PP, Retirement, and Safe Withdrawal Rates

General Discussion on the Permanent Portfolio Strategy

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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sat Jun 20, 2015 4:04 pm

tyler , just making sure you realized that the 4 worst scenario's i mentioned above that are what the 4% safe withdrawal rate is based on cannot be back tested by the PP.

the fact the PP  made it through the 1970's really does not mean much as far as success rate  except for those who started retirement in 1966  no other group would have hit a failure period passing through the 1970's ..
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Tyler » Sat Jun 20, 2015 4:23 pm

Understood. 

Also, the original SWR studies (both the Bengen and Trinity versions) were published in the 90s.  The subsequent crashes in 2001 and 2008 caused guys like Wade Pfau to reevaluate some of the assumptions and do more research, and his outlook is a lot more pessimistic today.

I personally don't believe backtesting any portfolio even for hundreds of years guarantees success looking forward at all.  The best you can do is to make an intelligent decision based on the best available data and go with the flow.  A high historic success rate does not absolve you from keeping your eyes open and making good decisions with your money in the future. 
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sat Jun 20, 2015 4:28 pm

i would assume they had to use some kind of monte carlo simulations  since you can't use historical data like firecalc  or the trinity.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sat Jun 20, 2015 4:34 pm

Tyler wrote: Understood. 

Also, the original SWR studies (both the Bengen and Trinity versions) were published in the 90s.  The subsequent crashes in 2001 and 2008 caused guys like Wade Pfau to reevaluate some of the assumptions and do more research, and his outlook is a lot more pessimistic today.

I personally don't believe backtesting any portfolio even for hundreds of years guarantees success looking forward at all.  The best you can do is to make an intelligent decision based on the best available data and go with the flow.  A high historic success rate does not absolve you from keeping your eyes open and making good decisions with your money in the future.

the usefulness is not in predicting but in analyzing the numbers.

thanks to  research by michael kitces we now know  how to turn  that data in to useful  useable information.

all failure periods happened when the 15 year real return  average over the first 15 years of a 30 year period  fell below 2%  .

that is all we need to know mathematically now.

so take the y2k hypothetical retiree with a 60/40 mix.  15 years later  his 15  year average is just under 2% real return.  we now know that is a danger sign and withdrawals have to be cut or mathematically you are on track to fail.

this is where the back testing is useful , because it helps us identify the failures and once we can quantify those failures we have real world numbers we can benchmark against .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sat Jun 20, 2015 4:41 pm

these  swr rules are only ball barks to get you to the gate of retirement with a number. since it is a laboratory number with no human spending patterns or intervention  you can see what worked and what didn't more often than not.

work by michael kitces has shown that every time a portfolio is up 50% from the starting point every 3 years another 10% can be taken on top of the standard 4% inflation adjusted withdrawal.

so if you are up 50% from the start you can take another 10%.  3 years later if you are still up at least 50% take another 10% and so on and so on.


i intend to use bob clyatts withdrawal method.

each year i take 4% of the portfolio value .  if markets fell i take 4% or 5% less than i was drawing , which ever is more.

it is nice because it is dynamic , it has never failed and inflation adjusting is not needed  as it is built in just by being dynamic.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Tyler » Sat Jun 20, 2015 4:45 pm

I like the different perspective.  Thanks!

Unfortunately we can't backtest every possible portfolio back to 1900.  But at least we can learn from danger signs in the past and keep a lookout for similar patterns today. 

Since its inception, the worst 15-year real CAGR for the PP over any rolling period is 3.7%.  If that ever starts to creep down close to 2%, my warning light will start blinking.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sat Jun 20, 2015 4:50 pm

exactly, and  knowing that the alarm should go off at the 2% real return level is all the back testing  ever done in this area boils down to.

it isn't about patterns repeating , or averages or events. it all boils down to just identifying the common denominator to those time frames that did fail.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by MachineGhost » Sat Jun 20, 2015 8:33 pm

mathjak107 wrote: all failure periods happened when the 15 year real return  average over the first 15 years of a 30 year period  fell below 2%  .

that is all we need to know mathematically now.
Using silver pre-1968:

