Safe Withdrawal Rates ? Complexity vs. Simplicity

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Safe Withdrawal Rates ? Complexity vs. Simplicity

Post by Taylor Larimore » Thu Apr 21, 2011 9:31 pm

Hi Bogleheads:

One of the great mysteries to me are the Great Debates over Safe Withdrawal Rates (SWR).

I put Safe Withdrawal Rates into Google and it came up with more than 16,000 hits. One wonders how people managed to retire without knowing their "SWR."

Mathematicians love numbers. Fortunately for them, the stock and bond markets spew-out millions of numbers every day which are carefully preserved and available for them to analyze. Unfortunately for us, past performance numbers do not predict future performance.

I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

This is what most people do and it works.
"There seems to be some perverse human characteristic that likes to make easy things difficult."--Warren Buffet
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by livesoft » Thu Apr 21, 2011 9:40 pm

1982 was the start of something in the stock market, what was it called again?

Oh, yeah, The Great U.S. Bull Market

You could not have timed it more perfectly. :)
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Post by Taylor Larimore » Thu Apr 21, 2011 9:52 pm

livesoft wrote:1982 was the start of something in the stock market, what was it called again?

Oh, yeah, The Great U.S. Bull Market

You could not have timed it more perfectly. :)
Hi livesoft:

And all this time I thought our investment success was my brilliant stock picks. In truth it was market-timing. :roll:
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by joe8d » Thu Apr 21, 2011 10:02 pm

I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

This is what most people do and it works.

Quote:
"There seems to be some perverse human characteristic that likes to make easy things difficult."--Warren Buffet

Excellent advice Taylor.
All the Best, | Joe

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Post by bobcat2 » Thu Apr 21, 2011 10:06 pm

Yes, as Livesoft has noted, 1982 was the beginning of a great bull stock market that lasted until early 2000 in the US. Furthermore, 1982 was the beginning of a great US bull bond market that went even longer. Almost any retirement withdrawal strategy you employed with a US retirement portfolio from 1982 through 1999 would have worked extremely well, regardless of whether the strategy was canny or inane. Everyone can not be that lucky when they pick their retirement year. For instance, a Japanese investor retiring in 1990 and keeping a substantial portion of her portfolio in the superbly performing Japanese stock market of the 80s in order to "protect her retirement from the ravages of inflation in the 90s and beyond" wouldn't have done well, regardless of the withdrawal strategy she picked.

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Post by grayfox » Thu Apr 21, 2011 10:19 pm

For the 30-year period from 1980-2009, the Maximum Withdrawal Rate (MWR) of a 50/50 Large Stocks/Bonds portfolio was 8.27%

from MWR.xls from bobsfinancialwebsite.com

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Post by jidina80 » Fri Apr 22, 2011 12:26 am

Maybe you were lucky on timing, Taylor, but your words also ring true.

When in retirement, I doubt many people stick to a formula for withdrawals. I know I don't. I watch the balance and adjust accordingly.

That said, it is important to have planning factors, so we don't retire earlier than we should. We need planning factors, and I think the 4% rule is a good, simple, one.

Maybe there are two levels of rules: The simple ones, such as the 4% withdrawal rule and the age-in-bonds rule, and then, if you want refinement, here's more.....

Thank you, Taylor, for helping to ground us to the basics.

Just.

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Post by paulsiu » Fri Apr 22, 2011 12:52 am

Taylor,

The withdraw rule is useful if you are trying to calculate how much you need to save. Many people on this forum often ask about their asset allocation, but we rarely ask how much they are saving. For example, person is using a 70/30 portfolio which is pretty good on the efficient frontier, but if that person is saving like 1% of income, that portfolio isn't going to work.

The withdraw rates allow someone to estimate how big of a portfolio they need. If you need $40K a year, then $1 million (inflation adjusted of course). if you need $80K a year, then $2 million. Now work backwards to see how much you need to save. Course adjust if necessary.

Obviously, this is not going to be what you get at retirement, People will probably adjust. Luck probably is a factor, too. If you retire in the terrible 2008 market, then you may be better off living off SS. Not everyone has that luxury though. What if you have health issue and can't reduce your withdraw?

In addition, you are fortunate to be a realist. Most people are or at least become so once the retirement situation sets in. On the flip-side, I recall an article about a financial advisor who's client retired with $2 million, which seems to be in good shape, but then he tells the advisor that he needs $200K a year, plus a boat. The advisor tells him that would be ill-advised, but the lawyer tells him that he must!

Paul

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Post by wade » Fri Apr 22, 2011 12:58 am

Thank you, Mr. Larimore.

While most people certainly follow your approach of withdrawing funds as needed, the trouble is that it is hard to model such discretionary behavior. Hence, the discussion turns to rules like constant inflation-adjusted withdrawals.

