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Old 02-03-2016, 09:06 AM
 
Location: Florida -
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All of the finer nuances of the traditional 4-percent rule tend to over-complicate things for the non-professional investors. After everyone weighs-in, a lot of confused folks would still appreciate a simple rule-of-thumb range based on an average 65-year old's life-span and market conditions over the past 5-years:

For example: 3%-conservative, 4%-reasonably secure, 5%-aggressive -may run out of money, 6%-will likely run-out of money.

I know this is an over-simplification, but, it really doesn't help anyone to say, "there are too many variables to come-up with a useful answer." That's why so many cling to the general 4% average rate --
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Old 02-03-2016, 11:35 AM
 
Location: Florida
4,360 posts, read 3,696,311 times
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Quote:
Originally Posted by jghorton View Post
All of the finer nuances of the traditional 4-percent rule tend to over-complicate things for the non-professional investors. After everyone weighs-in, a lot of confused folks would still appreciate a simple rule-of-thumb range based on an average 65-year old's life-span and market conditions over the past 5-years:

For example: 3%-conservative, 4%-reasonably secure, 5%-aggressive -may run out of money, 6%-will likely run-out of money.

I know this is an over-simplification, but, it really doesn't help anyone to say, "there are too many variables to come-up with a useful answer." That's why so many cling to the general 4% average rate --
Unfortunately you are probably correct for those that do not want to learn about generating income from investments. I agree a person could pick 3, 4, 5% and in most cases this will work out. The big risk is poor investment returns at the beginning of retirement that forces the sale of investments (should have a cash bucket of a few years of expenses) and thus increase the likelihood of running out of money. If the market starts off strong at the beginning of retirement then the person might be left with more money than they wanted.

Thus I think the rule has to have added a bucket of cash for expenses in down markets and base next years distributions on the value of your investment accounts for the prior year.

In general using the RMD (required minimum distribution) from the IRS regulations about IRA's and a bucket of cash is probably the way to go for those that do not want to put a lot of thought into the process. To refine a little more if you anticipate large outlays for say home repairs, new car, emergency fund, medical costs etc you should try and set aside assets for these purposes and not use then in determining your annual spendable income. Maybe meet with an hourly fee financial planner a few years prior to retirement to figure out a simple plan you can manage on your own is the way to go for the group of people you describe.
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Old 02-03-2016, 11:55 AM
 
71,515 posts, read 71,694,121 times
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neither bengens work nor the trinity assume any cash and they only use a 4% draw first year and inflation adjust from there . what your balance is yearly does not come in to play as the whole idea is the 4% safe withdrawal rate should stand a very good chance of staying constant in good or poor markets .

in theory the income stream should never vary , only the amount left in the bucket at the end changes based on good outcomes or bad outcomes . .

it is always a good idea to keep at least 2 years cash handy day 1 of retirement . after an up cycle you need to hold very little cash . once you pull ahead even a drop usually won't mean to much .

in fact if it wasn't for the fact we fear a down market day 1 even 100% in equity's had something like a 97% success rate over every rolling 30 year period ever .

the reason is cash and bonds do act like weight holding back the gains in up markets . the bigger cushion in the up markets from very high equity positions have cushioned the drops better then even diversified portfolios have . the longer you go out from 30 years the better 100% equity's did in retirement .

no i am not advocating going out and allocating to 100% equity's in retirement . but from a performance stand point 100% equity's was never a problem as long as as you did not have a prolonged drop right out of the gate ..

even 2008 would have passed okay because of the quick v-shaped recovery
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Old 02-03-2016, 12:04 PM
 
71,515 posts, read 71,694,121 times
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Quote:
Originally Posted by jghorton View Post
All of the finer nuances of the traditional 4-percent rule tend to over-complicate things for the non-professional investors. After everyone weighs-in, a lot of confused folks would still appreciate a simple rule-of-thumb range based on an average 65-year old's life-span and market conditions over the past 5-years:

For example: 3%-conservative, 4%-reasonably secure, 5%-aggressive -may run out of money, 6%-will likely run-out of money.

