Safe Withdrawal Rate?

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Tyler
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Re: Safe Withdrawal Rate?

Post by Tyler » Sun Nov 10, 2019 10:37 am

mathjak107 wrote:
Sun Nov 10, 2019 2:40 am
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 .
I completely agree. My point was not that I treat cash differently, but simply that I appreciate its unique characteristics that occasionally come in handy when doing smart tax management.

sophie wrote:
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.
Tax laws are so complex and dependent on your specific situation that it's hard to generalize, but here are a few situations I've experienced where the flexibility of the different assets in the PP/GB came in handy:

- With 50% cash and gold, the PP is more focused on capital gains than on ordinary income. So you have more flexibility in retirement to manage taxes than other investors depending heavily on dividends and interest to drive returns. When your capital gains qualify for the 0% long-term tax rate, you can also pretty easily offset the low amount of ordinary income via the standard deduction and tax loss harvesting.

- Let's say you've hit a rebalancing band in retirement. You run the numbers and determine that the capital gains from selling the appreciated assets will push you into the next tax bracket. Ouch! Luckily you can rebalance just enough to stay below the line and wait until the next tax year to do the rest. And in the meantime, you can temporarily fund your expenses directly out of the cash portion until it makes more sense to touch the appreciated assets again.

- You're enjoying retirement and decide to buy a new car in cash. Your first instinct may be to take the money out of your appreciated stocks to have a mini rebalance, but even though all the capital gains are long-term and qualify for the 0% tax rate you understand that the income still counts as MAGI in the ACA subsidy calculations. Running a few numbers, you learn that paying for your car with stock proceeds will double your healthcare premiums over paying for it out of cash. So you happily sell the TBills and re-fill them over the next year using the regular monthly dividend and interest income from stocks and bonds.

For reference, my federal income tax bill in retirement hovered at exactly zero for several years (before I got a part time job that brought in more income). Of course my situation may be very different from yours, so YMMV. And simply using a PP is not a magic bullet, as it's really all about smart tax planning. But IMO the PP is like a well-stocked financial toolbox with several handy tools to use when the need arises.
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Re: Safe Withdrawal Rate?

Post by vnatale » Sun Nov 10, 2019 10:56 am

Tyler wrote:
Sun Nov 10, 2019 10:37 am
mathjak107 wrote:
Sun Nov 10, 2019 2:40 am
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 .
I completely agree. My point was not that I treat cash differently, but simply that I appreciate its unique characteristics that occasionally come in handy when doing smart tax management.

sophie wrote:
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.
Tax laws are so complex and dependent on your specific situation that it's hard to generalize, but here are a few situations I've experienced where the flexibility of the different assets in the PP/GB came in handy:

- With 50% cash and gold, the PP is more focused on capital gains than on ordinary income. So you have more flexibility in retirement to manage taxes than other investors depending heavily on dividends and interest to drive returns. When your capital gains qualify for the 0% long-term tax rate, you can also pretty easily offset the low amount of ordinary income via the standard deduction and tax loss harvesting.

- Let's say you've hit a rebalancing band in retirement. You run the numbers and determine that the capital gains from selling the appreciated assets will push you into the next tax bracket. Ouch! Luckily you can rebalance just enough to stay below the line and wait until the next tax year to do the rest. And in the meantime, you can temporarily fund your expenses directly out of the cash portion until it makes more sense to touch the appreciated assets again.

- You're enjoying retirement and decide to buy a new car in cash. Your first instinct may be to take the money out of your stocks, bonds, and gold to have a mini rebalance, but even though all the capital gains are long-term and qualify for the 0% tax rate you understand that the income still counts as MAGI in the ACA subsidy calculations. Running a few numbers, you learn that paying for your car with stock proceeds will double your healthcare premiums over paying for it out of cash. So you happily sell the TBills and re-fill them over the next year using the regular monthly dividend and interest income from stocks and bonds.

For reference, my federal income tax bill in retirement hovered at exactly zero for several years (before I got a part time job that brought in more income). Of course my situation may be very different from yours, so YMMV. And simply using a PP is not a magic bullet, as it's really all about smart tax planning. But IMO the PP is like a well-stocked financial toolbox with several handy tools to use when the need arises.
Tyler! You just shocked me! In retirement! Until I just read that you'd had struck as this super bright late 20s, 30s something year old! Congratulations on maintaining a youthful persona!

