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Old 03-29-2014, 08:47 AM
 
Location: Great State of Texas
86,052 posts, read 84,281,002 times
Reputation: 27718

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Quote:
Originally Posted by Hamish Forbes View Post
The Trinity Study and Firecalc were developed well before the meltdown of 2008. Both were excellent work for their time. But the meltdown has informed most thoughtful people that the plan of 4% SWR, come hell or high water, is just silly, and that we have literally no idea of what's just around the corner in the world of finance. More recently, thoughtful analysis has moved away from the SWR concept, and on to other ways of looking at portfolio draw-down.

But the fundamental problem remains unsolved: there is no way for an individual to derive a safe, inflation-adjusted, predictable stream of retirement income from a portfolio of risky, volatile assets. That's what the SWR method claims to do, whereas in fact it only shifts the sequence-of-returns risk away from the monthly draw and onto the very real possibility of portfolio exhaustion.

By the way, people interested in this kind of stuff would likely be interested also in Dirk Cotton's blog called "Retirement Cafe," as well as Wade Pfau's. See: The Retirement Cafe
More and more people are approaching retirement without pensions.
They only have their 401K/stock portfolios to provide their income along with SS.

There is no longer the safety of bonds, CDs, etc. that offer decent returns with safety of principal.


That "3 legged stool" lost one leg years ago (pensions).
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Old 03-29-2014, 08:50 AM
 
Location: North Idaho
2,394 posts, read 2,999,090 times
Reputation: 2934
Quote:
Originally Posted by Hamish Forbes View Post
By the way, people interested in this kind of stuff would likely be interested also in Dirk Cotton's blog called "Retirement Cafe," as well as Wade Pfau's. See: The Retirement Cafe
X2.

Another great source of information is the Boglehead forum. Check out their Wiki page.
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Old 03-29-2014, 09:53 AM
 
7,898 posts, read 7,087,839 times
Reputation: 18587
Quote:
Originally Posted by Hamish Forbes View Post
The Trinity Study and Firecalc were developed well before the meltdown of 2008. Both were excellent work for their time. But the meltdown has informed most thoughtful people that the plan of 4% SWR, come hell or high water, is just silly, and that we have literally no idea of what's just around the corner in the world of finance. More recently, thoughtful analysis has moved away from the SWR concept, and on to other ways of looking at portfolio draw-down.

But the fundamental problem remains unsolved: there is no way for an individual to derive a safe, inflation-adjusted, predictable stream of retirement income from a portfolio of risky, volatile assets. That's what the SWR method claims to do, whereas in fact it only shifts the sequence-of-returns risk away from variability of the monthly draw and onto the very real possibility of portfolio exhaustion.

By the way, people interested in this kind of stuff would likely be interested also in Dirk Cotton's blog called "Retirement Cafe," as well as Wade Pfau's. See: The Retirement Cafe
This post is typical of many that I have read on this topic. First there are a lot of people who look at 2008 and decide that something like the 4% rule is "just silly." At the end of 2008 and through 2009 and beyond, many people seemed to be waiting for the second shoe to drop. Well, that did not happen and by now it is time to abandon that notion. The recession of 2008 gets lots and lots of attention for good reasons. First many people lost jobs and homes. Investing is a whole other issue. Many people did exactly the wrong thing. They sold low and were then did not rebuy into the stock market. Many are still sitting on the sidelines. If you did the right thing in 2008; i.e., buy low, then you have made lots of money. If you did absolutely nothing you are still in a good position having recoop'd your losses and made good profits.

So how does 2008 relate to the 4% rule? That should be obvious. Someone who planned withdrawals a bit before the recession would want to recalculate with a lower investment amount. By now they should have also recalculated again and their withdrawal amounts would be higher than originally predicted. Or they could have done nothing, withdrawn the same amounts and would be at about the same for the future. For someone, like myself, who setup withdrawal estimates in 2010, we would also need a revision. Our withdrawals can be much bigger than originally predicted.

Everyone seems to want some magic calculator that will take care of any potential future conditions. That will never happen. Instead I believe a simple 4% rule works very well provided one is willing and able to make some adjustments especially early in retirement. Later in retirement many of us will cut back on equities and look for sure, fixed returns. Some experts are advising the opposite and want us to increase equities even higher as we age. Clearly that makes little sense in spite of esoteric arguments and calculations.

