UPDATE - Assumed Portfolio Return in Retirement

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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

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Re: Assumed Portfolio Return in Retirement

Post by stuper1 » Thu May 31, 2018 9:17 am

Would Clyatt's 4/95 withdrawal be a problem for someone entering retirement right at the top of a big stock bubble? If things go way south for several years right after retirement, but they are only taking 5% decreases each year, would that significantly hurt their chances of success?

I guess what I'm saying is that if say the CAPE is at a very high level when you are entering retirement, maybe you should only count on 3.5% or less in the first few years. Am I being too cautious?

I'm still 10+ years from retirement. I want to find a withdrawal method that helps me spend the most money in my 60s and early 70s before I get into the years where I will probably be just as happy staying home and not traveling much, but without running out of money toward the end. We do have good LTC insurance fortunately.
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Re: Assumed Portfolio Return in Retirement

Post by barrett » Thu May 31, 2018 11:48 am

stuper1 wrote:
Thu May 31, 2018 9:17 am
Would Clyatt's 4/95 withdrawal be a problem for someone entering retirement right at the top of a big stock bubble? If things go way south for several years right after retirement, but they are only taking 5% decreases each year, would that significantly hurt their chances of success?

I guess what I'm saying is that if say the CAPE is at a very high level when you are entering retirement, maybe you should only count on 3.5% or less in the first few years. Am I being too cautious?

I'm still 10+ years from retirement. I want to find a withdrawal method that helps me spend the most money in my 60s and early 70s before I get into the years where I will probably be just as happy staying home and not traveling much, but without running out of money toward the end. We do have good LTC insurance fortunately.
I just retired (almost 60) and am starting out with a 3% draw. I don't like the current combo of high CAPE and low bonds yields. My wife is still working for a while so I don't have to get it exactly right just yet.

BUT, if we are both still posting on here in ten years, I can let you know how it turned out for us!
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Thu May 31, 2018 12:27 pm

stuper1 wrote:
Thu May 31, 2018 9:17 am
Would Clyatt's 4/95 withdrawal be a problem for someone entering retirement right at the top of a big stock bubble? If things go way south for several years right after retirement, but they are only taking 5% decreases each year, would that significantly hurt their chances of success?

I guess what I'm saying is that if say the CAPE is at a very high level when you are entering retirement, maybe you should only count on 3.5% or less in the first few years. Am I being too cautious?

I'm still 10+ years from retirement. I want to find a withdrawal method that helps me spend the most money in my 60s and early 70s before I get into the years where I will probably be just as happy staying home and not traveling much, but without running out of money toward the end. We do have good LTC insurance fortunately.
if you get hit early on with an extended downturn with a conventional 4% draw you are in the same situation . the first 5 years are the most critical and if you are in an extended downturn you need to take the same cuts . an extended down turn early on is the Achilles heel of any spending plan . it is like a trader having a string of losing trades day 1 . once you have your first up cycle you are in the clear usually

that is why quite a few use the rising glide path , to protect the early years .
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Re: Assumed Portfolio Return in Retirement

Post by Cortopassi » Thu May 31, 2018 1:33 pm

mathjak,

Retirement opportunity -- get an editor to put all your thoughts into a book. You have so many, and each one is usually only a sentence long, and you jump around in thoughts enough that I usually cannot follow your posts!

Sorry, no disrespect meant, you have a ton of experience and knowledge to share, it is just too much for me!
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Re: Assumed Portfolio Return in Retirement

Post by mathjak107 » Thu May 31, 2018 4:52 pm

that s okay , eventually it will all make sense to you as you learn more and more
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Re: UPDATE - Assumed Portfolio Return in Retirement

Post by EdwardjK » Thu May 31, 2018 7:22 pm

mathjack107,

I adjusted my "Monte Carlo" model (see updated initial post) to reflect the Clyatt 95-4% withdrawal strategy. Doing so raises the failure rate from 5.5% to almost 49%.

I adjusted my annual withdrawals as follows: If the prior year return was negative, then take 95% of the prior year withdrawal as the current year withdrawal. Otherwise, take 4% of the prior year ending portfolio balance as the current year withdrawal.

Am I interpreting this correctly?

Thanks.
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Re: UPDATE - Assumed Portfolio Return in Retirement

Post by mathjak107 » Fri Jun 01, 2018 3:11 am

well you have something wrong because firecalc actually has a tab for 95/5 and it tests great . you also don't just take 5% less if markets are down , you take the higher of the 2 , 4% of the actual balance or 5% less than the previous year .

so not sure of what you did but obviously it is not correct
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Re: Assumed Portfolio Return in Retirement

Post by sophie » Fri Jun 01, 2018 7:31 am

barrett wrote:
Thu May 31, 2018 11:48 am
stuper1 wrote:
Thu May 31, 2018 9:17 am
Would Clyatt's 4/95 withdrawal be a problem for someone entering retirement right at the top of a big stock bubble? If things go way south for several years right after retirement, but they are only taking 5% decreases each year, would that significantly hurt their chances of success?

