withdrawal strategy after market decline

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bb
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withdrawal strategy after market decline

Post by bb »

Lots of threads about SWR discuss the SWR as a rough planning tool as opposed to a literal plan and lots of folks have stated of course after a big market selloff/bear market it would be natural to reduce withdrawals. But I don't recall lots of discussions on the details of reducing withdrawals after a significant market decline.

So given the following hypothetical case:
- portfolio split 60/40 stock/bond
- 3% (initial) withdrawal rate, increased for inflation, 50% considered discretionary
- stocks decline by 50%
- all expenses have to be covered by portfolio (no other sources of money) (edit #2)

What are some thoughts on a withdrawal strategy following the market decline?

Edit #1: added (initial) to the assumptions

Edit #2: added assumption there are no other sources of money - all expenses have to be covered by investment portfolio.
Last edited by bb on Wed Apr 21, 2021 3:47 pm, edited 2 times in total.
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JoMoney
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Re: withdrawal strategy after market decline

Post by JoMoney »

If you have a balanced portfolio, you'll be drawing more from your bonds/cash after a market decline in order to get your portfolio back to your target allocation.
From what I've read on here, it's pretty normal for people to cut back on their spending when markets aren't so cheery.
There are many retired posters on here that seem to have a good amount of income from pensions, social security, annuities, and other sources that are not impacted by the market at all.
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Re: withdrawal strategy after market decline

Post by KlangFool »

OP.

A) I have 3 years of expense in CASH as my emergency fund. I do not need to worry about the withdrawal after market decline until it lasted more than 3 years.

B) A bigger question here is do you rebalance after the market decline? That should happen way before your withdrawal. My IPS says that I would rebalance until I hit a minimum limit of 5 years of expense in my fixed income.

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Re: withdrawal strategy after market decline

Post by Marseille07 »

Just withdraw in a way to keep the same AA, or nudge toward it. This means you automatically withdraw more from bonds after a crash, which is what you want.
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Re: withdrawal strategy after market decline

Post by sailaway »

If it is natural, you don't need a strategy, it just happens as a response to anxiety.

With a 3% withdrawal rate, it probably isn't necessary to have a conscious strategy, beyond thinking about rebalancing and which asset type to pull funds from in different situations.
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Re: withdrawal strategy after market decline

Post by Mullins »

This depends on how much money you have. In market declines, the more affluent have sufficient amounts in reserve or streaming in that they might continue their lifestyles maybe even to the point where the markets recover before they really feel the pinch. Others will do what's needed, tightening their belts. In your case with 50% being discretionary income you might cut back, cut out or push off some things you deem less important if need be.
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dbr
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Re: withdrawal strategy after market decline

Post by dbr »

You could look and see what VPW would do in case of a stock return of -50% in a year: https://www.bogleheads.org/wiki/Variabl ... withdrawal.

Between Nov of '07 and Feb of '09 my portfolio had declined by about 30% but we didn't make any withdrawal changes hovering around 3%-4% of initial portfolio value withdrawal.
Last edited by dbr on Sat Apr 17, 2021 11:46 am, edited 1 time in total.
Topic Author
bb
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Re: withdrawal strategy after market decline

Post by bb »

The issue I am trying to explore is not necessarily how much money could be withdrawn but rather what would you do given the hypothetical case, how much money would you withdraw, how much would you cut back, when would you be comfortable increasing your spending again.
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Re: withdrawal strategy after market decline

Post by Marseille07 »

bb wrote: Sat Apr 17, 2021 11:20 am The issue I am trying to explore is not necessarily how much money could be withdrawn but rather what would you do given the hypothetical case, how much money would you withdraw, how much would you cut back, when would you be comfortable increasing your spending again.
But you said 3% WR so wouldn't that take care of itself? Or was it a 3% + inflation "constant-dollar"? It's not your fault, but I find it extremely confusing, if not outright stupid, to call constant-dollar using a percentage.
Last edited by Marseille07 on Sat Apr 17, 2021 11:27 am, edited 1 time in total.
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Re: withdrawal strategy after market decline