Code: Select all

1928	1942	2.79%
1929	1943	2.16%
1930	1944	2.72%
1931	1945	4.59%
1932	1946	3.77%
1933	1947	2.67%
1934	1948	0.38%
1935	1949	0.56%
1936	1950	0.03%
1937	1951	0.07%
1938	1952	1.06%
1939	1953	0.42%
1940	1954	1.68%
1941	1955	2.47%
1942	1956	3.22%
1943	1957	2.74%
1944	1958	3.08%
1945	1959	2.99%
1946	1960	1.68%
1947	1961	3.28%
1948	1962	4.19%
1949	1963	4.80%
1950	1964	4.54%
1951	1965	4.39%
1952	1966	3.89%
1953	1967	4.86%
1954	1968	5.09%
1955	1969	3.27%
1956	1970	2.84%
1957	1971	3.46%
1958	1972	4.80%
1959	1973	4.53%
1960	1974	4.41%
1961	1975	4.19%
1962	1976	3.90%
1963	1977	3.64%
1964	1978	3.37%
1965	1979	4.68%
1966	1980	4.59%
1967	1981	3.96%
1968	1982	4.02%
1969	1983	3.69%
1970	1984	4.41%
1971	1985	5.32%
1972	1986	5.97%
1973	1987	5.07%
1974	1988	4.68%
1975	1989	5.34%
1976	1990	5.09%
1977	1991	5.28%
1978	1992	5.41%
1979	1993	5.91%
1980	1994	3.93%
1981	1995	5.01%
1982	1996	6.07%
1983	1997	5.26%
1984	1998	6.07%
1985	1999	6.19%
1986	2000	5.08%
1987	2001	3.81%
1988	2002	3.69%
1989	2003	4.50%
1990	2004	4.04%
1991	2005	4.63%
1992	2006	4.63%
1993	2007	5.20%
1994	2008	4.71%
1995	2009	5.24%
1996	2010	4.89%
1997	2011	5.32%
1998	2012	5.20%
1999	2013	4.18%
2000	2014	4.78%
Last edited by MachineGhost on Sat Jun 20, 2015 8:39 pm, edited 1 time in total.
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Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 3:32 am

as you see , the failures at 4% swr  would have been low to moderate  based on the 15 year average falling below 2% . i think i counted 6x.

true ,we don't know what gold would have done  exactly ,but the fact is from what you show it would have failed  a few times when using the actual worst time frames.

from the previous charts i saw  posted i realized the thinking was that by just figuring in the 1970's early 80's for the PP  that  would have been enough  to be considered a worst case but in reality it was not really nailing it.

it was those who retired in 1965-1966 who had A very different scenario play out from just including the time frame in other  periods.


what i find most interesting looking at your silver based portfolio is the worst case time frames are not the same traditional worst case time frames for the most part , but rather different years.

In the years after 1965, the perfect storm of retirement killing conditions took place.  Inflation grew rapidly over the following decade, exceeding 10% in several years in the 1970’s and averaging 6% a year from 1965 to 1985.  Interest rates rose rapidly, from ~4% in 1965 to ~8% in 1970, up to 15% in 1982, causing bonds prices to plummet.  The combo of fast rising high inflation and rising interest rates destroyed bonds.

Stocks also performed horribly adjusted for inflation.

1965-1966 is the all time worst period so far based on more than 146 years of history. it is the one the 4% swr is modeled after.  it is also why 90% of the time following a 4% swr left you with more than you started with  30 years later and 67% of the time left you with 2x or more than you started with.


wow i see i went from junior member to associate member in a day    ha ha ha . 

but the permanent portfolio has always been something i believed in even though i got bored with it decades ago and found it like watching paint dry.

now that i am retiring boring is good.


based  on 1965-1966 conditions here is how  a conventional portfolio did.

anything under a 90% success rate is unacceptable.

Image
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 5:11 am

so traditional investments worst cases were 1907-1929-1936 -1966 and potentially 2000

the PP worst case's using silver  were 1935  1936 1937-1939-1946 , no more modern times.

this is very interesting .....  i think craig needs to look in to this a bit more .  no modern day worst cases , at least with silver anyway using michael kitce's 15 year real returns as a guide for success rates.,
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 5:17 am

MachineGhost wrote:
mathjak107 wrote: all failure periods happened when the 15 year real return  average over the first 15 years of a 30 year period  fell below 2%  .

that is all we need to know mathematically now.
Using silver pre-1968:

Code: Select all

1928	1942	2.79%
1929	1943	2.16%
1930	1944	2.72%
1931	1945	4.59%
1932	1946	3.77%
1933	1947	2.67%
1934	1948	0.38%
1935	1949	0.56%
1936	1950	0.03%
1937	1951	0.07%
1938	1952	1.06%
1939	1953	0.42%
1940	1954	1.68%
1941	1955	2.47%
1942	1956	3.22%
1943	1957	2.74%
1944	1958	3.08%
1945	1959	2.99%
1946	1960	1.68%
1947	1961	3.28%
1948	1962	4.19%
1949	1963	4.80%
1950	1964	4.54%
1951	1965	4.39%
1952	1966	3.89%
1953	1967	4.86%
1954	1968	5.09%
1955	1969	3.27%
1956	1970	2.84%
1957	1971	3.46%
1958	1972	4.80%
1959	1973	4.53%
1960	1974	4.41%
1961	1975	4.19%
1962	1976	3.90%
1963	1977	3.64%
1964	1978	3.37%
1965	1979	4.68%
1966	1980	4.59%
1967	1981	3.96%
1968	1982	4.02%
1969	1983	3.69%
1970	1984	4.41%
1971	1985	5.32%
1972	1986	5.97%
1973	1987	5.07%
1974	1988	4.68%
1975	1989	5.34%
1976	1990	5.09%
1977	1991	5.28%
1978	1992	5.41%
1979	1993	5.91%
1980	1994	3.93%
1981	1995	5.01%
1982	1996	6.07%
1983	1997	5.26%
1984	1998	6.07%
1985	1999	6.19%
1986	2000	5.08%
1987	2001	3.81%
1988	2002	3.69%
1989	2003	4.50%
1990	2004	4.04%
1991	2005	4.63%
1992	2006	4.63%
1993	2007	5.20%
1994	2008	4.71%
1995	2009	5.24%
1996	2010	4.89%
1997	2011	5.32%
1998	2012	5.20%
1999	2013	4.18%
2000	2014	4.78%

i think your work here may be opening up some very interesting facts about the pp and retirement success rates.    thanks
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by barrett » Sun Jun 21, 2015 6:24 am

mathjak,

I don't know what time zone you are in but please get some sleep so that we don't lose you to THS (Tired Human Syndrome).

The low returns for 15 years is really helpful info. My question would be, how is knowing that actionable in terms of a safe withdrawal rate? I mean, we don't know in advance what any 15-year period will look like. You've posted about being able to withdraw extra $ if the PP is outperforming. What would be your strategy when it is underperforming? How soon would you cut spending and to what extent? Thanks.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 7:03 am

actually i fall asleep by 8:30 pm every night.    60 may be the new 45 but 9:00pm  is the new midnight  ha ha ha

the  2% is actionable because all you need to save the time frame is a slight downward adjustment is spending.  you still can salvage the next 15 years .

that is why i find michael kitce's work quite informative based on data that up to now really did us little good going forward
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 7:08 am

i intend to use bob clyatts withdrawal plan.  i start out at 4% of the portfolio balance.  each year is dynamic  and i get to take 4% or if markets are down i take 4% or 5% less than the previous amount , which ever is higher.

with kitce's plan for increasing ,if you past the 50% point off being up and each 3 years are still up  you are fine.  if you fell below just keep taking the same amount. once you passed the 50% even rolling back will not hurt you at the higher draw rate.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 8:39 am

yep
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 8:51 am

no withdrawal plan was ever meant to be set and forget .  it would be insane to think any adviser worth their salt would hand someone a plan that was " here , just pull 4% a year and inflation adjust"

the back testing was all laboratory results with no human intervention as well as based on the worst of the worst scenario's.

odds are someone following ia 4% swr like a robot would die leaving way to much money unspent.

the idea of inflation adjusting every year was kind of silly too. in life we tend to spend in a smile shape in retirement . early on we do lots of spending going places and doing things , then it falls off a cliff by mid 70's .  it ramps up again after 80 as healthcare and gifting pick up.

what retires s no longer do or buy tends to pay for the increases in what does go up so traditional inflation adjusting yearly is usually overkill.

the big wild card is healthcare costs.  we live in nyc and i couldn't believe how much medicare and a medigap f plan are .

it is about 6k each for medicare , part d and medigap f plans  and 6800 for our long term care partnership plan.  that is an insane amount of money devoted to healthcare and we have not included dental which has been brutal for us



