Anyone familiar with the "rule of 100" for seniors investing/financial planning ? (emotionally, divorce)
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From what I’ve seen higher equity ratio doesn’t necessarily mean higher balance. Looking at people who posted their returns for 1 year, it’s still negative. June to June. Even though this year YTD returns have been spectacular.
???
I’m no investments guru, but my own self managed portfolio, of 75/10/15, (NOT including the 15% in HYS @ 2.2% ) has been 14% YTD, 8% June to June, 9% Avg, last 3 years, 12% annual avg, last 10 years. Only really possible because of my highest salary years enabled much higher savings rates during this great bull run.
For portfolios where the cumulative average rate of return (after taxes etc.) exceeds the inflation-adjusted 4% withdrawal rate, nothing happens... the portfolio keeps chugging along. But if the 4% gets adjusted for inflation, where the portfolio doesn't earn enough, eventually withdrawals start overwhelming the capacity of the portfolio.
Running some numbers in my own calculation (not Fire Calc or any other web site), with conservative (but not direly pessimistic) rates of return, I find many scenarios where at year-30 the portfolio is healthy, but in the next 5-10 years it rapidly gets depleted. That's because that initial 4% has grown - due to inflation - to a much higher percent. The upshot is actually an obvious one: if we want a portfolio that endures perpetually, we need a withdrawal rate that is less than the after-tax annual rate of return. If the portfolio just barely manages to track inflation, then the "safe" withdrawal rate is 0%.
what happens most of the time is unless you take raises along the way you end up dying with more than you started ...90
5 of the 119 cycles have ended up with more than you started
in theory though if you planned to age 100 and at 99 had 30k left with 29k in expenses a year , that is a successful outcome but i doubt with 1 years worth of money left you would feel very successful . you could have a buck left the day after you dies and that is considered successful
For portfolios where the cumulative average rate of return (after taxes etc.) exceeds the inflation-adjusted 4% withdrawal rate, nothing happens... the portfolio keeps chugging along. But if the 4% gets adjusted for inflation, where the portfolio doesn't earn enough, eventually withdrawals start overwhelming the capacity of the portfolio.
Running some numbers in my own calculation (not Fire Calc or any other web site), with conservative (but not direly pessimistic) rates of return, I find many scenarios where at year-30 the portfolio is healthy, but in the next 5-10 years it rapidly gets depleted. That's because that initial 4% has grown - due to inflation - to a much higher percent. The upshot is actually an obvious one: if we want a portfolio that endures perpetually, we need a withdrawal rate that is less than the after-tax annual rate of return. If the portfolio just barely manages to track inflation, then the "safe" withdrawal rate is 0%.
the return is not the key , the sequence of those returns are key to what happens ... there can be a 15 year difference between best and worst outcomes using the same exact return in different orders so returns mean little , and sequences mean a whole lot. if you are using straight line average returns where every year is positive you are fooling yourself .
DR MOSHE MILEVSKY wrote a very interesting paper years ago , RETIREMENT RUIN AND THE SEQUENCE OF RETURNS.
he took an example of a constant 7% return year after year based on a 7% average return over 30 years and drew 7% or 950 a month out starting at age 65 . the money was exhausted by age 86. this is typical of what uninformed folks do in an excell spread sheet or reverse amortization calculator when they have to enter a growth rate so they use an average.
he used 7% so you can see the effect in all examples since the accounts could be drained .
next he took the same 7% average return and made it happen in different orders.
he made year 1 up 7% ,year 2 minus -13% and year 3 up 27% and repeated that pattern . the same 7% average return went broke at 83.
again , same 7% average return ,making the first year up 7% , next year up 27% and 3rd year minus -13%. you went broke at age 90. your money lasted 7 years longer than the example above with the same 7% average return.
next he did first year minus -13% , 2nd year up 7% and 3rd year up 27% . you were broke by 81.
that is also the same 7% average return
lastly he made 1st year up 27% ,2nd up 7% and 3rd year down 13% , same 7% average return and you lasted until 95.
that is almost 10 years longer than just figuring a constant 7% year after year ,.
the variation on the same 7% average return in how long your money will last is largely controlled by the order of those gains and losses.
in this case the same 7% average return most folks just throw in an excell spreadsheet and spend down didn't last until 86.5 like the spread sheet said. they went broke based on the order of that 7% average anywhere from 81 to 95.
as you see being down early on can drastically reduce your failure age by a lot even though the average return over time is identical. it isn't just the sequence of returns that has this effect ,it is the sequence of inflation too. now you have the two working against each other as well altering outcomes even more.
Last edited by mathjak107; 07-01-2019 at 02:23 AM..
Mathjak - thanks for the good analysis above and summary of the article. However, you left out the best part... what is the solution? Everything you are saying is exactly correct, and actually speaks to the problem with the drawdown method - so what do you do?
Also - another question for those who like this method rather than a passive income strategy. Rather than take 4% out every year and hope to preserve capital by gaining at equal or higher rates of return - why not just protect the capital completely and come up with a strategy that expects a 4% dividend return? Even if you simply bought the SPY ETF and played the overall S&P index, you would expect a 2% yield with a smaller tax hit. Serious question - I would love to understand the thoughts around this! Dante
it is already done for you ... the best calculators today like firecalc are based on the absolute worst outcomes for setting draw rates ..anything better then the worst we have had is a bonus .
a good calculator never uses any assumed average return , it plans around the worst case outcomes . so far are worst time frames for retirees are those who retired in 1907 ,1929,1937 1965,1966 .. 1965/1966 are the worst of the worst so a safe withdrawal rate is based around these outcomes.
a 2% or 4% nominal return is not good because in down years you will be spending down excessive amounts since dividends are not interest and your portfolio is offset by a matching drop ... and it is not inflation adjusted to your personal cost of living increases .
you need specifically a 2% REAL RETURN as a minimum , that is after inflation , as an average actual outcome over the first 15 years of a 30 year retirement ..spend down to far those first 15 years and the greatest bull market in history was to little to late .
but remember .. being 99 and having 30k left when it cost you 30k a year to live may be considered a successful retirement but you won feel so good , so you actually need more than to average a 2% real return .
a 2% real return is only what it takes to hold 4% inflation adjusted spending for 30 years . you may have a buck left for year 31
I’m no investments guru, but my own self managed portfolio, of 75/10/15, (NOT including the 15% in HYS @ 2.2% ) has been 14% YTD, 8% June to June, 9% Avg, last 3 years, 12% annual avg, last 10 years. Only really possible because of my highest salary years enabled much higher savings rates during this great bull run.
I saw it in ER forum. 89% in equity he had negative 1 year return, I have no idea why. I thought everybody invested in index, apparently not.
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Everything you are saying is exactly correct, and actually speaks to the problem with the drawdown method - so what do you do?