Post by jebmke »

bb wrote: Sat Apr 17, 2021 11:20 am The issue I am trying to explore is not necessarily how much money could be withdrawn but rather what would you do given the hypothetical case, how much money would you withdraw, how much would you cut back, when would you be comfortable increasing your spending again.
We actually increased our spending during the Great Recession. Prices for home improvements and travel were too good to pass up. Tourist traffic where we went was way off so it was quite pleasant.
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Re: withdrawal strategy after market decline

Post by KlangFool »

bb wrote: Sat Apr 17, 2021 11:20 am The issue I am trying to explore is not necessarily how much money could be withdrawn but rather what would you do given the hypothetical case, how much money would you withdraw, how much would you cut back, when would you be comfortable increasing your spending again.
bb,

1) I probably go with a smoothing algorithm.

A) Put 3% of the portfolio into the buffer. The buffer/emergency fund starts with 3 years of expense.

B) Spend 1/3 of the buffer.

C) You could change the number 3 to any number.

Essentially, the increase or decrease will average out over 3 years. You probably do not want your spending to be as volatile as the market.

2) In reality, my annual expense is probably going to be less than my portfolio growth. After a few years, it probably won't matter anymore. The portfolio would be too big. For example, once I hit my social security full retirement age, my portfolio will be 50X (2% SWR).

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Re: withdrawal strategy after market decline

Post by climber2020 »

bb wrote: Sat Apr 17, 2021 10:14 am
So given the following hypothetical case:
- portfolio split 60/40 stock/bond
- 3% withdrawal rate, increased for inflation, 50% considered discretionary
- stocks decline by 50%

What are some thoughts on a withdrawal strategy following the market decline?
1) Rebalance back to 60/40. It's impossible to tell in real time when the bottom has been hit, but if stocks have dropped 50%, then you're probably ok making the transaction.
2) Withdraw only from bonds until stocks get back to near their previous high.
3) Once stocks are near pre-crash levels, rebalance back to 60/40.

Since you have 40% of your portfolio in bonds, even if the bear market lasts many years you should still have enough to pay your bills.

This will also make your AA temporarily more aggressive since you're only spending from bonds and leaving stocks alone while they recover.
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Re: withdrawal strategy after market decline

Post by Ben Mathew »

Amortization based withdrawal (ABW) would respond to a decline in portfolio with the same percentage decline in withdrawals if expected returns stay the same and the portfolio is being fully depleted (i.e. no terminal value). A 50% decline in stocks for a 60/40 portfolio is a 30% decline of the portfolio. So withdrawals will reduce by 30%. Rebalance back to 60/40.

But if expected returns increase because of the crash, there will be an adjustment for that and earnings will decline by less than 30%. AA could also become higher than 60/40 because of higher expected return relative to bonds (i.e. higher equity premium) assuming stock risk stays the same.
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Topic Author
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Re: withdrawal strategy after market decline

Post by bb »

Clarified initial hypothetical case: The 3% withdrawal rate is a rough initial withdrawal rate (SWR rule of thumb), increased for inflation - not 3% of portfolio balance annually
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Re: withdrawal strategy after market decline

Post by Shallowpockets »

bb wrote: Sat Apr 17, 2021 11:20 am The issue I am trying to explore is not necessarily how much money could be withdrawn but rather what would you do given the hypothetical case, how much money would you withdraw, how much would you cut back, when would you be comfortable increasing your spending again.
Well, it is unlikely that the market would decline 50%. That is an outlier, historically. Using that as a basis only inspires fear and anxiety. Also, 50% may happen over time. Down 10%, then to 20 and so forth.
You can look up the historic drops and their time to recover. Better to know the recovery period than the drop. That timeframe provides for at least a view on planning. No drop last forever. If you can make it through the gap, you’d be alright.
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Re: withdrawal strategy after market decline

Post by KlangFool »

bb wrote: Sat Apr 17, 2021 12:20 pm Clarified initial hypothetical case: The 3% withdrawal rate is a rough initial withdrawal rate (SWR rule of thumb), increased for inflation - not 3% of portfolio balance annually
bb,

Do you rebalance after the 50% drop? That would be your first action. Withdrawal comes much later?

