Safe Withdrawal Rate?

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ahhrunforthehills
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Safe Withdrawal Rate?

Post by ahhrunforthehills » Fri Nov 08, 2019 2:43 pm

So the calculator over at portfoliocharts.com says that a 25% x 4 allocation will provide around a 4.7% SWR.

But then I noticed that the "DIY Withdrawal Rate Toolbox" at earlyretirementnow.com said the same allocation would be only 2.7%.

A HUGE 2% difference!

I sent the guy the following comment:
Are you familiar with the SWR calculator at https://portfoliocharts.com/portfolio/withdrawal-rates/ ? I was really surprised at how drastically different your results were for a 25% Stock, 25% Bond, 25% Cash, 25% Gold portfolio was. Their SWR was 4.7%, yours was 2.7%. Yours seems suspiciously low considering that even their Perpetual Withdrawal Rate was 3.8%. Any thoughts on what could be causing this ENORMOUS difference?
His response was:
The difference is due to the other calculator using only the 1970-current interval. If you remove the two worst episodes (1929 + 1965-68) you get higher SWRs.
But that’s not very comforting! It’s like estimating the probability that you’ll get into a traffic jam by looking at traffic patterns only between 1 and 3 am!
It is amazing how 2 viewpoints (both of which seem pretty valid) can make such an enormous impact. Is it fair to count those years? Is it fair to exclude them? What about gold? Is it fair to exclude a gold price that was fixed? After all, if gold ever became substantially important again, it would not be surprising to see the price artificially manipulated again.

Thoughts?

Here are the links:

https://earlyretirementnow.com/2018/08/ ... s-part-28/
https://portfoliocharts.com/portfolio/withdrawal-rates/
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Re: Safe Withdrawal Rate?

Post by Tyler » Fri Nov 08, 2019 4:42 pm

ahhrunforthehills wrote:
Fri Nov 08, 2019 2:43 pm
His response was:
The difference is due to the other calculator using only the 1970-current interval. If you remove the two worst episodes (1929 + 1965-68) you get higher SWRs.
But that’s not very comforting! It’s like estimating the probability that you’ll get into a traffic jam by looking at traffic patterns only between 1 and 3 am!
Nah. Study the breadth of retirement research out there, and you'll find the difference between a SWR calculated for a standard portfolio since 1970 and since 1870 is only about 0.3%. And not every portfolio had its worst start years in 1929 and 1966, so you can't assume those start dates are the problem without looking deeper. I explain that in detail here: https://portfoliocharts.com/withdrawal-rates-faq/ Long story short, the timeframe does make a difference but it doesn't explain the large discrepancy you're seeing. Without getting into the weeds of the ERN methodology, I'll simply point out that I calibrated the PC calculations against the findings of other well-known researchers in the above link. For a sanity check, you might try doing the same exercise for the ERN numbers.

But even assuming the long-term ERN numbers for the PP are 100% correct, it's really not surprising that the SWR would be much lower when 25% of your portfolio had its price artificially fixed by an international monetary agreement. So the number may very well be historically accurate but practically irrelevant today. More data always sounds good, but in this case it's like arguing that the historical data proves that one should not expect to live beyond 30 while ignoring the invention of antibiotics and vaccines. Context is important. ;)

So personally, I think the gold numbers before Bretton Woods was repealed are interesting in a historical sense but not very useful for evaluating the retirement strategies of modern investors. If they ever reinstitute a gold standard or otherwise ban gold ownership, I'll reevaluate my assumptions and calculate accordingly. But I choose not to plan my retirement around the data for an economic system that no longer exists.
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Re: Safe Withdrawal Rate?

Post by europeanwizard » Sat Nov 09, 2019 1:45 am

Thanks for answering, Tyler. Your website has brought me so much insight.
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sat Nov 09, 2019 3:58 am

Safe withdrawal rates are based on the worst outcomes in history for retirees ..

Specifically if you retired in 1907 ,1929 ,1937 ,1965,1966

Thanks to Michael kitces ,he crunched the numbers and found the common denominator to every failure to a 30 year retirement time frame so what assets are used is now irrelevant, only the math behind the failures is what counts .

Kitces found every failure happened at a 4% draw when the REAL RETURN averaged less than 2% over the first 15 years ....

Once it fell below 2% as a real return average the first 15 years the excessive draw left the portfolio in a state where even the greatest bull markets were not able to revive the retirement...

So if 5 years in you are below 2% real return an alarm should go off ,, 10 years in a pay cut from 4% is a good idea ....

So it really is not that important anymore as to the exact assets used ...we know the math we need to have 4% hold .

But keep in mind that is to end with at least a buck left ..you don’t want to hit 30 years ,be alive and now have little money left .

So you need to watch the balance too.

The good news is a 4% draw has been so conservative that the odds of it not lasting are the same odds you will end 30 years with 6x what you started with .