But to those who are suggesting that Taylor was "lucky" to retire in 1982, I earlier had such a thought, but it led me to write a paper about safe savings rates, instead of safe withdrawal rates. You see, while the 1982 retiree will get to enjoy one of the highest sustainable withdrawal rates in US history, this retiree also had to endure using one of the highest savings rates in history to obtain a particular wealth accumulation goal by their retirement date. It kind of all works out in the end...

Image

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Post by retcaveman » Fri Apr 22, 2011 5:25 am

Taylor Larimore wrote:
livesoft wrote:1982 was the start of something in the stock market, what was it called again?

Oh, yeah, The Great U.S. Bull Market

You could not have timed it more perfectly. :)
Hi livesoft:

And all this time I thought our investment success was my brilliant stock picks. In truth it was market-timing. :roll:
And then there are those of us who retired 1-1-2000. Ouch! Actually, by being very conservative, we have done well. After 12 years of retirement, our net worth is at an all time high. The result of a lot of savings and conservative investing. "Living beneath your means" and "saving" is too often under-appreciated.

Best wishes.
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Post by nisiprius » Fri Apr 22, 2011 6:24 am

Bless you, Taylor.

In reality, we spend our preretirement lives dealing with fluctuating incomes and fluctuating expenses, and we adapt our lifestyle to our income. At age 30, we don't sit down with some Monte Carlo simulator and say "based on the statistical average of all careers in the United States, there's a 94.3% chance that I can spend $3141.59 a month, indexed by inflation, and never overdraw my checking account."

I don't see why things should change in retirement. We're counting more on our adaptability than on the predictability of our investment returns.
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Post by Rodc » Fri Apr 22, 2011 8:22 am

wade wrote:Thank you, Mr. Larimore.

While most people certainly follow your approach of withdrawing funds as needed, the trouble is that it is hard to model such discretionary behavior. Hence, the discussion turns to rules like constant inflation-adjusted withdrawals.

But to those who are suggesting that Taylor was "lucky" to retire in 1982, I earlier had such a thought, but it led me to write a paper about safe savings rates, instead of safe withdrawal rates. You see, while the 1982 retiree will get to enjoy one of the highest sustainable withdrawal rates in US history, this retiree also had to endure using one of the highest savings rates in history to obtain a particular wealth accumulation goal by their retirement date. It kind of all works out in the end...

Image
That is an important point that is often overlooked.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Post by Rodc » Fri Apr 22, 2011 8:25 am

nisiprius wrote:Bless you, Taylor.

In reality, we spend our preretirement lives dealing with fluctuating incomes and fluctuating expenses, and we adapt our lifestyle to our income. At age 30, we don't sit down with some Monte Carlo simulator and say "based on the statistical average of all careers in the United States, there's a 94.3% chance that I can spend $3141.59 a month, indexed by inflation, and never overdraw my checking account."

I don't see why things should change in retirement. We're counting more on our adaptability than on the predictability of our investment returns.
Exactly.

Other than as rough planning number, the entire genre of SWR makes no sense. Since only a rough planning number makes sense, the 15 million pages is mostly wasted energy. At least it is not all wasted trees.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Post by ResNullius » Fri Apr 22, 2011 8:51 am

I think the point is to spend what you need, then save everything else. Our needs in retirement are no greater than they were the week before I retired. Whether they are less remains to be seen. I think the real issue is to be reasonable and flexible.

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Post by Dandy » Fri Apr 22, 2011 9:36 am

I think the 4% type "rules" help counter the investment companies and media that sometimes suggest you can withdraw much more. I have seen many articles that hype a much higher "safe" withdrawal rate. Just like people chase yields they chase stories that they can draw down more and be "safe".

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Post by bobcat2 » Fri Apr 22, 2011 10:24 am

The basic problem here is that attempting to calculate SWRs from a volatile portfolio to generate reliable income during retirement is not a prudent investment plan - period. If you are going to put 30% or more of your retirement portfolio into high expected return risky assets you have to avoid bad luck for this to work.

For retirement income to be truly reliable it will have to come from safe assets that have contingent claims properties and not from a portfolio that contains a significant allocation to equities. As a practical matter for most people that means that safe reliable retirement income will come from four sources: Social Security, db pensions, TIPS/Ibonds, and life annuities, preferably inflation adjusted. A fifth source of reliable retirement income for at least some people would be an annuity like stream of income from a reverse mortgage. None of the safe retirement income from any of these products has anything to do with so-called "Safe Withdrawal Rates". Some of retirement income can of course come from withdrawals from a portfolio that contains a significant allocation to equities. But that portion of your retirement income will not be safe and reliable. Instead it will be unreliable, but it will offer upside potential to your retirement income if equities perform as expected or better.
In reality, we spend our preretirement lives dealing with fluctuating incomes and fluctuating expenses, and we adapt our lifestyle to our income....
I don't see why things should change in retirement.
During pre-retirement we have many more options for dealing with fluctuating income than we have at our disposal during retirement. Prudent retirement planning requires that we structure the retirement plan to minimize income fluctuations during retirement.
Mathematicians love numbers.
Those that champion SWRs tend to be practitioners who spend a lot of time manipulating data in spreadsheets. These are not mathematicians and that is relatively low level math. Economists who do have a lot of formal math training are able to glean from their mathematical models that the SWR approach to retirement planning is dominated by the life-cycle finance approach to retirement planning, which emphasizes contingent claims like products to provide safe income.

