Constant $ withdrawal

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stone
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Constant $ withdrawal

Post by stone » Sun Dec 31, 2017 12:57 pm

I've discovered Tyler's (from here) fabulous website and have been playing around with his interactive charts. One thing that struck me was that the style of withdrawal seems to have major implications for what's safest as a portfolio composition. If a constant % withdrawal is used (ie 4% of whatever the portfolio happens to be at any given time) then a very low volatility portfolio is better because a volatile portfolio will get eaten up whenever the value spikes up. But if a constant $ withdrawal is used, then a much more volatile portfolio with a higher CAGR gives a much safer result. I used the chart at https://portfoliocharts.com/portfolio/r ... -spending/ and compared two UK portfolios. The low volatility one had 15%TDM,10%NorthAmerica,15%emergingMkt, 20%LTT,20%Tbills, 20%gold; the high volatility portfolio had 25%TDM,25%emergingMkt,25%LTT, 25%gold. The low volatility portfolio looked like it would keep going for perpetuity with a 4.7% withdrawal rate at constant$ or at 6% at constant%. The high volatility portfolio looked like it would keep going for perpetuity with a 6% withdrawal at constant$ or at 6.3% at constant%. The "ulcer index" was better for the low volatility portfolio so it might be thought of as "safer" but seems to me far from being the safest option since constant$ is probably closer to a real life situation. Am I in a muddle?
PS I'm not saying 6% constant$ withdrawal is recommendable, simply that having a portfolio like that would give a bigger margin of safety with a conservative constant$ withdrawal.
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Re: Constant $ withdrawal

Post by farjean2 » Sun Dec 31, 2017 1:59 pm

Yes, you are in a muddle and I suggest that since it's New Years Eve you should just chill out, have a beer or two or three or more and let tomorrow worry about itself.

I retired last year and it's really not as complicated as you are making it. We have accumulated X dollars that has to last for Y number of years with a realistic Z percent ROI and it looks good on paper but we don't know what tomorrow brings so we don't spend a lot of time and energy worrying about it. We live conservatively staying within the parameters of our plan but not denying ourselves anything within those parameters due to worries about things in the future we can't control. We will deal with those things if/when they come.
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Re: Constant $ withdrawal

Post by sophie » Sun Dec 31, 2017 3:30 pm

Stone, nice to hear from you!! Do you remember this thread? Maybe it should be stickied.

viewtopic.php?f=9&t=4887&hilit=safe+withdrawal&start=12

I didn't realize Tyler had turned his charts from that thread to a page on his portfoliocharts site. Tyler, what assumptions went into your retirement calculator? I saw something about withdrawals pegged to 4% of portfolio value if the portfolio increases.

In any case, I don't think I'd be trying to push withdrawal rates that hard. The future may or may not produce the boom years of the 1980s and early/mid 90s again, which have a lot to do with the lustrous return from stocks.
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Re: Constant $ withdrawal

Post by stone » Sun Dec 31, 2017 4:34 pm

Hi Sophie, Tyler's site is a wonderland of geeky fun :) . My aim wasn't to push withdrawal rates hard but to see what sort of portfolio would give the greatest margin of safety such that a modest withdrawal rate would still be OK even if things ended up generally giving lower returns. I just thought it was interesting that in principle a portfolio that is designed to give a very low "ulcer index" and so a very good maximum safe constant% withdrawal rate falls short on the safe constant$ withdrawal rate.
PS, That "high volatility" portfolio I described actually has the high returns scattered all over the time series. The 2000s were a boom for it.
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Re: Constant $ withdrawal

Post by Tyler » Sun Dec 31, 2017 5:40 pm

stone wrote:One thing that struck me was that the style of withdrawal seems to have major implications for what's safest as a portfolio composition.
I'm glad you find the site useful!

It doesn't surprise me that certain withdrawal methods may pair well with certain portfolios. I honestly haven't explored it enough to have an opinion on why that is, but I do think it deserves further study.

Oh, and I appreciate that you're taking a balanced approach to this that doesn't merely maximize withdrawal rates. I prefer to use these tools to validate the retirement performance of a portfolio you already like for other reasons, as withdrawal rates are meaningless if they're calculated for a portfolio that you're unable to stick with for the long haul.
sophie wrote: I didn't realize Tyler had turned his charts from that thread to a page on his portfoliocharts site. Tyler, what assumptions went into your retirement calculator? I saw something about withdrawals pegged to 4% of portfolio value if the portfolio increases.
Yep -- this forum has provided all sorts of inspiration for my own calculations over the years, and I'm happy to have found a way to share. :)

For reference, the Withdrawal Rate assumptions are here and the Retirement Spending assumptions are here.
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Re: Constant $ withdrawal

Post by stone » Mon Jan 01, 2018 2:30 am

Tyler, your website is a wonder to behold. It is set out so intuitively that even a dunce like me can just start messing around and everything becomes clear :).