To me it seems that the 4% rule still provides a very useful guide although some adjustments might be needed. Based on the past the 4% rule is very conservative. Again, that might change either way requiring some adjustments. It also seems clear that for the long haul, our returns are likely to be better with a fairly substantial stock allocation and over time that should be reduced because we do not have the time needed to recover from major volatility.
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Old 03-29-2014, 10:18 AM
 
2,991 posts, read 4,274,846 times
Reputation: 4270
Quote:
Originally Posted by jrkliny View Post

So how does 2008 relate to the 4% rule? That should be obvious. Someone who planned withdrawals a bit before the recession would want to recalculate with a lower investment amount. By now they should have also recalculated again and their withdrawal amounts would be higher than originally predicted. Or they could have done nothing, withdrawn the same amounts and would be at about the same for the future. For someone, like myself, who setup withdrawal estimates in 2010, we would also need a revision. Our withdrawals can be much bigger than originally predicted.

Everyone seems to want some magic calculator that will take care of any potential future conditions. That will never happen. Instead I believe a simple 4% rule works very well provided one is willing and able to make some adjustments especially early in retirement. Later in retirement many of us will cut back on equities and look for sure, fixed returns. Some experts are advising the opposite and want us to increase equities even higher as we age. Clearly that makes little sense in spite of esoteric arguments and calculations.

To me it seems that the 4% rule still provides a very useful guide although some adjustments might be needed. Based on the past the 4% rule is very conservative. Again, that might change either way requiring some adjustments. It also seems clear that for the long haul, our returns are likely to be better with a fairly substantial stock allocation and over time that should be reduced because we do not have the time needed to recover from major volatility.
The adjustments and recalculations that you talk about are exactly what the 4% rule promises that you won't need to do. Their idea is that the 4% rule has survived whatever in the past, and therefore will survive whatever in the future. The minute that you make adjustments, you are working in a way that is exactly contrary to the 4% rule. As you continue to make adjustments, you are moving ever further away from the essence of the rule, and are instead flying by the seat of your pants, in effect timing the market, which is probably the goofiest way of all to approach the problem.

Regarding the crash of 2008 -- governmental countermeasures have left us with unusually high prices for stocks, unprecedentedly (almost) low interest rates for bonds and cash, huge federal debt, and a distorted money supply. Anyone who thinks that the past informs us in a useful way today -- which is the entire foundation of the 4% rule -- is making a very big gamble. Not only does past performance not inform us about the future in general, we are now in a specific situation where we have no past data even remotely applicable to what is presently unfolding. If you look for historical parallels outside the USA, you find that the 4% rule is frighteningly optimistic.

Regarding your comment (recurring) about esoteric calculations, I can't help but wonder if you understand the difference between a calculation and the result of a discrete-event simulation??? Hardly anyone professionally active in this field is attempting to calculate anything from an analytic model . . .

Quote:
Originally Posted by jrkliny View Post
It also seems clear that for the long haul, our returns are likely to be better with a fairly substantial stock allocation and over time that should be reduced because we do not have the time needed to recover from major volatility.
Have you looked into sequence-of-returns risk? That's what this idea is attempting to address. The worst position to be in is to be caught in a down market with a lot of stock just as you begin retirement using an SWR approach. This is also of interest wrt your comment abut a second shoe -- a second shoe is not needed; rather, all that is needed for real trouble is an unfavorable sequence of returns for today's retiree.

Last edited by Hamish Forbes; 03-29-2014 at 10:28 AM..
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Old 03-29-2014, 10:51 AM
 
7,898 posts, read 7,087,839 times
Reputation: 18587
Perhaps this should be called the 4% guideline. No one should use any rule or guideline or calculator and expect it to work over a 30 year period. I advise using the guideline and making adjustments for any major events early in retirement. In my case that means a massive upward adjustment of my projected SWA. Making adjustments has absolutely nothing to do with timing the market. You would make a adjustments based on major trends that occurred in the recent PAST, and not by trying to predict changes in the future.

I agree that we are indeed in a position where we have no past data even remotely like the present. Not only do I agree but I think this has always been the case. WWII was not the same as WWI and that did not match the Roaring Twenties, etc. etc. etc. I also agree that the past is a poor basis for predicting the reliability of the 4% rule or any other rule. The validity of the 4% rule rests solely on the ability to generate gains of 2% over inflation. I think that is a very, very conservative estimate and especially now when most of us have been generating returns of 5-6 or greater times that amount.

Yes, I do understand the difference between projections and simulations. Sorry if I lump them both in the complex calculation category.