Finally a break for those who retired in 1982. Life-cycle finance was not as well understood then as it is today nearly 30 years later. More importantly, about the only people who knew about it then were the few economists writing papers about life-cycle finance. Also TIPS, Ibonds, and inflation-indexed life annuities did not exist then as sources of safe retirement income. So developing a retirement plan using an informal 4% WR rule was about as good as you could do in 1982. That is not true today.

BobK
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Post by midareff » Fri Apr 22, 2011 10:33 am

That was a perfect time to retire Taylor. I've been reading Otar's book on the Retirement Myth and am about 110 pages in so far. His point about an accumulation portfolio and a distribution portfolio behaving so differently makes perfect sense, as do all his points about luck of the draw retirement timing and the importance of those first few years to portfolio longevity.

You picked well :-)

Cheers

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Post by LarryG » Fri Apr 22, 2011 10:36 am

Our monthly withdrawals for living expenses, plus tax, plus gifts to children are about 4% of our portfolio. This is not a targeted amount.
We have found that our expenses have remained fairly constant since I retired. All of our income is from my IRA. At the present time I am getting more taxable income than before retirement.
As a result of the RMD our taxes go up each year.
The value of my IRA is more than when I retired in 1998.

Regards

LarryG.

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Reason for a larger portfolio.

Post by Taylor Larimore » Fri Apr 22, 2011 10:42 am

Hi Larry:
The value of my IRA is more than when I retired in 1998.
I'll venture a guess it is largely because you became a Boglehead when I met you at Boglehead 2.
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by bobcat2 » Fri Apr 22, 2011 10:52 am

Hi Larry,

You wrote.
All of our income is from my IRA.
Is that true? You really don't have any retirement income from Social Security or a DB pension plan?

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: Safe Withdrawal Rates ? Complexity vs. Simplicity

Post by Oneanddone » Fri Apr 22, 2011 12:09 pm

Taylor Larimore wrote:Hi Bogleheads:

One of the great mysteries to me are the Great Debates over Safe Withdrawal Rates (SWR).

I put Safe Withdrawal Rates into Google and it came up with more than 15 million hits. One wonders how people managed to retire without knowing their "SWR."

Mathematicians love numbers. Fortunately for them, the stock and bond markets spew-out millions of numbers every day which are carefully preserved and available for them to analyze. Unfortunately, past performance numbers do not predict future performance.

I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

This is what most people do and it works.
"There seems to be some perverse human characteristic that likes to make easy things difficult."--Warren Buffet
Taylor, thanks so much for writing this. All of the SWR stuff drives me crazy. A person isn't going to keep spending the same (+inflation) if their investments are way up and their time span is getting shorter. It's also true (or should be) if their investments are getting hammered.

I believe that the SWR should be nothing more than a target.

Ex. "Jim" wants to retire in 20 years with a big enough portfolio to maintain a $5,000/month standard of living. With 3% inflation, he'll need about $108,000 in that first year. Based upon a 4% SWR, he needs to accumulate around $2,700,000.

We can then very quickly figure out if this is plausible for him and what needs to be done and it is better to find out now that he needs to make significant changes in his life and/or goals.

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Re: Safe Withdrawal Rates ? Complexity vs. Simplicity

Post by unclemick » Fri Apr 22, 2011 12:23 pm

Taylor Larimore wrote:Hi Bogleheads:

One of the great mysteries to me are the Great Debates over Safe Withdrawal Rates (SWR).

I put Safe Withdrawal Rates into Google and it came up with more than 15 million hits. One wonders how people managed to retire without knowing their "SWR."

Mathematicians love numbers. Fortunately for them, the stock and bond markets spew-out millions of numbers every day which are carefully preserved and available for them to analyze. Unfortunately, past performance numbers do not predict future performance.

I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

This is what most people do and it works.
"There seems to be some perverse human characteristic that likes to make easy things difficult."--Warren Buffet
Jan 1993, age 49 1/9. Ditto. Bill Bernstein's Efficient Frontier website articles were my first exposure to withdrawal rates and then others later.

