PP Safe Withdrawal Rate?

[notsheigetz]

I was reading this thread, thinking about safe withdrawal rates from the PP post-retirement.  But now it looks like there needs to be consideration of a safe withdrawal rate from some 30 drugs by a 90-year-old.  Yikes!

Don't remember if I was the one who originally raised the issue or not but I was trying to point out what I learned from watching my own parents dwindling nest-egg. Consider it a public service announcement for my fellow PP'ers. It could end up being just as important as all the other facts and figures in your spreadsheet - what will happen if/when you get caught up in the American medical system after you retire - a system currently designed to bleed you dry (well, maybe it wasn't designed that way but at least that is the unintended consequence). It's a reality that a lot of us will have to deal with and based on my instincts about folks who invest in the PP I'm sure there will be a lot of wise ideas out there. Maybe when Craig and MT get old enough they can write another book.

[hedgehog]

You may want to discuss elderly care and such further here:
http://gyroscopicinvesting.com/forum/pe ... tives-com/

Back to the topic: I wonder what is your safe withdrawal rate for
- You do want your nest egg to last for ever for further generations, etc.
- How much % you can withdraw then considering inflation, bumps in the economy but considering these bums will even out in a longer time frame?
- Both Boglehead and PP portfolios might be interesting

What would be your best bet for this?

[murphy_p_t]

I've been wondering about this myself lately.  from http://www.mrmoneymustache.com/2012/05/ ... ment/    ..... I found this site: http://www.firecalc.com/index.php

Unfortunately, I don't see that you can built a PP as the site didn't include gold historical data

However, it seems like a pretty interesting site.

Part of the reason I think its an interesting question is that there's a HUGE difference between the 3% and 4% rate an annual spend....(hint: its not 1%)

[EdwardjK]

If you are concerned about a safe withdrawal rate and whether there is a risk of outliving your portfolio, then you have not saved enough.

Keep working until you have enough to live on throughout retirement.

[hedgehog]

@EdwardjK

Are you answering to me or to @murphy_p_t ? It is totally not clear.

If you are answering to me. No, I am not concerned, I just asked a simple - and hopefully interesting - question to which your answer is not really an answer ) But thanks.

[Tyler]

From my calculations, the worst year since 1972 to retire with the PP was in 1987.  However, a person retiring in 1987 still could have used a 3.8% SWR and maintained the same inflation-adjusted portfolio value after a decade.  Note that this performance is much better than typical stock/bond portfolio that the 4% SWR rule is based on.  A person retiring in 1972 with a 50/50 stock/bond mix would have had a -2.5% SWR over the next ten years (meaning if they didn't add 2.5% every year, they would have lost principal). 

I personally am aiming for a more conservative 3% SWR for the extra safety margin as an early retiree.  But in general the PP is a great retirement portfolio.  Specifically, the gold to battle extreme inflation events and large cash buffer to ride out market swings while never selling assets low make it quite robust.

[hedgehog]

I've been wondering about this myself lately.  from http://www.mrmoneymustache.com/2012/05/ ... ment/    ..... I found this site: http://www.firecalc.com/index.php

Unfortunately, I don't see that you can built a PP as the site didn't include gold historical data

However, it seems like a pretty interesting site.

Have found this as well. Truly interesting, yeah.

@Tyler: thanks for your insights!

[Tyler]

I've been wondering about this myself lately.  from http://www.mrmoneymustache.com/2012/05/ ... ment/    ..... I found this site: http://www.firecalc.com/index.php

Unfortunately, I don't see that you can built a PP as the site didn't include gold historical data

However, it seems like a pretty interesting site.

Part of the reason I think its an interesting question is that there's a HUGE difference between the 3% and 4% rate an annual spend....(hint: its not 1%)

You might find cfiresim.com interesting, as it includes stocks/bonds/gold/cash.  However, as a PP person you should keep a few things in mind:

1) Cash in the calculator is not ST treasuries.  You enter a fixed interest rate.  So it will not perform like PP cash.
2) Bonds represent the total bond market, not LT treasuries.
3) Because of 1 & 2, a reasonable PP alternative is to enter 25% stocks, 25% gold, and 50% bonds.  It's still not perfect as it doesn't represent only treasuries, but it's better.
4) The rules for gold changed in 1972 when it was decoupled from the dollar.  So PP performance prior to that is basically worthless.  And the way the simulator works, limiting the data to periods after 1972 will drastically reduce the number of runs so take any success percentages with a grain of salt. 
5) The calculator rebalances every year, and does not withdraw only from cash or follow rebalancing bands (both of which notably improve PP performance).

Basically, I've found it not all that useful for studying retirement situations with the PP, but it's a nice alternative to firecalc and you might find helpful in other ways.  With those caveats, happy calculating!

[jason]

This may sound like sort of a dumb question, but when we are talking about 4% annual withdrawal rate, we are talking about pre-tax money, right?  For example, let's say someone is retiring on $1 million, and they want live on a 4% withdrawal rate.  If they take out 4% from the PP, depending on how much cash they have (let's assume cash is at only 15% of the portfolio, so they can't take any more out without violating the 15/35 bands), they will have to sell holdings to generate the 4%, which is $40,000.  Assuming the $40,000 is taxed as a long term capital gain at 20%, they really only get to take out 80%, which is $32,000, which is only 3.2% of the portfolio value.  So, they are really living on 3.2% of their portfolio value, not 4%, right?  I've read several articles discussing withdrawal rate in retirement and they never talk about the tax portion of the equation.

[Tyler]

Yes, when people talk about the 4% rule it is important to include taxes in the expense column.  Luckily, the PP is pretty darn tax efficient compared to many other portfolios.

BTW, remember that capital gains are the gains on the initial principal, not every dollar from the sale.  So the taxable amount for selling $40k in stocks will likely be a lot less than that, especially if you selectively sell the lots with the lowest gains.  Also, the nice thing about capital gains is that you can also manage them with tax loss harvesting, splitting the gains over two tax years, etc.

[ns3]

This may sound like sort of a dumb question, but when we are talking about 4% annual withdrawal rate, we are talking about pre-tax money, right?  For example, let's say someone is retiring on $1 million, and they want live on a 4% withdrawal rate.  If they take out 4% from the PP, depending on how much cash they have (let's assume cash is at only 15% of the portfolio, so they can't take any more out without violating the 15/35 bands), they will have to sell holdings to generate the 4%, which is $40,000.  Assuming the $40,000 is taxed as a long term capital gain at 20%, they really only get to take out 80%, which is $32,000, which is only 3.2% of the portfolio value.  So, they are really living on 3.2% of their portfolio value, not 4%, right?  I've read several articles discussing withdrawal rate in retirement and they never talk about the tax portion of the equation.

In your hypothetical case of the $1 million portfolio I believe if you withdrew $40k and the rest of your income was <= $32k there would be no capital gains tax at all.

Not the same thing for multi-million portfolios of course.

[murphy_p_t]

anyone interested in this thread will definitely want to check out the charts/commentary over at http://gyroscopicinvesting.com/forum/pe ... in-the-pp/