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 » Tue Sep 08, 2015 12:55 pm

exactly the problem pointed stick . no one can tell what the swr on the pp would have been . it can never be tested for a true swr rate in the sense of what  the term safe withdrawal rate represents .

that has been my problem with using it for retirement day 1 . no history of what that rate actually would be in comparison .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Tue Sep 08, 2015 12:57 pm

Tyler wrote: Mathjak -- you need to read the links I included.  I am very open about the limitations of the research.

I used the exact same methodology of the Bengen study for the analysis, and the results for the 60/40 portfolio are basically identical.  The data is what it is.  And the reasoning behind it is very straightforward. 

Even if you do not trust the actual numbers, you must inherently realize that since the returns of your own Fidelity Insights portfolio are not the same as the results of the S&P500 index (why else would you invest differently except to get different results?) then the SWR must be different as well.  The Trinity and Bengen studies you quote did not analyze your portfolio!

I don't claim the data is a perfect representation of the SWR throughout all of history.  But it shows very clearly that asset allocation has a huge effect on SWRs.  You owe it to yourself to consider the implications for your own retirement expectations.

without those dates you never tested the pp for a safe withdrawal rate as compared to the work of bengan and the trinity .

you tested it for a withdrawal that met at least 4% over different time frames but not the worst case the trinity is based on .

not buying in to any thing else because the facts are the facts . if we can't test the pp over the same worst time frame all bets are off and  you are using a different set of benchmarks  which are not the worst case so of course things will look so much better .

the fact is if we can't test the pp by equal measure then we should refrain from the terminology of a safe withdrawal rate since that does not meet the definition of just what the term means .



it specifically means it weathered those dates , not your dates .



sorrry my friend you just can't measure the pp in that comparison .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Tyler » Tue Sep 08, 2015 1:07 pm

mathjak107 wrote: exactly the problem pointed stick . no one can twell what the swr on the pp would have been . it can never be tested for a true swr rate in the sense of what  the term safe withdrawal rate represents .

that has been my problem with using it for retirement day 1 . no history of what that rate actually would be in comparison .
Then what's the SWR for your own portfolio?  The Fidelity Insights growth fund you use started in 1987, and the growth & income fund in 1994.  Neither follows the very specific portfolios of the Trinity or Bengen studies. 

The best we can all do is to compare different portfolios over the longest timeframe possible and make a well-informed decision on how to proceed.  I'm just trying to study the problem from a new perspective, as I think many people (you included) carry a few misconceptions about SWRs and how they apply to their own portfolios. 
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Tue Sep 08, 2015 1:17 pm

don't know  to be fair , so i would never call it it a safe withdrawal rate  . it should perform pretty close to as tested being 50% equity and 50% intermediate term bonds but i can't say for sure it will actually be  the as tested results . but even within 25%  of it works fine since we know the  actual 4% swr leaves more money than you started with 90% of the time over all the rolling periods . that is a pretty big awe crap fudge factor

the pp is much to radical for me to assume even being  that close . 


i have no problem with your charts showing how the pp did from the 1970's on but i do have issues with it being called a safe withdrawal rate and being compared to the actual trinity where the mixes would have much higher withdrawal rates if we eliminate those time frames .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Tyler » Tue Sep 08, 2015 1:18 pm

mathjak107 wrote:
the fact is if we can't test the pp by equal measure then we should refrain from the terminology of a safe withdrawal rate since that does not meet the definition of just what the term means .
Fair enough. 

The charts show the SWR since 1972.  The Trinity and Bengen studies show SWRs since 1926.  Looking at the same 60/40 portfolio over both timeframes, the SWRs are virtually identical, with the longer timeframe being a few tenths of a percent lower because of the rough historic patches you mention.  Comparing results side by side over the same timeframe, you see that results can vary widely based on asset allocation.  This factually must be the same for the longer timeframe as well, but we don't (yet) have the data to compare numbers since 1926 directly. 

Those are the facts.  You are free to draw your own conclusions.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by sophie » Tue Sep 08, 2015 1:19 pm

One thing that always bothered me about a safe withdrawal rate expressed as a fixed percentage, is that it assumes your spending is going to increase or decrease along with portfolio value.  In practice, there is a "floor" of spending that won't decrease (property taxes, rent, mortgage, home repairs, food, utilities, medications etc).  Conversely, spending doesn't necessarily increase when the portfolio value goes up.

We had a thread a while back where portfolio sustainability was calculated by determining nominal portfolio value after an annual cash withdrawal that started at a fixed amount (3%, 4%, or 5% of the portfolio) and then increased according to inflation.  While that's still somewhat idealized, it's far more useful a representation I think.  Perhaps injecting random large expenses on top of a basic living "stipend" would be yet more realistic.  Like, the house needs a new roof or a new heating system, you decide to take an expensive vacation for your 50th wedding anniversary, a major medical expense comes up, etc.

Of course I'm suggesting this for the Tylers and Pet Hogs of the world, whose contributions have been amazing and incredibly appreciated.  I'm afraid I don't have time to monkey with spreadsheets for fun anymore.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Tyler » Tue Sep 08, 2015 1:24 pm

Good point, Sophie.

