dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

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iamblessed
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dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by iamblessed »

52k is that right? The only thing he has to do is not get a raise some years. He also has more money after 30 years than the 4% rule. Anybody ever heard of this? Here are the rules
Dynamic withdrawal scenario assumes that if the annual rate of return on portfolio is: 1) less than 3%, withdrawal
remains the same as the prior year; 2) between 3% and 15%, withdrawal is increased by inflation (3%); 3) greater than 15%, withdrawal is increased
by 4%. While the dynamic withdrawal scenario during this historical period provided 14% more total spending in today’s dollars,

https://am.jpmorgan.com/us/en/asset-man ... lsrc=aw.ds
It is on page 27
Last edited by iamblessed on Mon Jun 14, 2021 1:31 pm, edited 2 times in total.
Thesaints
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Re: dynamic spending spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by Thesaints »

If one "dynamically adjusts withdrawal rate" no rate <100% can ever cause portfolio depletion. The key is being able to live with the withdrawn money...
retiringwhen
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Re: dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by retiringwhen »

That report is very nice summary of all the scope of retirement planning!

Their example of dynamic withdrawal is about a simplified defense against running off the cliff with the 4% rule. It essentially defers the inflation increase in years that the market goes up less than inflation. That sounds okay, but as stated earlier, it means you do assume erosion in spending power as part of the plan up front. It is less variable than VPW in the spending changes, but also has much of the same downside as SWR as it can leave gigantic legacies for the heirs.
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iamblessed
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Re: dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by iamblessed »

retiringwhen wrote: Mon Jun 14, 2021 2:24 pm That report is very nice summary of all the scope of retirement planning!

Their example of dynamic withdrawal is about a simplified defense against running off the cliff with the 4% rule. It essentially defers the inflation increase in years that the market goes up less than inflation. That sounds okay, but as stated earlier, it means you do assume erosion in spending power as part of the plan up front. It is less variable than VPW in the spending changes, but also has much of the same downside as SWR as it can leave gigantic legacies for the heirs.
I know about VPW but had not heard of this exact method. You spending is cut but not to bad unlike some methods. Starting in 1966 is a very good test. I would love to see how a 60/40 would do with this this idea.
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iamblessed
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Re: dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by iamblessed »

Anybody else ever heard of this idea?
AlohaJoe
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Re: dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by AlohaJoe »

iamblessed wrote: Mon Jun 14, 2021 9:35 pm Anybody else ever heard of this idea?
Yes, dynamic spending rules are extremely well known. There are hundreds of variants of them. The specific one JP Morgan is talking about looks like a variant of David Zolt's "Target Percentage Adjustment" that he first wrote about in a 2013 article in the Journal of Financial Planning.

https://www.targetpercentage.com/

The basic idea is you skip inflation adjustments when the portfolio isn't doing well.
FactualFran
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Re: dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by FactualFran »

Both lines on the chart on page 27 of the document are for an initial withdrawal rate of 5.2%. For one line annual withdrawals were increased by 3%. For the other line annual withdrawals were increased by 0%, 3%, or 4% depending on the return. The chart does not contain a line for an initial withdrawal rate of 4%.
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iamblessed
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Re: dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by iamblessed »

AlohaJoe wrote: Mon Jun 14, 2021 9:45 pm
iamblessed wrote: Mon Jun 14, 2021 9:35 pm Anybody else ever heard of this idea?
Yes, dynamic spending rules are extremely well known. There are hundreds of variants of them. The specific one JP Morgan is talking about looks like a variant of David Zolt's "Target Percentage Adjustment" that he first wrote about in a 2013 article in the Journal of Financial Planning.

https://www.targetpercentage.com/

The basic idea is you skip inflation adjustments when the portfolio isn't doing well.
Like his 5.5% idea.
MarkRoulo
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Re: dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by MarkRoulo »

iamblessed wrote: Mon Jun 14, 2021 1:25 pm 52k is that right? The only thing he has to do is not get a raise some years. He also has more money after 30 years than the 4% rule. Anybody ever heard of this? Here are the rules
Dynamic withdrawal scenario assumes that if the annual rate of return on portfolio is: 1) less than 3%, withdrawal
remains the same as the prior year; 2) between 3% and 15%, withdrawal is increased by inflation (3%); 3) greater than 15%, withdrawal is increased
by 4%. While the dynamic withdrawal scenario during this historical period provided 14% more total spending in today’s dollars,
Note that not getting a "nominal" raise is the same thing as cutting spending in real terms if there is inflation.

Page 26 provides a chart that shows two years with negative returns (1973 and 1974). Those two years saw about 17% inflation between them, so the real spending (or budget) would be down 17% at the end of those two years (as inflation was 17% and spending in nominal dollars was unchanged).

I'll round this to 20% and then observe that If you had saved 20% more than necessary and then used the "4% rule" (*) you'd be withdrawing 20% more per year than you would have if you had saved "just enough". 20% more than 4% is 4.8%, so if you save 20% more than you NEED, you can withdraw a bit under 5% per year except for years that returns are poor. Then your withdrawn amount goes down.

So this is basically a variation of the theme that if you save more than you strictly NEED, you can spend more as a baseline because you have room to cut if necessary. This is one specific formula describing when to cut.

But the real key here is that you'll need to save about 20% more than you "need" so that you have that cushion to cut back from if times are bad.


