Safe Withdrawal Rate?

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ahhrunforthehills
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Safe Withdrawal Rate?

Post by ahhrunforthehills » Fri Nov 08, 2019 2:43 pm

So the calculator over at portfoliocharts.com says that a 25% x 4 allocation will provide around a 4.7% SWR.

But then I noticed that the "DIY Withdrawal Rate Toolbox" at earlyretirementnow.com said the same allocation would be only 2.7%.

A HUGE 2% difference!

I sent the guy the following comment:
Are you familiar with the SWR calculator at https://portfoliocharts.com/portfolio/withdrawal-rates/ ? I was really surprised at how drastically different your results were for a 25% Stock, 25% Bond, 25% Cash, 25% Gold portfolio was. Their SWR was 4.7%, yours was 2.7%. Yours seems suspiciously low considering that even their Perpetual Withdrawal Rate was 3.8%. Any thoughts on what could be causing this ENORMOUS difference?
His response was:
The difference is due to the other calculator using only the 1970-current interval. If you remove the two worst episodes (1929 + 1965-68) you get higher SWRs.
But that’s not very comforting! It’s like estimating the probability that you’ll get into a traffic jam by looking at traffic patterns only between 1 and 3 am!
It is amazing how 2 viewpoints (both of which seem pretty valid) can make such an enormous impact. Is it fair to count those years? Is it fair to exclude them? What about gold? Is it fair to exclude a gold price that was fixed? After all, if gold ever became substantially important again, it would not be surprising to see the price artificially manipulated again.

Thoughts?

Here are the links:

https://earlyretirementnow.com/2018/08/ ... s-part-28/
https://portfoliocharts.com/portfolio/withdrawal-rates/
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Re: Safe Withdrawal Rate?

Post by Tyler » Fri Nov 08, 2019 4:42 pm

ahhrunforthehills wrote:
Fri Nov 08, 2019 2:43 pm
His response was:
The difference is due to the other calculator using only the 1970-current interval. If you remove the two worst episodes (1929 + 1965-68) you get higher SWRs.
But that’s not very comforting! It’s like estimating the probability that you’ll get into a traffic jam by looking at traffic patterns only between 1 and 3 am!
Nah. Study the breadth of retirement research out there, and you'll find the difference between a SWR calculated for a standard portfolio since 1970 and since 1870 is only about 0.3%. And not every portfolio had its worst start years in 1929 and 1966, so you can't assume those start dates are the problem without looking deeper. I explain that in detail here: https://portfoliocharts.com/withdrawal-rates-faq/ Long story short, the timeframe does make a difference but it doesn't explain the large discrepancy you're seeing. Without getting into the weeds of the ERN methodology, I'll simply point out that I calibrated the PC calculations against the findings of other well-known researchers in the above link. For a sanity check, you might try doing the same exercise for the ERN numbers.

But even assuming the long-term ERN numbers for the PP are 100% correct, it's really not surprising that the SWR would be much lower when 25% of your portfolio had its price artificially fixed by an international monetary agreement. So the number may very well be historically accurate but practically irrelevant today. More data always sounds good, but in this case it's like arguing that the historical data proves that one should not expect to live beyond 30 while ignoring the invention of antibiotics and vaccines. Context is important. ;)

So personally, I think the gold numbers before Bretton Woods was repealed are interesting in a historical sense but not very useful for evaluating the retirement strategies of modern investors. If they ever reinstitute a gold standard or otherwise ban gold ownership, I'll reevaluate my assumptions and calculate accordingly. But I choose not to plan my retirement around the data for an economic system that no longer exists.
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Re: Safe Withdrawal Rate?

Post by europeanwizard » Sat Nov 09, 2019 1:45 am

Thanks for answering, Tyler. Your website has brought me so much insight.
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sat Nov 09, 2019 3:58 am

Safe withdrawal rates are based on the worst outcomes in history for retirees ..

Specifically if you retired in 1907 ,1929 ,1937 ,1965,1966

Thanks to Michael kitces ,he crunched the numbers and found the common denominator to every failure to a 30 year retirement time frame so what assets are used is now irrelevant, only the math behind the failures is what counts .

Kitces found every failure happened at a 4% draw when the REAL RETURN averaged less than 2% over the first 15 years ....

Once it fell below 2% as a real return average the first 15 years the excessive draw left the portfolio in a state where even the greatest bull markets were not able to revive the retirement...