Hinsight says I tap danced above and below the '4% rule' without even being aware of it as a benchmark till well into my retirement.

heh heh heh - probably a blind squirrel quote could inserted here. Much like plodding auto deduct 401 investments into Bogle's folly while my hands on the throttle investments produced less stellar results over my savings decades. :roll: :wink:

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Post by serbeer » Fri Apr 22, 2011 12:32 pm

SWR is only really useful for accumulation stage planning. It allows one approximate the time they can afford to retire to attempt to live the lifestyle they envision.

Once retired, you just have to keep an eye on your portfolio and act according to its performance exercising common sense IMO.

Though it does provide the guidance about ballpark of the initial withdrawal size as well, in the first few years of retirement.

SB

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Post by LarryG » Fri Apr 22, 2011 3:39 pm

BobK
You are correct. I do receive social security and it is a reasonable part of our monthly income.
I do not have a pension. My pension plan was rolled into an IRA.

Taylor,
Correct. The information that I received from you and Mel at the Boglehead meetings is responsible for my present position.
If I were to build a new house, I would call it "The House that Taylor Built"

Best Regards

Larry

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A beautiful compliment.

Post by Taylor Larimore » Fri Apr 22, 2011 8:16 pm

Hi Larry:
If I were to build a new house, I would call it "The House that Taylor Built"


Perhaps the nicest compliment I ever received.

Thank you.
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by Jack » Fri Apr 22, 2011 8:31 pm

Taylor, I agree with you. People often make things too complicated in the hope that somewhere they will find the magic formula that will guarantee safety and bliss forever.

But life has a way of throwing you curve balls so you have to always adapt no matter how much you plan. I like your method of keeping it simple and adjusting your yearly withdrawals as conditions change.

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Re: Safe Withdrawal Rates ? Complexity vs. Simplicity

Post by iceport » Fri Apr 22, 2011 8:33 pm

Taylor,

Thanks for your post. You do have a knack for keeping us grounded. Your point is well taken.

I have two thoughts. First, on the idea that we might be over-analyzing the whole SWR concept, some of us engineer-types just like to get as close to an accurate model of reality as we can using all available information and tools at our disposal. Then, because nothing's perfect, we use a "factor of safety". Personally, I like to use the nice, round 4% SWR estimate for planning purposes -- and then I'd most certainly keep your method in mind as sort of a factor of safety.

The other thought is more sprawling, and it touches on some of BobK's comments. Perhaps the fixation on a SWR is a little less mysterious if you consider how the number of people protected by a defined benefit plan has dwindled between 1982 and today. Except for people sophisticated enough to consider using SPIAs for part of their needs, most of us think we must rely on own savings and investments for the vast majority of our retirement income. Maybe it's just more important than it used to be?

Along those lines, are you withholding some pertinent information? [I looked for a smiling sideways glance with jaw out emoticon, but couldn't find one.] Besides your (very impressive) portfolio balance, didn't you also enjoy one or more annuitized income streams to help keep you afloat? If so, wouldn't that help to reduce any concern you might have had about making your portfolio last?

--Pete

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Re: Safe Withdrawal Rates ? Complexity vs. Simplicity

Post by Mel Lindauer » Fri Apr 22, 2011 8:56 pm

petrico wrote:Taylor,

Thanks for your post. You do have a knack for keeping us grounded. Your point is well taken.

I have two thoughts. First, on the idea that we might be over-analyzing the whole SWR concept, some of us engineer-types just like to get as close to an accurate model of reality as we can using all available information and tools at our disposal. Then, because nothing's perfect, we use a "factor of safety". Personally, I like to use the nice, round 4% SWR estimate for planning purposes -- and then I'd most certainly keep your method in mind as sort of a factor of safety.

The other thought is more sprawling, and it touches on some of BobK's comments. Perhaps the fixation on a SWR is a little less mysterious if you consider how the number of people protected by a defined benefit plan has dwindled between 1982 and today. Except for people sophisticated enough to consider using SPIAs for part of their needs, most of us think we must rely on own savings and investments for the vast majority of our retirement income. Maybe it's just more important than it used to be?

Along those lines, are you withholding some pertinent information? [I looked for a smiling sideways glance with jaw out emoticon, but couldn't find one.] Besides your (very impressive) portfolio balance, didn't you also enjoy one or more annuitized income streams to help keep you afloat? If so, wouldn't that help to reduce any concern you might have had about making your portfolio last?

--Pete
Taylor can correct me if I'm wrong, but I think he only recently purchased his SPIAs, not when he first retired.
Best Regards - Mel | | Semper Fi

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Annuities to help make portfolio last

Post by Taylor Larimore » Fri Apr 22, 2011 9:05 pm

Hi Pete:
Didn't you also enjoy one or more annuitized income streams to help keep you afloat? If so, wouldn't that help to reduce any concern you might have had about making your portfolio last?
You are correct. We own two Single Premium Immediate Life Annuities (SPIAs). One purchased in 2006 (AVIVA) and the other (Genworth) in 2007.

