PP, Retirement, and Safe Withdrawal Rates

[Desert]

I inherited an IRA that was at Vanguard. They use an interesting dynamic withdrawal rate that lasts forever. Using the IRS actuarial tables, they divide the balance on your yearly withdrawal date by the remaining number of years the IRS projects you will live. Since the older you get, the longer the actuarial tables calculate your remaining lifespan, you never run out of money.

Is that just the Required Minimum Distribution that the IRS requires?  I set up an automatic RMD at Vanguard for my parents.  I'm wondering if this is the same thing? 

[Dmilligan]

i intend to use bob clyatts withdrawal plan.  i start out at 4% of the portfolio balance.  each year is dynamic  and i get to take 4% or if markets are down i take 4% or 5% less than the previous amount , which ever is higher.

mathjak107, was there any particular intentionality behind selecting this particular withdrawal plan? Also, isn't Clyatt's plan designed for a traditional 60/40 allocation? If so, the 4% would seem to be overly conservative. Even Bengen's own research shows that one could go to 4.9% SWR if one is utilizing a -5% floor. Why have you chosen to stay with 4% for use with a Permanent Portfolio?

If the 1966 SWR is 5.55% for the Permanent Portfolio, would this mean that one could increase to at least a 6.5% SWR with a �5% floor and ceiling? And still not get near the dreaded 12% CWR for a period of 40+ years?

Sorry for the flurry of questions. I'm just impressed with your knowledge and apparent evaluation of the various SWR spending plans. I'm in the midst of evaluating, researching and backtesting SWR spending plans myself and would appreciate the benefit of your thinking behind selecting Clyatt's plan.

[Desert]

I apologize if this paper was posted already.  It's a good summary of a bunch of different withdrawal strategies. 

http://papers.ssrn.com/sol3/papers.cfm? ... id=2579123

After reading and pondering a bit, I think I like the simple fixed percentage withdrawal.  Not inflation-adjusted.  Just withdraw 4% of whatever your beginning-of-year investment balance is.  If real returns are poor, you'll have to cut spending (no vacation that year, for example).  If times are fat, you can splurge a bit.  It's simple; it doesn't rely on any complex decision tree or CPI calculations.  And you never run out of money. 

I need to go to some calculating on this concept.  I'm interested to hear any feedback you all might have. 

[mathjak107]

i intend to use bob clyatts withdrawal plan.  i start out at 4% of the portfolio balance.  each year is dynamic  and i get to take 4% or if markets are down i take 4% or 5% less than the previous amount , which ever is higher.

mathjak107, was there any particular intentionality behind selecting this particular withdrawal plan? Also, isn't Clyatt's plan designed for a traditional 60/40 allocation? If so, the 4% would seem to be overly conservative. Even Bengen's own research shows that one could go to 4.9% SWR if one is utilizing a -5% floor. Why have you chosen to stay with 4% for use with a Permanent Portfolio?

If the 1966 SWR is 5.55% for the Permanent Portfolio, would this mean that one could increase to at least a 6.5% SWR with a �5% floor and ceiling? And still not get near the dreaded 12% CWR for a period of 40+ years?

Sorry for the flurry of questions. I'm just impressed with your knowledge and apparent evaluation of the various SWR spending plans. I'm in the midst of evaluating, researching and backtesting SWR spending plans myself and would appreciate the benefit of your thinking behind selecting Clyatt's plan.

the clyatt plan is based on portfolio balance , the type of portfolio does not matter because it is dynamic.

don't forget when markets do better you do better so unlike a constant spending plan like 4% inflation adjusted your swr is variable.  increasing your draw is only a problem with a constant spending strategy like the 4% rule.

But no withdrawal stratagy was ever meant to be fixed forever except for inflation adjusting


why start with 4% ?  because  that was about the safemax bill bengan  found based on the worst case scenarios.