In my case, the answer is yes until it reaches the minimum limit of 5 years of expense in fixed income.

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Re: withdrawal strategy after market decline

Post by bb »

Do you rebalance after the 50% drop?
Not sure - but sounds like that might be part of the answer to "What would you do.."
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Re: withdrawal strategy after market decline

Post by David Jay »

I would "rebalance" with my regular withdrawals. Which would mean that I would be withdrawing from bonds.
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Re: withdrawal strategy after market decline

Post by KlangFool »

bb wrote: Sat Apr 17, 2021 12:40 pm
Do you rebalance after the 50% drop?
Not sure - but sounds like that might be part of the answer to "What would you do.."
What did you do in March 2020? Did you rebalance? It should be part of your IPS.

Please note that this has nothing to do with withdrawal. It is part of your IPS. If you don't have this, you should not be in the 3 funds portfolio.

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Re: withdrawal strategy after market decline

Post by 1210sda »

Ben Mathew wrote: Sat Apr 17, 2021 12:10 pm Amortization based withdrawal (ABW) would respond to a decline in portfolio with the same percentage decline in withdrawals if expected returns stay the same and the portfolio is being fully depleted (i.e. no terminal value). A 50% decline in stocks for a 60/40 portfolio is a 30% decline of the portfolio. So withdrawals will reduce by 30%. Rebalance back to 60/40.
Thanks Ben. Can always count on you.

So, if the OP's expenses are 50% discretionary (i.e. 50% non discretionary), then he should be able to fully cover his non discretionary and still have 20% to use as discretionary. Right?
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Re: withdrawal strategy after market decline

Post by vineviz »

bb wrote: Sat Apr 17, 2021 10:14 am
What are some thoughts on a withdrawal strategy following the market decline?
As a rule, you should never change your STRATEGY in response to a foreseeable event: any strategy worth employing won’t need a change after something you knew could happen actually does happen.

More to the point, with a 3% withdrawal rate a 50% drop in equity markets should not trigger any action at all (besides rebalancing of course) .
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: withdrawal strategy after market decline

Post by Ben Mathew »

1210sda wrote: Sat Apr 17, 2021 1:56 pm
Ben Mathew wrote: Sat Apr 17, 2021 12:10 pm Amortization based withdrawal (ABW) would respond to a decline in portfolio with the same percentage decline in withdrawals if expected returns stay the same and the portfolio is being fully depleted (i.e. no terminal value). A 50% decline in stocks for a 60/40 portfolio is a 30% decline of the portfolio. So withdrawals will reduce by 30%. Rebalance back to 60/40.
Thanks Ben. Can always count on you.

So, if the OP's expenses are 50% discretionary (i.e. 50% non discretionary), then he should be able to fully cover his non discretionary and still have 20% to use as discretionary. Right?
I ignored the discretionary vs non discretionary distinction in the OP. But let's bring that in:

If 1.5% of a $1,000,000 portfolio is non-discretionary, that's $15,000 per year of non-discretionary expenses. For an 80 year old planning till age 100, funding that with 100% bonds at 0% real interest rate comes to $315,000.

So the 60/40 AA on the $1,000,000 portfolio is actually:

- 0/100 on the safe portfolio of $315,000 to fund non-discretionary expenses, plus
- 88/12 on the risk portfolio of $685,000 to fund discretionary expenses.

If stocks drop 50% and there is no compensating increase in expected returns, then:

- the $15,000 withdrawal for non-discretionary expenses does not change because it's funded by a 0/100 portfolio.
- the withdrawal for discretionary expenses falls 44% because it's funded by an 88/12 portfolio.