 
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 9:07 am

ss can be quite complex.  in fact i was trying to decide what to do myself.

i  will be 63 and retiring in 5 weeks , wife is 65 and retired last week.  she is already collecting.

if i delay taking ss ,  once i figure in the checks i did not take  ,  the fact i have to spend down invested assets and the fact my wife does not get a spousal kicker  added to hers ,  break even is 22-24 years figuring just 6% on a balanced portfolio.

my  plan is to see how markets do , if we are up i will delay , but if i have to spend down an excessive amount from investments delaying  because we are down  i will file earlier at 63.

delaying isn't the big deal it is made out to be once all the other parameters are included.

n fact you need to live to 90 to see a 5% real return advantage.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by barrett » Sun Jun 21, 2015 9:17 am

mathjak107 wrote: actually i fall asleep by 8:30 pm every night.    60 may be the new 45 but 9:00pm  is the new midnight  ha ha ha
OK, good to know your schedule. I'll try to sneak in one more question before you have to retire for the night!
mathjak107 wrote: i intend to use bob clyatts withdrawal plan.  i start out at 4% of the portfolio balance.  each year is dynamic  and i get to take 4% or if markets are down i take 4% or 5% less than the previous amount , which ever is higher.
Let's use some real numbers. Say I start with an even $1,000,000 and I retire 1/1/13. I am fully invested in the PP so the PP returns are my returns. Let's say the returns are:

2013 -2%
2014 +9%
2015  flat

What would be your withdrawal amounts in dollars each year?

I'd love to get that answer before this thread diverts totally to a discussion about SS. Thanks again.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 9:21 am

using bob clyats method which is what i will use i would take 4% of 1 million in 2013 ,      4% of the balance in 2014  and 4% of my balance in 2015.

if 2016 was down 10% i would take 4% of the actual balance or 5% less than i took in 2015 , which ever is higher.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by barrett » Sun Jun 21, 2015 9:24 am

mathjak107 wrote: using bob clyats method which is what i will use i would take 4% of 1 million in 2013 ,      4% of the balance in 2014  and 4% of my balance in 2015.

if 2016 was down 10% i would take 4% of the actual balance or 5% less than i took in 2015 , which ever is higher.
Does it make a difference if you withdraw at the beginning or the end of the year?
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 9:27 am

well i wouldn't have anything to live on if i do not withdraw for day 1 so it has to be upfront  . our year starts june 1 so next june we will  look at that balance .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by barrett » Sun Jun 21, 2015 9:28 am

mathjak107 wrote: using bob clyats method which is what i will use i would take 4% of 1 million in 2013 ,      4% of the balance in 2014  and 4% of my balance in 2015.

if 2016 was down 10% i would take 4% of the actual balance or 5% less than i took in 2015 , which ever is higher.
And by "which ever is higher" do you mean whichever number leaves you with a higher balance or whichever number gives you more to spend that year?
mathjak107 wrote: well i wouldn't have anything to live on if i do not withdraw for day 1 so it has to be upfront
Oh yeah. Turkey question. Got it.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 9:33 am

which ever gives you more to spend. the idea is if markets fall 40% your budget is not cut that far down
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by barrett » Sun Jun 21, 2015 9:54 am

mathjak,

OK, not trying to be a pain in the butt, I just want to really understand this.

This is what I have so far:

Starting balance of $1,000,000 on 1/1/13
I withdraw $40,000 1/1/13 and lose $20,000 as the PP drops 2% to finish 2013 with $940,000
I withdraw $37,600 1/1/14 and I end 2014 with a balance of $983,616 as the PP returns 9%
I withdraw $39,344 1/1/15. The PP is flat that year so my finishing balance at the end of 2015 is $944,272
I withdraw $37,770 1/1/16 and the PP loses 10% that year so my ending balance on 12/31/16 is $815,851

I guess I could take a few bucks more on 1/1/16 in line with your "whichever gives you more to spend" rule.

Does this all look correct? It's a pretty crappy sequence of returns right up front but that's kind of the point.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Sun Jun 21, 2015 11:38 am

correct , now in 2016 you lost 10% so you are going to take  either a 5% cut in draw or 5% of that balance for the following year , which ever is higher.

remember though , this is using bob clyatts method from his book work less ,live more .  there are many other strategy's .
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