Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
well thats the idea but the point is what do you use to kick off the first plan as a guide?
Someone who detaches emotionally from the concept of SWR and looks at the table you posted above will probably begin to realize that the notion of SWR is meaningless for at least the following reasons: the table purports to convey information about the world of finance thirty years into the future -- at no less than two significant figures of precision. This is simply absurd, prima facie. Moreover, the underlying simulations presume that the moments (for example: mean and variance) of the stochastic processes that underly investment returns and inflation are finite and stable (this assumption has been found to be quite incorrect, as common sense would suggest), and that the underlying probability density functions themselves are known (they are not).
Presuming that your question is serious, however, I would suggest looking into a draw-down plan based on a conservative estimate of your life expectancy. For example, a 65 year old might estimate life expectancy (perhaps jointly with a spouse) to be, conservatively, and only for illustration, 35 years. So, he would take one thirty-fifth of his portfolio value in year 65, one thirty-forth of the updated year-66 value in year 66, one thirty-third of the again updated year-67 value in year 67, and so on. This is the same general idea as the schedule for IRA RMDs required by the IRS, although you may easily alter the numbers in response to your own estimate of your life expectancy. Someone following this kind of method can expect the amount withdrawn to vary each year in response to investment returns.
If life expectancy is estimated conservatively, chances are excellent that the second-to-die will be solvent, leaving an estate for the kids or for charity. Pfau references a paper showing that this kind of withdrawal strategy just about maximizes the total take from a portfolio (meaning that it tends to minimize the value of the estate). By the way, I am not quoting Pfau because he is my guru ; rather, he is someone that you, Matt, mention frequently and often reverentially.
Another really simple method is to spend no more than about three percent of your net worth each year, recomputed once a year, as many rich families have been known to do for generations (shhhh -- don't let the secret out!).
Last edited by Hamish Forbes; 06-02-2013 at 11:43 AM..
if you were building a house and wanted to construct to withstand the worst storms ever, the chart is telling you what type of construction weathered the worst of the storms.
could stronger storms hit? they could but at least you are constructed to withstand the worst so far with a bit to spare.
at least you are going to the gate with a good well constructed home . you can season to taste later as you progress through retirement .
Within reason, it doesn't actually matter. If you are 65 and want to live the same lifestyle to age 90, take 1÷25 (4%) out of what you have right now. If you are 60, take 1÷30 (3.33%) instead. Either one of those would easily be within a rational ballpark, so if you need a little more as the result of first-year lifestyle conversion effects, take that too. Once you get used to this new world and have some set patterns and standards and actual expectations, do a more careful analysis just to make sure you aren't boiling the kettle dry.
that might not work depending on inflation, where you have your money invested and how the markets did and where interests rates are.
as an example many of those that followed that format and tried to take that inflation adjusted 4% and retired in 1965 or 1966 were broke before 30 years..
20 years of dead stock markets, followed by beng pounded by double digit inflation and having to withdraw double just to pay the same bills.
many other groups failed the 30 year time frame by having to little in equities and trying to take inflation adjusted raises.
Using the irs tables to spend down is not a finished product in my opinion.. volatility in investments makes for volatility in spending budgets. Because it is recalculated every year the income stream is anything but safe ,secure and consistant.
It would take a major modification to get the withdrawals consistant enough in my opinion.
I would want my income in retirement no different than how i want my paychecks.
A bunch of negative returns and you can take some serious hits in income.
Overall not any system i would be interested in. It sounds easy enough but that is because they ruled out volatility.
The trinity based withdrawals strive to keep the income consistant with the pile of money left over at the end of time fluctuating instead.
To date it has done it 98%of the time as far back as 1926 and even farther back with shillers data.
That is why that method has been adopted by much of the financial community.
Last edited by mathjak107; 06-02-2013 at 06:53 PM..
that might not work depending on inflation, where you have your money invested and how the markets did and where interests rates are.
Inflation is a part of interest. The latter offsets the former. Meanwhile, the request was for a START POINT -- the FIRST-YEAR withdrawal rate. As was noted earlier, faith in any fixed sort of plan is misplaced. "Make a plan and then stick to it" most often turns out to be really bad advice. "Make a plan today and then make a new one again tomorrow" would turn out to be a better bromide for most people.
Quote:
Originally Posted by mathjak107
as an example many of those that followed that format and tried to take that inflation adjusted 4% and retired in 1965 or 1966 were broke before 30 years..
I have not remotely suggested 4% is some on-going, armor-plated rule. Quite to the contrary. It would be a reasonable first-year number to use until the post-retirement dust had settled and some clearer appreciation of the patterns and parameters actually applying within one's new life could be gained.
Quote:
Originally Posted by mathjak107
20 years of dead stock markets...
DJIA at the end of 1965: 969.26
DJIA at the end of 1985: 1,546.67
That's about a 60% gain in 20 years. Not including dividends of course.
Quote:
Originally Posted by mathjak107
...followed by beng pounded by double digit inflation and having to withdraw double just to pay the same bills.
Even when it actually occurred, double-digit inflation did not result in a doubling of bills. And it occurred only in 1974-75 and 1979-80, each time as the result of an exogneous oil price spike. That first spurt was enough for Congress to add an annual COLA to SS benefits though. Many private corporations (especially those with unions) followed suit.
Quote:
Originally Posted by mathjak107
many other groups failed the 30 year time frame by having to little in equities and trying to take inflation adjusted raises.
There is nothing magic about equities. They are one of dozens of potential avenues for investment. Sometimes they are a good one, sometimes they are an awful one. It pays to know the difference between the two.
Quote:
Originally Posted by mathjak107
it is a whole lot more complex then you wrote.
No, it isn't. Within reason, the choice of a a first-year withdrawal rate is a matter of grade-school level arithmetic. A new retiree will not yet have reliable values for the parameters needed to perform a detailed financial analysis, so there is no sense wasting time in trying to go through one. How complicated a deal is that?
Quote:
Originally Posted by mathjak107
there are no do overs if you get this wrong.
Save the drama. Choosing a first-year withdrawal rate of 3.3-4.0% is nothing like the iceberg that sunk the Titanic. Anything in that range would be a reasonable start point, and of course one would have all the years one started out with less one in which to make up for a misestimation error in either direction.
I agree with mathjak that it's better to be too conservative vs. too optimistic when estimating how your portfolio will perform. The biggest mistake I've seen with plenty of friends and clients is they over estimate what their ROI would be. Many used far too high estimates of what they assumed they would earn over the long run.
I also totally agree that today and going forward is MUCH different vs. the past. Obviously no one knows for sure but my philosophy is it's better to be conservative vs. overly optimistic.
There have been quite a few articles over the last couple years about the 4% "Rule" not working....
I never understand why people like to bring up 'the good ol' days'. A lot of consumables are actually cheaper now, adjusted for inflation.
Gallon of milk in 1965: $.95; $6.89 in 2013 dollars. I get this for under $4.50 at my supermarket.
Six-pack of pepsi: $.59; $4.28. I get 12-packs for this price, often 4 12-packs for $12.
Dozen eggs: $.53; $3.85. I pay $2.50, on sale just $1.00
1lb. steak $.85; $6.17. I pay $5.50 per lb.
Median household income: $7143; $51833. Today that is slightly lower, and back then, most families only had one income, so this aspect at least may have been better back then.
Price of new car: $2650; $19229. Roughly the same, but cars are so much more advanced now, the modern era wins out from an economic/safety/fuel efficiency/environmental perspective.
I could go on, but it should be clear that the present has a lot going for it.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
