Withdrawal rate for an early retirement

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Brianjp18
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

Marseille07 wrote: Wed Sep 22, 2021 12:32 pm
jarjarM wrote: Wed Sep 22, 2021 12:25 pm Keep in mind that if the market drops by 50%, expected future return will likely be better so pulling 8% is not such a bad idea. Also, pulling only 5% of the portfolio, in this case $25k, may not be sufficient for the retiree, depending how much slack there are in the retiree's expense.
I'm not sure if I agree. What kills your portfolio is selling lots of shares at the bottom, and pulling 8% after -50% is exactly that.
If you are 50/50 couldn’t you just rely on selling bonds during down market and avoid selling equity at a low?
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Brianjp18 wrote: Wed Sep 22, 2021 3:54 pm If you are 50/50 couldn’t you just rely on selling bonds during down market and avoid selling equity at a low?
Most people do so, yes. David Jay was saying earlier though, even spending down from bonds would run into the SORR.
RetiredAL
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Re: Withdrawal rate for an early retirement

Post by RetiredAL »

David Jay wrote: Wed Sep 22, 2021 1:32 pm
....... I did a bit of a deep dive into SORR a couple of years ago and it turns out that sequence of return risk comes primarily from the 8% withdrawal rate, not from the "selling stocks", which is certainly a contributing factor. Many on this forum are mistaken about this, saying things like: "I have 10 years in bonds, so SORR will not affect me". But they are still pulling 8% from their portfolio if they spend only bonds during the market downturn.

Additionally, in decumulation most folks are using withdrawals for rebalancing, so few will be selling "lots of stock" because they will have an excess percentage of bonds after the market drop. From a practical standpoint most will not be selling "lots of stock" unless they have a very high stock AA, but they still face SORR. They are withdrawing from bonds but they are still withdrawing 8% from their portfolio.
+1

I'm in decumulation and use these similar concepts in my IPS. The bulk of my withdrawals come from an IRA that was funded with my Retirement Lump Sum. This IRA is separate from my 401K funded IRA. The actual withdrawal fund is a "short-term Treasuries" fund and is part of the fixed income allocation for that IRA. I view the risk profile of short-term treasuries as pretty close to that of cash. Every 6 month's, I re-balance that entire IRA to 55/45, with the primary goal of re-funding that withdrawal fund back to a balance of 18 month's worth of withdrawals. Thus effectively, these re-funding $ come from whatever asset class had the most gain (or the least loss). My IPS does allow me to skip on such re-funding if the losses in both asset classes it too great, in which case that withdrawal fund would a defacto "cash reserve" to help tide me over.

My overall withdrawal rate is <2%, however the withdrawal rate to this withdrawal IRA is approximately 6%. This withdrawal is the same $ amount as if I had taken my retirement as an annuity. Some day in the future, it will go to zero. In the meantime, my larger 401K, IRA having had minimal withdrawals outside of RMD's (starting next year) to taxable, will continue to grow, as will the taxable.

Fundamentally I embrace the 4% rule as being a safe simple rule. I've just taken a slightly different path.

I retired 5 years ago, and the SORR has been very good to me so far. Today, even with all those withdrawals, that IRA is approx 10% higher than it started at.
Brianjp18
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

David Jay wrote: Wed Sep 22, 2021 1:32 pm
Marseille07 wrote: Wed Sep 22, 2021 12:32 pm
jarjarM wrote: Wed Sep 22, 2021 12:25 pm Keep in mind that if the market drops by 50%, expected future return will likely be better so pulling 8% is not such a bad idea. Also, pulling only 5% of the portfolio, in this case $25k, may not be sufficient for the retiree, depending how much slack there are in the retiree's expense.
I'm not sure if I agree. What kills your portfolio is selling lots of shares at the bottom, and pulling 8% after -50% is exactly that.
Marseille:

Your instincts are usually "right on", but in this case I believe that they may be misleading you. I did a bit of a deep dive into SORR a couple of years ago and it turns out that sequence of return risk comes primarily from the 8% withdrawal rate, not from the "selling stocks", which is certainly a contributing factor. Many on this forum are mistaken about this, saying things like: "I have 10 years in bonds, so SORR will not affect me". But they are still pulling 8% from their portfolio if they spend only bonds during the market downturn.

Additionally, in decumulation most folks are using withdrawals for rebalancing, so few will be selling "lots of stock" because they will have an excess percentage of bonds after the market drop. From a practical standpoint most will not be selling "lots of stock" unless they have a very high stock AA, but they still face SORR. They are withdrawing from bonds but they are still withdrawing 8% from their portfolio.

Run some numbers and I think you will find that this is the case...
This is an interesting point. Even when you avoid selling stocks after a down market you still are depleting a bigger chunk from your portfolio if you don’t cut back on your withdrawal.

In your research what did you find to be the best way to combat SORR?
MotoTrojan
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Re: Withdrawal rate for an early retirement

Post by MotoTrojan »

I think it is fine to compromise with your wife and use a 2% rate, assuming you have a provision that allows it it ratchet up to 2% of current portfolio value as it grows, which you'd expect it to do obviously.

This pod episode shares lots of perspectives but one I found interesting is the bumpers, which will modestly reduce spending when things do poorly and increase when they do better.

https://rationalreminder.ca/podcast/164

One interesting point they make is that contrary to our gut, it actually is better to make a perpetual but very small reduction in withdrawal rate, rather than a drastic but transient one. For example, instead of reducing your spend for a year or two by 20%, just forgo your 2% inflation adjustment for a year or two. Easy to do in that period, and the impact will compound in every future inflation adjustment.
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David Jay
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Re: Withdrawal rate for an early retirement

Post by David Jay »

Brianjp18 wrote: Wed Sep 22, 2021 8:16 pmIn your research what did you find to be the best way to combat SORR?
True sequence of return risk (sequence of return risk != portfolio depletion) can be eliminated, but to do so can be painful. Here is a thread: viewtopic.php?p=5746833

An earlier look at SOR here: viewtopic.php?p=5255874

And the thread that started it all: viewtopic.php?f=10&t=314679
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Brianjp18
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

David Jay wrote: Wed Sep 22, 2021 10:53 pm
Brianjp18 wrote: Wed Sep 22, 2021 8:16 pmIn your research what did you find to be the best way to combat SORR?
True sequence of return risk (sequence of return risk != portfolio depletion) can be eliminated, but to do so can be painful. Here is a thread: viewtopic.php?p=5746833

An earlier look at SOR here: viewtopic.php?p=5255874

And the thread that started it all: viewtopic.php?f=10&t=314679
Thanks for the links! Look forward to reading during my lunch tomorrow.
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Dealing with SORR isn't that difficult, use a very conservative SWR (constant-dollar) or a percentage-based withdrawal method. VPW also works too (as far as fighting SORR) but I don't like it for other reasons.
Zeno
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Re: Withdrawal rate for an early retirement

Post by Zeno »

David Jay wrote: Wed Sep 22, 2021 10:53 pm
Brianjp18 wrote: Wed Sep 22, 2021 8:16 pmIn your research what did you find to be the best way to combat SORR?
True sequence of return risk (sequence of return risk != portfolio depletion) can be eliminated, but to do so can be painful. Here is a thread: viewtopic.php?p=5746833

An earlier look at SOR here: viewtopic.php?p=5255874

And the thread that started it all: viewtopic.php?f=10&t=314679
I am on the cusp of retirement so SOR is very real for me. Our AA is roughly 65/35.

I understand from Kitces that some of the major risks associated with SOR are sustained down markets for the first ten years of retirement. In contrast, a short bear market then a quick recovery during that same period isn’t that big of a deal.