90% of of the 119 rolling 30 year cycles to date had you end with more than you started ..67% ended with 2x what you started , and 50% of the time ended with 3x what you started with ...so typically raises have been needed or you could leave to much unspent and enjoyed .

If you eliminate the worst cases above a draw rate with 60/40 would be about 6.50%.

It is like knowing that if our blood pressure falls lower than a certain amount all our organs are in danger of shutting down ...it does not matter how our blood pressure got to where it is , all that matters is the numbers say we are in danger .

How you fix it is another story
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Re: Safe Withdrawal Rate?

Post by ahhrunforthehills » Sat Nov 09, 2019 5:03 pm

Thank you so much for the clarification Tyler. Your website is awesome :)

The good news is a 4% draw has been so conservative that the odds of it not lasting are the same odds you will end 30 years with 6x what you started with .
In regards to a SWR, what you are saying seems true....

A 60/40 does appear to have amazing potential outside of those "worst case scenarios". Using Tyler's website, you can see that a 60/40 allocation in the "United States" can lead to the possibility of some crazy high "Individual Withdrawal Rates (blue lines), most in the 7% to 9 % range. Even in Japan, a 60/40 has many north of 5.5%. All those blue lines spread out everywhere have lots of opportunities for great returns.

When looking at a 25% x 4 allocation, things are pretty boring. All those blue lines "possibilities" are tightly grouped. As expected the PP is "predictable". It appears to have basically no possibility of ever getting above 5.5% in those "Individual Withdrawal Rates (blue lines).

So the 4% draw being classified as "conservative" seems based on the assumption of a booming economy going forward, no?

This is actually where my concern lies. For my situation, I am only really interested in the Perpetual Withdrawal Rate (PWR) over the course of 40 to 60 years (not the SWR).

Just for simplicity's sake, I am comparing the following:

- 60/40 (United States) - 3.5% PWR
- 60/40 (Japan) - 1% PWR
- 25% x 4 (United States) - 3.9% PWR
- 25% x 4 (Japan) - 2.2% PWR

I was surprised to see the PWR (and SWR) was actually higher for a 25x4 allocation than for a 60/40 allocation. I guess I was expecting Japan-proof insurance to come at the expense of returns... but instead a PP outperformed a 60/40?

Tyler, I noticed that a 30/25/25/20 allocation seemed like a nice PP tweak considering that the odds of the US becoming like Japan seems pretty low (IMHO). Have you noticed any surprisingly "good value" allocations in regards to the PWR% outside of the PP?

I also noticed that your website states that the PWR maintains the "inflation-adjusted principal" but "Returns ignore taxes". I assume that you are ignoring taxes completely even from an inflation standpoint (i.e. if inflation alone makes an asset go from $100 to $200, we would be paying the capital gains tax of the purely inflationary event). Can you please confirm that even these types of taxes are not factored in?
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Re: Safe Withdrawal Rate?

Post by Tyler » Sat Nov 09, 2019 9:17 pm

ahhrunforthehills wrote:
Sat Nov 09, 2019 5:03 pm
I was surprised to see the PWR (and SWR) was actually higher for a 25x4 allocation than for a 60/40 allocation. I guess I was expecting Japan-proof insurance to come at the expense of returns... but instead a PP outperformed a 60/40?
It's indeed a little counter-intuitive, but it works out like that because withdrawal rates benefit from low volatility just as much as they do from high average returns. This may help explain what's going on > How safe withdrawal rates work

ahhrunforthehills wrote:
Sat Nov 09, 2019 5:03 pm
Tyler, I noticed that a 30/25/25/20 allocation seemed like a nice PP tweak considering that the odds of the US becoming like Japan seems pretty low (IMHO). Have you noticed any surprisingly "good value" allocations in regards to the PWR% outside of the PP?
I'm also a big fan of PWRs, and that's one of the reasons I like the Golden Butterfly.

ahhrunforthehills wrote:
Sat Nov 09, 2019 5:03 pm
I also noticed that your website states that the PWR maintains the "inflation-adjusted principal" but "Returns ignore taxes". I assume that you are ignoring taxes completely even from an inflation standpoint (i.e. if inflation alone makes an asset go from $100 to $200, we would be paying the capital gains tax of the purely inflationary event). Can you please confirm that even these types of taxes are not factored in?
Inflation is a measure of cost of living and is separate from capital gains. But it's true that the calculations do not account for taxes, and I'd recommend you include them in your planned expenses. But one of the really cool things about the PP is that with four very different assets there are lots of opportunities for things like tax loss harvesting or even just living off the cash for a while without selling anything. So with a little planning you may end up paying a lot less tax than you expect.
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 2:40 am

i don't really see one living off the portfolio without selling something .. the cash in the pp is not just cash , it is an integral part of the plan ..

it should not be looked at as "cash " for spending anymore than you would reduce any other asset class by spending it and not rebalancing .

cash has a job to fill .