[mathjak107]

don't forget when using a variable method how it is invested does not matter as your yearly balance will be effected by that . since you draw off the yearly balance that is the bottom line.

it is only when you have a constant spending strategy  that how you are invested determines your success rate.

the permanent portfolio can be a double edge sword as far as success rates go using the traditional  constant spending 4% rule.

the difference between bill bengans safemax results  and the trinity study is bill bengan actually had a higher success rate because he used 5 year gov bonds . it was a bit over 4.15% with no failures.

the trinity study used more volatile longer term corporate bonds and so there were failure periods.


more volatility can skew results  during unfavorable  time frames .

as of 4/1/2015 PFAU  is showing that a 2.50% withdrawal rate may be the new 4% .

http://retirementresearcher.com/dashboard/

[pugchief]

I inherited an IRA that was at Vanguard. They use an interesting dynamic withdrawal rate that lasts forever. Using the IRS actuarial tables, they divide the balance on your yearly withdrawal date by the remaining number of years the IRS projects you will live. Since the older you get, the longer the actuarial tables calculate your remaining lifespan, you never run out of money.

Is that just the Required Minimum Distribution that the IRS requires?  I set up an automatic RMD at Vanguard for my parents.  I'm wondering if this is the same thing?

Correct, they set this up per IRS WMD requirements. Ever notice that Req Min Dist and Weapon of Mass Destruction have the same acronym? 

[Tyler]

the permanent portfolio can be a double edge sword as far as success rates go using the traditional  constant spending 4% rule.

the difference between bill bengans safemax results  and the trinity study is bill bengan actually had a higher success rate because he used 5 year gov bonds . it was a bit over 4.15% with no failures.

the trinity study used more volatile longer term corporate bonds and so there were failure periods.

more volatility can skew results  during unfavorable  time frames .

You're absolutely correct on the effect of volatility on portfolio failure.  That's where the PP really shines in retirement.

Since 1972:
A 50/50 Stocks/Total Bond Trinity portfolio has a 4.95% real CAGR with a 10.28 St. Dev.
A 50/50 Stocks/5-year T-bills Bengen portfolio has a 5.05% real CAGR with a 10.08 St. Dev.
The PP  has a 4.46% real CAGR with a 6.87% St. Dev.  (Use 2-year treasuries for cash and you get 4.96% CAGR, 7.09 SD)

Despite having the most volatile bonds and a big chunk of even more volatile gold, the PP has much less total volatility than the portfolios used in all of the SWR studies.  That's where Harry Browne was so insightful -- he didn't cut back on volatile assets, he loaded up on uncorrelated volatile assets that respond well in every economic condition to balance each other out.  It's the resulting low volatility for the portfolio as a whole that allows it to outperform other portfolios at the same WR regarding retirement failures even while the average return is sometimes lower.  People who only look at averages miss the measurable effect of uncertainty.

BTW -- that's one more reason to be wary of reading too much into PP performance by substituting silver for gold.  That alone increases the PP's St. Dev to 15.98.  More than double!  That could trigger a few failures that a portfolio with gold would not.

[mathjak107]

I am hoping the lower volatility is a big plus  towards lowering sequence risk in retirement.

got my fingers crossed  just because we are in uncharted territory

[screwtape]

as of 4/1/2015 PFAU  is showing that a 2.50% withdrawal rate may be the new 4% .

Retirees over on Bogleheads talk about the 4% SWR rule from time to time and I don't recall a single one that ever said they paid any attention to it. For most people I think you just save what you can and then do what you have to do to live on it. 

[flagator]

the permanent portfolio can be a double edge sword as far as success rates go using the traditional  constant spending 4% rule.

the difference between bill bengans safemax results  and the trinity study is bill bengan actually had a higher success rate because he used 5 year gov bonds . it was a bit over 4.15% with no failures.

the trinity study used more volatile longer term corporate bonds and so there were failure periods.

more volatility can skew results  during unfavorable  time frames .

You're absolutely correct on the effect of volatility on portfolio failure.  That's where the PP really shines in retirement.

Since 1972:
A 50/50 Stocks/Total Bond Trinity portfolio has a 4.95% real CAGR with a 10.28 St. Dev.
A 50/50 Stocks/5-year T-bills Bengen portfolio has a 5.05% real CAGR with a 10.08 St. Dev.
The PP  has a 4.46% real CAGR with a 6.87% St. Dev.  (Use 2-year treasuries for cash and you get 4.96% CAGR, 7.09 SD)

Despite having the most volatile bonds and a big chunk of even more volatile gold, the PP has much less total volatility than the portfolios used in all of the SWR studies.  That's where Harry Browne was so insightful -- he didn't cut back on volatile assets, he loaded up on uncorrelated volatile assets that respond well in every economic condition to balance each other out.  It's the resulting low volatility for the portfolio as a whole that allows it to outperform other portfolios at the same WR regarding retirement failures even while the average return is sometimes lower.  People who only look at averages miss the measurable effect of uncertainty.