Our plan to address SOR is brute force, by which I mean we are at 47X and have about 15X in bond funds. We have no debt and live in LCOL. DW is also on the cusp of claiming SS.

I am assuming that SOR is primarily associated with the equity piece of one’s portfolio (but I admit that I don’t know if that is the case). I suppose inflation could separately degrade everything. I am hopeful, however, that our 15X in bond funds, even if degraded by 33%, could get us through a decade of poor market returns.

And at the end of that decade I separately could claim SS. And between both of our SS’s, we basically have a lot of our budget covered. Plus DW is only three years away from Medicare; and I am only 7 years away.

If the above doesn’t work to mitigate SOR in our situation I’m not certain what else we could have done except maybe annuitize a portion of our portfolio.
Brianjp18
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

Marseille07 wrote: Wed Sep 22, 2021 11:39 pm Dealing with SORR isn't that difficult, use a very conservative SWR (constant-dollar) or a percentage-based withdrawal method. VPW also works too (as far as fighting SORR) but I don't like it for other reasons.
Just looked up VPW (this is all new studying for me), and it seems it has the same negative attribute of the percentage-based withdrawal. It’s does slowly increase the percentage you take out every year, but withdrawal amounts would fluctuate quite a bit as it follows the market’s affect on your portfolio.

I guess end of the day a conservative constant dollar SWR is one of the the better ways to combat SORR, but the main flaw I see with the static approach is you don’t get the benefit of the up years and you don’t conservatively adjust for down years. I understand you are pretty safe if you don’t adjust spending less in down years (based on the back testing), but again I don’t want to be sitting around at 90 years old with 7 million dollars I wish I had splurged a bit with.

Any suggestion on an alternative, middle-ground approach?
nigel_ht
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Re: Withdrawal rate for an early retirement

Post by nigel_ht »

Marseille07 wrote: Wed Sep 22, 2021 3:56 pm
Brianjp18 wrote: Wed Sep 22, 2021 3:54 pm If you are 50/50 couldn’t you just rely on selling bonds during down market and avoid selling equity at a low?
Most people do so, yes. David Jay was saying earlier though, even spending down from bonds would run into the SORR.
Except it shouldn’t. I almost wrote “it doesn’t” but I’m on my phone and can’t run any numbers but follow the logic:

First is the hope that LTTs rise in a crash due to flight to safety. Your stocks lose 50% but your bonds go up to partially offset this.

Second, even if this doesn’t happen the reason why bonds are called a ballast is because portfolio volatility drops. A 50% loss for a 100/0 is a 25% loss for a 50/50.

IF the only thing that matters in SORR portfolio depletion risk (vs income risk for any of the percentage withdrawal methods) is percentage of portfolio withdrawal you don’t go from withdrawing $40K from $1M (4%) to withdrawing $40K from $500K (8%) but $40K from $750K (5.3%).

From what I remember off the top of my head, Jim Otar wrote about how at some point a sustained high withdrawal rate will decouple your portfolio from future gains…it may recover a bit but it’s lost too much value to ever grow again because of your withdrawals.

I don’t remember when this kicks in but I’m guessing 5.3% isn’t it. 8% might not be it either but stocks can drop more than 50%. A 70% drop in portfolio value sees you withdrawing $40K from $300K or 13%. A few years of that would be ruinous even if the markets recovered strongly after that.

The obvious downsides of a conservative 50/50 portfolio is that gains are correspondingly reduced but the assumption is that your portfolio can provide the income you need IF it can keep up enough with inflation…not that it keeps growing or that there will be any residual value left in it after X years (typically 30 years in most studies).

Either way, SORR sucks even if you have a low WR or do ABW or whatever BUT bonds are protective simply because it doesn’t drop as much as stocks in a crash and sometimes goes up.

But like ballast, today it’s dead weight at the bottom of your financial boat. There was a time it did more than that but not at current yields…

It’s to the point that there are still enough risks in bond that I’m looking at more diversification for the bond part of my FI allocation.
whereskyle
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Re: Withdrawal rate for an early retirement

Post by whereskyle »

nptit wrote: Tue Nov 17, 2020 8:58 pm I am doing some planning/simulation regarding early retirement say 45 years old.
What would be a safe withdrawal rate for a bogleheads portfolio with an allocation of 70% (US and Intl stocks) and 30% (Bonds)?
I am targeting 4 MM portfolio size with a 2% withdrawal rate yielding 80K of income each year.
Do you think 2% is the appropriate withdrawal rate for an early retirement if possible to attain this at around 45 years old or what would be the withdrawal rate to target?
Thanks!

Edit:

I am asking this question on behalf of my wife. She is on the conservative side regarding retirement planning. I believe 3-3.5% is safe enough, wife wants 2% so we won’t run out of money in any circumstance, and we could have some remaining left for children and grandchildren.

Thanks for everyone’s opinion. This helps my wife assure our plan is on track.
It's so safe it's kind of ridiculous. Withdrawing 2% per year with zero portfolio growth of course lasts you 50 years.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
nigel_ht
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Re: Withdrawal rate for an early retirement

Post by nigel_ht »

Brianjp18 wrote: Thu Sep 23, 2021 7:19 am
Marseille07 wrote: Wed Sep 22, 2021 11:39 pm Dealing with SORR isn't that difficult, use a very conservative SWR (constant-dollar) or a percentage-based withdrawal method. VPW also works too (as far as fighting SORR) but I don't like it for other reasons.
Just looked up VPW (this is all new studying for me), and it seems it has the same negative attribute of the percentage-based withdrawal. It’s does slowly increase the percentage you take out every year, but withdrawal amounts would fluctuate quite a bit as it follows the market’s affect on your portfolio.

I guess end of the day a conservative constant dollar SWR is one of the the better ways to combat SORR, but the main flaw I see with the static approach is you don’t get the benefit of the up years and you don’t conservatively adjust for down years. I understand you are pretty safe if you don’t adjust spending less in down years (based on the back testing), but again I don’t want to be sitting around at 90 years old with 7 million dollars I wish I had splurged a bit with.

Any suggestion on an alternative, middle-ground approach?
The middle ground is a conservative fixed WR rate and every 5 years take stock of where you are…if your portfolio is much different than what you expected then you can reset to your same WR as before on the larger or smaller portfolio values if you want.

There is some risk that you will have catastrophically withdrawn too much in the last 5 years but if (almost) 4% worked in 1929 the odds are you will have noticed whatever is going on and have trimmed beforehand.

The risk of premature trimming is unnecessarily foregoing some of the more expensive life experiences during your healthy years that you didn’t have to.

So I mentally bucketed money to exist outside of my portfolio earmarked to pay for trips during early retirement. As far as I’m concerned that money is already “spent”.

2025 Global Financial Crash? Whatever. We’re still traveling if the planes are still flying.

If 3% is gonna fail in the long run even with SS then we’ll just have to live with one of the kids.
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

nigel_ht wrote: Thu Sep 23, 2021 7:28 am Except it shouldn’t. I almost wrote “it doesn’t” but I’m on my phone and can’t run any numbers but follow the logic:

First is the hope that LTTs rise in a crash due to flight to safety. Your stocks lose 50% but your bonds go up to partially offset this.

Second, even if this doesn’t happen the reason why bonds are called a ballast is because portfolio volatility drops. A 50% loss for a 100/0 is a 25% loss for a 50/50.

IF the only thing that matters in SORR portfolio depletion risk (vs income risk for any of the percentage withdrawal methods) is percentage of portfolio withdrawal you don’t go from withdrawing $40K from $1M (4%) to withdrawing $40K from $500K (8%) but $40K from $750K (5.3%).

From what I remember off the top of my head, Jim Otar wrote about how at some point a sustained high withdrawal rate will decouple your portfolio from future gains…it may recover a bit but it’s lost too much value to ever grow again because of your withdrawals.