So if 5 years in you are below 2% real return an alarm should go off ,, 10 years in a pay cut from 4% is a good idea ....

So it really is not that important anymore as to the exact assets used ...we know the math we need to have 4% hold .

But keep in mind that is to end with at least a buck left ..you don’t want to hit 30 years ,be alive and now have little money left .

So you need to watch the balance too.

The good news is a 4% draw has been so conservative that the odds of it not lasting are the same odds you will end 30 years with 6x what you started with .

90% of of the 119 rolling 30 year cycles to date had you end with more than you started ..67% ended with 2x what you started , and 50% of the time ended with 3x what you started with ...so typically raises have been needed or you could leave to much unspent and enjoyed .

If you eliminate the worst cases above a draw rate with 60/40 would be about 6.50%.

It is like knowing that if our blood pressure falls lower than a certain amount all our organs are in danger of shutting down ...it does not matter how our blood pressure got to where it is , all that matters is the numbers say we are in danger .

How you fix it is another story
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Re: Safe Withdrawal Rate?

Post by ahhrunforthehills » Sat Nov 09, 2019 5:03 pm

Thank you so much for the clarification Tyler. Your website is awesome :)

The good news is a 4% draw has been so conservative that the odds of it not lasting are the same odds you will end 30 years with 6x what you started with .
In regards to a SWR, what you are saying seems true....

A 60/40 does appear to have amazing potential outside of those "worst case scenarios". Using Tyler's website, you can see that a 60/40 allocation in the "United States" can lead to the possibility of some crazy high "Individual Withdrawal Rates (blue lines), most in the 7% to 9 % range. Even in Japan, a 60/40 has many north of 5.5%. All those blue lines spread out everywhere have lots of opportunities for great returns.

When looking at a 25% x 4 allocation, things are pretty boring. All those blue lines "possibilities" are tightly grouped. As expected the PP is "predictable". It appears to have basically no possibility of ever getting above 5.5% in those "Individual Withdrawal Rates (blue lines).

So the 4% draw being classified as "conservative" seems based on the assumption of a booming economy going forward, no?

This is actually where my concern lies. For my situation, I am only really interested in the Perpetual Withdrawal Rate (PWR) over the course of 40 to 60 years (not the SWR).

Just for simplicity's sake, I am comparing the following:

- 60/40 (United States) - 3.5% PWR
- 60/40 (Japan) - 1% PWR
- 25% x 4 (United States) - 3.9% PWR
- 25% x 4 (Japan) - 2.2% PWR

I was surprised to see the PWR (and SWR) was actually higher for a 25x4 allocation than for a 60/40 allocation. I guess I was expecting Japan-proof insurance to come at the expense of returns... but instead a PP outperformed a 60/40?

Tyler, I noticed that a 30/25/25/20 allocation seemed like a nice PP tweak considering that the odds of the US becoming like Japan seems pretty low (IMHO). Have you noticed any surprisingly "good value" allocations in regards to the PWR% outside of the PP?

I also noticed that your website states that the PWR maintains the "inflation-adjusted principal" but "Returns ignore taxes". I assume that you are ignoring taxes completely even from an inflation standpoint (i.e. if inflation alone makes an asset go from $100 to $200, we would be paying the capital gains tax of the purely inflationary event). Can you please confirm that even these types of taxes are not factored in?
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Re: Safe Withdrawal Rate?

Post by Tyler » Sat Nov 09, 2019 9:17 pm

ahhrunforthehills wrote:
Sat Nov 09, 2019 5:03 pm
I was surprised to see the PWR (and SWR) was actually higher for a 25x4 allocation than for a 60/40 allocation. I guess I was expecting Japan-proof insurance to come at the expense of returns... but instead a PP outperformed a 60/40?
It's indeed a little counter-intuitive, but it works out like that because withdrawal rates benefit from low volatility just as much as they do from high average returns. This may help explain what's going on > How safe withdrawal rates work

ahhrunforthehills wrote:
Sat Nov 09, 2019 5:03 pm
Tyler, I noticed that a 30/25/25/20 allocation seemed like a nice PP tweak considering that the odds of the US becoming like Japan seems pretty low (IMHO). Have you noticed any surprisingly "good value" allocations in regards to the PWR% outside of the PP?
I'm also a big fan of PWRs, and that's one of the reasons I like the Golden Butterfly.