BTW -- that's one more reason to be wary of reading too much into PP performance by substituting silver for gold.  That alone increases the PP's St. Dev to 15.98.  More than double!  That could trigger a few failures that a portfolio with gold would not.

I read HB's book many years ago. I cannot recall if HB "factored into" his calculations price manipulation of precious metals by the powers that be.

If indeed gold and consequently silver prices are "being managed" how can the PP deliver what it promises when one of its legs is broken?

There is ample evidence that that is indeed the case.

Here is a recent letter of a silver company CEO to the CFTC ( US Commodities and Futures Trade Commission) regarding blatant price manipulation as he sees it.

http://www.gata.org/files/FirstMajestic ... 1-2015.pdf

The same is happening more or less to the gold market as well.

Silver is more volatile than gold because it is a smaller market and it is not a purely monetary metal like gold. There is no silver held as reserves in any central bank.

In any event, how can the PP fulfill its role if metals are "being managed"?

[MachineGhost]

BTW -- that's one more reason to be wary of reading too much into PP performance by substituting silver for gold.  That alone increases the PP's St. Dev to 15.98.  More than double!  That could trigger a few failures that a portfolio with gold would not.

In reality, it would be risk paritized.

[Tyler]

In any event, how can the PP fulfill its role if metals are "being managed"?

If price manipulation negates a portfolio then stocks and bonds are off limits as well.  Nothing goes untouched these days.

IMHO, the PP works because it is diversified.  If people try to hold down gold to prop up the dollar, the PP holds dollars.  If the FED reduces interest rates to prop up stocks, the PP holds stocks.  What drives the change in any one asset is less important than where the money goes afterwards. 

[mathjak107]

the permanent portfolio can be a double edge sword as far as success rates go using the traditional  constant spending 4% rule.

the difference between bill bengans safemax results  and the trinity study is bill bengan actually had a higher success rate because he used 5 year gov bonds . it was a bit over 4.15% with no failures.

the trinity study used more volatile longer term corporate bonds and so there were failure periods.

more volatility can skew results  during unfavorable  time frames .

You're absolutely correct on the effect of volatility on portfolio failure.  That's where the PP really shines in retirement.

Since 1972:
A 50/50 Stocks/Total Bond Trinity portfolio has a 4.95% real CAGR with a 10.28 St. Dev.
A 50/50 Stocks/5-year T-bills Bengen portfolio has a 5.05% real CAGR with a 10.08 St. Dev.
The PP  has a 4.46% real CAGR with a 6.87% St. Dev.  (Use 2-year treasuries for cash and you get 4.96% CAGR, 7.09 SD)

Despite having the most volatile bonds and a big chunk of even more volatile gold, the PP has much less total volatility than the portfolios used in all of the SWR studies.  That's where Harry Browne was so insightful -- he didn't cut back on volatile assets, he loaded up on uncorrelated volatile assets that respond well in every economic condition to balance each other out.  It's the resulting low volatility for the portfolio as a whole that allows it to outperform other portfolios at the same WR regarding retirement failures even while the average return is sometimes lower.  People who only look at averages miss the measurable effect of uncertainty.

BTW -- that's one more reason to be wary of reading too much into PP performance by substituting silver for gold.  That alone increases the PP's St. Dev to 15.98.  More than double!  That could trigger a few failures that a portfolio with gold would not.

of course the problem is that while the volatility of the portfolio may be lower the wrong asset being volatile and hurting returns  can hurt the retirement .

the longer term bonds used in the trinity study were more volatile than the 5 year bonds used in bill bengan's study.  those longer term bonds made the portfolio fail in the high inflation periodss in the 1966 retiree group.

our long term treasuries are akin. they are very volatile and perhaps they too would have caused failures just like the longer term corporate bonds did.

[Kevin K.]