My impression about safe withdrawal methods and portfolio composition was that the safest withdrawal method would be a composite between the constant% and constant$. If the inflation adjusted portfolio value fell below the starting point, then constant% would be withdrawn until the portfolio regained its value, at which point constant$ would be withdrawn. That probably would be what most cautious people would just do instinctively anyway. Such a withdrawal method would be even more tilted in favour of a portfolio that had consistently high 10year CAGR rolling returns but worse max-draw-down statistics.

Portfolios such as the HBPP minimize the "ulcer index" but perhaps that mainly has purely emotional benefit for people who check on their portfolio values more than the once a year that Harry Browne recommended. In terms of genuine financial security, it is much better to have a portfolio that has say grown twice as large as you need but has occasional, brief, 20% draw-downs. What really matters is the extent of draw-downs to below the starting value of the portfolio during the withdrawal period.
Last edited by stone on Mon Jan 01, 2018 11:04 am, edited 1 time in total.
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Re: Constant $ withdrawal

Post by stone » Mon Jan 01, 2018 3:15 am

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Re: Constant $ withdrawal

Post by stone » Mon Jan 01, 2018 4:25 am

6% constant$ withdrawal from "constant$-safe-portfolio" (ie CDSP :) )
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6%constant$ withdrawal from HBPP
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6%constant$ withdrawal from GoldenButterfly
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CDSP benchmarked against GoldenButterfly
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CDSP Ulcer index:
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HBPP Ulcer Index
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Re: Constant $ withdrawal

Post by barrett » Sun Jan 07, 2018 7:34 am

stone wrote:Portfolios such as the HBPP minimize the "ulcer index" but perhaps that mainly has purely emotional benefit for people who check on their portfolio values more than the once a year that Harry Browne recommended. In terms of genuine financial security, it is much better to have a portfolio that has say grown twice as large as you need but has occasional, brief, 20% draw-downs. What really matters is the extent of draw-downs to below the starting value of the portfolio during the withdrawal period.
stone, correct me if I am wrong but aren't you finding that variations on Tyler's Golden Butterfly portfolio have generally done better than the HBPP during the testable timeframe? It looks like the AAs that you are plugging in are all 40% - 50% stocks, right?

As Sophie alluded to, it was really the stock bull market of 1982 to 1999 that separated a high stock allocation from the HPBB. Or are the numbers telling you something different?

The GB is appealing because by holding a higher percentage of stocks, it diminishes the feeling of being "left behind" when stocks are roaring. And it fits nicely into Machine Ghost's synopsis (probably slightly misquoted here) that "stocks drive PP returns and everything else is just hedges."

That 40% stock allocation is so tempting... if only the Shiller CAPE weren't up over 33. Hmm.
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Re: Constant $ withdrawal

Post by sophie » Sun Jan 07, 2018 8:11 am

Barrett - that's why I was thinking that instead of using a stock-heavy PP variant, you could instead think of the PP as a safe, conservative core, and put any additional savings into 100% stocks with the expectation that it might take off like it has the past few years, or go nowhere for 10 years like in the 1999-2009 period. Because you have the PP for core expenses, this wouldn't be as much of a concern.

The idea that it's ok to have a portfolio that drops 20% (or 40%) but outpaces the conservative approach is fine, as long as you have a plan for dealing with the possibility of prolonged negative returns or a deep drawdown. Like, hold 5 years expenses in cash or increase target portfolio size by 20-30%. If you hold the cash though, you'd have to factor that into return calculations, in order to get a fair comparison to the PP. I suspect the lustrous-looking CAGR of, say, a 60/40 portfolio would drop quite a bit if you did.
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Re: Constant $ withdrawal

Post by mathjak107 » Tue Jan 09, 2018 5:50 am

to sustain a 4% safe withdrawal rate it has taken a 2% average real return over the first 15 years of a retirement time frame to last .
if you don't have at least a 2% real return average the first 15 years no matter how good the next years are the risk of failing is very very high .

all 30 year time frames for all the worst 30 year periods going as far back as 1871 failed in the first 15 years because the real return average was to low to support 4%.