To be clear, my calculations assume that the withdrawal rate quoted is the percentage of the portfolio in year one.  After that, it is adjusted by inflation and not by portfolio value.  I agree that this is the better method.  And you're also correct that it still doesn't tell the whole story, and that simply being smart about expenses rather than mechanically spending the amount of money the spreadsheet tells you to can massively improve your retirement performance. 
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Pointedstick » Tue Sep 08, 2015 1:30 pm

Awesome tool, Tyler. Your site is getting better and better.

It doesn't surprise me in the least that the PP has historically been able to sustain 5% withdrawals without depleting the principal; my own calculations a few years ago were in the same ballpark.

My current favorite PP alternative (20% midcaps 20% SCV 10% EM 10% gold 20% LTGB 20% short-term treasuries) looks like it would sustain almost 6% withdrawals without depleting the principal. More gold would push it over 6%.

I also think Sophie's point about expenses being unpredictable is a very salient one. My own expenses have been either flat or declining over the past couple of years as I have learned to do more and more myself rather than paying other people to do them for me at the wildly inflated prices that are necessary to sustain oneself in many fields. Plumbers here charge north of $100 an hour for labor alone!

It might be useful to have options for determining spending, or even adding of subtracting from inflation to account for people who don't trust CPI. If it could be shown that a given portfolio would survive even if CPI were only half of the supposed real value, for example, that would be a very powerful piece of information to have.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Pointedstick » Tue Sep 08, 2015 1:34 pm

Also FYI Tyler, the new calculator appears to occasionally download empty files named "chartiframe" (zero KB, no content) to the user's specified download location. It's happened twice so far.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Tue Sep 08, 2015 2:25 pm

don't forget though that the 4% swr rate is only the income side of things . what varies is what is left in the bucket at the end .

it can range from very little as in the worst of times to  3x what you started with in the best of times .

so you can't just compare draw rates but what is actually left at the end  too .

historically using a 60/40 mix there has been more than you started with 90% of the time and more than 2x what you started with 67% of the time . median wealth has been 2.8x what you started with .

was that reflected in your calculations ?


remember the whole idea of a safe withdrawal rate was the income held constant through thick and thin  and the markets effected the balance at the end without running dry . but since the 4% swr is based on the worst of times and we have never duplicated the worst of times since 1966 the 4% swr as is , has left way to much money left over .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Tyler » Tue Sep 08, 2015 2:54 pm

@Mathjak -- That's true.

I used the Bengen SAFEMAX methodology that mapped the maximum WR for the single worst retirement period with no regard for percentages. The SWR shown is the worst case, and all other retirement periods will be better.  I accounted for end portfolio values using the Sustainable WR.  I personally prefer that to getting bogged down in arguments like "is a 50% chance acceptable, or is 90% better?" but I know where you're coming from.  It's true that a single SWR alone does not tell the whole story when it comes to end portfolio values.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Tue Sep 08, 2015 2:59 pm

we both agree there .

i think trying to compare  the pp  when it comes to swr is very difficult on so many levels .  trying to compare the pp's 5% with a 4% true swr based on far worse time frames and no regard for what is left as a balance really does not compare much at all .

in fact remember that bill  in safemax had better results than the trinity did because  safemax used 5 year gov't  bonds while the trinity used intermediate corporate bonds .  the GREATER VOLATILITY  in the portfolio of the corporate longer term bonds actually hurt things  and the trinity had more failure periods . 

so we really don't know what the pp will do vs conventional mixes , in fact in the new normal neither may conform to what was so basing results on conditions that no longer exist in both cases may be the wrong thing to do .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by sophie » Tue Sep 08, 2015 3:01 pm

Pointedstick wrote: It might be useful to have options for determining spending, or even adding of subtracting from inflation to account for people who don't trust CPI. If it could be shown that a given portfolio would survive even if CPI were only half of the supposed real value, for example, that would be a very powerful piece of information to have.
+1.

The more I think about it, the more I think CPI is inadequate for capturing year to year increases in retirement spending.  It doesn't effectively capture two of the largest expenditures:  property taxes and medical costs - the former is not considered at all, and the latter is considered separately (as far as I can tell from the BLS website).  Also, as you get older you may need more and more services for things you used to do yourself.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Tue Sep 08, 2015 3:07 pm

which is why no one can really go by the sterile lab tests of the past .

a good dynamic spending plan is what is needed that looks at things yearly .

but thanks to michael kitces and his research we know if after a few years in retirement if we are not at least getting a 2% real return and we are drawing close to 4%  the red flag should go up .

once you hit 15 years it may be to late to adjust so i think one needs to make spending cuts if you do not see  at least that 2% number starting to average out .

it used to be that inflation adjusting every year like these study's do was way over kill.

what retirees stopped buying and doing tended to offset most of what inflation increased  on what they continued to do .

but today healthcare costs are eating that up . our insurance costs are insane our first year in retirement since i am only 62 .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Pointedstick » Tue Sep 08, 2015 3:09 pm