Don't know if you've seen this recent post by Wade Pfau, but I thought it was an excellent short discussion about how much the type of bonds used in the two most influential SWR write-ups matters:

http://retirementresearcher.com/safe-wi ... i=18360981

I think Bob Clyatt's approach to a variable SWR is a good one.

Backtesting shows the PP has been a well-crafted "bunker" (Clyatt's own admiring characterization of it) in the past, but the standard selling point on it is don't look at backtesting, look at its true diversification of assets in various economic conditions. Bill Bernstein's recent "Deep Risk: How History Informs Porfolio Design" is a really interesting and provocative "riff" on the four economic conditions the PP is designed to perform well in, and among other points he shows that it makes little sense to allocate exactly equal percentages of a portfolio to risks that are anything but equally likely to occur and that have wildly different costs to insure against. The book takes maybe an hour to read (cheap Kindle download).

[Tyler]

the longer term bonds used in the trinity study were more volatile than the 5 year bonds used in bill bengan's study.  those longer term bonds made the portfolio fail in the high inflation periodss in the 1966 retiree group.

our long term treasuries are akin. they are very volatile and perhaps they too would have caused failures just like the longer term corporate bonds did.

Counter-intuitively, the key to addressing the high volatility of the stock market is not necessarily to dial back the volatility of the other assets.  Keeping volatile stocks but muting bonds helps a bit, but only goes so far.  Another way is to balance the volatility of multiple uncorrelated assets.

But really that's just part of the equation. Stealing a great line from Craig, a usual stock/bond allocation bases diversification on correlation between asset classes. The Permanent Portfolio looks only at how the assets correlate to the economy. The problem with corporate bonds in the Trinity study may simply be that they have a habit of becoming pretty correlated with stocks in bear markets. 

You might browse some of the posts by MachineGhost. He's done some good research on risk parity in the PP.  The book covers this as well.

(Edited for clarity)

[mathjak107]

Don't know if you've seen this recent post by Wade Pfau, but I thought it was an excellent short discussion about how much the type of bonds used in the two most influential SWR write-ups matters:

http://retirementresearcher.com/safe-wi ... i=18360981

I think Bob Clyatt's approach to a variable SWR is a good one.

Backtesting shows the PP has been a well-crafted "bunker" (Clyatt's own admiring characterization of it) in the past, but the standard selling point on it is don't look at backtesting, look at its true diversification of assets in various economic conditions. Bill Bernstein's recent "Deep Risk: How History Informs Porfolio Design" is a really interesting and provocative "riff" on the four economic conditions the PP is designed to perform well in, and among other points he shows that it makes little sense to allocate exactly equal percentages of a portfolio to risks that are anything but equally likely to occur and that have wildly different costs to insure against. The book takes maybe an hour to read (cheap Kindle download).

To me bob's variable method makes sense , we will use it set a max budget each year. it is real time and dynamic and I can see it working well for us.

[Dmilligan]

Backtesting shows the PP has been a well-crafted "bunker" (Clyatt's own admiring characterization of it) in the past, but the standard selling point on it is don't look at backtesting, look at its true diversification of assets in various economic conditions.

Did Clyatt ever say why he went with a slice-and-dice rather than with the PP?

Bill Bernstein's recent "Deep Risk: How History Informs Porfolio Design" is a really interesting and provocative "riff" on the four economic conditions the PP is designed to perform well in, and among other points he shows that it makes little sense to allocate exactly equal percentages of a portfolio to risks that are anything but equally likely to occur and that have wildly different costs to insure against. The book takes maybe an hour to read (cheap Kindle download).

Thanks for mentioning this book. I had not heard of it but grabbed it through Kindle Unlimited today and had an opportunity to read. A quick read and interesting. Very enjoyable.

[Dmilligan]

Backtesting shows the PP has been a well-crafted "bunker" (Clyatt's own admiring characterization of it) in the past, but the standard selling point on it is don't look at backtesting, look at its true diversification of assets in various economic conditions.

Did Clyatt ever say why he went with a slice-and-dice rather than with the PP?

I've answered my own question by finding this thread over on Early Retirement forums where you and Craig had an awesome conversation on the merits of slice-and-dice versus PP.