Vinny
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Re: Safe Withdrawal Rate?

Post by Kriegsspiel » Sun Nov 10, 2019 11:00 am

Tyler, I had the same experience when I was sabbaticaling. That big pile of cash lets you live in some high tax areas, without having that big tax liability. Re-stock your war chest when you move on.
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Re: Safe Withdrawal Rate?

Post by Tyler » Sun Nov 10, 2019 11:06 am

vnatale wrote:
Sun Nov 10, 2019 10:56 am
Tyler! You just shocked me! In retirement! Until I just read that you'd had struck as this super bright late 20s, 30s something year old! Congratulations on maintaining a youthful persona!
Well, I'm in my early 40's and really more of a MMM-style financially independent type than a traditional retiree. But I'm glad to hear the youthful energy still comes through! Not being stressed about full-time work certainly takes a few years off. ^-^
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Re: Safe Withdrawal Rate?

Post by vnatale » Sun Nov 10, 2019 12:02 pm

Tyler wrote:
Sun Nov 10, 2019 11:06 am
vnatale wrote:
Sun Nov 10, 2019 10:56 am
Tyler! You just shocked me! In retirement! Until I just read that you'd had struck as this super bright late 20s, 30s something year old! Congratulations on maintaining a youthful persona!
Well, I'm in my early 40's and really more of a MMM-style financially independent type than a traditional retiree. But I'm glad to hear the youthful energy still comes through! Not being stressed about full-time work certainly takes a few years off. ^-^
The rest of the story! That now makes more sense. And, congratulations on pulling it off! When I was in the age bracket that movement was not as prominent. I could have retired from work a while ago but have not for two main reasons. 1) I'm the ultimate security seeking personality, meaning no amount is enough. 2) But, more importantly, I enjoy the challenge of a lot of the work that I do. All that said, I would gladly reduce the amount of time I put into work if someone else could do some of the work that I do. Unfortunately, that is not the case. Too much of it can only be done by me. But one day I WILL stop and a complete replacement will be needed for me. That day is yet to be decided by me.

Vinny
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Re: Safe Withdrawal Rate?

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

Tyler wrote:
Sun Nov 10, 2019 10:37 am
mathjak107 wrote:
Sun Nov 10, 2019 2:40 am
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 .
I completely agree. My point was not that I treat cash differently, but simply that I appreciate its unique characteristics that occasionally come in handy when doing smart tax management.

sophie wrote:
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.
Tax laws are so complex and dependent on your specific situation that it's hard to generalize, but here are a few situations I've experienced where the flexibility of the different assets in the PP/GB came in handy:

- With 50% cash and gold, the PP is more focused on capital gains than on ordinary income. So you have more flexibility in retirement to manage taxes than other investors depending heavily on dividends and interest to drive returns. When your capital gains qualify for the 0% long-term tax rate, you can also pretty easily offset the low amount of ordinary income via the standard deduction and tax loss harvesting.

- Let's say you've hit a rebalancing band in retirement. You run the numbers and determine that the capital gains from selling the appreciated assets will push you into the next tax bracket. Ouch! Luckily you can rebalance just enough to stay below the line and wait until the next tax year to do the rest. And in the meantime, you can temporarily fund your expenses directly out of the cash portion until it makes more sense to touch the appreciated assets again.

- You're enjoying retirement and decide to buy a new car in cash. Your first instinct may be to take the money out of your appreciated stocks to have a mini rebalance, but even though all the capital gains are long-term and qualify for the 0% tax rate you understand that the income still counts as MAGI in the ACA subsidy calculations. Running a few numbers, you learn that paying for your car with stock proceeds will double your healthcare premiums over paying for it out of cash. So you happily sell the TBills and re-fill them over the next year using the regular monthly dividend and interest income from stocks and bonds.