I don’t remember when this kicks in but I’m guessing 5.3% isn’t it. 8% might not be it either but stocks can drop more than 50%. A 70% drop in portfolio value sees you withdrawing $40K from $300K or 13%. A few years of that would be ruinous even if the markets recovered strongly after that.

The obvious downsides of a conservative 50/50 portfolio is that gains are correspondingly reduced but the assumption is that your portfolio can provide the income you need IF it can keep up enough with inflation…not that it keeps growing or that there will be any residual value left in it after X years (typically 30 years in most studies).

Either way, SORR sucks even if you have a low WR or do ABW or whatever BUT bonds are protective simply because it doesn’t drop as much as stocks in a crash and sometimes goes up.

But like ballast, today it’s dead weight at the bottom of your financial boat. There was a time it did more than that but not at current yields…

It’s to the point that there are still enough risks in bond that I’m looking at more diversification for the bond part of my FI allocation.
I think it depends on what we mean by "running into SORR." A 4% SWR jumping to 8% is a huge deal, and I think that's SORR. Is 5.3% SORR? The answer might be subjective depending on who you ask.
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Brianjp18 wrote: Thu Sep 23, 2021 7:19 am Just looked up VPW (this is all new studying for me), and it seems it has the same negative attribute of the percentage-based withdrawal. It’s does slowly increase the percentage you take out every year, but withdrawal amounts would fluctuate quite a bit as it follows the market’s affect on your portfolio.

I guess end of the day a conservative constant dollar SWR is one of the the better ways to combat SORR, but the main flaw I see with the static approach is you don’t get the benefit of the up years and you don’t conservatively adjust for down years. I understand you are pretty safe if you don’t adjust spending less in down years (based on the back testing), but again I don’t want to be sitting around at 90 years old with 7 million dollars I wish I had splurged a bit with.

Any suggestion on an alternative, middle-ground approach?
Constant-dollar SWR does NOT combat SORR. The dollar amount is more or less fixed, which means your withdrawal percentage (relative to the portfolio) is a variable.

A middle-ground approach I prefer is constant-percentage + a spending floor. This way, you're only cheating when there's a crash and you still have to spend X dollars. But at the end of the day, if there's a huge crash we have to cut spending...it's really that simple.
Brianjp18
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

Marseille07 wrote: Thu Sep 23, 2021 10:09 am
Brianjp18 wrote: Thu Sep 23, 2021 7:19 am Just looked up VPW (this is all new studying for me), and it seems it has the same negative attribute of the percentage-based withdrawal. It’s does slowly increase the percentage you take out every year, but withdrawal amounts would fluctuate quite a bit as it follows the market’s affect on your portfolio.

I guess end of the day a conservative constant dollar SWR is one of the the better ways to combat SORR, but the main flaw I see with the static approach is you don’t get the benefit of the up years and you don’t conservatively adjust for down years. I understand you are pretty safe if you don’t adjust spending less in down years (based on the back testing), but again I don’t want to be sitting around at 90 years old with 7 million dollars I wish I had splurged a bit with.

Any suggestion on an alternative, middle-ground approach?
Constant-dollar SWR does NOT combat SORR. The dollar amount is more or less fixed, which means your withdrawal percentage (relative to the portfolio) is a variable.

I agree with this 👍

A middle-ground approach I prefer is constant-percentage + a spending floor. This way, you're only cheating when there's a crash and you still have to spend X dollars. But at the end of the day, if there's a huge crash we have to cut spending...it's really that simple.
The above suggestions sounds pretty good. In that example would you pick something like 4% and draw 4% from your portfolio based on the portfolio amount at the start of every year? So if your portfolio doubled to 2 million would you pull 80k that year?

Then on the downside, how do you set a floor. Would you say something like….I won’t draw more than 6% of my portfolio any given year? Or do you decide on a dollar amount that you won’t fall below?
Brianjp18
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

nigel_ht wrote: Thu Sep 23, 2021 7:45 am
Brianjp18 wrote: Thu Sep 23, 2021 7:19 am
Marseille07 wrote: Wed Sep 22, 2021 11:39 pm Dealing with SORR isn't that difficult, use a very conservative SWR (constant-dollar) or a percentage-based withdrawal method. VPW also works too (as far as fighting SORR) but I don't like it for other reasons.
Just looked up VPW (this is all new studying for me), and it seems it has the same negative attribute of the percentage-based withdrawal. It’s does slowly increase the percentage you take out every year, but withdrawal amounts would fluctuate quite a bit as it follows the market’s affect on your portfolio.

I guess end of the day a conservative constant dollar SWR is one of the the better ways to combat SORR, but the main flaw I see with the static approach is you don’t get the benefit of the up years and you don’t conservatively adjust for down years. I understand you are pretty safe if you don’t adjust spending less in down years (based on the back testing), but again I don’t want to be sitting around at 90 years old with 7 million dollars I wish I had splurged a bit with.

Any suggestion on an alternative, middle-ground approach?
The middle ground is a conservative fixed WR rate and every 5 years take stock of where you are…if your portfolio is much different than what you expected then you can reset to your same WR as before on the larger or smaller portfolio values if you want.

There is some risk that you will have catastrophically withdrawn too much in the last 5 years but if (almost) 4% worked in 1929 the odds are you will have noticed whatever is going on and have trimmed beforehand.

The risk of premature trimming is unnecessarily foregoing some of the more expensive life experiences during your healthy years that you didn’t have to.

So I mentally bucketed money to exist outside of my portfolio earmarked to pay for trips during early retirement. As far as I’m concerned that money is already “spent”.

2025 Global Financial Crash? Whatever. We’re still traveling if the planes are still flying.

If 3% is gonna fail in the long run even with SS then we’ll just have to live with one of the kids.
In your suggestion is the fixed WR referring to pulling a fixed percentage of the portfolio or pulling a fixed dollar value every year?

Are you saying you reduce excess trimming by sticking to pulling a fixed percentage of the whole portfolio?

When you speak of resetting at year 5, is that basically saying if you started off by taking 4% from your portfolio in year one, you reestablish what 4% is based on your portfolio at year 5 then go from there?

Thanks.
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Brianjp18 wrote: Thu Sep 23, 2021 12:00 pm The above suggestions sounds pretty good. In that example would you pick something like 4% and draw 4% from your portfolio based on the portfolio amount at the start of every year? So if your portfolio doubled to 2 million would you pull 80k that year?

Then on the downside, how do you set a floor. Would you say something like….I won’t draw more than 6% of my portfolio any given year? Or do you decide on a dollar amount that you won’t fall below?
If the portfolio doubles to 2M then 80K would be the max, yes. Realistically there's no point withdrawing all of 80K if you don't need that much though.

The floor is whatever you deem you need. If you started off at 1M@4%, then 40K would be the norm; so maybe you set your spending floor at 30K for example. If 1M becomes 500K and 4% of that can only afford 20K, you'd be exposed to some SORR by withdrawing 30K then.

But as I said earlier, there's no happy ending when the market drops by 50%; the impact shows up somewhere - either you cut your spending or face SORR or somewhere in between.
EnjoyIt
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Re: Withdrawal rate for an early retirement

Post by EnjoyIt »

Brianjp18 wrote: Wed Sep 22, 2021 3:45 pm
EnjoyIt wrote: Wed Sep 22, 2021 12:23 pm
Brianjp18 wrote: Wed Sep 22, 2021 10:15 am
zuma wrote: Wed Sep 22, 2021 8:09 am
Brianjp18 wrote: Wed Sep 22, 2021 7:47 am Glancing at the article referenced on dynamic spending, they talk about setting a floor and ceiling of -1.5% and 5%, respectively.

