PP, Retirement, and Safe Withdrawal Rates

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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

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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 .
Last edited by mathjak107 on Tue Sep 08, 2015 5:43 pm, edited 1 time in total.
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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 .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Desert » Tue Sep 08, 2015 6:34 pm

mathjak107 wrote: 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 .
I think all backtesting, including so-called safe withdrawal calculations, give us some very general indication regarding what to hope for in the future.  But in my opinion, nobody can really calculate a safe withdrawal rate.  All these calculations depend on past returns, of course, and can't be assumed to repeat in the future. 

I also tend to think that the term "financial independence" is thrown about way too loosely.  We won't know if we were truly financially independent until we're laying on our death beds, gently fondling our few remaining gold coins (and treasury bonds).  "Past performance is no guarantee of future results."  It's not just a disclaimer, it's the truth. 

As societies get richer, returns tend to become smaller (see Bernstein's Paradox of Wealth). 

Now excuse me, I must get back to finding an allocation that will provide me with a 7% SWR so I can sleep in tomorrow.  ;)
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Tue Sep 08, 2015 6:56 pm

Actually we can compute a swr based on history.

We are able to do that in real time because by studying the failures we know every failure happened when the 15 year real return average was less than 2%  .

Mathamatically you need to have more than that to sustain that 4% .

It is like  5+5=10  7+3  8+2 all =10.

It doe not matter what numbers got us to 10

All we need to know is when we get to 10 we have to cut spending to mathamatically have something happen
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Desert » Tue Sep 08, 2015 7:16 pm

mathjak107 wrote: Actually we can compute a swr based on history.

We are able to do that in real time because by studying the failures we know every failure happened when the 15 year real return average was less than 2%  .

Mathamatically you need to have more than that to sustain that 4% .

It is like  5+5=10  7+3  8+2 all =10.

It doe not matter what numbers got us to 10

All we need to know is when we get to 10 we have to cut spending to mathamatically have something happen
That's correct, you can calculate a withdrawal rate that would have worked in the past.  Unfortunately, to know what will work in the future, you have to know the future. 

I'm not sure what you meant by the numbers equaling 10.  -2 x -5 equals 10 also ... I'm not trying to be snarky, I just don't see what point you're trying to make with the arithmetic exercises at the end of your post. 
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by dragoncar » Tue Sep 08, 2015 8:58 pm

sophie wrote: 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.
I prefer a "greedy SWR" model for most people:  Start at 4% baseline income and increase the baseline by CPI every year.  Every year, withdraw the greater of the baseline income and 4% of the current portfolio value.  Basically, most people who see a giant portfolio balance are likely to get a little over-exuberant, and withdraw a bit more.  On the other hand, they will be resistant to lowering their baseline expenses (for example, by selling their house or making other major life changes).
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Tyler » Tue Sep 08, 2015 10:48 pm

Pointedstick wrote: 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.
Good ideas. Inflation is a lot more variable than most people think, and I also appreciate Sophie's point about unpredictable expenses.  I'll ponder on that.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Wed Sep 09, 2015 3:17 am

Desert wrote:
mathjak107 wrote: Actually we can compute a swr based on history.

We are able to do that in real time because by studying the failures we know every failure happened when the 15 year real return average was less than 2%  .

Mathamatically you need to have more than that to sustain that 4% .

It is like  5+5=10  7+3  8+2 all =10.

It doe not matter what numbers got us to 10

All we need to know is when we get to 10 we have to cut spending to mathamatically have something happen
That's correct, you can calculate a withdrawal rate that would have worked in the past.  Unfortunately, to know what will work in the future, you have to know the future. 