Risk portfolio is rebalanced back to 88/12.
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Re: withdrawal strategy after market decline

Post by dogagility »

bb wrote: Sat Apr 17, 2021 11:20 am The issue I am trying to explore is not necessarily how much money could be withdrawn but rather what would you do given the hypothetical case, how much money would you withdraw, how much would you cut back, when would you be comfortable increasing your spending again.
I plan on following the calculation embedded within the VPW method.
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Re: withdrawal strategy after market decline

Post by m@ver1ck »

@klangfool -

Why would one even be in 60/40.
Wouldn’t it be sufficient to have say a 5 year buffer in bonds and the rest in stock.

In “good” markets, one would essentially keep
Selling stocks - that way the 5 year buffer remains.
In bad years, you eat into your buffer?

Now - I guess what is a bad year or good year still remains to be defined.

If one spends $x a year and we’re saying that 25x is what one should have, then effectively we just need a 80/20 stock to bond ratio at the start of retirement.

I guess this would mean that the stock to bond ratio keeps decreasing over the years - so maybe it won’t work.

Thoughts?
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Re: withdrawal strategy after market decline

Post by KlangFool »

m@ver1ck wrote: Sat Apr 17, 2021 9:22 pm @klangfool -

Why would one even be in 60/40.
Wouldn’t it be sufficient to have say a 5 year buffer in bonds and the rest in stock.
m@ver1ck,

1) My AA is 60/40 with 10+ years of expense in Fixed Income. My minimum limit is 5 years of expense in fixed income. Hence, I have the FI tolerance for rebalancing.

2) If you only keep the minimum in the FI, you cannot take advantage of the market oscillation. And, the market is getting more volatile. I am prepared for the market oscillation. My EF and minimum Fixed Income will last me more than 5 years.

3) There is no reason to be more aggressive than 60/40. As of this moment, my portfolio is at 27X and my EF is at 3X. My SWR is close to 3%. Once I reach my social security full retirement age, the social security will cover 50% of my annual expense. Then, my SWR will be 1.5% to 2%

4) I have "enough" return. I do not need more.

5) I have 3X in my EF. I do not need to sell anything in a bad market for at least 3 years.

6) My portfolio had grown so big that I am harvesting 30K to pay down my mortgage whenever it goes up by 60K. I am de-risking.

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Re: withdrawal strategy after market decline

Post by MikeG62 »

bb wrote: Sat Apr 17, 2021 12:20 pm Clarified initial hypothetical case: The 3% withdrawal rate is a rough initial withdrawal rate (SWR rule of thumb), increased for inflation - not 3% of portfolio balance annually
bb wrote: Sat Apr 17, 2021 11:20 am The issue I am trying to explore is not necessarily how much money could be withdrawn but rather what would you do given the hypothetical case, how much money would you withdraw, how much would you cut back, when would you be comfortable increasing your spending again.
We are following a modified version of Guyton and Klinger's withdrawal decision rules. Unless we run through a guardrail, we would withdrawal and spend the amount we had planned to spend prior to the market decline. That's the premise behind withdrawal decision rules in general. Maintain your lifestyle and don't react to market corrections by panicking and slamming the brakes on spending. Over time those end up just being noise.
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Re: withdrawal strategy after market decline

Post by sixtyforty »

I've been using the ABW approach for withdrawals, along with including a "what if" scenario of a 50% decline.
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Re: withdrawal strategy after market decline

Post by midareff »

bb wrote: Sat Apr 17, 2021 10:14 am Lots of threads about SWR discuss the SWR as a rough planning tool as opposed to a literal plan and lots of folks have stated of course after a big market selloff/bear market it would be natural to reduce withdrawals. But I don't recall lots of discussions on the details of reducing withdrawals after a significant market decline.

So given the following hypothetical case:
- portfolio split 60/40 stock/bond
- 3% (initial) withdrawal rate, increased for inflation, 50% considered discretionary
- stocks decline by 50%

What are some thoughts on a withdrawal strategy following the market decline?