Assuming you start with 1million portfolio and pull 4% the first year (40k), how do you apply the floor and ceiling?

Are they saying, at start of year 2, if your portfolio drops to 700k you can take a maximum of 5% from your portfolio value, that being 35,000? And thereby avoid taking 40k in year 2, which would technically be 5.7% of your year 2 portfolio value?
Using your example, my understanding is that you would take $39,400 in year two ($40,000 x .985). In other words, you reduce the withdrawal amount by 1.5%, not 30%.

If your portfolio grows 20% the following year, you would then take a maximum of $41,370 ($39,400 x 1.05).

The floor/ceiling adjustment is always applied to the previous withdrawal amount.
In your example on year 2 you reduced the 40K pulled from year 1 by 1.5% (39,400). But, say your portfolio was cut in half in year one, down to 500,000 and you use the same rule, max reduction of 1.5% you would still pull 39,400. But now, compared to your portfolio you are pulling 8% (39,400/500,000), that does not seem like a safe rate to pull.

That is why I feel like the floor/ceiling is based off your portfolio value, not last year's withdrawal amount. For example, if year one you pulled 40K of 1mill (4%), then the following year when you plan to pull 40K, you ensure you are not pulling greater than 5% from your portfolio? So the 5% ceiling would ensure you don't pull greater than 5% out of your portfolio value, therefore avoiding depleting your portfolio too fast.
The 4% withdrawal strategy takes into account having a portfolio drop significantly early in retirement. The 4% number comes from our history that in the past, if the worst case in history repeats itself, one can withdraw 4% and adjust for inflation without running out of money for 30 years. 4% takes into account this 50% drop as you describe. So although you are withdrawing 8% that year, history, the market would recover and one would be fine. By adding a bit more variability to your withdrawal strategy such as decrease withdrawals by 1.5% in a bad year, one will increase the chance of that portfolio lasting over 30 years.

The only caveat is that the future has to look better than the past. Add in a sprinkle of variability in your yearly withdrawals and you should be golden.
So it’s basically like the historically proven safe withdrawal rate (4%) plus a little extra insurance, granting you a little freedom to pull more in an up market, but reigning back in a down market, up to a max of 1.5% less than the value you withdrew last year.

Quick question. If you decide on pulling 4% (40k) in year one. To calculate year two you would add the inflation percentage from year one to that value (say 2%; so year 2 you plan to pull 40,800)?

Then how do you use that 48,800 relative to your portfolio value to decide how much more/less to pull for year 2?
I'm not sure I understand your question. Where did you get $48,800 above? Did you mean to write $40,800?

The point of the 4% rule is that once you begin, your portfolio value does not matter. Just increase by inflation every year and you're done. So as you said, in your 2 if inflation is 2% then you you would withdraw $40,800. If inflation the following year is again 2% then you would withdraw $41,616. This is how the strategy is supposed to work on its own. Reality is that people are not robots. They don't blindly withdraw $41,616 on year 3 just because some spreadsheet says to. Also, your personal inflation rate might not coincide with what CPI (consumer price index) says it is. As an example maybe housing a gas has gone up, but you drive electric and already own your home so that increase may not affect you. Maybe healthcare costs increased by 5% while CPI only increased by 2% and you are a frequent consumer of healthcare.

Me personally, I prefer flexibility in my spending plan. That is why I prefer that my fixed expenses, things I must pay for are as little as possible while the bulk of my expenses are discretionary. That is achieved by being debt free in a low property tax state. Doing so allows us significant flexibility in our spending.

Others prefer a more variable withdrawal strategy that is fixed to current market valuation. This allows you to spend more when times are good, but may force you into more significant cuts when times are bad.

In your particular example, what you can do is decide that if the portfolio did poorly, instead of increasing by inflation, you instead decrease by 1.5% and if the portfolio is doing well, you can increase by inflation plus 1%. Then you must decide what is the definition of doing well and doing poorly. Maybe doing well is the portfolio increased by more than 4% plus inflation for the year. and doing poorly is the portfolio is flat or negative for the year. Anything in between would follow the strict inflation guidelines.

The problem with the 4% rule is that it is academic. I bet there are very few people who follow it strictly. 4% is a good place to start and then adjust as your circumstances dictate.
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Re: Withdrawal rate for an early retirement

Post by abc132 »

I am finding it helpful to express a SWR in terms of specific stock market expectations.

*** These are from memory, so they may be off a little bit:

An annually rebalanced 60/40 portfolio with 25x expenses (4% SWR) will need stocks to earn 2.6% real to last 30 years when bonds are yielding -1% real.
An annually rebalanced 60/40 portfolio with 50x expenses (2% SWR) will need stocks to earn -4% real to last 30 years when bonds are yielding -1% real.

We understand our market expectations better than our SWR, so it makes sense to start with stock expectations and determine our SWR. One can alter the above method to their stock/bond AA and length of retirement. It is also helpful for consistent thinking --> someone with 60/40 and 25x expenses for 30 years should expect stocks to earn at least 2.6% real when they discuss alternative portfolios.

This did not include sequence of returns, it was just the constant stock performance needed for the SWR to be considered.
Last edited by abc132 on Thu Sep 23, 2021 3:17 pm, edited 1 time in total.
Brianjp18
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

EnjoyIt wrote: Thu Sep 23, 2021 2:07 pm
I'm not sure I understand your question. Where did you get $48,800 above? Did you mean to write $40,800?

The point of the 4% rule is that once you begin, your portfolio value does not matter. Just increase by inflation every year and you're done. So as you said, in your 2 if inflation is 2% then you you would withdraw $40,800. If inflation the following year is again 2% then you would withdraw $41,616. This is how the strategy is supposed to work on its own. Reality is that people are not robots. They don't blindly withdraw $41,616 on year 3 just because some spreadsheet says to. Also, your personal inflation rate might not coincide with what CPI (consumer price index) says it is. As an example maybe housing a gas has gone up, but you drive electric and already own your home so that increase may not affect you. Maybe healthcare costs increased by 5% while CPI only increased by 2% and you are a frequent consumer of healthcare.

Me personally, I prefer flexibility in my spending plan. That is why I prefer that my fixed expenses, things I must pay for are as little as possible while the bulk of my expenses are discretionary. That is achieved by being debt free in a low property tax state. Doing so allows us significant flexibility in our spending.

Others prefer a more variable withdrawal strategy that is fixed to current market valuation. This allows you to spend more when times are good, but may force you into more significant cuts when times are bad.

In your particular example, what you can do is decide that if the portfolio did poorly, instead of increasing by inflation, you instead decrease by 1.5% and if the portfolio is doing well, you can increase by inflation plus 1%. Then you must decide what is the definition of doing well and doing poorly. Maybe doing well is the portfolio increased by more than 4% plus inflation for the year. and doing poorly is the portfolio is flat or negative for the year. Anything in between would follow the strict inflation guidelines.

The problem with the 4% rule is that it is academic. I bet there are very few people who follow it strictly. 4% is a good place to start and then adjust as your circumstances dictate.
I Meant to type 40,800, but you answered my question in the second to last paragraph. I wasn’t sure how one would define a good versus a bad year. I know it is subjective, but was curious what your opinion was. Thanks for the detailed response.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Brianjp18 wrote: Thu Sep 23, 2021 3:16 pm I Meant to type 40,800, but you answered my question in the second to last paragraph. I wasn’t sure how one would define a good versus a bad year. I know it is subjective, but was curious what your opinion was. Thanks for the detailed response.
I think there are a couple of valid approaches.

a) use SWR as your baseline but be "flexible" during the downturns
b) use constant-% as your baseline but have a spending floor

They are both valid ways to soften the SORR, i.e. hitting a middle ground.
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

Marseille07 wrote: Thu Sep 23, 2021 12:15 pm
Brianjp18 wrote: Thu Sep 23, 2021 12:00 pm The above suggestions sounds pretty good. In that example would you pick something like 4% and draw 4% from your portfolio based on the portfolio amount at the start of every year? So if your portfolio doubled to 2 million would you pull 80k that year?