I'm not sure what you meant by the numbers equaling 10.  -2 x -5 equals 10 also ... I'm not trying to be snarky, I just don't see what point you're trying to make with the arithmetic exercises at the end of your post.
what i mean by the numbers example is mathematically we do know what works .


the past teaches us what the mathematical  numbers are that do not work.  it does not matter how the numbers are arrived at .  all we need to know is whatever model we are using and whatever the events , if the combo equals less than a 2% real return and it is close to the 15 year mark 4% will not hold .



studying the past itself may not mean much but what it does do is let us extract a number that no matter how it is arrived at will pretty much stay true


trying to draw 4% inflation adjusted with less than a 2% real return average the first 15 years will not mathematically support it .

but with out the past data we would never have known what that common denominator  was  so my example means no matter the events or combinations that lead to that real return if it equals less than 2% that is your red flag .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by sophie » Wed Sep 09, 2015 9:08 am

One good thing about examining portfolio stability between the mid 1970s and present time is that all major economic climates are represented in the data:  inflation/stagflation (1970s), prosperity in pretty much every other decade, deflation, and recession.  However, I think the stock-heavy portfolios look good because prosperity is overrepresented, compared to what I think is going to be the case going forward.

Several reasons for this.  One is our continued high rate of importation of an economic underclass that will under-contribute (i.e. not paying taxes, keeping wage rates low) and over-consume (i.e. require more than their share of welfare/government services).  That's not so troubling if it is a time-limited condition, which was the case with the immigration wave in the early 20th century.  Instead, they are creating their own self-perpetuating, independent subculture.  Another reason is that the underclass has a far higher birth rate than the middle and upper classes - so they will one day be in the majority.

As my dad used to say...too many people in the wagon, and not enough pulling it.  That's not a recipe for prosperity in the long run.  Maybe I'm wrong about this but I can't see how it can turn out any other way.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Wed Sep 09, 2015 9:36 am

while yes , while it represented an assortment of climates  the climates it represented the issue still remains that they  were not representative of the real worst times .

hypothetically if we were actually able to measure the pp during those times while that 60/40 mix may have passed muster at 4% inflation adjusted and had lots of money let over the pp may have been restricted over those poor time frames to maybe 3% safe withdrawals  with very little money left over or maybe 5% safe withdrawals on the flip side of what if . .

that is why we can't compare the amounts or use the same terminology  as a safe withdrawal rate , we just do not know what the pp would have done under the same benchmarks .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Thu Sep 10, 2015 7:35 am

if we go by a 25% equity allocation using the traditional benchmark worst case time frames  that allocation  would have failed 20% of all the time frames at 4% and 69% of the time at  5%

we also know that using longer term more volatile corporate bonds in the mix in the trinity study resulted in more failures than bill bengans 5 year bonds . so not sure how really long term bonds would have done .  you would possibly be locked in to lower rates for a very long time in a rising rate environment .

with gold tracking the cpi and not much more we can't say what effect gold would have on the results .  my feeling is buying the gold at the expense of buying equity's would not have resulted in better performance since equity's far and away had much higher returns over most of history .

we can't predict the future of course but my guess is the pp would likely have measured more like a 25% equity portfolio being limited to about 3% as an swr  not 4%  over those benchmark time frames  and certainly not 5% under the same benchmarks .

if i was going to use the  pp in retirement and i really wanted to have the same conservative level of a swr that a 4% swr gives a conventional  allocation of 60/40 or 50/50  i would start the pp based on a 3% draw rate .

if  after the first  3 years in retirement  the portfolio was 2x what i started with i would take another 10% raise on top of inflation adjusting ,  3 years later if i was still at a level of 2x what i started with  i would take another 10% raise.

better to start with lower expectations and go up then plan a life around a budget that may have to be cut .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by Jack Jones » Thu Sep 10, 2015 10:43 am

mathjak107 wrote: while yes , while it represented an assortment of climates  the climates it represented the issue still remains that they  were not representative of the real worst times .
Neither were the original studies. There have been "real worst times" in other places that were worse than the Great Depression. Since the Trinity study didn't have a way to include those in the model, should we also throw away the results of that study?
mathjak107 wrote: that is why we can't compare the amounts or use the same terminology  as a safe withdrawal rate , we just do not know what the pp would have done under the same benchmarks .
Yes we can. It's totally valid to compare the SWR of a 60/40 to the SWR of the PP using Tyler's data. I understand that you object to using the term "Safe Withdrawal Rate" when applied to any data set that isn't from the original studies, but I think you're in the minority there.
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by mathjak107 » Thu Sep 10, 2015 10:49 am

the trinity included all ibbotson data from 1925 to 1995 . with the actual worst of times being 1965/1966 in this country  in the study .