1- it is the other half of the barbel so if i was to spend down 6 figures in cash to fill our spending buffer , being retired , the fixed income portion is totally unbalanced unless i sell something .
2 it acts as a an option with no expiration date to buy other assets when they are down .

so in order to maintain the effectiveness of the pp you need to sell and rebalance to raise that cash ,. it would not make sense to spend the cash , then sell assets to rebalance anyway , unless you wanted to be a " dirty lil market timer " like me and disregard the unbalanced portfolio until you choose when to rebalance .

it is no different than having a traditional portfolio with no cash buffer . you just rebalance the portfolio for your cash or risk an unbalanced portfolio.

in my opinion that cash should not be considered spendable cash like a checking account . it is an asset in the mix with a job to do and you really don't want to compromise things .

it is like right now the income model in fidelity insight is using a very very conservative bond fund as one fund in the model , which is actually an old style money market that is free to move up or down a penny or so from a buck .

that cash can be deployed at some point in a friday night update so that cash is not just cash for spending either
Last edited by mathjak107 on Sun Nov 10, 2019 8:13 am, edited 9 times in total.
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 2:47 am

here is a very interesting article from one of my favorite top researchers michael kitces


Executive Summary
As retirees and their planners adjust to the ‘new normal’ – a world of lower-than-average returns for the foreseeable future, many have questioned whether the historical safe withdrawal rate research is still valid. After all, if returns will be below average in the coming years, doesn’t that imply safe withdrawal rates must be below average as well?

In point of fact, though, safe withdrawal rates do not depend on average returns in the first place; the worst safe withdrawal rates in history that we rely upon are actually associated with 15-year real returns of less than 1%/year from a balanced portfolio! Accordingly, given current bond yields, dividend yields, and inflation, if the current environment for today’s retirees will result in a “new record low” safe withdrawal rate, the S&P 500 would still have to be no higher in 2027 than it was in 2007 or even 2000!

On the other hand, merely projecting equities to recover to new highs by the end of the decade or generating a mid-single-digits return would actually represent an upside surprise, allowing for higher retirement spending than 4.5% safe withdrawal rates!




https://www.kitces.com/blog/what-return ... ased-upon/
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 2:49 am

another very interesting view from michael looking at 2000 and 2008 and the 4% swr

Executive Summary
The 4% rule has been much maligned lately, as recent market woes of the past 15 years – from the tech crash of 2000 to the global financial crisis of 2008 – have pressured both market returns and the portfolios of retirees.

Yet a deeper look reveals that if a 2008 or even a 2000 retiree had been following the 4% rule since retirement, their portfolios would be no worse off than any of the other “terrible” historical market scenarios that created the 4% rule from retirement years like 1929, 1937, and 1966. To some extent, the portfolio of the modern retiree is buoyed by the (only) modest inflation that has been occurring in recent years, yet even after adjusting for inflation, today’s retirees are not doing any materially worse than other historical bad-market scenarios where the 4% rule worked.

Ultimately, this doesn’t necessarily mean that the coming years won’t turn out to be even worse or that the 4% rule is “sacred”, but it does emphasize just how bad the historical market returns were that created it and just how conservative the 4% rule actually is, and that recent market events like the financial crisis are not an example of the failings of the 4% rule but how robustly it succeeds!


https://www.kitces.com/blog/how-has-the ... al-crisis/
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Re: Safe Withdrawal Rate?

Post by vnatale » Sun Nov 10, 2019 9:14 am

mathjak107 wrote:
Sun Nov 10, 2019 2:47 am
here is a very interesting article from one of my favorite top researchers michael kitces


Executive Summary
As retirees and their planners adjust to the ‘new normal’ – a world of lower-than-average returns for the foreseeable future, many have questioned whether the historical safe withdrawal rate research is still valid. After all, if returns will be below average in the coming years, doesn’t that imply safe withdrawal rates must be below average as well?

In point of fact, though, safe withdrawal rates do not depend on average returns in the first place; the worst safe withdrawal rates in history that we rely upon are actually associated with 15-year real returns of less than 1%/year from a balanced portfolio! Accordingly, given current bond yields, dividend yields, and inflation, if the current environment for today’s retirees will result in a “new record low” safe withdrawal rate, the S&P 500 would still have to be no higher in 2027 than it was in 2007 or even 2000!

On the other hand, merely projecting equities to recover to new highs by the end of the decade or generating a mid-single-digits return would actually represent an upside surprise, allowing for higher retirement spending than 4.5% safe withdrawal rates!




https://www.kitces.com/blog/what-return ... ased-upon/
Have you (on anyone else here) directly corresponded with Michael Kitces?

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Re: Safe Withdrawal Rate?