For reference, my federal income tax bill in retirement hovered at exactly zero for several years (before I got a part time job that brought in more income). Of course my situation may be very different from yours, so YMMV. And simply using a PP is not a magic bullet, as it's really all about smart tax planning. But IMO the PP is like a well-stocked financial toolbox with several handy tools to use when the need arises.
my reply was to sophie ....


whether i choose to put 1 million in the pp or 4 million of my cash , it has no bearing on the portfolio performance .

if cash is a mandatory component then it is what it is , cash is a part of it .

if i decide i want a 100% equity portfolio then that is what the return is calculated on , not how much cash i choose to hold .

if a portfolio calls for cash , short term bonds , reits , etc then it is judged solely on its components .

what my personal rate of return is would include the portfolio i chose , interest on my cash and possibly any real estate i own ..that return will be effected by the individual asset returns . so how much cash my personal rate of return is , would be effected by the amount of cash i hold ,but that has nothing to do with portfolio performance as that portfolio is designed
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 4:42 pm

vnatale wrote:
Sun Nov 10, 2019 10:56 am
Tyler wrote:
Sun Nov 10, 2019 10:37 am
mathjak107 wrote:
Sun Nov 10, 2019 2:40 am
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 .
I completely agree. My point was not that I treat cash differently, but simply that I appreciate its unique characteristics that occasionally come in handy when doing smart tax management.

sophie wrote:
Sun Nov 10, 2019 9:16 am


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.
Tax laws are so complex and dependent on your specific situation that it's hard to generalize, but here are a few situations I've experienced where the flexibility of the different assets in the PP/GB came in handy:

- With 50% cash and gold, the PP is more focused on capital gains than on ordinary income. So you have more flexibility in retirement to manage taxes than other investors depending heavily on dividends and interest to drive returns. When your capital gains qualify for the 0% long-term tax rate, you can also pretty easily offset the low amount of ordinary income via the standard deduction and tax loss harvesting.

- Let's say you've hit a rebalancing band in retirement. You run the numbers and determine that the capital gains from selling the appreciated assets will push you into the next tax bracket. Ouch! Luckily you can rebalance just enough to stay below the line and wait until the next tax year to do the rest. And in the meantime, you can temporarily fund your expenses directly out of the cash portion until it makes more sense to touch the appreciated assets again.

- You're enjoying retirement and decide to buy a new car in cash. Your first instinct may be to take the money out of your stocks, bonds, and gold to have a mini rebalance, but even though all the capital gains are long-term and qualify for the 0% tax rate you understand that the income still counts as MAGI in the ACA subsidy calculations. Running a few numbers, you learn that paying for your car with stock proceeds will double your healthcare premiums over paying for it out of cash. So you happily sell the TBills and re-fill them over the next year using the regular monthly dividend and interest income from stocks and bonds.

For reference, my federal income tax bill in retirement hovered at exactly zero for several years (before I got a part time job that brought in more income). Of course my situation may be very different from yours, so YMMV. And simply using a PP is not a magic bullet, as it's really all about smart tax planning. But IMO the PP is like a well-stocked financial toolbox with several handy tools to use when the need arises.
Tyler! You just shocked me! In retirement! Until I just read that you'd had struck as this super bright late 20s, 30s something year old! Congratulations on maintaining a youthful persona!

Vinny
Simply having an array of different types of accounts is all you need for flexibility tax wise ...Roth’s ,traditional and taxable accounts can be utilized for maximum efficiency......that can be key more then the types of assets
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Re: Safe Withdrawal Rate?

Post by ahhrunforthehills » Sun Nov 10, 2019 5:25 pm

Tyler wrote:
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.
Thanks Tyler! I never really considered the Golden Butterfly. At first glance I always just assumed it was just a bunch of performance-chasing noise caused by recent returns. I guess there is more to it than meets the eye after all. Hopefully the market tanks soon so I can transition... can't see adding an extra 15% into the stock market with it so dangerously overpriced (based on CAPE Ratio).
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 5:44 pm

The cape ratio is really a poor indicator of short term moves ....the reality is we have no idea what markets will do .

EXECUTIVE SUMMARY

Despite the recent Nobel Prize given to its originator, the Shiller cyclically-adjusted P/E (or “CAPE”) ratio continues to be controversial, driven in no small part by its current “reading” that markets are overvalued, yet they continue to climb higher and higher… a formula that has played out in the recent past as well, in both the mid-2000s and especially the late 1990s. Yet the poor recent predictive performance of Shiller CAPE shouldn’t entirely be a surprise; it has never had a particularly high correlation to year-over-year market returns.