I know this is an over-simplification, but, it really doesn't help anyone to say, "there are too many variables to come-up with a useful answer." That's why so many cling to the general 4% average rate --
i like being more dynamic . i use bob clyatt's method .

each year i look at my balance . i draw 4% or if my portfolio is down i draw 4% or just 5% less , which ever is higher . inflation adjusting is built in .

that keeps your income from taking a big hit if we fall 15 or 20% .

that has tested out to 40 years at 100% success rate and never ran out of money through any time frame .

it is simple , easy and rewards you when markets are up .
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Old 02-05-2016, 04:48 AM
 
71,515 posts, read 71,694,121 times
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Quote:
Originally Posted by jghorton View Post
All of the finer nuances of the traditional 4-percent rule tend to over-complicate things for the non-professional investors. After everyone weighs-in, a lot of confused folks would still appreciate a simple rule-of-thumb range based on an average 65-year old's life-span and market conditions over the past 5-years:

For example: 3%-conservative, 4%-reasonably secure, 5%-aggressive -may run out of money, 6%-will likely run-out of money.

I know this is an over-simplification, but, it really doesn't help anyone to say, "there are too many variables to come-up with a useful answer." That's why so many cling to the general 4% average rate --
a simple answer to a complex question is usually going to be the wrong answer .

the 4% rule was never meant to be a rule . it was a lab experiment to see what the lowest withdrawal rate is that you would have needed to survive the worst scenario's in history using different allocations . .

it was never meant to be a financial plan and a replacement for a comprehensive road map for retirement .

laymen being like they are , were looking for a do it yourself number to hang their hat on and believed they found it in this number .

this number is only a mathematical ball park for day one with no human intervention and most important NO human spending patterns .

the truth is we are all unique in what we need or want .

i like lifestyle planning . that is where complex computer programs are used in house by retirement specialists who lay out a road map based on your needs .

like we would like to figure things based on heavy draws up front for travel and going and doing and smaller draws later on down the road .

there is so much more to retirement income planning then take 4% - c-ya

Last edited by mathjak107; 02-05-2016 at 05:00 AM..
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Old 02-06-2016, 01:38 PM
 
6,241 posts, read 4,725,740 times
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Quote:
Originally Posted by mathjak107 View Post
..................

i like lifestyle planning . that is where complex computer programs are used in house by retirement specialists who lay out a road map based on your needs .

like we would like to figure things based on heavy draws up front for travel and going and doing and smaller draws later on down the road .

there is so much more to retirement income planning then take 4% - c-ya
Future investment returns and the cost increases due to inflation are the big factors. No complex computer programs can predict those. All the predictions are just guesses based on the past.


You don't need fancy programs to understand the effect of spending heavily at the start of retirement. Segregate the extra money you plan to spend on travel and then look at the safe returns for the remainder. A 4% rule works was well as most of the planning advisor nonsense except that the advisors are almost always very conservative. They want to keep your money and take their cut.
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Old 02-06-2016, 02:31 PM
 
71,515 posts, read 71,694,121 times
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yes and no , how do you know when 4% isn't working before it is to late to recover ?

we needed computer programs to crunch the results of all the numbers and data so we know what is safe historically based on all our absolutely horrible time frames .

it took decades of analyzing the data from the 2 biggest study's to take that raw data , boil it down and find what the math was that was the common denominator to every single failure .

so because of all those study's we know mathematically we need to average at least a 2% real return over the first 15 years or 4% inflation adjusted can't stand up mathematically .

so yes , we can take a safe withdrawal rate early on of 4% , and since it is already based on worst case we just need to monitor as time goes on that we are not below that or adjustments are needed in draw ..

thanks to the study's it is easy enough to monitor ourselves now , but the problem is very few including those in these forums know what the 4% number represents , so using it how do they know before it is to late to recover ? blow it the first 15 years and no amount of gains the 2nd half can save you once you spent down to far . .

it was never meant to be a rule and in fact it shouldn't be , it has to many variables once you introduce human spending patterns and decisions .

the biggest problem in the past is it has left way to much money left over that could have been spent and enjoyed in retirement just because it is based on the worst scenario's . .