Post by sophie » Sun Nov 10, 2019 9:16 am

Tyler wrote:
Sat Nov 09, 2019 9:17 pm
But one of the really cool things about the PP is that with four very different assets there are lots of opportunities for things like tax loss harvesting or even just living off the cash for a while without selling anything. So with a little planning you may end up paying a lot less tax than you expect.
Very interesting point Tyler! Do you have some specific examples in mind that you could share? Tax management during the withdrawal phase is crying out for a really good, detailed treatment. I notice that in the Bogleheads and Mr. Money Mustache forums retirement withdrawal strategies are sort of taken for granted, and rarely discussed.

I had run some spreadsheet simulations a few years back, and cash played a surprisingly important role in protecting other assets from badly-timed or frequent sales. It also dawned on me that the standard recommendation for retirees to plan on 5 years annual expenses in cash is similar to the cash allocation in a 25x4 PP, if you have exactly 25x expenses (4% SWR) saved. The reported returns of a stock/bond portfolio are falsely boosted by excluding the cash allocation. It would be like judging the PP's return based only on the 3 volatile assets. If that's the case, then the performance described for the PP family of portfolios on Tyler's website is all the more impressive. Conversely, the safe withdrawal rate of a stock/bond portfolio complemented with 5 years expenses in cash might be better than advertised.
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 9:29 am

i would disagree with returns being inaccurate because of cash ... for one thing cash as a holding is a component in the strategy of the pp so as i said above whether you spend the cash or sell assets to develop the cash that cash is a part of the portfolio strategy and needs to be replaced and in effect is forced to be maintained . ....

other portfolios have cash outside the portfolio strategy and can maintain a dollar balance if they want and rebalance say monthly for spending cash or yearly .in retirement no one needs cash buffers . traditional re balancing between just stocks and bonds works just fine to develop cash for spending .. cash buffers are a mental thing . cash buffers are a mirage as kitces points out and do nothing over simply rebalancing to fill cash when you need it .

most who use cash buffers in a traditional portfolio are not holding much more than 1 or 2 years cash usually anyway , not 25% of assets ..

so if the portfolio strategy includes a permanent cash position then it is what it is and that should weigh on the return as it is a component of the model and it is not for general spending down . when i do the pp the cash component has nothing to do with what we spend since it is an integral part of the portfolio strategy and needs to be intact .

if i was doing the desert portfolio i would not include my checking account in the returns . that strategy holds no cash in the portfolio mix . returns on the desert portfolio definatly have to be looked at differently than the pp since cash is not forced to be maintained as a part of it.

right now because i am doing the pp until i am not i have 275k tied up in cash instruments and if we fall another 1% i will add the last of the money making that 300k in cash equivalents . that certainly needs to be separate from the 10-12k we draw a month to live on from our checking account or i would defeat the whole purpose of that cash position in he pp as i unbalance it .
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Re: Safe Withdrawal Rate?

Post by Tyler » Sun Nov 10, 2019 10:37 am

mathjak107 wrote:
Sun Nov 10, 2019 2:40 am
in my opinion that cash should not be considered spendable cash like a checking account . it is an asset in the mix with a job to do and you really don't want to compromise things .
I completely agree. My point was not that I treat cash differently, but simply that I appreciate its unique characteristics that occasionally come in handy when doing smart tax management.

sophie wrote:
Sun Nov 10, 2019 9:16 am
Tyler wrote:
Sat Nov 09, 2019 9:17 pm
But one of the really cool things about the PP is that with four very different assets there are lots of opportunities for things like tax loss harvesting or even just living off the cash for a while without selling anything. So with a little planning you may end up paying a lot less tax than you expect.
Very interesting point Tyler! Do you have some specific examples in mind that you could share? Tax management during the withdrawal phase is crying out for a really good, detailed treatment. I notice that in the Bogleheads and Mr. Money Mustache forums retirement withdrawal strategies are sort of taken for granted, and rarely discussed.
Tax laws are so complex and dependent on your specific situation that it's hard to generalize, but here are a few situations I've experienced where the flexibility of the different assets in the PP/GB came in handy:

- With 50% cash and gold, the PP is more focused on capital gains than on ordinary income. So you have more flexibility in retirement to manage taxes than other investors depending heavily on dividends and interest to drive returns. When your capital gains qualify for the 0% long-term tax rate, you can also pretty easily offset the low amount of ordinary income via the standard deduction and tax loss harvesting.

- Let's say you've hit a rebalancing band in retirement. You run the numbers and determine that the capital gains from selling the appreciated assets will push you into the next tax bracket. Ouch! Luckily you can rebalance just enough to stay below the line and wait until the next tax year to do the rest. And in the meantime, you can temporarily fund your expenses directly out of the cash portion until it makes more sense to touch the appreciated assets again.

- You're enjoying retirement and decide to buy a new car in cash. Your first instinct may be to take the money out of your appreciated stocks to have a mini rebalance, but even though all the capital gains are long-term and qualify for the 0% tax rate you understand that the income still counts as MAGI in the ACA subsidy calculations. Running a few numbers, you learn that paying for your car with stock proceeds will double your healthcare premiums over paying for it out of cash. So you happily sell the TBills and re-fill them over the next year using the regular monthly dividend and interest income from stocks and bonds.

