more conservative and makes a lot more sense.