Then on the downside, how do you set a floor. Would you say something like….I won’t draw more than 6% of my portfolio any given year? Or do you decide on a dollar amount that you won’t fall below?
If the portfolio doubles to 2M then 80K would be the max, yes. Realistically there's no point withdrawing all of 80K if you don't need that much though.

The floor is whatever you deem you need. If you started off at 1M@4%, then 40K would be the norm; so maybe you set your spending floor at 30K for example. If 1M becomes 500K and 4% of that can only afford 20K, you'd be exposed to some SORR by withdrawing 30K then.

But as I said earlier, there's no happy ending when the market drops by 50%; the impact shows up somewhere - either you cut your spending or face SORR or somewhere in between.
Gotcha. Makes more sense to set a dollar value for the floor rather than a percentage.

In the above scenario I would not pull 80k, but it was just to clarify that there essentially isn’t a ceiling in your example, but at the same time one should be reasonable.

I guess you are right, no way to not be affected by a 50% drop, but I’m trying to figure out the most logical and relatively safe approach if it were to occur early in retirement (or anytime really).

Cutting from 40k to 30k would be a big cut in spending (your floor example). In the above example (1 mill portfolio cut to 500k), if you set the floor to something like 35k (rather than 30k), do you think that 7% withdrawal from a 500k portfolio would have a large impact if it only occurred one year? What about two consecutive years?
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Brianjp18 wrote: Thu Sep 23, 2021 3:35 pm Cutting from 40k to 30k would be a big cut in spending (your floor example). In the above example (1 mill portfolio cut to 500k), if you set the floor to something like 35k (rather than 30k), do you think that 7% withdrawal from a 500k portfolio would have a large impact if it only occurred one year? What about two consecutive years?
Well, constant-% + spending floor will not run out of money. It's just that if the downturns continue (30K or 35K withdrawals when 4% says only 20K) then your portfolio will end up smaller that's all.

Tradeoffs are inevitable when you withdraw more than the method says you can. Personally I don't even look for a middle ground, I would cap my withdrawals at whatever the method says, not a penny more.
Last edited by Marseille07 on Thu Sep 23, 2021 5:21 pm, edited 1 time in total.
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

Marseille07 wrote: Thu Sep 23, 2021 3:28 pm
Brianjp18 wrote: Thu Sep 23, 2021 3:16 pm I Meant to type 40,800, but you answered my question in the second to last paragraph. I wasn’t sure how one would define a good versus a bad year. I know it is subjective, but was curious what your opinion was. Thanks for the detailed response.
I think there are a couple of valid approaches.

a) use SWR as your baseline but be "flexible" during the downturns
b) use constant-% as your baseline but have a spending floor

They are both valid ways to soften the SORR, i.e. hitting a middle ground.
Or use ABW with dynamic return assumptions. You get smoother results than a constant percentage approach but retain the benefit of being guaranteed to not prematurely deplete your portfolio.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

willthrill81 wrote: Thu Sep 23, 2021 5:10 pm Or use ABW with dynamic return assumptions. You get smoother results than a constant percentage approach but retain the benefit of being guaranteed to not prematurely deplete your portfolio.
Yes, I like ABW better than VPW, though I consider it a "1/N" method, which has its own set of pros and cons.
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

Marseille07 wrote: Thu Sep 23, 2021 5:31 pm
willthrill81 wrote: Thu Sep 23, 2021 5:10 pm Or use ABW with dynamic return assumptions. You get smoother results than a constant percentage approach but retain the benefit of being guaranteed to not prematurely deplete your portfolio.
Yes, I like ABW better than VPW, though I consider it a "1/N" method, which has its own set of pros and cons.
Every withdrawal method has its warts, to be sure. Retirees must determine which method works best for them.
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

Marseille07 wrote: Thu Sep 23, 2021 3:41 pm
Brianjp18 wrote: Thu Sep 23, 2021 3:35 pm Cutting from 40k to 30k would be a big cut in spending (your floor example). In the above example (1 mill portfolio cut to 500k), if you set the floor to something like 35k (rather than 30k), do you think that 7% withdrawal from a 500k portfolio would have a large impact if it only occurred one year? What about two consecutive years?
Well, constant-% + spending floor will not run out of money. It's just that if the downturns continue (30K or 35K withdrawals when 4% says only 20K) then your portfolio will end up smaller that's all.

Tradeoffs are inevitable when you withdraw more than the method says you can. Personally I don't even look for a middle ground, I would cap my withdrawals at whatever the method says, not a penny more.

Sorry to keep asking questions that are probably common sense to many people…
Say I retired tomorrow with the example portfolio of 1million and pulling 4%. Every year I would pull 4% (not taking more than say 50k on a good return year). If I’m enjoying the up years by drawing 4% when the portfolio is up, and I set the floor at 35,000 - do you feel like those parameters are relatively safe?
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Brianjp18 wrote: Thu Sep 23, 2021 6:12 pm Sorry to keep asking questions that are probably common sense to many people…
Say I retired tomorrow with the example portfolio of 1million and pulling 4%. Every year I would pull 4% (not taking more than say 50k on a good return year). If I’m enjoying the up years by drawing 4% when the portfolio is up, would 35,000 be a reasonable floor for withdrawals on really bad years? Do you feel it needs to be as low as your suggestion of 30k?

I know there is no right or wrong, just always seeing if other people would do the same.
I don't think the framing of your question is quite right. I wasn't trying to suggest a 30K floor on 40K, it was just an idea of what a spending floor might look like given a 1M portfolio@4%.

If you need a spending floor, go with what EnjoyIt suggested - constant-dollar X% + CPI adjustment and go "flexible" during the downturns. You can potentially face SORR, but that's when you go "flexible" and try surviving.
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

Brianjp18 wrote: Thu Sep 23, 2021 6:12 pm
Marseille07 wrote: Thu Sep 23, 2021 3:41 pm
Brianjp18 wrote: Thu Sep 23, 2021 3:35 pm Cutting from 40k to 30k would be a big cut in spending (your floor example). In the above example (1 mill portfolio cut to 500k), if you set the floor to something like 35k (rather than 30k), do you think that 7% withdrawal from a 500k portfolio would have a large impact if it only occurred one year? What about two consecutive years?
Well, constant-% + spending floor will not run out of money. It's just that if the downturns continue (30K or 35K withdrawals when 4% says only 20K) then your portfolio will end up smaller that's all.

Tradeoffs are inevitable when you withdraw more than the method says you can. Personally I don't even look for a middle ground, I would cap my withdrawals at whatever the method says, not a penny more.

Sorry to keep asking questions that are probably common sense to many people…
Say I retired tomorrow with the example portfolio of 1million and pulling 4%. Every year I would pull 4% (not taking more than say 50k on a good return year). If I’m enjoying the up years by drawing 4% when the portfolio is up, and I set the floor at 35,000 - do you feel like those parameters are relatively safe?
You should use the retirement spending chart tool at Portfolio Charts. It will let you place ceilings and floors in conjunction with different spending rates on whatever portfolio you want.