For reference, my federal income tax bill in retirement hovered at exactly zero for several years (before I got a part time job that brought in more income). Of course my situation may be very different from yours, so YMMV. And simply using a PP is not a magic bullet, as it's really all about smart tax planning. But IMO the PP is like a well-stocked financial toolbox with several handy tools to use when the need arises.
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Re: Safe Withdrawal Rate?

Post by vnatale » Sun Nov 10, 2019 10:56 am

Tyler wrote:
Sun Nov 10, 2019 10:37 am
mathjak107 wrote:
Sun Nov 10, 2019 2:40 am
in my opinion that cash should not be considered spendable cash like a checking account . it is an asset in the mix with a job to do and you really don't want to compromise things .
I completely agree. My point was not that I treat cash differently, but simply that I appreciate its unique characteristics that occasionally come in handy when doing smart tax management.

sophie wrote:
Sun Nov 10, 2019 9:16 am
Tyler wrote:
Sat Nov 09, 2019 9:17 pm
But one of the really cool things about the PP is that with four very different assets there are lots of opportunities for things like tax loss harvesting or even just living off the cash for a while without selling anything. So with a little planning you may end up paying a lot less tax than you expect.
Very interesting point Tyler! Do you have some specific examples in mind that you could share? Tax management during the withdrawal phase is crying out for a really good, detailed treatment. I notice that in the Bogleheads and Mr. Money Mustache forums retirement withdrawal strategies are sort of taken for granted, and rarely discussed.
Tax laws are so complex and dependent on your specific situation that it's hard to generalize, but here are a few situations I've experienced where the flexibility of the different assets in the PP/GB came in handy:

- With 50% cash and gold, the PP is more focused on capital gains than on ordinary income. So you have more flexibility in retirement to manage taxes than other investors depending heavily on dividends and interest to drive returns. When your capital gains qualify for the 0% long-term tax rate, you can also pretty easily offset the low amount of ordinary income via the standard deduction and tax loss harvesting.

- Let's say you've hit a rebalancing band in retirement. You run the numbers and determine that the capital gains from selling the appreciated assets will push you into the next tax bracket. Ouch! Luckily you can rebalance just enough to stay below the line and wait until the next tax year to do the rest. And in the meantime, you can temporarily fund your expenses directly out of the cash portion until it makes more sense to touch the appreciated assets again.

- You're enjoying retirement and decide to buy a new car in cash. Your first instinct may be to take the money out of your stocks, bonds, and gold to have a mini rebalance, but even though all the capital gains are long-term and qualify for the 0% tax rate you understand that the income still counts as MAGI in the ACA subsidy calculations. Running a few numbers, you learn that paying for your car with stock proceeds will double your healthcare premiums over paying for it out of cash. So you happily sell the TBills and re-fill them over the next year using the regular monthly dividend and interest income from stocks and bonds.

For reference, my federal income tax bill in retirement hovered at exactly zero for several years (before I got a part time job that brought in more income). Of course my situation may be very different from yours, so YMMV. And simply using a PP is not a magic bullet, as it's really all about smart tax planning. But IMO the PP is like a well-stocked financial toolbox with several handy tools to use when the need arises.
Tyler! You just shocked me! In retirement! Until I just read that you'd had struck as this super bright late 20s, 30s something year old! Congratulations on maintaining a youthful persona!

Vinny
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Re: Safe Withdrawal Rate?

Post by Kriegsspiel » Sun Nov 10, 2019 11:00 am

Tyler, I had the same experience when I was sabbaticaling. That big pile of cash lets you live in some high tax areas, without having that big tax liability. Re-stock your war chest when you move on.
You there, Ephialtes. May you live forever.
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Re: Safe Withdrawal Rate?

Post by Tyler » Sun Nov 10, 2019 11:06 am

vnatale wrote:
Sun Nov 10, 2019 10:56 am
Tyler! You just shocked me! In retirement! Until I just read that you'd had struck as this super bright late 20s, 30s something year old! Congratulations on maintaining a youthful persona!
Well, I'm in my early 40's and really more of a MMM-style financially independent type than a traditional retiree. But I'm glad to hear the youthful energy still comes through! Not being stressed about full-time work certainly takes a few years off. ^-^
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Re: Safe Withdrawal Rate?