ahhrunforthehills wrote:
Sat Nov 09, 2019 5:03 pm
I also noticed that your website states that the PWR maintains the "inflation-adjusted principal" but "Returns ignore taxes". I assume that you are ignoring taxes completely even from an inflation standpoint (i.e. if inflation alone makes an asset go from $100 to $200, we would be paying the capital gains tax of the purely inflationary event). Can you please confirm that even these types of taxes are not factored in?
Inflation is a measure of cost of living and is separate from capital gains. But it's true that the calculations do not account for taxes, and I'd recommend you include them in your planned expenses. But one of the really cool things about the PP is that with four very different assets there are lots of opportunities for things like tax loss harvesting or even just living off the cash for a while without selling anything. So with a little planning you may end up paying a lot less tax than you expect.
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 2:40 am

i don't really see one living off the portfolio without selling something .. the cash in the pp is not just cash , it is an integral part of the plan ..

it should not be looked at as "cash " for spending anymore than you would reduce any other asset class by spending it and not rebalancing .

cash has a job to fill .

1- it is the other half of the barbel so if i was to spend down 6 figures in cash to fill our spending buffer , being retired , the fixed income portion is totally unbalanced unless i sell something .
2 it acts as a an option with no expiration date to buy other assets when they are down .

so in order to maintain the effectiveness of the pp you need to sell and rebalance to raise that cash ,. it would not make sense to spend the cash , then sell assets to rebalance anyway , unless you wanted to be a " dirty lil market timer " like me and disregard the unbalanced portfolio until you choose when to rebalance .

it is no different than having a traditional portfolio with no cash buffer . you just rebalance the portfolio for your cash or risk an unbalanced portfolio.

in my opinion that cash should not be considered spendable cash like a checking account . it is an asset in the mix with a job to do and you really don't want to compromise things .

it is like right now the income model in fidelity insight is using a very very conservative bond fund as one fund in the model , which is actually an old style money market that is free to move up or down a penny or so from a buck .

that cash can be deployed at some point in a friday night update so that cash is not just cash for spending either
Last edited by mathjak107 on Sun Nov 10, 2019 8:13 am, edited 9 times in total.
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 2:47 am

here is a very interesting article from one of my favorite top researchers michael kitces


Executive Summary
As retirees and their planners adjust to the ‘new normal’ – a world of lower-than-average returns for the foreseeable future, many have questioned whether the historical safe withdrawal rate research is still valid. After all, if returns will be below average in the coming years, doesn’t that imply safe withdrawal rates must be below average as well?

In point of fact, though, safe withdrawal rates do not depend on average returns in the first place; the worst safe withdrawal rates in history that we rely upon are actually associated with 15-year real returns of less than 1%/year from a balanced portfolio! Accordingly, given current bond yields, dividend yields, and inflation, if the current environment for today’s retirees will result in a “new record low” safe withdrawal rate, the S&P 500 would still have to be no higher in 2027 than it was in 2007 or even 2000!

On the other hand, merely projecting equities to recover to new highs by the end of the decade or generating a mid-single-digits return would actually represent an upside surprise, allowing for higher retirement spending than 4.5% safe withdrawal rates!




https://www.kitces.com/blog/what-return ... ased-upon/
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 2:49 am

another very interesting view from michael looking at 2000 and 2008 and the 4% swr

Executive Summary
The 4% rule has been much maligned lately, as recent market woes of the past 15 years – from the tech crash of 2000 to the global financial crisis of 2008 – have pressured both market returns and the portfolios of retirees.

Yet a deeper look reveals that if a 2008 or even a 2000 retiree had been following the 4% rule since retirement, their portfolios would be no worse off than any of the other “terrible” historical market scenarios that created the 4% rule from retirement years like 1929, 1937, and 1966. To some extent, the portfolio of the modern retiree is buoyed by the (only) modest inflation that has been occurring in recent years, yet even after adjusting for inflation, today’s retirees are not doing any materially worse than other historical bad-market scenarios where the 4% rule worked.

Ultimately, this doesn’t necessarily mean that the coming years won’t turn out to be even worse or that the 4% rule is “sacred”, but it does emphasize just how bad the historical market returns were that created it and just how conservative the 4% rule actually is, and that recent market events like the financial crisis are not an example of the failings of the 4% rule but how robustly it succeeds!


https://www.kitces.com/blog/how-has-the ... al-crisis/
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Re: Safe Withdrawal Rate?