Edit: added (initial) to the assumptions
My thoughts as a 73 y/o 10 retired investor with a small government pension and SS to support our household. All WRs are a guess. You don't know how long you will live and you don't know how the market will perform. The only logical way forward (IMHO) is to start conservatively. If the market keeps going up you are gradually expiring your sequence of return's risk. The years from 2010 forward have been wonderful but have brought forth a different issue in the REAL return of bond funds. You used to be able to get 2% - 3% REAL from IT treasuries and now that's a negative number. When I refinanced our home (circa 2010) to a 3.0% mortgage IT Munis were yielding 3.4% to 3.5% and I could make money on their money + the tax write advantage. Now the advantage is to dump the munis and payoff the mortgage, which will happen tomorrow. ... nice chunk of capital gains on the munis too. If you can keep your monthly expenses low enough living modestly and have an income floor that doesn't totally depend on market returns little can happen to hurt you and you will be able to SWAN easily. All prescriptions for WR, AA and portfolio survivability are guesses pro-offered based on an unknown future. When I retired in 2010 the Shiller was 15, now it's 37.6 .. I think the chances of a repeat of that great fortune are not in the cards and planning should not include that type of optimism.

If you want a plan for a market sell-off contemplate this..... if you equities lost 60% of their value within the first 3 or 4 months of your retirement could you adjust your WR to 3% of that new investment balance and survive while maintaining an adequate lifestyle? If the answer is NO you might want to rethink your planning.
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Re: withdrawal strategy after market decline

Post by bb »

KlangFool wrote: Sat Apr 17, 2021 1:24 pm If you don't have this, you should not be in the 3 funds portfolio.

KlangFool
Can you elaborate on this? If you don't re-balance you should not be in 3-funds or if you don't have an IPS?
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Re: withdrawal strategy after market decline

Post by KlangFool »

bb wrote: Sun Apr 18, 2021 11:47 am
KlangFool wrote: Sat Apr 17, 2021 1:24 pm If you don't have this, you should not be in the 3 funds portfolio.

KlangFool
Can you elaborate on this? If you don't re-balance you should not be in 3-funds or if you don't have an IPS?
Then, you are not maintaining your Asset Allocation (AA). It is not 60/40 or whatever that you think you have. You should use an all-in-one fund like Vanguard Lifestrategy fund that maintain the AA for you.

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Re: withdrawal strategy after market decline

Post by willthrill81 »

A 3% fixed real dollar withdrawal strategy has been approximately equal to the perpetual withdrawal rate, meaning that even in the worst historic periods, such withdrawals would at least preserve the inflation-adjusted starting balance over the long-term (>20 years). So adjustments have not been strictly necessary with such a low starting withdrawal rate. In fact, it's been so conservative that you could have always withdrawn the greater of 3% of your current portfolio balance or last year's withdrawal plus inflation and still at least preserved, and generally have seen substantial growth in, your capital over the long-term.

That said, I prefer the amortization-based withdrawal method discussed in this thread. It can be adapted to virtually any scenario and can take non-portfolio income (e.g., SS benefits, real estate income, pension) into account. Also, dynamic growth rates can be incorporated, which typically has the effect of smoothing the withdrawals from year to year. And this method is mathematically guaranteed to not prematurely deplete one's portfolio (assuming that the underlying assets don't go to zero, of course).
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Re: withdrawal strategy after market decline

Post by reln »

bb wrote: Sat Apr 17, 2021 10:14 am Lots of threads about SWR discuss the SWR as a rough planning tool as opposed to a literal plan and lots of folks have stated of course after a big market selloff/bear market it would be natural to reduce withdrawals. But I don't recall lots of discussions on the details of reducing withdrawals after a significant market decline.

So given the following hypothetical case:
- portfolio split 60/40 stock/bond
- 3% (initial) withdrawal rate, increased for inflation, 50% considered discretionary
- stocks decline by 50%

What are some thoughts on a withdrawal strategy following the market decline?

Edit: added (initial) to the assumptions
Trick question. You don't reduce your withdrawals because you purchased a SPIA before retirement.
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Re: withdrawal strategy after market decline

Post by bb »

midareff wrote: Sun Apr 18, 2021 9:07 am if you equities lost 60% of their value within the first 3 or 4 months of your retirement could you adjust your WR to 3% of that new investment balance and survive while maintaining an adequate lifestyle?
If you are arguing a reduction would make sense what are some details of the frame work you are suggesting? Started the thread to see if folks would expand upon statements such as "of course nobody would continue to withdraw the same inflation indexed amount following a large market correction".