Post by vnatale » Sun Nov 10, 2019 12:02 pm

Tyler wrote:
Sun Nov 10, 2019 11:06 am
vnatale wrote:
Sun Nov 10, 2019 10:56 am
Tyler! You just shocked me! In retirement! Until I just read that you'd had struck as this super bright late 20s, 30s something year old! Congratulations on maintaining a youthful persona!
Well, I'm in my early 40's and really more of a MMM-style financially independent type than a traditional retiree. But I'm glad to hear the youthful energy still comes through! Not being stressed about full-time work certainly takes a few years off. ^-^
The rest of the story! That now makes more sense. And, congratulations on pulling it off! When I was in the age bracket that movement was not as prominent. I could have retired from work a while ago but have not for two main reasons. 1) I'm the ultimate security seeking personality, meaning no amount is enough. 2) But, more importantly, I enjoy the challenge of a lot of the work that I do. All that said, I would gladly reduce the amount of time I put into work if someone else could do some of the work that I do. Unfortunately, that is not the case. Too much of it can only be done by me. But one day I WILL stop and a complete replacement will be needed for me. That day is yet to be decided by me.

Vinny
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 2:40 pm

Tyler wrote:
Sun Nov 10, 2019 10:37 am
mathjak107 wrote:
Sun Nov 10, 2019 2:40 am
in my opinion that cash should not be considered spendable cash like a checking account . it is an asset in the mix with a job to do and you really don't want to compromise things .
I completely agree. My point was not that I treat cash differently, but simply that I appreciate its unique characteristics that occasionally come in handy when doing smart tax management.

sophie wrote:
Sun Nov 10, 2019 9:16 am
Tyler wrote:
Sat Nov 09, 2019 9:17 pm
But one of the really cool things about the PP is that with four very different assets there are lots of opportunities for things like tax loss harvesting or even just living off the cash for a while without selling anything. So with a little planning you may end up paying a lot less tax than you expect.
Very interesting point Tyler! Do you have some specific examples in mind that you could share? Tax management during the withdrawal phase is crying out for a really good, detailed treatment. I notice that in the Bogleheads and Mr. Money Mustache forums retirement withdrawal strategies are sort of taken for granted, and rarely discussed.
Tax laws are so complex and dependent on your specific situation that it's hard to generalize, but here are a few situations I've experienced where the flexibility of the different assets in the PP/GB came in handy:

- With 50% cash and gold, the PP is more focused on capital gains than on ordinary income. So you have more flexibility in retirement to manage taxes than other investors depending heavily on dividends and interest to drive returns. When your capital gains qualify for the 0% long-term tax rate, you can also pretty easily offset the low amount of ordinary income via the standard deduction and tax loss harvesting.

- Let's say you've hit a rebalancing band in retirement. You run the numbers and determine that the capital gains from selling the appreciated assets will push you into the next tax bracket. Ouch! Luckily you can rebalance just enough to stay below the line and wait until the next tax year to do the rest. And in the meantime, you can temporarily fund your expenses directly out of the cash portion until it makes more sense to touch the appreciated assets again.

- You're enjoying retirement and decide to buy a new car in cash. Your first instinct may be to take the money out of your appreciated stocks to have a mini rebalance, but even though all the capital gains are long-term and qualify for the 0% tax rate you understand that the income still counts as MAGI in the ACA subsidy calculations. Running a few numbers, you learn that paying for your car with stock proceeds will double your healthcare premiums over paying for it out of cash. So you happily sell the TBills and re-fill them over the next year using the regular monthly dividend and interest income from stocks and bonds.

For reference, my federal income tax bill in retirement hovered at exactly zero for several years (before I got a part time job that brought in more income). Of course my situation may be very different from yours, so YMMV. And simply using a PP is not a magic bullet, as it's really all about smart tax planning. But IMO the PP is like a well-stocked financial toolbox with several handy tools to use when the need arises.
my reply was to sophie ....


whether i choose to put 1 million in the pp or 4 million of my cash , it has no bearing on the portfolio performance .

if cash is a mandatory component then it is what it is , cash is a part of it .

if i decide i want a 100% equity portfolio then that is what the return is calculated on , not how much cash i choose to hold .

if a portfolio calls for cash , short term bonds , reits , etc then it is judged solely on its components .

what my personal rate of return is would include the portfolio i chose , interest on my cash and possibly any real estate i own ..that return will be effected by the individual asset returns . so how much cash my personal rate of return is , would be effected by the amount of cash i hold ,but that has nothing to do with portfolio performance as that portfolio is designed
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 4:42 pm

vnatale wrote:
Sun Nov 10, 2019 10:56 am
Tyler wrote:
Sun Nov 10, 2019 10:37 am
mathjak107 wrote:
Sun Nov 10, 2019 2:40 am
in my opinion that cash should not be considered spendable cash like a checking account . it is an asset in the mix with a job to do and you really don't want to compromise things .
I completely agree. My point was not that I treat cash differently, but simply that I appreciate its unique characteristics that occasionally come in handy when doing smart tax management.

sophie wrote:
Sun Nov 10, 2019 9:16 am


Very interesting point Tyler! Do you have some specific examples in mind that you could share? Tax management during the withdrawal phase is crying out for a really good, detailed treatment. I notice that in the Bogleheads and Mr. Money Mustache forums retirement withdrawal strategies are sort of taken for granted, and rarely discussed.
Tax laws are so complex and dependent on your specific situation that it's hard to generalize, but here are a few situations I've experienced where the flexibility of the different assets in the PP/GB came in handy:

- With 50% cash and gold, the PP is more focused on capital gains than on ordinary income. So you have more flexibility in retirement to manage taxes than other investors depending heavily on dividends and interest to drive returns. When your capital gains qualify for the 0% long-term tax rate, you can also pretty easily offset the low amount of ordinary income via the standard deduction and tax loss harvesting.