Before purchasing our annuities, we consulted with Mel who is an annuity expert. We are happy we followed his sound advice.
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Annuities to help make portfolio last

Post by iceport » Fri Apr 22, 2011 9:17 pm

Taylor Larimore wrote:Hi Pete:
Didn't you also enjoy one or more annuitized income streams to help keep you afloat? If so, wouldn't that help to reduce any concern you might have had about making your portfolio last?
You are correct. We own two Single Premium Immediate Life Annuities (SPIAs). One purchased in 2006 (AVIVA) and the other (Genworth) in 2007.
Hi Taylor,

Those are recent, Mel was right. I was guessing there would have been a federal pension of some sort.

Sorry, I stand corrected. When it mattered most, going into uncharted waters as you entered retirement, you only had your savings.

--Pete

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Federal pension

Post by Taylor Larimore » Fri Apr 22, 2011 9:23 pm

Pete:
I was guessing there would have been a federal pension of some sort.


I have a federal pension reduced for early retirement.
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Safe Withdrawal Rates ? Complexity vs. Simplicity

Post by iceport » Sat Apr 23, 2011 9:43 pm

Oh so you were holding out on us! :shock: 8)

I wasn't trying to put you on the spot or pry, but that sort of thing might matter. It might not have been significant to you in your particular circumstances.

If all goes well, I hope to have a pension also, reduced to ~ 37% of my highest 3-year average if I also go early. That's enough, combined with SS a few years later, to make a SWR far less critical for me too. But that still isn't enough to keep me from thinking it to death.

Without a pension, you could bet I'd be studying Jim Otar's work and interpolating his tables to two decimal places! (And I'd probably take his advice and annuitize, 'cause I'd probably be in the red zone.)

--Pete

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Re: Safe Withdrawal Rates ? Complexity vs. Simplicity

Post by gabylon » Sun Apr 24, 2011 10:06 am

Taylor Larimore wrote: We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.
Thank you Taylor for your always helpful and wise advice.
Please forgive me if I am asking the obvious, but could you be more specific? Do you mean, for example, that you have always aimed to keep your balance at the original $1M (COLA'ed?) and spend the excess? And if it had gone below $1M you'd have spent the minimum possible until it went back up? Back to $1M or to a lower balance each year?
I know this didn't happen (fortunately!); I am trying to understand your plan if things had gone south with your balance.
Again, I'm sorry if I 'm asking a dumb question, but some things I need to understand at the most basic level possible :D

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Post by Mitchell777 » Sun Apr 24, 2011 10:47 am

The age of 57, desire to retire, and the $1M (indexed for inflation) hits home with me. I think a defined benefit pension plan, and/or retirement health insurance or access to a group health plan, would be a very large factor in my decision to retire. I do not have either so continue to work. I may just be too much of a worrier

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Answer to questions.

Post by Taylor Larimore » Sun Apr 24, 2011 11:50 am

gabylon wrote:

Please forgive me if I am asking the obvious, but could you be more specific? Do you mean, for example, that you have always aimed to keep your balance at the original $1M (COLA'ed?) and spend the excess? And if it had gone below $1M you'd have spent the minimum possible until it went back up? Back to $1M or to a lower balance each year?
I know this didn't happen (fortunately!); I am trying to understand your plan if things had gone south with your balance.
Again, I'm sorry if I 'm asking a dumb question, but some things I need to understand at the most basic level possible
Hi Gaby:

Quote:
Do you mean, for example, that you have always aimed to keep your balance at the original $1M?

We have chosen to give to our heirs and charity while we are alive. For this reason our current portfolio is less than $1M and getting smaller. I would be happy if our portfolio balance is zero when the last of us dies (I am 87).

Quote:
I am trying to understand your plan if things had gone south with your balance.

We have a declining minimum balance we think is necessary. If our portfolio should decline to that minimum balance, I would exchange our stock funds (now 35% of our portfolio) for much safer securities--probably another life annuity (if in good health) or a short-term bond fund.
"Simplicity is the master key to financial success." -- Jack Bogle

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Variable Withdrawals

Post by RebusCannébus » Sun Apr 24, 2011 12:11 pm

I'm just wondering [and I'm sure this has been discussed elsewhere, but if I search on SWR, well, you know, +/- a million hits]:

1. With a DB pension and retirement healthcare benefits, I will be better positioned to let my annual portfolio withdrawals roll with performance.
2. That being the case, if I were to adopt a strategy of withdrawing x% of my prior end-of-year portfolio (where, of course, x, though a constant percentage, would translate into more or less money, depending on performance), can we assume that x would be higher than the typical SWR's (~3%) that work by establishing a first year baseline withdrawal amount, then adjust it for inflation, and disregard subsequent performance?
3. Short version: If I adopt this approach, can I let x=5% or so? If not, can I at least assume that it could safely be greater than the SWR as defined above?

