UPDATE - Assumed Portfolio Return in Retirement

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Tyler
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Re: Assumed Portfolio Return in Retirement

Post by Tyler » Tue May 29, 2018 9:00 am

mathjak107 wrote:
Tue May 29, 2018 7:53 am
ochotona wrote:
Tue May 29, 2018 6:53 am
Portfolio charts.com by Tyler will give you historical retirement feasibility studies. Very informative graphics.
if i remember , tylers charts miss all the worst case scenario data by starting in the 1970's . it is the first 15 years of every worst case scenario case we had that made the entire 30 year retirement a failure .
The effect of the sampling timeframe on withdrawal rates is covered in detail here: https://portfoliocharts.com/withdrawal-rates-faq/
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Tue May 29, 2018 9:37 am

here is the good news :

as michael kitces extracted from all the worst cases , it all boils down to the first 15 years averaging at at least a 2% real return to have 4% inflation adjusted hold .

it really does not matter what investments you use as long as the math holds . it can be invested in beaver cheese and it will not matter .

of course if you want to see if how you would have done against the worst case scenarios you would need the exact data on those investments or else you can not compare to the past , with gold we can't really do that so just like when we use other investments in our portfolio that did not exist you in all honesty cannot stress test the portfolio .

but thanks to michael kitce's work we don't have to . we can monitor our own actual results going forward with our actual portfolio's . all we really need from the past is the math and sequencing of the failures .

if five years in you are not seeing at least a 2% real return a red flag should go up that says monitor this and a pay cut may be coming . remember a 2% real return my leave you with a buck in the 31st year so you really need to do better . if you are not seeing at least 2% real return as an average that red flag has to go up .

so far i have been retired 3 years and even after pulling 6 figures a year to live on we are a few hundred thousand higher than the day we retired so there is a nice cushion built up .

so it is not just about the swr it is about the balance too that goes with that swr rate . kitces found a 60/40 mix not only provided a 4% safe withdrawal rate over 30 years but it left you with more than you started with over 90% of the 117 rolling 30 year time frames to date and 67% of those time frame left you with double what you started with .

so just looking at an swr rate holding in a portfolio is only part of the story , the balance left for heirs and a cushion is also something of concern .

but thanks to the numbers crunching of the old data it is now translated in to a actual average real return we need to see as a min over the first 15 years . .
Last edited by mathjak107 on Tue May 29, 2018 10:23 am, edited 14 times in total.
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Re: Assumed Portfolio Return in Retirement

Post by ochotona » Tue May 29, 2018 9:37 am

The 1966 begin date for retirement is seen as one of the very worst in recent decades. Maybe 1929 would be worse.
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Tue May 29, 2018 9:38 am

ochotona wrote:
Tue May 29, 2018 9:37 am
The 1966 begin date for retirement is seen as one of the very worst in recent decades. Maybe 1929 would be worse.
actually 1965/1966 was the worst ever because of inflation .
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Re: Assumed Portfolio Return in Retirement

Post by ochotona » Tue May 29, 2018 10:00 am

Yeah I guess a dime went a long way in the 1930s due to deflation!
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Tue May 29, 2018 10:07 am

deflation played a big roll in 1929 . markets only had to come back within 18% of the old high and it was the same in dollars .

when it comes to 1965/1966 inflation was 2.50% -3.50% . who would have guessed in 3 years time it would have doubled and by 1974 it would be 11%. it was crushing to a retiree. but with inflation so low who ever expected a 4x increase coming .
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Re: Assumed Portfolio Return in Retirement

Post by Tyler » Tue May 29, 2018 12:36 pm

EdwardjK wrote:
Mon May 28, 2018 10:02 pm
Hi. I've built a spreadsheet that takes into account my starting portfolio value, estimated spending in retirement, inflation, and Social Security income. Using Solver, the spreadsheet calculates the average annual return needed so that I exhaust my portfolio at age 100. Not that my wife and I will last that long, but it's good to plan that long.

So I am asking what others are using as their assumed portfolio return in retirement to compare to what my spreadsheet says I need. 4% ? 5% ? Something else?

Your feedback is appreciated.
I see two things here worth more discussion.

First is the idea that retirement portfolio performance can be accurately modeled with simple average returns. That’s definitely not true, and doing it that way without accounting for sequence of returns will drastically over-state your true safe withdrawal rate. For more on that, read this: https://portfoliocharts.com/2015/11/17/ ... ates-work/

The second is the idea of using an alternative withdrawal strategy designed to deplete your portfolio at age 100. That sounds a lot like Variable Percentage Withdrawal (VPW) that is popular among some Bogleheads. Basically, it constantly adjusts withdrawals with an amortization-based goal to deplete your portfolio on a certain date. You might try searching Bogleheads.org for “VPW” or playing with the VPW setting on this retirement spending calculator: https://portfoliocharts.com/portfolio/r ... -spending/
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Tue May 29, 2018 1:27 pm

i use bob clyatt's withdrawal method myself . it works great .

it rewards you when markets are up and does not require much adjusting if it is down .