Using that tool for a 60/40 AA with global equities with data going back to 1970, a $50k ceiling and $35k floor would have been extremely safe. In only one period would you have finished a 30 year withdrawal period with slightly less than the inflation-adjusted starting balance. In most periods, you would have ended with significantly more, adjusting for inflation, than you started with.
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Re: Withdrawal rate for an early retirement

Post by EnjoyIt »

Brianjp18 wrote: Thu Sep 23, 2021 3:35 pm
Marseille07 wrote: Thu Sep 23, 2021 12:15 pm
Brianjp18 wrote: Thu Sep 23, 2021 12:00 pm The above suggestions sounds pretty good. In that example would you pick something like 4% and draw 4% from your portfolio based on the portfolio amount at the start of every year? So if your portfolio doubled to 2 million would you pull 80k that year?

Then on the downside, how do you set a floor. Would you say something like….I won’t draw more than 6% of my portfolio any given year? Or do you decide on a dollar amount that you won’t fall below?
If the portfolio doubles to 2M then 80K would be the max, yes. Realistically there's no point withdrawing all of 80K if you don't need that much though.

The floor is whatever you deem you need. If you started off at 1M@4%, then 40K would be the norm; so maybe you set your spending floor at 30K for example. If 1M becomes 500K and 4% of that can only afford 20K, you'd be exposed to some SORR by withdrawing 30K then.

But as I said earlier, there's no happy ending when the market drops by 50%; the impact shows up somewhere - either you cut your spending or face SORR or somewhere in between.
Gotcha. Makes more sense to set a dollar value for the floor rather than a percentage.

In the above scenario I would not pull 80k, but it was just to clarify that there essentially isn’t a ceiling in your example, but at the same time one should be reasonable.

I guess you are right, no way to not be affected by a 50% drop, but I’m trying to figure out the most logical and relatively safe approach if it were to occur early in retirement (or anytime really).

Cutting from 40k to 30k would be a big cut in spending (your floor example). In the above example (1 mill portfolio cut to 500k), if you set the floor to something like 35k (rather than 30k), do you think that 7% withdrawal from a 500k portfolio would have a large impact if it only occurred one year? What about two consecutive years?
A few things to consider.

1) Most bogleheads would not recommend 100% equities in retirement for exactly the above reason. Some do 100% equites, but it appear to me that many sit at around 60/40 in retirement. If that was the case, a 50% drop would decrease a $1 million portfolio down to $700k instead of $500k. As an example, we plan on being 60/40 in retirement. Some will even do 40/60 though I would not recommend going much lower than that as you still need equity growth for your portfolio to survive.

2) your asking if taking 7% is safe long term. No it is not, but when there is a large market decline such as when equites drop 50%, returns tend to be higher that historically has supported taking 7% for a few years and the portfolio lasting.

3) Next, if you are using a more conservative asset allocation such as 60/40 and the market drops 50% that would give you an asset allocation of 43/57 which means you either rebalance or if you do t have intestinal fortitude to sell bonds and buy equities, you would be at a minimum selling bonds to live off of. This would keep you from selling equites at a loss and giving them a chance to grow back. Obviously nothing is guaranteed, but that is how the process would look.
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

Marseille07 wrote: Thu Sep 23, 2021 6:22 pm
Brianjp18 wrote: Thu Sep 23, 2021 6:12 pm Sorry to keep asking questions that are probably common sense to many people…
Say I retired tomorrow with the example portfolio of 1million and pulling 4%. Every year I would pull 4% (not taking more than say 50k on a good return year). If I’m enjoying the up years by drawing 4% when the portfolio is up, would 35,000 be a reasonable floor for withdrawals on really bad years? Do you feel it needs to be as low as your suggestion of 30k?

I know there is no right or wrong, just always seeing if other people would do the same.
I don't think the framing of your question is quite right. I wasn't trying to suggest a 30K floor on 40K, it was just an idea of what a spending floor might look like given a 1M portfolio@4%.

If you need a spending floor, go with what EnjoyIt suggested - constant-dollar X% + CPI adjustment and go "flexible" during the downturns. You can potentially face SORR, but that's when you go "flexible" and try surviving.
Fair enough! Thanks for all the input. Much appreciated.
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

willthrill81 wrote: Thu Sep 23, 2021 6:29 pm
Brianjp18 wrote: Thu Sep 23, 2021 6:12 pm
Marseille07 wrote: Thu Sep 23, 2021 3:41 pm
Brianjp18 wrote: Thu Sep 23, 2021 3:35 pm Cutting from 40k to 30k would be a big cut in spending (your floor example). In the above example (1 mill portfolio cut to 500k), if you set the floor to something like 35k (rather than 30k), do you think that 7% withdrawal from a 500k portfolio would have a large impact if it only occurred one year? What about two consecutive years?
Well, constant-% + spending floor will not run out of money. It's just that if the downturns continue (30K or 35K withdrawals when 4% says only 20K) then your portfolio will end up smaller that's all.

Tradeoffs are inevitable when you withdraw more than the method says you can. Personally I don't even look for a middle ground, I would cap my withdrawals at whatever the method says, not a penny more.

Sorry to keep asking questions that are probably common sense to many people…
Say I retired tomorrow with the example portfolio of 1million and pulling 4%. Every year I would pull 4% (not taking more than say 50k on a good return year). If I’m enjoying the up years by drawing 4% when the portfolio is up, and I set the floor at 35,000 - do you feel like those parameters are relatively safe?
You should use the retirement spending chart tool at Portfolio Charts. It will let you place ceilings and floors in conjunction with different spending rates on whatever portfolio you want.

Using that tool for a 60/40 AA with global equities with data going back to 1970, a $50k ceiling and $35k floor would have been extremely safe. In only one period would you have finished a 30 year withdrawal period with slightly less than the inflation-adjusted starting balance. In most periods, you would have ended with significantly more, adjusting for inflation, than you started with.
Thanks for the great resource! Plan on plugging away tonight after I put the little one down.
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

EnjoyIt wrote: Thu Sep 23, 2021 6:31 pm
A few things to consider.

1) Most bogleheads would not recommend 100% equities in retirement for exactly the above reason. Some do 100% equites, but it appear to me that many sit at around 60/40 in retirement. If that was the case, a 50% drop would decrease a $1 million portfolio down to $700k instead of $500k. As an example, we plan on being 60/40 in retirement. Some will even do 40/60 though I would not recommend going much lower than that as you still need equity growth for your portfolio to survive.

2) your asking if taking 7% is safe long term. No it is not, but when there is a large market decline such as when equites drop 50%, returns tend to be higher that historically has supported taking 7% for a few years and the portfolio lasting.

3) Next, if you are using a more conservative asset allocation such as 60/40 and the market drops 50% that would give you an asset allocation of 43/57 which means you either rebalance or if you do t have intestinal fortitude to sell bonds and buy equities, you would be at a minimum selling bonds to live off of. This would keep you from selling equites at a loss and giving them a chance to grow back. Obviously nothing is guaranteed, but that is how the process would look.
Very concise and helpful 👍
I plan to be at 50/50 in retirement. So you are right, the idea of my portfolio cutting in half is extremely unlikely. I just like looking at the extremes to try to learn how the concepts work on either extreme of the spectrum. All the posts have definitely helped me understand the many options as well as pros and cons to the withdrawal process.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Brianjp18 wrote: Thu Sep 23, 2021 6:46 pm Very concise and helpful 👍
I plan to be at 50/50 in retirement. So you are right, the idea of my portfolio cutting in half is extremely unlikely. I just like looking at the extremes to try to learn how the concepts work on either extreme of the spectrum. All the posts have definitely helped me understand the many options as well as pros and cons to the withdrawal process.
If you are doing 50/50 then SORR is less of an issue. After a crash, your AA becomes 40/60 and you can withdraw from the fixed income side, during which your equities are protected as you aren't selling anything until your AA is restored at 50/50.
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Re: Withdrawal rate for an early retirement

Post by nigel_ht »

Marseille07 wrote: Thu Sep 23, 2021 6:56 pm
Brianjp18 wrote: Thu Sep 23, 2021 6:46 pm Very concise and helpful 👍
I plan to be at 50/50 in retirement. So you are right, the idea of my portfolio cutting in half is extremely unlikely. I just like looking at the extremes to try to learn how the concepts work on either extreme of the spectrum. All the posts have definitely helped me understand the many options as well as pros and cons to the withdrawal process.
If you are doing 50/50 then SORR is less of an issue. After a crash, your AA becomes 40/60 and you can withdraw from the fixed income side, during which your equities are protected as you aren't selling anything until your AA is restored at 50/50.
David Jay said this isn’t right. I don’t get his objection so I think this is right.