I think the approach is just a way of putting a little bit of formula around what Taylor describes in the OP.

This is a bit of a highjack. Apologies.

Edit: Don't plan to leave an estate.
Peter

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bob90245
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Re: Variable Withdrawals

Post by bob90245 » Sun Apr 24, 2011 3:02 pm

Hi Rebus,

You can try looking into the variable withdrawal strategies offered by several authors. Bill Bengen's "Floor and Ceiling" appears to be the one closest to what you describe. For the floor, you can set it at 3% CPI-adjusted. And then if performance is strong, the variable withdrawal can rise to 5% or higher if you which.

To play out how it would have done, you can give it test drive using my Excel spreadsheet found here:

http://www.bobsfinancialwebsite.com/Var ... tml#bengen
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Variable Withdrawals

Post by Rodc » Sun Apr 24, 2011 6:15 pm

RebusCannébus wrote:I'm just wondering [and I'm sure this has been discussed elsewhere, but if I search on SWR, well, you know, +/- a million hits]:

1. With a DB pension and retirement healthcare benefits, I will be better positioned to let my annual portfolio withdrawals roll with performance.
2. That being the case, if I were to adopt a strategy of withdrawing x% of my prior end-of-year portfolio (where, of course, x, though a constant percentage, would translate into more or less money, depending on performance), can we assume that x would be higher than the typical SWR's (~3%) that work by establishing a first year baseline withdrawal amount, then adjust it for inflation, and disregard subsequent performance?
3. Short version: If I adopt this approach, can I let x=5% or so? If not, can I at least assume that it could safely be greater than the SWR as defined above?

I think the approach is just a way of putting a little bit of formula around what Taylor describes in the OP.

This is a bit of a highjack. Apologies.

Edit: Don't plan to leave an estate.
In my opinion that is a reasonable approach. On Merriman's site you can find a comparison of how 4% and 5% have fared historically.

With 4% you get less to start, but your portfolio grows faster (or declines less in bad times), so that over time you actually get a larger income stream. However, the 4% may not overtake the 5% before you get too old to really be able to make much use of the extra money. For example you might prefer the higher initial income from using 5% for travel when earlier in retirement when healthier and more energetic.

If you can set up a steady income stream from pensions, SS, annuities, bond ladder, that will take care of your basic needed, a variable income stream from your portfolio should be fine. You could start at whatever percent you want, and keep an eye on things and cut back if needed, and due to having set up a steady income to cover your needs first, you will still be fine if you have to cut back.

There really are two keys: (1) keep fixed expenses modest and no or little debt, and (2) setting up a reliable steady income. Together these make it possible to be flexible and not highly dependent on volatile markets.

You can also use the last three year average balance or such to smooth some of the ups and downs.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Post by saurabhec » Sun Apr 24, 2011 7:34 pm

bobcat2 wrote:So developing a retirement plan using an informal 4% WR rule was about as good as you could do in 1982. That is not true today.
Are SPIAs really a recent financial offering? I would think they would have been around for decades given the relatively straightforward product they are. TIPS seem like the only true addition to the arsenal. I am also not sure how robust a SPIA will be in times of true financial distress, and they also have issues from an estate planning point of view.

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Post by bobcat2 » Sun Apr 24, 2011 8:56 pm

Finally a break for those who retired in 1982....Also TIPS, Ibonds, and inflation-indexed life annuities did not exist then as sources of safe retirement income.
Life annuities have been around for centuries in Europe. In fact life annuities have been around in Europe longer than stock markets have been around in Europe. A primary reason that life annuities have been around so long in Europe is because they have been so safe over the centuries. I know of no other private financial product that has been safer over the very long term than life annuities.

Life annuities have also been around a long time in the US, but obviously not as long as in Europe. :) Life annuities in the US, as in Europe, have been a very safe product historically.

What is new about life annuities in the US is having inflation-indexed life annuities. It would have been difficult, but not impossible before the introduction of TIPS in 1997, for insurance companies to hedge the risk of inflation-indexed life annuities without an existing TIPS market to hedge their inflation exposure against. So as you might guess, inflation-indexed life annuities were not introduced in the US until the TIPS market had become established.

Between 2000 and 2003 a couple of insurance companies introduced inflation-indexed life annuities in the US. Hardly anybody bought any, and the products were withdrawn from the market. In 2004 Vanguard introduced inflation-indexed life annuities thru AIG at the Vanguard annuity site. There are now several companies that offer inflation-indexed life annuities. Vanguard currently offers inflation-indexed life annuities from three differ insurance companies.