Nonetheless, the reality is that while Shiller CAPE has little predictive value in the short term, its correlation to market returns is far stronger over longer time periods; Shiller CAPE shows its strongest correlation to nominal returns over an 8-year time horizon, and is actually most predictive of real returns over an *18* year time horizon… supporting Benjamin Graham’s old adage that the markets may be a voting machine in the short run, but they are ultimately a weighing machine in the long run as valuation eventually takes hold. On the other hand, over very long time horizons (e.g., 30 years) Shiller CAPE once again begins to lose its value as other longer-term structural market factors take hold.

The fact that Shiller CAPE is a strong predictor of market performance in the long run (but not the “ultra” long run, nor the short run) suggests that the valuation measure does have use, but only if applied in the correct contexts. For instance, while all this suggests that Shiller CAPE may be a poor market-timing investment indicator, clients who are retiring and exposed to “sequence-of-returns” risk over the first half of their retirement may benefit greatly by adjusting their initial spending levels in light of market valuation at the start of retirement. Similarly, those considering the benefits of delaying Social Security – or choosing to annuitize or claim pension payments over an equivalent lump sum – would do well to evaluate their decision in light of whether there is a market-valuation-based headwind or tailwind underway. Thus, even if Shiller CAPE is a poor market-timing indicator, that doesn’t mean it’s useless at all when it comes to retirement planning!


https://www.kitces.com/blog/shiller-cap ... -planning/
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Re: Safe Withdrawal Rate?

Post by ahhrunforthehills » Sun Nov 10, 2019 6:20 pm

mathjak107 wrote:
Sun Nov 10, 2019 5:44 pm
The cape ratio is really a poor indicator of short term moves ....the reality is we have no idea what markets will do .
True, hence me saying "hopefully". I think us just having this conversation in this specific forum aligns our common viewpoint of accepting the fact that we cannot predict the future. We all still have our educated guesses though.

Wth that said...

Cape ratios + stock buyback programs + fed rates + etc.... my pile of educated guesses for "waiting to buy stock" seems much bigger than my pile of educated guesses for "buying stock today". YMMV.

Besides, I am technically putting it off until my next rebalance :) Afterall, Harry said to minimize transactions ;)
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Re: Safe Withdrawal Rate?

Post by sophie » Mon Nov 11, 2019 8:24 am

Tyler wrote:
Sun Nov 10, 2019 10:37 am
mathjak107 wrote:
Sun Nov 10, 2019 2:40 am
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 .
I completely agree. My point was not that I treat cash differently, but simply that I appreciate its unique characteristics that occasionally come in handy when doing smart tax management.
Of course cash is "spendable". Isn't that the whole idea of a retirement portfolio implied by this whole "safe withdrawal rate" discussion? If you don't plan on spending anything out of your portfolio then I guess you would consider it more of a hobby than as a retirement vehicle. That would explain a lot of mathjak posts.

However I do think cash serves double roles - whether the cash is held explicitly within the portfolio or alongside it. First, as the primary conduit for withdrawing money from a portfolio. I would consider that to be "spending", or you could call it "withdrawal from the portfolio" if you like - it amounts to the same thing. Second, it has a role in managing other assets as Tyler points out - not only tax management but also avoiding having to sell assets that have dropped in value. I'm just pointing out the obvious, that comparisons of the return of, say, a 60/40 stock/bond portfolio with the PP are invalid because of the different treatments of cash.
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Mon Nov 11, 2019 9:05 am

you can't judge portfolio performance once you start considering other factors like cash on hand or cash not chosen to be invested .

otherwise tylers work is a moot point ... the portfolio's are compared for what they are , not how much cash someone keeps on hand .

we are interested in comparing portfolios AS DESIGNED WITH ALL THEIR NEEDED COMPONENTS and cash is a key component in the pp vs say the desert portfolio .

you can't start using a component as spending money because then you are changing the design and functionality of the portfolio which calls for 4 equal parts .

like i said if i choose to commit 1 million to a portfolio and and keep 3 million in cash instruments , that 3 million has zero to do with the portfolio performance ...

the portfolio as designed is what it is . by keeping more cash my personal rate of return is suffering but that is totally different than portfolio performance using the stated components the portfolio requires
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