[Tyler]

So this thread made me do a lot of thinking and encouraged me to fire up the spreadsheets again.  The safe withdrawal rate was a pretty simple calculation in the Trinity and Bengen studies, so what's stopping me from calculating it for the PP? 

Mission accomplished, and the results may surprise you.

First, the 60-40 portfolio to calibrate expectations. 

[img width=500]https://portfoliocharts.files.wordpress ... -rates.jpg[/img]

The light green bars are the safe withdrawal rates based on the original Bengen study methodology -- the Max WR that would have not completely run out of money during the worst rolling retirement period of a given duration.  The dark green are my own twist -- the Max WR that would have sustained the original inflation-adjusted principal during the worst rolling retirement period of a given duration.  The Safe WR is right about what you'd expect, trending towards 4%.  So the calculations are on target.

Now the PP:

[img width=500]https://portfoliocharts.files.wordpress ... -rates.jpg[/img]

Basically, the SWR of the PP is about 5%, and a 4% WR would preserve the original principal rather than draw it down at all.  Pretty surprising, huh? 

For more info on background, assumptions, and disclaimers, read this.  For an explanation of why the SWR for portfolios like the PP departs so much from the conclusions of the Trinity and Bengen studies (and the calculators built on them), read this.  And to calculate it for your own portfolio and study just how much asset allocation really does affect withdrawal rates, try out the new Withdrawal Rates calculator here. 

Then after all that, start brainstorming ways to ditch the day job and let your portfolio do the work for you. 

[mathjak107]

only problem is  THAT IS NOT A TRUE SAFE WITHDRAWAL RATE ,  that is only a withdrawal rate that worked over a specific time frame .

to be called a safe withdrawal rate we first need to know what that term means .

the term means that the portfolio was able to stand up to not just any 30 year rolling time frames  even if not to good but specifically stood up to  the worst times frames we have had going back to 1926.

those time frames were 1929 1937 and 1965/1966.

so why those time frames and no others ?

because more modern research by michael kitces has taught us that  what made those time frames the absolute worst time frames that to date have not been duplicated  by any other date ranges is the following :


all the failed time frames had the same common denominator . they all failed to maintain at least a 2% real return average  with a 60/40 portfolio over  THE FIRST 15 YEARS OF A 30 YEAR TIME FRAME .

all the failed periods had very respectable 30 year numbers .  but their  first 15 years were terrible and no matter how good it got after the  first 15 years it was to little to late to save things .

want to know what the actual results were over the worst 30 year periods ever ?

suppose you were so unlucky to retire in one of those worst time frames ,what would your 30 year results look 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%

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

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%

it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.

while 6.50% to 4% does not sound like a lot 1 million at 4% is an initial draw rate of 40k , at 6.50% you could have had 65k . that is a whopping 60% more .

so what it boils down to is any time you fall below a 2% real return average over the first 15 years you run the danger of 4% not holding. but even a 1/2% cut in spending will make you whole again over the next 15 years or longer.


starting in  the early 1970's totally misses the disasters the 4% swr was based on . if we discount them out then 6.50% would be the  draw rate for a 60/40 mix.

you cannot pull those time frames out as they are the time frames the safe withdrawal rate was created off of .  to be called a safe withdrawal rate by comparison the pp would have had to maintain at least a 2% real return over the first 15 years of specifically those dates above .

otherwise if we eliminate them the  average  withdrawal rate for a 60/40 mix is 6.50%  but we can not call it a safe withdrawal rate because like the pp it has not made it through the worst of times .

[Pointedstick]

If you define "safe withdrawal rate" to require data going back before the PP was capable of existing because the dollar was still pegged to gold, then the PP has no safe withdrawal rate and the term cannot be used. I think Tyler's data speaks for itself.

[Tyler]

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

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

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

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

[mathjak107]

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

that has been my problem with using it for retirement day 1 . no history of what that rate actually would be in comparison .

[mathjak107]

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

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

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

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

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

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

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

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



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



sorrry my friend you just can't measure the pp in that comparison .

[Tyler]

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

that has been my problem with using it for retirement day 1 . no history of what that rate actually would be in comparison .

Then what's the SWR for your own portfolio?  The Fidelity Insights growth fund you use started in 1987, and the growth & income fund in 1994.  Neither follows the very specific portfolios of the Trinity or Bengen studies. 

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