you just look at your year end balance and you get either 4% of it or if markets are down :

you take the higher of 4% of the balance or what you took last year less 5% ..

that is it , there is nothing else to it . it stress tested out to 40 years just fine .

personally i would never want any draw method that tried to guess the future and deplete my portfolio by a certain date. as you saw in milvesky's work the same return can see a 15 year difference in how long the money lasted just based on sequences .
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Re: Assumed Portfolio Return in Retirement

Post by ochotona » Tue May 29, 2018 1:39 pm

Why not just run a new retirement plan every year and just accept the specified new payout? Why does it have to be complicated?
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Tue May 29, 2018 1:50 pm

ochotona wrote:
Tue May 29, 2018 1:39 pm
Why not just run a new retirement plan every year and just accept the specified new payout? Why does it have to be complicated?
because the income can vary by a lot year to year just doing it off the cuff . that is just the opposite of what a retirement income stream should be . it needs to be safe ,secure and consistent . if markets are down 20% you should not have a plan that cuts you in draw so much you can't pay bills .

so it needs to have a structure and form to it that tests well . that is the issue trying to use something like an rmd schedule . it does the opposite of what it should .
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Re: Assumed Portfolio Return in Retirement

Post by stuper1 » Tue May 29, 2018 2:53 pm

mathjak107 wrote:
Tue May 29, 2018 1:27 pm
i use bob clyatt's withdrawal method myself . it works great .

it rewards you when markets are up and does not require much adjusting if it is down .

you just look at your year end balance and you get either 4% of it or if markets are down :

you take the higher of 4% of the balance or what you took last year less 5% ..

that is it , there is nothing else to it . it stress tested out to 40 years just fine .

personally i would never want any draw method that tried to guess the future and deplete my portfolio by a certain date. as you saw in milvesky's work the same return can see a 15 year difference in how long the money lasted just based on sequences .
This simple withdrawal method sounds good. Just a question to help me understand. Say the market was way up in the preceding year, so that my 4% withdrawal was a big number compared to previous years. Then, this year the market is way down. Would I really only take 5% off my big number from last year? Then, what if the market was way down for a second year, would I only take another 5% off the next year?
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Tue May 29, 2018 3:01 pm

yes , that is exactly how it works . that 5% drop off that big number is all you take . if markets are down the following year then once again you get the higher of 4% of the balance or 5% off the previous years draw .

all inflation adjusting is built in .

it really works well .

with the standard 4% constant dollar draw we typically hear of (4% rule ) you can die with way to much money unspent as 90% of the time with a 60/40 mix you die with more than you started .

so you need to take raises . a rule of thumb is anytime your balance is 50% higher than you started take a 10% raise plus the inflation raise. repeat every 3 years if you are still up more than 50% .

that is a lot of work compared to the method i use.

we just use that amount to set goal posts for spending each year . we can easily spend 2 or 3x our budget , we love travel and spending on our hobbies so over spending is easy . we both love photography so we are always going some where so we need goal posts .
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Re: Assumed Portfolio Return in Retirement

Post by stuper1 » Tue May 29, 2018 3:16 pm

mathjak107 wrote:
Tue May 29, 2018 1:27 pm

you just look at your year end balance and you get either 4% of it or if markets are down :

you take the higher of 4% of the balance or what you took last year less 5% ..
I want to make sure I understand this right, so please don't think I'm quibbling over words. Is the first line of your description above somewhat redundant, or am I missing something? If the method was simply stated this way would it be accurate: at the end of the year take the higher of 4% of the balance or what you took last year less 5% ?
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Tue May 29, 2018 3:19 pm

yes that is it . you always take the higher of the 2 . if 4% of the balance is higher take that or if markets were really down then take 5% less than the previous draw . you get which ever gives you more in a down year .
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Re: Assumed Portfolio Return in Retirement

Post by stuper1 » Tue May 29, 2018 3:29 pm

Sounds good. Thanks for the input. I like simple methods. Where can I read more about this method? You say it stress tested out 40 years. Was that published somewhere where I could read more about it, or was that just your personal test?
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Tue May 29, 2018 3:38 pm

you can read bob clyatts book WORK LESS - LIVE MORE . bob was a contributor over on the financial independence early retirement forum . they actually are the founders of firecalc .

http://www.retireearlyhomepage.com/clyatt.html

http://www.workless-livemore.com/
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Re: Assumed Portfolio Return in Retirement

Post by stuper1 » Tue May 29, 2018 4:48 pm

Thank you!

Simple is good. I read the threads over at bogleheads going on for pages and pages about withdrawal rates. It's pretty funny and then boring.
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Tue May 29, 2018 6:02 pm

i like simple too .

my wife was once a widow . her deceased husband left her with a mess . she understood nothing . she trusted the broker at the bank who lost 1/2 her savings in dot com stuff .

so we do things simple . she knows exactly how to follow the fidelity insight newsletter updates which we have 90% of assets in the 2 models we use
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Re: Assumed Portfolio Return in Retirement

Post by sophie » Wed May 30, 2018 7:35 am

I think that if I had to calculate my budget that carefully in retirement, then I retired too soon. Isn't the point of retiring to reduce stress, not exchange a job for a different set of worries? I'd just track day to day living expenses and watch the portfolio to be sure it stays above the magic number of 25x. If it dropped below that, then I'd go into tight-budget mode.