The problem is that the inflation rate for individual expenses are, well, very individually-specific. I barely drive at all so the fluctuation in fuel prices hardly affects me. None of my insurance rates rose this year, including health insurance. My property taxes FELL this year. What's my personal inflation rate?
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Tue Sep 08, 2015 3:14 pm

which is why the cpi was never meant to reflect anyones personal cost of living . it can't since we are 1500 separate mini economies in this country .

it is only a measure of price changes in a basket of goods which may have very little reflection on what you buy or use .

this is why counting on TIPS  for inflation protection  can be way off base .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by lordmetroid » Tue Sep 08, 2015 4:33 pm

Image
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by lordmetroid » Tue Sep 08, 2015 4:39 pm

I would have liked the calculator to be aside the other three, as it is now. I thought you had not added it because it was below the first screen.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by sophie » Tue Sep 08, 2015 4:43 pm

<reproduction of large and particularly beautiful chart omitted>

Wow Tyler, that is a real gem of a chart!!!!!  And, a pretty striking outcome for that 60/20/20 portfolio, also.  Makes me really wish I had gold as an option in my retirement accounts.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Desert » Tue Sep 08, 2015 4:52 pm

sophie wrote: <reproduction of large and particularly beautiful chart omitted>

Wow Tyler, that is a real gem of a chart!!!!!  And, a pretty striking outcome for that 60/20/20 portfolio, also.  Makes me really wish I had gold as an option in my retirement accounts.
+1  That is a great chart.  And I hope it's accurate, because I just quit my job!  ;)
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Pointedstick » Tue Sep 08, 2015 4:56 pm

It's a glorious tool. There are all kinds of amazing options out there, like this:

[img width=600]http://i.imgur.com/30vyboe.png[/img]

5-6% sustainable withdrawal rate! :P
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Tue Sep 08, 2015 4:59 pm

if you missed or didn't follow the discussion tyler and i had above  make sure everyone understands that the 5-6% pp withdrawal rate  ( not a safe withdrawal rate ) is not the same comparison to what is called a 4% or 5% SAFE withdrawal rate as discussed above .

a safe withdrawal rate of 4% means something very different than the charts above and use  very different benchmarks with different criteria for what makes it up  as well as  does not figure in what is left over at the end of the 30 years ..

that is an important distinction and while you can take the pp results for face  value you can not compare the results to what a 4% safe withdrawal rate means and represents .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Tyler » Tue Sep 08, 2015 5:59 pm

Mathjak makes a good point that not all SWRs are necessarily equal.  In essence, that's one aspect of my entire point.

The SWR from the Bengen study cannot be compared directly to the Trinity study because they used different bond indices and also different methodologies.  Likewise, mine cannot be compared directly to either because it does not look back as far.  I expect SWRs over longer timeframes to eventually hit a new low point, and the numbers can only go down from what is shown.  Use each tool in isolation to study a portfolio, and be careful not to draw too many conclusions by overlapping results. 

On the other hand, The Trinity and Bengen studies really do not apply to the vast majority of people that quote them because they do not personally invest in the specific indices studied.  Unless you do, I would not recommend drawing any significant conclusions from them at all!
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Fred » Tue Sep 08, 2015 6:01 pm

Combining this thread with the one about all PP assets trending down, I think maybe we should put the idea of the PP offering a SWR of 4-5% on hold for a while to see what happens. In the other thread, the point is raised that the PP has never encountered the kind of economic conditions we are seeing now with interest rates at zero percent for such a long time (for that matter, have they ever been zero percent before?)

If you are a long way off from retirement then it is mainly an academic question that you can sit back and ponder but if you're like me and getting very close to the moment of truth I don't feel as confident with the PP going forward as I would like to be. I'll feel more confident if I can get to where I only need around a 2.5% SWR to tell the boss goodbye. Expected to be there next year but if there is no return this year, maybe not.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Tue Sep 08, 2015 6:03 pm

Tyler wrote: Mathjak makes a good point that not all SWRs are necessarily equal.  In essence, that's one aspect of my entire point.

The SWR from the Bengen study cannot be compared directly to the Trinity study because they used different bond indices and also different methodologies.  Likewise, mine cannot be compared directly to either because it does not look back as far.  I expect SWRs over longer timeframes to eventually hit a new low point, and the numbers can only go down from what is shown.  Use each tool in isolation to study a portfolio, and be careful not to draw too many conclusions by overlapping results. 

On the other hand, The Trinity and Bengen studies really do not apply to the vast majority of people that quote them because they do not personally invest in the specific indices studied.  Unless you do, I would not recommend drawing any significant conclusions from them at all!

it took us a few months but we finally see eye to eye about this stuff .

the only thing i will add is that while in conventional investing we all do not hold what the portfolio's were  in  academic study after study your allocations are 80% of your returns . so that being the case just following the standard equity bond mixes will likely have you  well in the ball park of the results .

so far the worst modern day group is the y2k retiree. so far they are on par with the 1929  retiree . they still may get a passing grade but they will have one of the lowest balances left .


the 2008 retiree is not even a blip on the radar and is right in their with any other group and where they stood 7 years in .
Last edited by mathjak107 on Tue Sep 08, 2015 6:10 pm, edited 1 time in total.
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