- Let's say you've hit a rebalancing band in retirement. You run the numbers and determine that the capital gains from selling the appreciated assets will push you into the next tax bracket. Ouch! Luckily you can rebalance just enough to stay below the line and wait until the next tax year to do the rest. And in the meantime, you can temporarily fund your expenses directly out of the cash portion until it makes more sense to touch the appreciated assets again.

- You're enjoying retirement and decide to buy a new car in cash. Your first instinct may be to take the money out of your stocks, bonds, and gold to have a mini rebalance, but even though all the capital gains are long-term and qualify for the 0% tax rate you understand that the income still counts as MAGI in the ACA subsidy calculations. Running a few numbers, you learn that paying for your car with stock proceeds will double your healthcare premiums over paying for it out of cash. So you happily sell the TBills and re-fill them over the next year using the regular monthly dividend and interest income from stocks and bonds.

For reference, my federal income tax bill in retirement hovered at exactly zero for several years (before I got a part time job that brought in more income). Of course my situation may be very different from yours, so YMMV. And simply using a PP is not a magic bullet, as it's really all about smart tax planning. But IMO the PP is like a well-stocked financial toolbox with several handy tools to use when the need arises.
Tyler! You just shocked me! In retirement! Until I just read that you'd had struck as this super bright late 20s, 30s something year old! Congratulations on maintaining a youthful persona!

Vinny
Simply having an array of different types of accounts is all you need for flexibility tax wise ...Roth’s ,traditional and taxable accounts can be utilized for maximum efficiency......that can be key more then the types of assets
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Re: Safe Withdrawal Rate?

Post by ahhrunforthehills » Sun Nov 10, 2019 5:25 pm

Tyler wrote:
Sat Nov 09, 2019 9:17 pm
ahhrunforthehills wrote:
Sat Nov 09, 2019 5:03 pm
I was surprised to see the PWR (and SWR) was actually higher for a 25x4 allocation than for a 60/40 allocation. I guess I was expecting Japan-proof insurance to come at the expense of returns... but instead a PP outperformed a 60/40?
It's indeed a little counter-intuitive, but it works out like that because withdrawal rates benefit from low volatility just as much as they do from high average returns. This may help explain what's going on > How safe withdrawal rates work

ahhrunforthehills wrote:
Sat Nov 09, 2019 5:03 pm
Tyler, I noticed that a 30/25/25/20 allocation seemed like a nice PP tweak considering that the odds of the US becoming like Japan seems pretty low (IMHO). Have you noticed any surprisingly "good value" allocations in regards to the PWR% outside of the PP?
I'm also a big fan of PWRs, and that's one of the reasons I like the Golden Butterfly.

ahhrunforthehills wrote:
Sat Nov 09, 2019 5:03 pm
I also noticed that your website states that the PWR maintains the "inflation-adjusted principal" but "Returns ignore taxes". I assume that you are ignoring taxes completely even from an inflation standpoint (i.e. if inflation alone makes an asset go from $100 to $200, we would be paying the capital gains tax of the purely inflationary event). Can you please confirm that even these types of taxes are not factored in?
Inflation is a measure of cost of living and is separate from capital gains. But it's true that the calculations do not account for taxes, and I'd recommend you include them in your planned expenses. But one of the really cool things about the PP is that with four very different assets there are lots of opportunities for things like tax loss harvesting or even just living off the cash for a while without selling anything. So with a little planning you may end up paying a lot less tax than you expect.
Thanks Tyler! I never really considered the Golden Butterfly. At first glance I always just assumed it was just a bunch of performance-chasing noise caused by recent returns. I guess there is more to it than meets the eye after all. Hopefully the market tanks soon so I can transition... can't see adding an extra 15% into the stock market with it so dangerously overpriced (based on CAPE Ratio).
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Sun Nov 10, 2019 5:44 pm

The cape ratio is really a poor indicator of short term moves ....the reality is we have no idea what markets will do .

EXECUTIVE SUMMARY

Despite the recent Nobel Prize given to its originator, the Shiller cyclically-adjusted P/E (or “CAPE”) ratio continues to be controversial, driven in no small part by its current “reading” that markets are overvalued, yet they continue to climb higher and higher… a formula that has played out in the recent past as well, in both the mid-2000s and especially the late 1990s. Yet the poor recent predictive performance of Shiller CAPE shouldn’t entirely be a surprise; it has never had a particularly high correlation to year-over-year market returns.