If a 50/50 portfolio loses 50% of its value in a crash there would be a bunch of very unhappy Bogleheaders…

I guess if you lose 80% of your stocks and 20% of your bonds that give you that result…possible with BND.

Heh…if I was paranoid about that outcome I’d be looking more seriously at all weather, Golden Butterfly and permanent portfolio.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

nigel_ht wrote: Thu Sep 23, 2021 7:40 pm David Jay said this isn’t right. I don’t get his objection so I think this is right.

If a 50/50 portfolio loses 50% of its value in a crash there would be a bunch of very unhappy Bogleheaders…
I think it kind of depends on your rebalancing strategy too. For example, say your 50/50 becomes 40/60 after a crash, and you buy more shares at the bottom to reset your AA at 50/50. In this case, you face a diluted version of SORR because you're still selling equities to withdraw money.

This is different than leaving 40/60 alone and simply spend down the fixed income side, i.e. the nudging approach. I'm a nudger, not a rebalancer.
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

Marseille07 wrote: Thu Sep 23, 2021 7:50 pm
nigel_ht wrote: Thu Sep 23, 2021 7:40 pm David Jay said this isn’t right. I don’t get his objection so I think this is right.

If a 50/50 portfolio loses 50% of its value in a crash there would be a bunch of very unhappy Bogleheaders…
I think it kind of depends on your rebalancing strategy too. For example, say your 50/50 becomes 40/60 after a crash, and you buy more shares at the bottom to reset your AA at 50/50. In this case, you face a diluted version of SORR because you're still selling equities to withdraw money.

This is different than leaving 40/60 alone and simply spend down the fixed income side, i.e. the nudging approach. I'm a nudger, not a rebalancer.
If a crash adjusted your AA to 40/60, after pulling that year's spending from the bond allocation I imagine you would still be greater than 50% bonds, allowing you to rebalance to 50/50 by buying equities at a low, if you desire to return right back to 50/50. Either way, you are either not touching equities, or buying them at a low during a crash. Both seem protective for improving longevity.

Maybe I'm wrong there, but in your first paragraph you mention you would have to sell equities. Wouldn't you only be purchasing them?
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Brianjp18 wrote: Thu Sep 23, 2021 8:38 pm If a crash adjusted your AA to 40/60, after pulling that year's spending from the bond allocation I imagine you would still be greater than 50% bonds, allowing you to rebalance to 50/50 by buying equities at a low, if you desire to return right back to 50/50. Either way, you are either not touching equities, or buying them at a low during a crash. Both seem protective for improving longevity.

Maybe I'm wrong there, but in your first paragraph you mention you would have to sell equities. Wouldn't you only be purchasing them?
If you rebalance your AA from 40/60 to 50/50 then you'd need to withdraw from both sides to maintain it at 50/50. If you only draw from fixed income, your AA starts tilting toward 60/40.
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Re: Withdrawal rate for an early retirement

Post by EnjoyIt »

Brianjp18 wrote: Thu Sep 23, 2021 8:38 pm
Marseille07 wrote: Thu Sep 23, 2021 7:50 pm
nigel_ht wrote: Thu Sep 23, 2021 7:40 pm David Jay said this isn’t right. I don’t get his objection so I think this is right.

If a 50/50 portfolio loses 50% of its value in a crash there would be a bunch of very unhappy Bogleheaders…
I think it kind of depends on your rebalancing strategy too. For example, say your 50/50 becomes 40/60 after a crash, and you buy more shares at the bottom to reset your AA at 50/50. In this case, you face a diluted version of SORR because you're still selling equities to withdraw money.

This is different than leaving 40/60 alone and simply spend down the fixed income side, i.e. the nudging approach. I'm a nudger, not a rebalancer.
If a crash adjusted your AA to 40/60, after pulling that year's spending from the bond allocation I imagine you would still be greater than 50% bonds, allowing you to rebalance to 50/50 by buying equities at a low, if you desire to return right back to 50/50. Either way, you are either not touching equities, or buying them at a low during a crash. Both seem protective for improving longevity.

Maybe I'm wrong there, but in your first paragraph you mention you would have to sell equities. Wouldn't you only be purchasing them?
Many people think they can rebalance at a market low, but that is much easier said then done. Just imagine everyone around you is telling you the financial markets are in ruin and may never recover. The news is spreading doom and gloom and somehow out of it all will you have the guts to buy more equities as they continue plummeting.

Also realize that you will never know the bottom. At best you have an IPS (investment policy statement) that tells you to rebalance if you hit some rebalancing bands. Will you be able to follow through? Will it be easy to rebalance and then watch the market continue to fall as it did in 2009?

This forum has history and displays how people act during economic turmoil. You don’t even need to look back that far. Just read some of the posts from March 2020. Or you can go back to 2011 or 2009 . It’s all there and shows how much fear was in the air. It’s shows how many people sold equites at the bottom and didn’t rebalance. Will you be one of them?

This same history shows people who don’t rebalance into equites during retirement. They ride it out living on their bonds. Will that be you?

Learn thyself.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
Brianjp18
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

Marseille07 wrote: Thu Sep 23, 2021 8:53 pm
Brianjp18 wrote: Thu Sep 23, 2021 8:38 pm If a crash adjusted your AA to 40/60, after pulling that year's spending from the bond allocation I imagine you would still be greater than 50% bonds, allowing you to rebalance to 50/50 by buying equities at a low, if you desire to return right back to 50/50. Either way, you are either not touching equities, or buying them at a low during a crash. Both seem protective for improving longevity.

Maybe I'm wrong there, but in your first paragraph you mention you would have to sell equities. Wouldn't you only be purchasing them?
If you rebalance your AA from 40/60 to 50/50 then you'd need to withdraw from both sides to maintain it at 50/50. If you only draw from fixed income, your AA starts tilting toward 60/40.
Gotcha, thanks
Brianjp18
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

EnjoyIt wrote: Thu Sep 23, 2021 9:01 pm
Brianjp18 wrote: Thu Sep 23, 2021 8:38 pm
Marseille07 wrote: Thu Sep 23, 2021 7:50 pm
nigel_ht wrote: Thu Sep 23, 2021 7:40 pm David Jay said this isn’t right. I don’t get his objection so I think this is right.

If a 50/50 portfolio loses 50% of its value in a crash there would be a bunch of very unhappy Bogleheaders…
I think it kind of depends on your rebalancing strategy too. For example, say your 50/50 becomes 40/60 after a crash, and you buy more shares at the bottom to reset your AA at 50/50. In this case, you face a diluted version of SORR because you're still selling equities to withdraw money.

This is different than leaving 40/60 alone and simply spend down the fixed income side, i.e. the nudging approach. I'm a nudger, not a rebalancer.
If a crash adjusted your AA to 40/60, after pulling that year's spending from the bond allocation I imagine you would still be greater than 50% bonds, allowing you to rebalance to 50/50 by buying equities at a low, if you desire to return right back to 50/50. Either way, you are either not touching equities, or buying them at a low during a crash. Both seem protective for improving longevity.