I guess what I'm saying is that if say the CAPE is at a very high level when you are entering retirement, maybe you should only count on 3.5% or less in the first few years. Am I being too cautious?

I'm still 10+ years from retirement. I want to find a withdrawal method that helps me spend the most money in my 60s and early 70s before I get into the years where I will probably be just as happy staying home and not traveling much, but without running out of money toward the end. We do have good LTC insurance fortunately.
I just retired (almost 60) and am starting out with a 3% draw. I don't like the current combo of high CAPE and low bonds yields. My wife is still working for a while so I don't have to get it exactly right just yet.

BUT, if we are both still posting on here in ten years, I can let you know how it turned out for us!
Zing! Congratulations barrett!!!!!!
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Re: UPDATE - Assumed Portfolio Return in Retirement

Post by mathjak107 » Fri Jun 01, 2018 7:54 am

EdwardjK wrote:
Thu May 31, 2018 7:22 pm
mathjack107,

I adjusted my "Monte Carlo" model (see updated initial post) to reflect the Clyatt 95-4% withdrawal strategy. Doing so raises the failure rate from 5.5% to almost 49%.

I adjusted my annual withdrawals as follows: If the prior year return was negative, then take 95% of the prior year withdrawal as the current year withdrawal. Otherwise, take 4% of the prior year ending portfolio balance as the current year withdrawal.

Am I interpreting this correctly?

Thanks.

the obvious fact you have made errors is a portfolio that is dependent on it's actual balance can never actually fail since it is impossible to go to zero .

you can never ever deplete a portfolio to failure that depends on a percentage of balance .

when NORDS looked in to the method this was what they found.

"Bob’s 4%/95% system starts with a 4% withdrawal every year and isn’t adjusted for inflation , it is a by product of the methodology . Every year you withdraw 4% from the portfolio. However if the market had a bad year then your portfolio might have lost quite a bit of value, and a 4% withdrawal might be a much smaller dollar figure than the year before. This could put an unacceptable crimp into a spending plan. (In 2008 the S&P500 dropped 37%. Nobody wants to cut their retirement spending by over a third.) The “95%” part of Bob’s system is a compromise– it reduces spending a small amount during down years by “allowing” the withdrawal to be as much as 95% of the previous year. That way if next year’s 4% withdrawal is less than 95% of last year’s withdrawal, you can take the 95% amount. It’s more than a 4% withdrawal, but it’s still less than the Trinity Study withdrawal. Because the 4%/95% system varies its withdrawals, even the 95% option gives a bear-chewed portfolio some recovery time before withdrawals begin to rise again.

Bob had a financial research firm analyze the 4%/95% system in more historical detail than the Trinity Study. They showed that it works with diversified portfolios of 50% stocks. Better yet, Bob’s recommended portfolios still grew well enough to keep up with inflation. Although retirees only withdraw 4% each year (no boost for inflation), the portfolio keeps up with inflation so the 4% withdrawal preserves buying power. Best of all, Bob’s variable withdrawal system had a 100% success rate out to 40 years (a third longer than the Trinity Study).

Bob’s analysis is so popular that the FIRECalc planner includes a 4%/95% variable-spending feature on the “Spending Models” tab.
Last edited by mathjak107 on Fri Jun 01, 2018 8:15 am, edited 2 times in total.
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Re: UPDATE - Assumed Portfolio Return in Retirement

Post by mathjak107 » Fri Jun 01, 2018 7:55 am

i ran firecalc on the 95/5 tab. 1 milllion portfolio 40k initial draw 30 years 60/40 portfolio

Following the "95% Rule," from Work Less, Live More, each subsequent annual withdrawal will be the greater of 95% of your previous year's withdrawal, or 4.0% of your current portfolio, with no adjustment for inflation (unlike the normal FIRECalc behavior, which uses your starting portfolio, and makes adjustments for inflation). Although the calculations are based on unadjusted withdrawals, the charted withdrawals are shown using 2018 dollars.

FIRECalc looked at the 117 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 117 cycles. The lowest and highest portfolio balance at the end of your retirement was $564,799 to $2,458,646, with an average at the end of $1,218,582. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
In other models in FIRECalc, "failure" means the portfolio drops to zero. Since you are limiting spending to a percentage of your remaining portfolio, the total balance should never reach zero — but it could become pretty small in some situations. Pay attention to the spending graph, below. Since we can't use portfolio failure as a metric, FIRECalc is following the lead of the 95% Rule from Work Less, Live More, in which one of the goals is for the portfolio to be as big (after adjustment for inflation) at the end of the 30 years as it was when you started. FIRECalc found that 65.0% of the time, the portfolio you would have left behind exceeded the portfolio you started with.
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