tyler agrees , you cannot benchmark the pp against a true swr as defined by the 4% "rule" the data does not exist . nor does tyler's chart account for anything  balance left over . the actual 4% swr has more than you started with over 90% of all those time frames left over .

you may have a 4% draw rate that held up over other selected time frames  but , no , they were not as bad as 1966/1965 to date .

if we eliminated the worst time frames  the pp can't measure against the actual safe withdrawal rate would be 6.50% with more than 90% of the time more than you started with left over  .
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Re: PP, Retirement, and Safe Withdrawal Rates

Post by rickb » Thu Sep 10, 2015 11:04 am

mathjak107 wrote: if we go by a 25% equity allocation using the traditional benchmark worst case time frames  that allocation  would have failed 20% of all the time frames at 4% and 69% of the time at  5%

we also know that using longer term more volatile corporate bonds in the mix in the trinity study resulted in more failures than bill bengans 5 year bonds . so not sure how really long term bonds would have done .  you would possibly be locked in to lower rates for a very long time in a rising rate environment .

with gold tracking the cpi and not much more we can't say what effect gold would have on the results .  my feeling is buying the gold at the expense of buying equity's would not have resulted in better performance since equity's far and away had much higher returns over most of history .

we can't predict the future of course but my guess is the pp would likely have measured more like a 25% equity portfolio being limited to about 3% as an swr  not 4%  over those benchmark time frames  and certainly not 5% under the same benchmarks .
I thought you already agreed that it's pointless to talk about how the PP would have done during the time periods you're talking about here. 

What we do know is that since gold has been available as a freely traded investment, the long term return of the PP has been fairly close to that of even a 100% stock portfolio (within the margin of error, depending on your start and end dates) and that its volatility and max drawdowns have been significantly less.

How can this be if (as you keep insisting) the amount of stocks in your portfolio is the primary driver of long term returns?

What you seem to be missing is that gold does not simply match CPI, but is a volatile investment (as volatile or even more volatile than stocks).  And that long term bonds are also volatile.  And that mixing these three highly volatile assets together creates a very stable portfolio.  BTW - you're never "locked in to lower rates for a very long time in a rising rate environment".  You sell long term bonds after holding them for 10 years and rebalance as well, so in a rising rate environment you'd be rebalancing into long term bonds meaning you're benefiting from rising rates as they rise.

The theory that the assets act together to shield you from the wild swings in value that a mostly stock portfolio endures has not been invalidated in the past 40+ years.  In 2008 (on an annual basis) a 60/40 stock/bond portfolio dropped about 25% while a vanilla PP (using t-bills as cash) dropped less than 2%.  Rather than require a 33% increase to get back to even the PP only needed a 2.04% increase.  Note that this particular case was covered by Browne's theoretical framework (long term bonds will strongly react in a deflationary environment) but he had never seen an example.  This is at least as out of sample as the years you seem to be focused on in which the PP could not have existed.
mathjak107 wrote: if i was going to use the  pp in retirement and i really wanted to have the same conservative level of a swr that a 4% swr gives a conventional  allocation of 60/40 or 50/50  i would start the pp based on a 3% draw rate .

if  after the first  3 years in retirement  the portfolio was 2x what i started with i would take another 10% raise on top of inflation adjusting ,  3 years later if i was still at a level of 2x what i started with  i would take another 10% raise.

better to start with lower expectations and go up then plan a life around a budget that may have to be cut .
If after 3 years the portfolio was 2x what you started with?  To double in 3 years requires a return of 26% per year.  That clearly isn't going to happen with any portfolio, so what do you really mean?
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