1965 /1966 the poster children for the worst group on record also included the greatest bull market in history in their time frame . but it was to little to late .

so if 5 years in you see you are not averaging at least a 2% real return , a red flag should go up to the fact you may be taking a pay cut if this keeps up
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Re: Constant $ withdrawal

Post by mathjak107 » Tue Jan 09, 2018 8:34 am

all the stress testing of all these portfolio allocations do is identify what failed . it is the high speed numbers crunching we have today that was able to analyze the common denominator to all the worst case outcomes for a retiree .

1907,1929,1937.1965/1966 were all the poster children for the worst outcomes and when the time frames were analyzed (thanks to michael kitces )

the same common denominators all came up .

the 30 year results were all pretty average . you would really not know anything bad happened . but all failed in the first 15 years when the real return average sucked .


30 year results looked like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

now look at the 15 year periods

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%
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Re: Constant $ withdrawal

Post by stone » Tue Jan 09, 2018 4:38 pm

It is really helpful to have those much older time series as well as the 1970-2017 period. However I guess there is a very big difference between a 60%domestic-stock:40%bond portfolio and a 25%emerging market:25domestic:25%bond:25%gold portfolio. Looking at Tyler's calculators for the 1970-2017 period, a mix of emerging market and various developed world stockmarkets hasn't suffered the "lost decade" phenomenon to anything like the same extent as any single regional stock market has. I wonder whether that also holds for the older periods?

I'm with you guys though that now looks like a bad time to increase stock allocations. Perhaps something to think off once stocks crash again.
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Re: Constant $ withdrawal

Post by mathjak107 » Tue Jan 09, 2018 4:54 pm

i have seen so few actual crashes in my 30 plus years as an investor . as peter lynch said , more money has been given up in preparation for or waiting for the next down turn then ends up actually being lost in the downturn .

it really does not matter what you use to model at this point . in the past we had no numbers to hang our hat on as far as how much is a safe draw rate so like building a house to withstand the strongest hurricane , the worst retiree outcomes became the benchmarks .

today we don't need to do that anymore . all knowing those past periods did is give us a magic number that we can hang our hat on ..

that number is the 2% real return or higher the first 15 years .

of course that may leave you with a buck at the end of 30 years but the good news is we have yet to hit anything near the worst times in the last 50 years .
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Re: Constant $ withdrawal

Post by Kriegsspiel » Tue Jan 09, 2018 9:14 pm

1. Save up a fuck load of money. Put at least like 12 years worth of expenses into a PP.
2. Stop worrying about the initial 15 year period?
3-infinity. Drink beer.
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Re: Constant $ withdrawal

Post by Xan » Tue Jan 09, 2018 9:45 pm

Kriegsspiel wrote:1. Save up a fuck load of money. Put at least like 12 years worth of expenses into a PP.
2. Stop worrying about the initial 15 year period?
3-infinity. Drink beer.
Wouldn't 12 years' expenses saved up mean you'd need an 8.3% rate of return in order for it to last forever? That's a lot.

The typical goal is 25 years' expenses, which means the traditional 4% would be "safe" (not accounting for Mathjak's order of returns).
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Re: Constant $ withdrawal

Post by Kriegsspiel » Tue Jan 09, 2018 9:56 pm

Xan wrote:
Kriegsspiel wrote:1. Save up a fuck load of money. Put at least like 12 years worth of expenses into a PP.
2. Stop worrying about the initial 15 year period?
3-infinity. Drink beer.
Wouldn't 12 years' expenses saved up mean you'd need an 8.3% rate of return in order for it to last forever? That's a lot.

The typical goal is 25 years' expenses, which means the traditional 4% would be "safe" (not accounting for Mathjak's order of returns).
If mathjak/Kitces was implying that 4% withdrawal wasn't safe with a certain asset allocation because that allocation has had very bad 15 year returns, I suggested having an allocation that generally has solid returns. I think 12 years worth of PP would be a good defense against a bad 15 year run. The rest of your fuck load could be more PP, stocks, whatever. Just a fuck load of it. At least 25 years.
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Re: Constant $ withdrawal

Post by stone » Wed Jan 10, 2018 2:24 am

I suppose the crux quandary I was wondering about was whether there is any historical/geographic example where a 25%domesticstocks:25%EM:25%LTT:25%gold portfolio would have run out of money with a constant dollar draw down that a HBPP would have survived? Basically it's whether cash provides more diversification/"growth" than EM stocks when viewed over the sort of time frame where a portfolio would be entirely used up (ie >15years-ish). Cash often is a better diversifier over a year but that is less relevant for this because a portfolio takes several years to run out.