Therefore the new life annuity product I was referring to was the inflation-indexed life annuity, which dates back only to the introduction of the product by Vanguard in 2004.

BobK

PS - One famous historical figure who received a life annuity was Christopher Columbus. It was his reward for being the first to sight land in the new world. The Spanish Crown paid Columbus about $600 per year for the rest of his life. Not a piddling sum over 500 years ago.
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Post by bob90245 » Sun Apr 24, 2011 9:18 pm

bobcat2 wrote:Life annuities have also been around a long time in the US, but obviously not as long as in Europe. :) Life annuities in the US, as in Europe, have been a very safe product historically.
A "product" may be safe. But you are relying on the solvency of the insurer. And have insurers become insolvent? The answer is yes. A Google search finds this list of insolvent insurance companies:

http://www.lhipa.org/Home/Insolvencies.aspx
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Variable Withdrawals

Post by RebusCannébus » Sun Apr 24, 2011 9:33 pm

bob90245 wrote:Hi Rebus,

You can try looking into the variable withdrawal strategies offered by several authors. Bill Bengen's "Floor and Ceiling" appears to be the one closest to what you describe. For the floor, you can set it at 3% CPI-adjusted. And then if performance is strong, the variable withdrawal can rise to 5% or higher if you which.

To play out how it would have done, you can give it test drive using my Excel spreadsheet found here:

http://www.bobsfinancialwebsite.com/Var ... tml#bengen
Thank you!
Peter

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Post by bobcat2 » Sun Apr 24, 2011 9:46 pm

Insurance companies become insolvent and banks become insolvent, but since WWII it has been very rare for individual depositors to lose any significant amount of money in insolvent banks or life annuitants to lose any significant amount of money in insolvent insurance companies.

The worst case I know of since WWII for life annuities was Executive Life in California in the early 1990s. They had about 44,000 life annuity contracts. For 13 months, while the assets were being sorted out at Executive Life, the annuitants only received 70% of their monthly income from the life annuities. After the 13 months the contracts were assumed by another insurance company and the annuitants went back to receiving 100% of their monthly income. I don't know if state annuity associations picked up the missing 30% of income over the 13 month period. I am not aware of any cases worse than this over the last 60+ years. If some one is aware of a worse case in the post WWII era, lets hear about it.

Unfortunately we don't live in a utopia so it is possible for US bank depositors to lose money in the future and it is possible for life annuitants to lose money in the future. But in the post WWII era both of these products have been very safe.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Post by bob90245 » Sun Apr 24, 2011 9:56 pm

bobcat2 wrote:Insurance companies become insolvent and banks become insolvent, but since WWII it has been very rare for individual depositors to lose any significant amount of money in insolvent banks or life annuitants to lose any significant amount of money in insolvent insurance companies.

The worst case I know of since WWII for life annuities was Executive Life in California in the early 1990s. They had about 44,000 life annuity contracts. For 13 months, while the assets were being sorted out at Executive Life, the annuitants only received 70% of their monthly income from the life annuities. After the 13 months the contracts were assumed by another insurance company and the annuitants went back to receiving 100% of their monthly income. I don't know if state annuity associations picked up the missing 30% of income over the 13 month period. I am not aware of any cases worse than this over the last 60+ years. If some one is aware of a worse case in the post WWII era, lets hear about it.

Unfortunately we don't live in a utopia so it is possible for US bank depositors to lose money in the future and it is possible for life annuitants to lose money in the future. But in the post WWII era both of these products have been very safe.

BobK
What does US bank depositors have anything to do with the topic at hand? Huh? Are you implying that life annuities have equivalent backstop? FDIC-type coverage? Sounds like you're trying to make the link that life annuities have the same safety as US bank depositors. Is this a fact? Or your belief?
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Post by bobcat2 » Sun Apr 24, 2011 10:35 pm

Hi Bob90245,

There are between seven and eight thousand banks in the US. The five biggest banks have most of the assets. The 50 biggest banks probably have over 95% of the assets. The thousands of other banks have the other 5%. The FDIC can handle multiple community banks on any given weekend. It can handle one reasonably sized regional bank on a weekend. If any of the five biggest banks went under, or even any of the biggest 10 banks, the FDIC would be completely overwhelmed. They could not possibly make good if BofA, or Citibank, or Wells Fargo went under. It would take many months just to figure out what had happened and the FDIC certainly doesn't have the resources to quickly pay out the money to all the depositors of any of these behemoths.

So if you have your bank deposits with Podunk Natl the FDIC while quickly make amends, if Podunk goes under. If Citibank goes under and your deposits are there, the best you can hope for is to get your money back many months in the future. And that's the best you can hope for.