(*) NOTE: The 4% rule was *never* intended as a withdrawl strategy. It was an idiot simple formula to show that a 4% real withdrawl from retirement savings worked over the past 70-80 years for investors in the US stock and bond markets. Since it wasn't provided as a strategy it shouldn't be terribly surprising that intentionally designed strategies are better. But note that the KEY to all the "cut back if you must" strategies is that there has to be *something* to cut!
SnowBog
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Re: dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by SnowBog »

I haven't read thru the details from the link you shared... But I still think VPW sounds like the better option...

If you haven't, take at the "forward" test: viewtopic.php?t=284519

Every month for the last few years, this is updated with the numbers for that month. Including the big drop March 2020 (granted that was short lived).

But seeing how fairly steady in terms of "monthly withdrawal" the results have been, despite noticeable market changes was enough to "sell me" on VPW. (And even with higher withdrawals [than a normal 4% SWR] the account balance is still growing...)

For clarity, they are using a buffer to help balance the monthly changes. If you go back to the first month, instead of withdrawing the recommended "monthly" amount - I think they withdrew something like 5x or 6x the amount. Each month since, they essentially add the "monthly" amount to that buffer and then take the average remaining (let's say it was 6 months, they withdraw 1/6 of the buffer account). IIRC their mechanism is a little different, but essentially that's what they are doing.

Why I think VPW is better?

First, if I'm following what you shared, this alternative "never goes down". To me that's insane... If the markets drop 30% a year for say 5 years in a row... No way am I comfortable to "keep spending" what I spent the last year before the drop.

By contrast, since VPW is based on current value, the amount gets adjusted... This requires more flexibility (being able to cut back on spending), but to my mind is much more realistic. If I get a paycut at work (aka market decline), it's obvious I should spend less...

Second, VPW helps deal with income streams such as pensions and SSN. I won't "need" to withdraw as much when those kick in. But in a typical SWR model, and maybe in this alternative (again didn't read the details) you found - YOU have to figure out how to adjust.

Lastly, VPW is drop dead simple (at least with longinvest's spreadsheet). As they show in the "forward test", you basically need to do one thing - update your current portfolio balance.

The method you mentioned requires you to know your return and the inflation rate. Most people will struggle to accurately know their return (unless they have a single account). I can't imagine my spouse would be interested in that much work... Especially compared with VPW, they basically just need to update their age and portfolio amount annually - withdraw the recommended amount, and revisit the following year...
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iamblessed
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Re: dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by iamblessed »

I guess it is a good idea if your spending is heavy the first few years of retirement.
Topic Author
iamblessed
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Re: dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by iamblessed »

MarkRoulo wrote: Mon Jun 14, 2021 11:21 pm
iamblessed wrote: Mon Jun 14, 2021 1:25 pm 52k is that right? The only thing he has to do is not get a raise some years. He also has more money after 30 years than the 4% rule. Anybody ever heard of this? Here are the rules
Dynamic withdrawal scenario assumes that if the annual rate of return on portfolio is: 1) less than 3%, withdrawal
remains the same as the prior year; 2) between 3% and 15%, withdrawal is increased by inflation (3%); 3) greater than 15%, withdrawal is increased
by 4%. While the dynamic withdrawal scenario during this historical period provided 14% more total spending in today’s dollars,
Note that not getting a "nominal" raise is the same thing as cutting spending in real terms if there is inflation.

Page 26 provides a chart that shows two years with negative returns (1973 and 1974). Those two years saw about 17% inflation between them, so the real spending (or budget) would be down 17% at the end of those two years (as inflation was 17% and spending in nominal dollars was unchanged).

I'll round this to 20% and then observe that If you had saved 20% more than necessary and then used the "4% rule" (*) you'd be withdrawing 20% more per year than you would have if you had saved "just enough". 20% more than 4% is 4.8%, so if you save 20% more than you NEED, you can withdraw a bit under 5% per year except for years that returns are poor. Then your withdrawn amount goes down.

So this is basically a variation of the theme that if you save more than you strictly NEED, you can spend more as a baseline because you have room to cut if necessary. This is one specific formula describing when to cut.

But the real key here is that you'll need to save about 20% more than you "need" so that you have that cushion to cut back from if times are bad.


(*) NOTE: The 4% rule was *never* intended as a withdrawl strategy. It was an idiot simple formula to show that a 4% real withdrawl from retirement savings worked over the past 70-80 years for investors in the US stock and bond markets. Since it wasn't provided as a strategy it shouldn't be terribly surprising that intentionally designed strategies are better. But note that the KEY to all the "cut back if you must" strategies is that there has to be *something* to cut!
I see what you mean. Then in 1975 you get a 3% raise.
MikeG62
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Re: dynamic spending 5.2% outdoing the 4% rule. If I am understanding this right he never takes out less than

Post by MikeG62 »

iamblessed wrote: Mon Jun 14, 2021 9:35 pm Anybody else ever heard of this idea?
As AlohaJoe said, there are many dynamic spending strategies.

We are following a modified version of Guyton and Klinger's withdrawal decision rules (another dynamic spending strategy). There is lots of information out there on this strategy.

With regard to inflation, G&K skips inflation adjustments following years when asset returns are negative and the current year withdrawal rate > initial annual withdrawal rate. We have modified this to add that we skip the inflation adjustment when our spending in the prior year was below our budget by roughly the current rate of inflation or more (the theory is by spending up to the prior year budget we can still keep pace with inflation).
Real Knowledge Comes Only From Experience
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