I guess the Japanese bubble of 1990 was followed by an EM crisis in 1997-1998. Maybe Japan gives an example of the HBPP being the safest option?

PS; Tyler's interactive charts seem to have hit a glitch (at least on my browser).
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Re: Constant $ withdrawal

Post by mathjak107 » Wed Jan 10, 2018 2:28 am

there are 2 issues with that premise . there is no guarantee the pp will hold even 2% real return when rates rise on bonds . gold ,stocks and long term treasuries could suck .

the other is the balance left is a consideration too . i don't use the pp because as a long term investor , there really was no logic to mitigating temporary short term dips (which are irrelevant as a long term investor ) and permanently reducing my long term gains .

in a tough retirement outcome the cushion in the balance with the pp may be weak .
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Re: Constant $ withdrawal

Post by stone » Wed Jan 10, 2018 3:38 am

mathjak107 wrote: i don't use the pp because as a long term investor , there really was no logic to mitigating temporary short term dips (which are irrelevant as a long term investor ) and permanently reducing my long term gains .
I suppose that was sort of the realization I was seeing too. But I was wondering whether almost everyone is in reality a "long term investor". Perhaps some saving schedules do require all of the savings to be drawn down at once. Perhaps saving up for buying something expensive outright at an auction or whatever. But retirement drawn downs don't look like that and a >15year draw down period in itself pushes things over to being in the "long term investor" realm.
mathjak107 wrote: there is no guarantee the pp will hold even 2% real return when rates rise on bonds . gold ,stocks and long term treasuries could suck .......in a tough retirement outcome the cushion in the balance with the pp may be weak .
I hadn't got my head around the possibility of sustained rising interest rates without severe inflation. In the 1970s there were rising interest rates but outpaced by inflation (at least in the UK) so gold did very well indeed. The hike in real interest rates at the start of the 1980s was so short it was survivable. I must admit I find it hard to see why a central bank would hike up interest rates unless battling out of control inflation.
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Re: Constant $ withdrawal

Post by mathjak107 » Wed Jan 10, 2018 4:26 am

even spending down directly from 100% stocks as a hypothetical retiree (which i would not do ) , you actually did just fine . without the weight of cash and bonds the difference in gains over time allows spending even in down years with almost the same success rate as 50/50 .

if i remember 50/50 has a 96% success rate at 4% while 100% equity has a 94% success rate .

it really is a mental issue which way you do it not a financial one . the only risk , and it never happened is an extended down turn day 1 .

even 2008 was a non event to a retiree and if you retired in 2008 on 100% equities , today you are no different than any other average retiree group .

a typical portfolio with bonds too will likely never be spending down stocks at a loss in a down turn as rebalancing will always have bonds being sold .in fact if the drop is steep enough conventional rebalancing will have you buying stocks as well as spinning off spending cash .

yeah we can all create visions in our heads of all kinds of nasty exceptions to things and scenario's where things don't work out as they typically do , but it just never plays out that way .

peter lynch was 100% correct when he said more money is lost or given up in anticipation and preparation for a downturn than is actually lost in any downturn . unless of course you exhibit poor investor behavior and hurt yourself ..


so the reality is that since 1871 , at least 35% equities has always maintained a very high success rate of at least lasting 30 years under the worst outcomes so far but the greater the equity allocation the greater the cushion and the balance left .

for the record i am retired and we do live 80% off our portfolio . which i let range from 40 to 50% equities . as of last week i rebalanced my portfolios and are back to the 40% range . i think there is more risk than reward at this point in markets . they had grown from 40 to over 50% the last few years so i scaled them back to have money to put back in when there are more values .

but i was always 100% equities for much of my 30 years as an investor.

that difference in balance from what i had vs would have had if i went much more conservative , can cushion a whole lot of awe craps today compared to where i would have been .

as an example , i have been using the fidelity insight newsletter for 30 years . a 100k in 1987 in the growth model is 2.75 million today . that is what i used for almost all the years since i started in 1987 up until about 5 or 6 years from retiring .

if you were more aggressive and followed their sector model , that actually started a year later and is 3.70 million .

but a growth and income model is about a million less than the growth model . so that mental comfort cost you big time .

in fact there is no evidence that people stick around in more conservative portfolio's . these people tend to be more gun shy and their trigger points are generally lower too so they are just as inclined to bail and run when they see losses mount . morningstar data shows this to be true .
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Re: Constant $ withdrawal

Post by Kbg » Fri Jan 12, 2018 8:29 am

I’ve said many times here...the vanilla PP is not a good port for a younger person.