Post by vnatale » Sun Nov 10, 2019 9:14 am

mathjak107 wrote:
Sun Nov 10, 2019 2:47 am
here is a very interesting article from one of my favorite top researchers michael kitces


Executive Summary
As retirees and their planners adjust to the ‘new normal’ – a world of lower-than-average returns for the foreseeable future, many have questioned whether the historical safe withdrawal rate research is still valid. After all, if returns will be below average in the coming years, doesn’t that imply safe withdrawal rates must be below average as well?

In point of fact, though, safe withdrawal rates do not depend on average returns in the first place; the worst safe withdrawal rates in history that we rely upon are actually associated with 15-year real returns of less than 1%/year from a balanced portfolio! Accordingly, given current bond yields, dividend yields, and inflation, if the current environment for today’s retirees will result in a “new record low” safe withdrawal rate, the S&P 500 would still have to be no higher in 2027 than it was in 2007 or even 2000!

On the other hand, merely projecting equities to recover to new highs by the end of the decade or generating a mid-single-digits return would actually represent an upside surprise, allowing for higher retirement spending than 4.5% safe withdrawal rates!




https://www.kitces.com/blog/what-return ... ased-upon/
Have you (on anyone else here) directly corresponded with Michael Kitces?

Vinny
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Re: Safe Withdrawal Rate?

Post by sophie » Sun Nov 10, 2019 9:16 am

Tyler wrote:
Sat Nov 09, 2019 9:17 pm
But one of the really cool things about the PP is that with four very different assets there are lots of opportunities for things like tax loss harvesting or even just living off the cash for a while without selling anything. So with a little planning you may end up paying a lot less tax than you expect.
Very interesting point Tyler! Do you have some specific examples in mind that you could share? Tax management during the withdrawal phase is crying out for a really good, detailed treatment. I notice that in the Bogleheads and Mr. Money Mustache forums retirement withdrawal strategies are sort of taken for granted, and rarely discussed.

I had run some spreadsheet simulations a few years back, and cash played a surprisingly important role in protecting other assets from badly-timed or frequent sales. It also dawned on me that the standard recommendation for retirees to plan on 5 years annual expenses in cash is similar to the cash allocation in a 25x4 PP, if you have exactly 25x expenses (4% SWR) saved. The reported returns of a stock/bond portfolio are falsely boosted by excluding the cash allocation. It would be like judging the PP's return based only on the 3 volatile assets. If that's the case, then the performance described for the PP family of portfolios on Tyler's website is all the more impressive. Conversely, the safe withdrawal rate of a stock/bond portfolio complemented with 5 years expenses in cash might be better than advertised.
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 9:29 am

i would disagree with returns being inaccurate because of cash ... for one thing cash as a holding is a component in the strategy of the pp so as i said above whether you spend the cash or sell assets to develop the cash that cash is a part of the portfolio strategy and needs to be replaced and in effect is forced to be maintained . ....

other portfolios have cash outside the portfolio strategy and can maintain a dollar balance if they want and rebalance say monthly for spending cash or yearly .in retirement no one needs cash buffers . traditional re balancing between just stocks and bonds works just fine to develop cash for spending .. cash buffers are a mental thing . cash buffers are a mirage as kitces points out and do nothing over simply rebalancing to fill cash when you need it .

most who use cash buffers in a traditional portfolio are not holding much more than 1 or 2 years cash usually anyway , not 25% of assets ..

so if the portfolio strategy includes a permanent cash position then it is what it is and that should weigh on the return as it is a component of the model and it is not for general spending down . when i do the pp the cash component has nothing to do with what we spend since it is an integral part of the portfolio strategy and needs to be intact .

if i was doing the desert portfolio i would not include my checking account in the returns . that strategy holds no cash in the portfolio mix . returns on the desert portfolio definatly have to be looked at differently than the pp since cash is not forced to be maintained as a part of it.

right now because i am doing the pp until i am not i have 275k tied up in cash instruments and if we fall another 1% i will add the last of the money making that 300k in cash equivalents . that certainly needs to be separate from the 10-12k we draw a month to live on from our checking account or i would defeat the whole purpose of that cash position in he pp as i unbalance it .
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