Nonetheless, the reality is that while Shiller CAPE has little predictive value in the short term, its correlation to market returns is far stronger over longer time periods; Shiller CAPE shows its strongest correlation to nominal returns over an 8-year time horizon, and is actually most predictive of real returns over an *18* year time horizon… supporting Benjamin Graham’s old adage that the markets may be a voting machine in the short run, but they are ultimately a weighing machine in the long run as valuation eventually takes hold. On the other hand, over very long time horizons (e.g., 30 years) Shiller CAPE once again begins to lose its value as other longer-term structural market factors take hold.

The fact that Shiller CAPE is a strong predictor of market performance in the long run (but not the “ultra” long run, nor the short run) suggests that the valuation measure does have use, but only if applied in the correct contexts. For instance, while all this suggests that Shiller CAPE may be a poor market-timing investment indicator, clients who are retiring and exposed to “sequence-of-returns” risk over the first half of their retirement may benefit greatly by adjusting their initial spending levels in light of market valuation at the start of retirement. Similarly, those considering the benefits of delaying Social Security – or choosing to annuitize or claim pension payments over an equivalent lump sum – would do well to evaluate their decision in light of whether there is a market-valuation-based headwind or tailwind underway. Thus, even if Shiller CAPE is a poor market-timing indicator, that doesn’t mean it’s useless at all when it comes to retirement planning!


https://www.kitces.com/blog/shiller-cap ... -planning/
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Re: Safe Withdrawal Rate?

Post by ahhrunforthehills » Sun Nov 10, 2019 6:20 pm

mathjak107 wrote:
Sun Nov 10, 2019 5:44 pm
The cape ratio is really a poor indicator of short term moves ....the reality is we have no idea what markets will do .
True, hence me saying "hopefully". I think us just having this conversation in this specific forum aligns our common viewpoint of accepting the fact that we cannot predict the future. We all still have our educated guesses though.

Wth that said...

Cape ratios + stock buyback programs + fed rates + etc.... my pile of educated guesses for "waiting to buy stock" seems much bigger than my pile of educated guesses for "buying stock today". YMMV.

Besides, I am technically putting it off until my next rebalance :) Afterall, Harry said to minimize transactions ;)
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Re: Safe Withdrawal Rate?

Post by sophie » Mon Nov 11, 2019 8:24 am

Tyler wrote:
Sun Nov 10, 2019 10:37 am
mathjak107 wrote:
Sun Nov 10, 2019 2:40 am
in my opinion that cash should not be considered spendable cash like a checking account . it is an asset in the mix with a job to do and you really don't want to compromise things .
I completely agree. My point was not that I treat cash differently, but simply that I appreciate its unique characteristics that occasionally come in handy when doing smart tax management.
Of course cash is "spendable". Isn't that the whole idea of a retirement portfolio implied by this whole "safe withdrawal rate" discussion? If you don't plan on spending anything out of your portfolio then I guess you would consider it more of a hobby than as a retirement vehicle. That would explain a lot of mathjak posts.

However I do think cash serves double roles - whether the cash is held explicitly within the portfolio or alongside it. First, as the primary conduit for withdrawing money from a portfolio. I would consider that to be "spending", or you could call it "withdrawal from the portfolio" if you like - it amounts to the same thing. Second, it has a role in managing other assets as Tyler points out - not only tax management but also avoiding having to sell assets that have dropped in value. I'm just pointing out the obvious, that comparisons of the return of, say, a 60/40 stock/bond portfolio with the PP are invalid because of the different treatments of cash.
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Re: Safe Withdrawal Rate?

Post by mathjak107 » Mon Nov 11, 2019 9:05 am

you can't judge portfolio performance once you start considering other factors like cash on hand or cash not chosen to be invested .

otherwise tylers work is a moot point ... the portfolio's are compared for what they are , not how much cash someone keeps on hand .

we are interested in comparing portfolios AS DESIGNED WITH ALL THEIR NEEDED COMPONENTS and cash is a key component in the pp vs say the desert portfolio .

you can't start using a component as spending money because then you are changing the design and functionality of the portfolio which calls for 4 equal parts .

like i said if i choose to commit 1 million to a portfolio and and keep 3 million in cash instruments , that 3 million has zero to do with the portfolio performance ...

the portfolio as designed is what it is . by keeping more cash my personal rate of return is suffering but that is totally different than portfolio performance using the stated components the portfolio requires
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Re: Safe Withdrawal Rate?

Post by mukramesh » Mon Nov 11, 2019 1:22 pm

mathjak107 wrote:
Mon Nov 11, 2019 9:05 am
Dude... we get it. You don't need to go on this tirade for multiple huge posts in every single topic on this board omg :(
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