I’m not sure so sure I agree with mj’s post retirement spin on things. Historically his market history math may be just fine; however, would a retiree just roll easily with a 50% drawdown of their source of income? My guess is a good portion of them would panic and do something emotionally and financially stupid. Therefore, I think a portfolio that is easier to deal with psychologically is a better way to go.
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Re: Constant $ withdrawal

Post by mathjak107 » Fri Jan 12, 2018 8:48 am

mental is a different issue from what makes financial sense .

my wife would not let me ever go higher than 50% equities in retirement . she already lost half her savings in the dot com crash when her first husband died and she went to the adviser at her bank for help . so he loaded her up on tech and dot coms , the moron .

so what we do mentally is a whole other story . i was always 100% equities up until just about retirement . but 40-50% suits us just fine .

but even 40-50% can be a white knuckle ride as we get more and more dollars in our account .

a mere 7% drop today in portfolio value would represent 9 years of maxing out my 401k at catchup .

so when the crap hits the fan if your dollars are high enough there is no such thing as a "good nights sleep " in a down draft regardless of allocation unless relatively few dollars are effected the body reacts .. "everyone has a plan-until they get punched in the face " is so true . thank you tyson .

we humans are prewired to hate loosing money more than making money and it makes us exhibit poor investor behavior all the time regardless of amounts . there is no evidence balanced funds exhibit any better behavior in rough times than growth funds do ...

you would think they would be easier to stay the course , but nope , down is down and investors exhibit poor behavior regardless .
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Re: Constant $ withdrawal

Post by Kriegsspiel » Fri Jan 12, 2018 9:29 am

mathjak107 wrote:there are 2 issues with that premise . there is no guarantee the pp will hold even 2% real return when rates rise on bonds . gold ,stocks and long term treasuries could suck .
Granted. Although I'd wager that every investment would suck in that situation. The best you could expect would be that the PP would not suck as much.
the other is the balance left is a consideration too . i don't use the pp because as a long term investor , there really was no logic to mitigating temporary short term dips (which are irrelevant as a long term investor ) and permanently reducing my long term gains .

in a tough retirement outcome the cushion in the balance with the pp may be weak .
I see your point if you're working, spending some of your income and saving some (and not touching it for 20 years). If you're retired, you aren't a long term investor. You are spending your savings. According to your own posts, you do want to mitigate first-15-year dips because they ruin retirements.
mathjak107 wrote:even spending down directly from 100% stocks as a hypothetical retiree (which i would not do ) , you actually did just fine . without the weight of cash and bonds the difference in gains over time allows spending even in down years with almost the same success rate as 50/50 .
In 1907, 1929, 1937, 1966?

I legit can't tell what you're saying... Just so we're clear, you're saying that the retirements that failed due to 15 year bad returns for the balanced portfolios would have succeeded if they were in 100% stocks? No bonds, no cash at all?

The stocks had worse 15 year returns than bonds in a few of those cases, from what you posted, so you can see why I'm asking.
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Re: Constant $ withdrawal

Post by mathjak107 » Fri Jan 12, 2018 9:36 am

no ,those dates are the worst historical dates for retirees in any allocation and they are the dates the 4% safe withdrawal rate was based on . all of those dates failed and you needed to reduce to about 3.70% with any allocation over 35% equities to survive the stress test 100% .

but those dates failing still represent over a 90% success rate at 4% so it is still acceptable .

but the common denominator to all failures at 4% are conditions were so bad the first 15 years that even the best of years coming along later could not salvage them .

so mathematically it takes about a 2% real return the first 15 years to have 4% hold . of course what balance is left at 30 years depends on your actual allocation , but the income stream should hold up ok

the funny thing is researcher michael kitces found that if you made it to the 15 year mark okay , that even if your retirement went out longer than 30 years you still were okay .

so you can see in the 30 year results for all those failure years 30 years was not bad . but the 15 year periods sucked .

we don't know how the pp would have held up over those benchmark years since gold's prices were really skewed but it is not important . thanks to kitces we know no matter what you use if you are not seeing a 2% real return the first 15 years you are in danger of not holding 4% so a pay cut may be in order. in fact if you are not holding a 2% real return 5 years in , i certainly would proactively cut spending as a precaution
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