I do think you and many, many others are excessively pessimistic due largely to the 2008 recession. Sure some major event can and probably will occur again. I think there are some ticking time bombs including the huge amounts of money tied up in low interest rate loans and mortgages. But I also think our economy is showing lots of strength and we can expect continued improvements over the next few years. Beyond that who knows? Then it will make little difference to me.
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Old 03-29-2014, 10:53 AM
 
Location: SoCal desert
8,091 posts, read 15,390,430 times
Reputation: 15036
Quote:
Originally Posted by mathjak107 View Post
what if you live 31 years?
One year on SS dollars alone, rack up the bills, and leave this earth owing money.
Isn't that what a lot of people do?
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Old 03-29-2014, 10:58 AM
 
106,152 posts, read 108,118,136 times
Reputation: 79702
Quote:
Originally Posted by jrkliny View Post
I am totally confused by your post. First, Kitces and Firecalc have nothing to do with establishing a "real return" that we need. A simple calculator proves that you need an average 2% gain over inflation. I have no idea what you are saying about a "mathematical floor" that comes from Firecalc. Firecalc tries to use scenarios from the past to predict what will happen in the future. It will indicate some probability of success for a proposed withdrawal scheme and again it does this from estoteric calculations based on the past. A simple calculator does not predict at all. It calculates exactly what happens under certain conditions. Using a simple calculator you can investigate the outcomes for scenarios that you input. Many of us will input average inflation from the past (3.5% or so) and average gains from the past (6-7%) or so and then we will look at the output as a rough guide. When we do this, we know that averages in the future are unpredictable and we also know that there will be large fluctuations which also perturb the outcomes. Finally we also know that what happens in the early years of retirement is very important. This is not some wonderful conclusion from a researcher or from Firecalc. It is totally predictable by inputing scenarios and calculating the outcomes.
what it would take to have the 4% swr in real return fail had everything to do with kitces. everything i have seen up to this point only spoke in terms of success rates.

What Returns Are Safe Withdrawal Rates REALLY Based Upon? | Kitces.com
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Old 03-29-2014, 11:00 AM
 
31,672 posts, read 40,949,633 times
Reputation: 14419
Quote:
Originally Posted by Gandalara View Post
One year on SS dollars alone, rack up the bills, and leave this earth owing money.
Isn't that what a lot of people do?
And if that one becomes five and so on.
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Old 03-29-2014, 11:01 AM
 
106,152 posts, read 108,118,136 times
Reputation: 79702
Quote:
Originally Posted by Hamish Forbes View Post
The adjustments and recalculations that you talk about are exactly what the 4% rule promises that you won't need to do. Their idea is that the 4% rule has survived whatever in the past, and therefore will survive whatever in the future. The minute that you make adjustments, you are working in a way that is exactly contrary to the 4% rule. As you continue to make adjustments, you are moving ever further away from the essence of the rule, and are instead flying by the seat of your pants, in effect timing the market, which is probably the goofiest way of all to approach the problem.

Regarding the crash of 2008 -- governmental countermeasures have left us with unusually high prices for stocks, unprecedentedly (almost) low interest rates for bonds and cash, huge federal debt, and a distorted money supply. Anyone who thinks that the past informs us in a useful way today -- which is the entire foundation of the 4% rule -- is making a very big gamble. Not only does past performance not inform us about the future in general, we are now in a specific situation where we have no past data even remotely applicable to what is presently unfolding. If you look for historical parallels outside the USA, you find that the 4% rule is frighteningly optimistic.

Regarding your comment (recurring) about esoteric calculations, I can't help but wonder if you understand the difference between a calculation and the result of a discrete-event simulation??? Hardly anyone professionally active in this field is attempting to calculate anything from an analytic model . . .



Have you looked into sequence-of-returns risk? That's what this idea is attempting to address. The worst position to be in is to be caught in a down market with a lot of stock just as you begin retirement using an SWR approach. This is also of interest wrt your comment abut a second shoe -- a second shoe is not needed; rather, all that is needed for real trouble is an unfavorable sequence of returns for today's retiree.
government counter measures left us with unusally high prices for stocks ?????? you mean like bringing us back to just about where we were 13 years ago?
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Old 03-29-2014, 11:02 AM
 
31,672 posts, read 40,949,633 times
Reputation: 14419
Quote:
Originally Posted by Hamish Forbes View Post
The Trinity Study and Firecalc were developed well before the meltdown of 2008. Both were excellent work for their time. But the meltdown has informed most thoughtful people that the plan of 4% SWR, come hell or high water, is just silly, and that we have literally no idea of what's just around the corner in the world of finance. More recently, thoughtful analysis has moved away from the SWR concept, and on to other ways of looking at portfolio draw-down.

But the fundamental problem remains unsolved: there is no way for an individual to derive a safe, inflation-adjusted, predictable stream of retirement income from a portfolio of risky, volatile assets. That's what the SWR method claims to do, whereas in fact it only shifts the sequence-of-returns risk away from variability of the monthly draw and onto the very real possibility of portfolio exhaustion.

By the way, people interested in this kind of stuff would likely be interested also in Dirk Cotton's blog called "Retirement Cafe," as well as Wade Pfau's. See: The Retirement Cafe
Isn't this the same problem with defined benefit pensions?
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