Maybe I'm wrong there, but in your first paragraph you mention you would have to sell equities. Wouldn't you only be purchasing them?
Many people think they can rebalance at a market low, but that is much easier said then done. Just imagine everyone around you is telling you the financial markets are in ruin and may never recover. The news is spreading doom and gloom and somehow out of it all will you have the guts to buy more equities as they continue plummeting.

Also realize that you will never know the bottom. At best you have an IPS (investment policy statement) that tells you to rebalance if you hit some rebalancing bands. Will you be able to follow through? Will it be easy to rebalance and then watch the market continue to fall as it did in 2009?

This forum has history and displays how people act during economic turmoil. You don’t even need to look back that far. Just read some of the posts from March 2020. Or you can go back to 2011 or 2009 . It’s all there and shows how much fear was in the air. It’s shows how many people sold equites at the bottom and didn’t rebalance. Will you be one of them?

This same history shows people who don’t rebalance into equites during retirement. They ride it out living on their bonds. Will that be you?

Learn thyself.
Easier said than done as always, but I feel like I've ran enough simulations to know the catastrophic nature of selling stocks after a crash, and the common sense nature of buying low. Again, we shall see how I do when I go through my first recession. I just started investing less than a year ago.
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Brianjp18 wrote: Thu Sep 23, 2021 10:20 pm Easier said than done as always, but I feel like I've ran enough simulations to know the catastrophic nature of selling stocks after a crash, and the common sense nature of buying low. Again, we shall see how I do when I go through my first recession. I just started investing less than a year ago.
It's not that common sense to buy low in terms of rebalancing. Say your target AA is 50/50, it is 40/60 after a crash and you buy low to reset your AA at 50/50. Well, if the stocks rise from here then your AA starts tilting toward 60/40. Guess what, you'd be selling shares you bought low to keep your AA at 50/50.

This is why the nudging camp doesn't rebalance. If your AA becomes 40/60, so be it and simply spend down the fixed income side.
Brianjp18
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

Marseille07 wrote: Fri Sep 24, 2021 12:16 pm
Brianjp18 wrote: Thu Sep 23, 2021 10:20 pm Easier said than done as always, but I feel like I've ran enough simulations to know the catastrophic nature of selling stocks after a crash, and the common sense nature of buying low. Again, we shall see how I do when I go through my first recession. I just started investing less than a year ago.
It's not that common sense to buy low in terms of rebalancing. Say your target AA is 50/50, it is 40/60 after a crash and you buy low to reset your AA at 50/50. Well, if the stocks rise from here then your AA starts tilting toward 60/40. Guess what, you'd be selling shares you bought low to keep your AA at 50/50.

This is why the nudging camp doesn't rebalance. If your AA becomes 40/60, so be it and simply spend down the fixed income side.
Ok, I see the issue now. Soon after you rebalance your stocks allocation could overtake bonds. Hmmm I’m glad you mentioned the idea of nudging. Thanks 👍
Brianjp18
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Re: Withdrawal rate for an early retirement

Post by Brianjp18 »

Marseille07 wrote: Fri Sep 24, 2021 12:16 pm
Brianjp18 wrote: Thu Sep 23, 2021 10:20 pm Easier said than done as always, but I feel like I've ran enough simulations to know the catastrophic nature of selling stocks after a crash, and the common sense nature of buying low. Again, we shall see how I do when I go through my first recession. I just started investing less than a year ago.
It's not that common sense to buy low in terms of rebalancing. Say your target AA is 50/50, it is 40/60 after a crash and you buy low to reset your AA at 50/50. Well, if the stocks rise from here then your AA starts tilting toward 60/40. Guess what, you'd be selling shares you bought low to keep your AA at 50/50.

This is why the nudging camp doesn't rebalance. If your AA becomes 40/60, so be it and simply spend down the fixed income side.
Say you are at 50/50, then a really bad year shifts you to 40/60. At the start of the following year you would naturally pull from bonds, and with the nudging mindset you say to not rebalance to 50/50. If you rebalanced to 50/50 and took advantage of buying equities at a low the next year when it is time to withdrawal I see 2 scenarios:

A: Equities do great that year and bump you up to something like 60/40 so you sell equities. Wouldn't this be selling high?
B: Another bad year, which shifts you to something more like 40/60 again, then pull more bond money?

I'm sure there is an issue here I'm not seeing....please help me to point it out.
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Brianjp18 wrote: Sat Sep 25, 2021 6:14 am Say you are at 50/50, then a really bad year shifts you to 40/60. At the start of the following year you would naturally pull from bonds, and with the nudging mindset you say to not rebalance to 50/50. If you rebalanced to 50/50 and took advantage of buying equities at a low the next year when it is time to withdrawal I see 2 scenarios:

A: Equities do great that year and bump you up to something like 60/40 so you sell equities. Wouldn't this be selling high?
B: Another bad year, which shifts you to something more like 40/60 again, then pull more bond money?

I'm sure there is an issue here I'm not seeing....please help me to point it out.
Yes, rebalancing is always buying a cheaper asset and selling an expensive asset. You can withdraw first then rebalance the rest to 50/50, or rebalance first and withdraw from both assets 50/50. It's a personal decision.
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Re: Withdrawal rate for an early retirement

Post by nigel_ht »

Marseille07 wrote: Sat Sep 25, 2021 6:37 am
Brianjp18 wrote: Sat Sep 25, 2021 6:14 am Say you are at 50/50, then a really bad year shifts you to 40/60. At the start of the following year you would naturally pull from bonds, and with the nudging mindset you say to not rebalance to 50/50. If you rebalanced to 50/50 and took advantage of buying equities at a low the next year when it is time to withdrawal I see 2 scenarios:

A: Equities do great that year and bump you up to something like 60/40 so you sell equities. Wouldn't this be selling high?
B: Another bad year, which shifts you to something more like 40/60 again, then pull more bond money?

I'm sure there is an issue here I'm not seeing....please help me to point it out.
Yes, rebalancing is always buying a cheaper asset and selling an expensive asset. You can withdraw first then rebalance the rest to 50/50, or rebalance first and withdraw from both assets 50/50. It's a personal decision.
Hmmm…I wonder if the data shows a minor benefit either way.
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

nigel_ht wrote: Sun Sep 26, 2021 9:37 am Hmmm…I wonder if the data shows a minor benefit either way.
I'm skeptical of the impact of rebalancing. It sounds good on paper, but I don't see much improvements on PV.

Often we hear people bragging because they bought the dip and didn't sell. Well, that's not really rebalancing, that's just making their AA more aggressive.
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willthrill81
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

Marseille07 wrote: Sun Sep 26, 2021 9:43 am
nigel_ht wrote: Sun Sep 26, 2021 9:37 am Hmmm…I wonder if the data shows a minor benefit either way.
I'm skeptical of the impact of rebalancing. It sounds good on paper, but I don't see much improvements on PV.
That's correct. Rebalancing hurts as often as it helps, and you obviously don't know in advance which way it would go.

As an example of a very different approach to rebalancing, McClung's Prime Harvesting approach only offers one-way rebalancing: from stocks to bonds, but withdrawals are only made from bonds.
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Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

willthrill81 wrote: Sun Sep 26, 2021 10:01 am That's correct. Rebalancing hurts as often as it helps, and you obviously don't know in advance which way it would go.

As an example of a very different approach to rebalancing, McClung's Prime Harvesting approach only offers one-way rebalancing: from stocks to bonds, but withdrawals are only made from bonds.
Right, this is essentially the 'nudging' approach. If you have too much in fixed income, you just spend it down without selling stocks. If you have too much in equities, you sell some.
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