Note though that while the majority of bank deposits in the US cannot be saved by the FDIC (they're in the big banks), very few people have lost money by having it in bank deposits. So yes in reality there is more than a passing similarity to FDIC backed and state annuity association backed.

BobK

PS - If a community bank with a few branches fails, the FDIC sends out a team of about 35-60 people. If Wells Fargo were to go down the FDIC would need to send out a team many times larger than all the employees at FDIC. How would they do that?
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: A beautiful compliment.

Post by Bulldawg » Mon Apr 25, 2011 6:20 am

Taylor Larimore wrote:Hi Larry:
If I were to build a new house, I would call it "The House that Taylor Built"


Perhaps the nicest compliment I ever received.

Thank you.
Taylor,

I can't point to a " house that Taylor built" just yet, but the site has been selected, the lot cleared , and the foundation set.

I have learned much from your sage advice over the years !
" IN GOD WE TRUST " ( official motto of the United States )

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Source of investment advice.

Post by Taylor Larimore » Mon Apr 25, 2011 9:53 am

Larry/Bulldawg:

I must confess that what you learned from me almost certainly came from what I learned from Jack Bogle.
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by bob90245 » Mon Apr 25, 2011 10:25 am

bobcat2 wrote:If a community bank with a few branches fails, the FDIC sends out a team of about 35-60 people. If Wells Fargo were to go down the FDIC would need to send out a team many times larger than all the employees at FDIC. How would they do that?
So now you're doubting that US Bank Deposits are safe? I'm not going to argue in circles with you anymore. :roll:
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Post by Oneanddone » Mon Apr 25, 2011 11:51 am

bob90245 wrote:
bobcat2 wrote:If a community bank with a few branches fails, the FDIC sends out a team of about 35-60 people. If Wells Fargo were to go down the FDIC would need to send out a team many times larger than all the employees at FDIC. How would they do that?
So now you're doubting that US Bank Deposits are safe? I'm not going to argue in circles with you anymore. :roll:
Up to the FDIC amount the accounts are certainly safe due to the U.S. printing press. For amounts over a guarantee, I would take a strong insurer over a bank.

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Post by bobcat2 » Mon Apr 25, 2011 12:24 pm

Hi again bob90245,

Both life annuities and bank deposits are safe products.The protection provided by the FDIC for bank deposits is slightly safer than the overall protection provided to life annuities by state guarantee associations. The best state guarantee associations are about as safe as the FDIC. But much like in Lake Woebegone, not all state guarantee associations are well above average. If a very large insurance company failed the state guarantee associations would have problems. But it is also true that if a very large bank failed the FDIC would have problems.

Many people think the money in the FDIC reserve fund is taxpayer revenue. It is not. The money in the FDIC reserve fund is from fees the FDIC levies on FDIC member banks. That is very similar to the fees the state guarantee associations assess on insurance companies. Right now the FDIC reserve fund is fairly low because there have been a lot of bank failures in the last four years. The FDIC is reluctant to raise the assessment fee to replenish the fund because they are afraid such an increase would tip some marginal banks into insolvency, and because the banks are stiffly resisting any rise in the assessment rate. Even if they were to replenish the fund it wouldn't help much if a very large bank failed.

If one of the largest banks were to fail, the FDIC does not have nearly enough manpower, expertise, or reserve assets to make depositors whole in a short period of time. The same thing is true with regard to large insurance companies and state guarantee associations. Despite these weaknesses in the backup systems both bank deposits and life annuities have been very safe products for many decades.

A very large bank like BoA has about twice the asset base of the combined asset base of all 7,000 of the smallest banks. The FDIC can easily handle several small banks failing in a short period of time. If a very large bank were to fail the FDIC would have to service assets that are about 14,000 times greater than the asset base of the typical small bank. The FDIC is simply not equipped to do that. Despite this keeping assets on deposit in a bank has been very safe since the creation of the FDIC in the 1930s.

If BofA were to fail how would FDIC be able to quickly reopen such a very large bank in your opinion? Where would the FDIC get the shear manpower to reopen these branches all over the country? Where would the FDIC find on short notice the expertise to quickly re-open such a complicated entity with world wide operations? Where would the money come from to make depositors whole in a short period of time, given that the amount needed would be several times the amount in the FDIC reserve fund?

If a very large insurance company were on the verge of insolvency the only thing that could keep it from collapsing would be ad hoc measures by the federal government such as in 2008. If a very large bank were on the verge of insolvency the only thing that would keep it from collapsing would be ad hoc measures by the federal government such as in 2008. So in either case as a practical matter either the Treasury or the Fed would have to backstop these guys. The pools of assets in the state guarantee associations or at the FDIC would not be nearly sufficient to make claimants whole.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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