Folks go on and on about SWR not being a plan but not a lot of discussion about an actual plan or rules of thumb or whatever.
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Re: withdrawal strategy after market decline

Post by bb »

willthrill81 wrote: Tue Apr 20, 2021 9:25 pm So adjustments have not been strictly necessary with such a low starting withdrawal rate.
So seems like your argument is person could make a reduction if it made them feel better but would not really be necessary.

I can look into amortization-based withdrawal method.

There are lots of threads debating SWR, saying it is not a plan, important to have flexibility, but not a lot of threads that discuss what is a sensible plan/framework given someone has low withdrawal rate, has flexibility, etc.
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Re: withdrawal strategy after market decline

Post by Sandtrap »

bb wrote: Wed Apr 21, 2021 2:45 pm
willthrill81 wrote: Tue Apr 20, 2021 9:25 pm So adjustments have not been strictly necessary with such a low starting withdrawal rate.
So seems like your argument is person could make a reduction if it made them feel better but would not really be necessary.

I can look into amortization-based withdrawal method.

There are lots of threads debating SWR, saying it is not a plan, important to have flexibility, but not a lot of threads that discuss what is a sensible plan/framework given someone has low withdrawal rate, has flexibility, etc.
As alluded to earlier by "jomoney", it depends on how much of your baseline expenses are covered my an income stream outside of your investment portfolio. IE: Annuities, SS, Pension, Rental or Business income, etc.

Some folks have all of their baseline annual expenses covered this way and the investment portfolio proceeds/etc, are either a smaller portion of total assets or discretionary income.
And, others, might be the reverse of that where all of their annual income in retirement comes from the investment portfolio, and they don't have or very little income is derived from SS, Pension, Annuities, etc.

So, in other words, that 3% annual withdrawal rate might be more easily adjusted depending on the above.
If the withdrawal rate can be greatly reduced or put on pause after a large market decline, and one is financially able to do that, then great. It also moderates sequence of returns risk.
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Re: withdrawal strategy after market decline

Post by willthrill81 »

bb wrote: Wed Apr 21, 2021 2:45 pm
willthrill81 wrote: Tue Apr 20, 2021 9:25 pm So adjustments have not been strictly necessary with such a low starting withdrawal rate.
So seems like your argument is person could make a reduction if it made them feel better but would not really be necessary.

I can look into amortization-based withdrawal method.

There are lots of threads debating SWR, saying it is not a plan, important to have flexibility, but not a lot of threads that discuss what is a sensible plan/framework given someone has low withdrawal rate, has flexibility, etc.
The ABW method is a very flexible technique for determining withdrawals. Those willing and able to take on a conservative approach can set the terminal (i.e., ending) value at the end of a withdrawal period to be equal to their current portfolio balance (or any other amount desired).
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Re: withdrawal strategy after market decline

Post by bb »

Sandtrap wrote: Wed Apr 21, 2021 3:14 pm depends on how much of your baseline expenses are covered my an income stream outside of your investment portfolio. IE: Annuities, SS, Pension, Rental or Business income, etc.
Edit #2: added assumption there are no other sources of money - all expenses have to be covered by investment portfolio.
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Re: withdrawal strategy after market decline

Post by midareff »

bb wrote: Wed Apr 21, 2021 2:38 pm
midareff wrote: Sun Apr 18, 2021 9:07 am if you equities lost 60% of their value within the first 3 or 4 months of your retirement could you adjust your WR to 3% of that new investment balance and survive while maintaining an adequate lifestyle?
If you are arguing a reduction would make sense what are some details of the frame work you are suggesting? Started the thread to see if folks would expand upon statements such as "of course nobody would continue to withdraw the same inflation indexed amount following a large market correction".