If you're still worried about sequence of return risk, stash some extra cash savings. Once your portfolio is sufficiently ahead of the game, blow that cash on something fun!
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Wed May 30, 2018 8:39 am

sophie wrote:
Wed May 30, 2018 7:35 am
I think that if I had to calculate my budget that carefully in retirement, then I retired too soon. Isn't the point of retiring to reduce stress, not exchange a job for a different set of worries? I'd just track day to day living expenses and watch the portfolio to be sure it stays above the magic number of 25x. If it dropped below that, then I'd go into tight-budget mode.

If you're still worried about sequence of return risk, stash some extra cash savings. Once your portfolio is sufficiently ahead of the game, blow that cash on something fun!
cash does not help. in fact cd's have had negative real returns after inflation and taxes over almost 40-50% of the time . that is still sequence risk .
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Wed May 30, 2018 8:41 am

sophie wrote:
Wed May 30, 2018 7:35 am
I think that if I had to calculate my budget that carefully in retirement, then I retired too soon. Isn't the point of retiring to reduce stress, not exchange a job for a different set of worries? I'd just track day to day living expenses and watch the portfolio to be sure it stays above the magic number of 25x. If it dropped below that, then I'd go into tight-budget mode.

If you're still worried about sequence of return risk, stash some extra cash savings. Once your portfolio is sufficiently ahead of the game, blow that cash on something fun!
a safe withdrawal rate assumes you spend principal over time , it would be silly not to . but what the safe withdrawal rate does is give you a controlled burn if outcomes are less than average.

all we need are some spending goal posts to keep us from over shooting what is safe. once we establish that each year it is on auto pilot .
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Re: Assumed Portfolio Return in Retirement

Post by Cortopassi » Wed May 30, 2018 9:14 am

sophie wrote:
Wed May 30, 2018 7:35 am
I think that if I had to calculate my budget that carefully in retirement, then I retired too soon. Isn't the point of retiring to reduce stress, not exchange a job for a different set of worries? I'd just track day to day living expenses and watch the portfolio to be sure it stays above the magic number of 25x. If it dropped below that, then I'd go into tight-budget mode.

If you're still worried about sequence of return risk, stash some extra cash savings. Once your portfolio is sufficiently ahead of the game, blow that cash on something fun!
Sophie, 25x comes from where? That is 25x your yearly spending, right?
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Wed May 30, 2018 9:28 am

that is trying to preserve all capital at 4% draws . but that is not what a 4% swr represents . 4% swr assumes you can have 1 dollar left at the end of 30 years . it would make little sense to me to never spend the money i could while i was alive .
a 4% swr tries to keep dollars constant while adjusting for inflation so lifestyle does not get cut in down years but it certainly uses principal when it has to
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Re: Assumed Portfolio Return in Retirement

Post by sophie » Wed May 30, 2018 9:50 pm

Cortopassi wrote:
Wed May 30, 2018 9:14 am
sophie wrote:
Wed May 30, 2018 7:35 am
I think that if I had to calculate my budget that carefully in retirement, then I retired too soon. Isn't the point of retiring to reduce stress, not exchange a job for a different set of worries? I'd just track day to day living expenses and watch the portfolio to be sure it stays above the magic number of 25x. If it dropped below that, then I'd go into tight-budget mode.

If you're still worried about sequence of return risk, stash some extra cash savings. Once your portfolio is sufficiently ahead of the game, blow that cash on something fun!
Sophie, 25x comes from where? That is 25x your yearly spending, right?
A portfolio that is 25x spending means your spending is 4% of the portfolio. Thus a 4% withdrawal rate. You can of course go with a different number for withdrawal rate if you like, but the point stands either way.

(now back to your regularly scheduled program.)
Last edited by sophie on Thu May 31, 2018 8:28 am, edited 1 time in total.
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Thu May 31, 2018 2:39 am

after year 1 your balance is all over the place . trying to hold a 25x relationship can produce some nasty income cuts , just the thing that safe withdrawal rates try to prevent .

2008 would have given many quite a slash in income to the point it would hurt their lifestyle bad if you were trying to maintain a 25x relationship.
this defeats the idea of a safe withdrawal rate which tries to provide a pensionized predictable income you can count on through thick and thin.

so i think in theory you are trying to do something like the dynamically changing bob clyatt method but the problem is in that "pure version " you have no way of limiting big pay cuts in down years .

so yes , bobs method is based on a 25x relationship if markets are up since it is 4% , but there is a strategy also for when markets are down so income stays fairly consistent.

fireclac i think has an option to use bob clyatts 95/5 dynamic draw method , which really was not founded by bob clyatt but was actually the work of

Keith Marbach
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