Last edited by mathjak107; 02-06-2016 at 02:39 PM..
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Old 02-06-2016, 03:25 PM
 
Location: Ponte Vedra Beach FL
14,628 posts, read 17,925,663 times
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Tell me when someone is going to die - I'll tell you how much they can spend. At age 68 - I have a life expectancy of 18+ years. At age 97 - my father still has a life expectancy of 2+ years. IOW - you're not dead until you're dead . And life expectancy tables are quite worthless. You also have to tell me how much it will cost you in the end (some deaths are cheap - others aren't).

Also - FWIW - I would toss any conclusions about any of this stuff based on studies of historical data. I have been doing fixed income for 30+ years - and I have never ever seen anything like the current interest rate environment (which has pretty much been going on for more than half a decade now). There have been long periods of time in the past when equity returns (in terms of price appreciation) - like those we've seen since 2000 - have been paltry. But they were offset by (much) higher dividends and much higher interest rates.

Looking at the past while ignoring what is actually going on now is kind of like seeing the NHC predicting that a major hurricane is going to hit you 2 days from now - but your ignoring the warnings because your area has never been hit by a major hurricane before.

Note that I am not talking about short term passing storms in otherwise calm seas. I am looking at what I think are now well-established GLOBAL secular trends. And they're affecting not only individual retired people - but large institutional investors like pension plans - university endowments - sovereign wealth funds and the like. Robyn
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Old 02-06-2016, 03:35 PM
 
Location: Texas
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4% rule or not, I don't have much choice in the matter. With our IRA's the RMD is approximately 4%.
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Old 02-06-2016, 03:49 PM
 
71,515 posts, read 71,694,121 times
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Quote:
Originally Posted by Robyn55 View Post
Tell me when someone is going to die - I'll tell you how much they can spend. At age 68 - I have a life expectancy of 18+ years. At age 97 - my father still has a life expectancy of 2+ years. IOW - you're not dead until you're dead . And life expectancy tables are quite worthless. You also have to tell me how much it will cost you in the end (some deaths are cheap - others aren't).

Also - FWIW - I would toss any conclusions about any of this stuff based on studies of historical data. I have been doing fixed income for 30+ years - and I have never ever seen anything like the current interest rate environment (which has pretty much been going on for more than half a decade now). There have been long periods of time in the past when equity returns (in terms of price appreciation) - like those we've seen since 2000 - have been paltry. But they were offset by (much) higher dividends and much higher interest rates and that is who the math of today is based on ..

Looking at the past while ignoring what is actually going on now is kind of like seeing the NHC predicting that a major hurricane is going to hit you 2 days from now - but your ignoring the warnings because your area has never been hit by a major hurricane before.

Note that I am not talking about short term passing storms in otherwise calm seas. I am looking at what I think are now well-established GLOBAL secular trends. And they're affecting not only individual retired people - but large institutional investors like pension plans - university endowments - sovereign wealth funds and the like. Robyn
common practice is to plan until 95 but typically current planning methods have been so conservative that 70% of the time you still have more then you even started with at the 30 year mark . don't forget we still have not come close to any of the worst time frames of the past including the great depression and the world wars . the worst were the 1965/1966 retirees who had the most awful combination of market returns , inflation and rates . it is them the math of today is based on in most of the retirement planners . those were some pretty tough conditions to top .

it wasn't just crappy sideways markets for 20 years in 1965/1966 that created the horror for the 1965/1966 group . it was on top of 20 years of barely higher returns inflation soared from 1% to double digits in just a few short years . it ate principal like crazy as folks tried to keep up but had to burn huge amounts of cash to cover the same expenses .

could we top that ? maybe we will , no one knows but it could take a whole lot worse then we have at this point since the worst of the past for retirees was pretty bad . .

if you are really concerned a longevity annuity can help .

fixed income used alone already had a very high rate of failure over many time frames so unless you need 2% or less it has never been bullet-proof and already was a poor choice for anything but the lowest draw rates . . i certainly wouldn't trust it as my only investment at this stage .

the conditions we have today are why more and more , spia's and your own diversified investing are becoming more and more popular since they do much better if conditions are not so great

but in any case the 4% rule was never meant to be a rule after year 1 in retirement . it was only a way of ball parking an INITIAL SAFE WITHDRAWAL RATE .

the best we can do today is monitor and make sure we are still on track . good or bad 20 years from now things can be very different then we see them now .

Last edited by mathjak107; 02-06-2016 at 04:23 PM..
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