Folks go on and on about SWR not being a plan but not a lot of discussion about an actual plan or rules of thumb or whatever.
Easy.. let's suppose you retire with $1.2M in equities and $.8M in FI (bonds, etc.).... 60/40 on a $2M portfolio. Your planned withdrawal rate is 4% because you read about it on Bogleheads and heard it repeated here endlessly. That's $80K annually as a start inflationary indexed. Let's say you need the $80K + your family SS to maintain your lifestyle. You retire and the market begins to drop and the Shiller PE drops from 37.6 to 15, 2hich is roughly it's long term median. That's roughly a 60% drop in the NAV pricing of equities. Your portfolio is now $1.28M and had you retired at a 4% WR now, three or four months later your 4% WR would provide $51,200 instead of the forecast $80,000.

Under the revised scenario could you live on a 4% WR of $51,200 and adjust your withdrawals to it?
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Scott S
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Re: withdrawal strategy after market decline

Post by Scott S »

There are quite a few variable-withdrawal methods. Not sure how you missed all the discussions about ABW and VPW on Bogleheads ;), but here's a blog post from Early Retirement Now testing a bunch: https://earlyretirementnow.com/2017/03/ ... -criteria/ If you can take his skepticism in stride, he has good info on how they operate.

Pretty much any scheme that begins with 3% and implements cuts in bear markets should be safe, I'd think! :beer
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Re: withdrawal strategy after market decline

Post by Marseille07 »

Scott S wrote: Wed Apr 21, 2021 4:06 pm There are quite a few variable-withdrawal methods. Not sure how you missed all the discussions about ABW and VPW on Bogleheads ;), but here's a blog post from Early Retirement Now testing a bunch: https://earlyretirementnow.com/2017/03/ ... -criteria/ If you can take his skepticism in stride, he has good info on how they operate.

Pretty much any scheme that begins with 3% and implements cuts in bear markets should be safe, I'd think! :beer
It's easy to miss ABW and VPW because certain individuals keep flashing the first chart of the first ERN article for years. I tried pointing them different charts / simulations but fell on deaf ears.
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Re: withdrawal strategy after market decline

Post by bb »

midareff wrote: Wed Apr 21, 2021 3:58 pm Easy.. let's suppose you retire with $1.2M in equities and $.8M in FI (bonds, etc.).... 60/40 on a $2M portfolio. Your planned withdrawal rate is 4% because you read about it on Bogleheads and heard it repeated here endlessly. That's $80K annually as a start inflationary indexed. Let's say you need the $80K + your family SS to maintain your lifestyle. You retire and the market begins to drop and the Shiller PE drops from 37.6 to 15, 2hich is roughly it's long term median. That's roughly a 60% drop in the NAV pricing of equities. Your portfolio is now $1.28M and had you retired at a 4% WR now, three or four months later your 4% WR would provide $51,200 instead of the forecast $80,000.

Under the revised scenario could you live on a 4% WR of $51,200 and adjust your withdrawals to it?
I wish you would not change the initial assumptions but so be it.

I understand you are arguing if the overall portfolio declines a simple rule of thumb would be to apply the initial withdrawal rate to that new balance. What about when the market goes back up - are you proposing always taking the same fixed % from the portfolio? You have just covered the declining case. What about after 10 years into retirement and the market declines 20% - how would you figure out that reduction? The portfolio might be worth more than the starting portfolio even with the reduction at that point.
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Re: withdrawal strategy after market decline

Post by bb »

Scott S wrote: Wed Apr 21, 2021 4:06 pm Not sure how you missed all the discussions about ABW and VPW on Bogleheads
I didn't miss them - confession - so far I have not dived into those posts but will. But mostly because this hypothetical case has a lot of ambiguity and I suspect that a lot of people that stated they would reduce withdrawals after a market decline didn't imply they would get out their excel spreadsheet to fire up VPW/ABW to figure out what they will do next.
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Re: withdrawal strategy after market decline

Post by willthrill81 »

bb wrote: Wed Apr 21, 2021 4:15 pm
midareff wrote: Wed Apr 21, 2021 3:58 pm Easy.. let's suppose you retire with $1.2M in equities and $.8M in FI (bonds, etc.).... 60/40 on a $2M portfolio. Your planned withdrawal rate is 4% because you read about it on Bogleheads and heard it repeated here endlessly. That's $80K annually as a start inflationary indexed. Let's say you need the $80K + your family SS to maintain your lifestyle. You retire and the market begins to drop and the Shiller PE drops from 37.6 to 15, 2hich is roughly it's long term median. That's roughly a 60% drop in the NAV pricing of equities. Your portfolio is now $1.28M and had you retired at a 4% WR now, three or four months later your 4% WR would provide $51,200 instead of the forecast $80,000.

Under the revised scenario could you live on a 4% WR of $51,200 and adjust your withdrawals to it?
I wish you would not change the initial assumptions but so be it.

I understand you are arguing if the overall portfolio declines a simple rule of thumb would be to apply the initial withdrawal rate to that new balance. What about when the market goes back up - are you proposing always taking the same fixed % from the portfolio? You have just covered the declining case. What about after 10 years into retirement and the market declines 20% - how would you figure out that reduction? The portfolio might be worth more than the starting portfolio even with the reduction at that point.
If you use dynamic returns in something like the ABW method, withdrawals can be effectively smoothed considerably. In the thread I linked to above, you can see that withdrawals from 2007-2010 didn't change nearly as much as the portfolio balance did because the smaller portfolio balance was largely offset by higher expected forward returns.
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Re: withdrawal strategy after market decline

Post by Ben Mathew »

bb wrote: Wed Apr 21, 2021 2:45 pm I can look into amortization-based withdrawal method.

There are lots of threads debating SWR, saying it is not a plan, important to have flexibility, but not a lot of threads that discuss what is a sensible plan/framework given someone has low withdrawal rate, has flexibility, etc.
Yes, do look into ABW. It neatly addresses how to respond to changes in portfolio value as well as expected return. Simple and reasonable.

Note that ABW with P/E based return expectations is not tested in the earlyretirementnow article linked to above. VPW is tested, but VPW is a version of ABW that uses a fixed expected return (equal to raw historical returns) and does not update. An ABW strategy that updates expected return based on P/E ratios should result in smoother withdrawals than VPW, as discussed in the ABW thread.
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Re: withdrawal strategy after market decline

Post by midareff »

bb wrote: Wed Apr 21, 2021 4:15 pm
midareff wrote: Wed Apr 21, 2021 3:58 pm Easy.. let's suppose you retire with $1.2M in equities and $.8M in FI (bonds, etc.).... 60/40 on a $2M portfolio. Your planned withdrawal rate is 4% because you read about it on Bogleheads and heard it repeated here endlessly. That's $80K annually as a start inflationary indexed. Let's say you need the $80K + your family SS to maintain your lifestyle. You retire and the market begins to drop and the Shiller PE drops from 37.6 to 15, 2hich is roughly it's long term median. That's roughly a 60% drop in the NAV pricing of equities. Your portfolio is now $1.28M and had you retired at a 4% WR now, three or four months later your 4% WR would provide $51,200 instead of the forecast $80,000.

Under the revised scenario could you live on a 4% WR of $51,200 and adjust your withdrawals to it?
I wish you would not change the initial assumptions but so be it.

I understand you are arguing if the overall portfolio declines a simple rule of thumb would be to apply the initial withdrawal rate to that new balance. What about when the market goes back up - are you proposing always taking the same fixed % from the portfolio? You have just covered the declining case. What about after 10 years into retirement and the market declines 20% - how would you figure out that reduction? The portfolio might be worth more than the starting portfolio even with the reduction at that point.
bb... FWIW, .. your sequence of return risk is strongest at the beginning of your retirement. That also corresponds with a huge drop in your personal capital (value as a worker). If your equities NAV values go back to historic medians and stay there for a decade what will happen to your portfolio's asset value? ... and resultingly, your expected portfolio depletion timeline projections. As far as original assumptions.. I was just picking 1.2/.8 for $2 mil to keep things numerically simple for illustrative purposes.
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