Kitces guard rail approach to safe withdrawal

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Brianjp18
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Kitces guard rail approach to safe withdrawal

Post by Brianjp18 »

Kitces modified guard rail approach is quoted as:

For instance, an initial withdrawal rate of 5%, but if the ongoing withdrawals relative to the portfolio rise above 6% then spending is cut (because spending is dangerously outpacing portfolio growth), while if the withdrawal rate falls below 4% (as portfolio growth outpaces spending growth) then the retiree would get a spending increase.

So from this example you would pull 50k from a one million dollar portfolio in year one. In year 2, I understand you add inflation to 50k then divide that by your portfolio value at the end of year one. Say your portfolio drops to 700k, thereby you would be pulling roughly 7%, which is above the 6% threshold.

My question is how much do you reduce your withdrawal in this case? Do you simply pull 6% (upper rail) from your portfolio, being 42k in this scenario? Or is there some other approach to reduce your withdrawal for year 2?
L84SUPR
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Re: Kitces guard rail approach to safe withdrawal

Post by L84SUPR »

There is a follow-up article where Kitces concludes that small permanent decreases in withdrawals are more effective at prolonging the life of the portfolio than larger temporary reductions. I don't have a preference just pointing out the article.

https://www.kitces.com/blog/dynamic-ret ... justments/
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MathWizard
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Re: Kitces guard rail approach to safe withdrawal

Post by MathWizard »

You did not give the reference to the source if your quote, so I can't go back to the source, but my guess is that you take 6% and perhaps stay in that rail, effectively making the WR a constant percentage, which may mean that you are continually cutting your withdrawals.

The other approach is a reset to 5% , like it would be if you had retired one year later with the current balance. That seems a safer approach. I plan assuming a large drop on the day after I retire, so that I know that I can respond that way.

No withdrawal plan is guaranteed.

Another strategy is to not take the inflation adjustment in years where there is a large portfolio decline.
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Brianjp18
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Re: Kitces guard rail approach to safe withdrawal

Post by Brianjp18 »

MathWizard wrote: Thu Sep 23, 2021 8:18 am You did not give the reference to the source if your quote, so I can't go back to the source, but my guess is that you take 6% and perhaps stay in that rail, effectively making the WR a constant percentage, which may mean that you are continually cutting your withdrawals.

The other approach is a reset to 5% , like it would be if you had retired one year later with the current balance. That seems a safer approach. I plan assuming a large drop on the day after I retire, so that I know that I can respond that way.

No withdrawal plan is guaranteed.

Another strategy is to not take the inflation adjustment in years where there is a large portfolio decline.
Here’s the article: https://www.kitces.com/blog/url-upside- ... al-wealth/

It’s near the bottom Of the article under the heading dynamic spending rules. Maybe you can make more sense of it, but he doesn’t seem to explain his approach to how much you would cut back in the case that your withdrawal exceeds the 6% guardrail. Basically would you simply pull 6% of your portfolio or would you reduce last years withdrawal a certain percentage? Not really sure.
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Brianjp18
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Re: Kitces guard rail approach to safe withdrawal

Post by Brianjp18 »

L84SUPR wrote: Wed Sep 22, 2021 10:12 pm There is a follow-up article where Kitces concludes that small permanent decreases in withdrawals are more effective at prolonging the life of the portfolio than larger temporary reductions. I don't have a preference just pointing out the article.

https://www.kitces.com/blog/dynamic-ret ... justments/
Thanks for the article. Will give it a read tonight.
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Re: Kitces guard rail approach to safe withdrawal

Post by willthrill81 »

Brianjp18 wrote: Wed Sep 22, 2021 9:50 pm My question is how much do you reduce your withdrawal in this case? Do you simply pull 6% (upper rail) from your portfolio, being 42k in this scenario? Or is there some other approach to reduce your withdrawal for year 2?
I'm not trying to be rude, but this isn't a great withdrawal strategy at all because of the reason you're asking these questions: it isn't clear enough. I'm a fan of Kitces, but the strategies he's put forward for determining withdrawals are subpar, to say the least.

The amortization based withdrawal method (ABW) is far superior in every way except that it requires more effort to set it up initially.
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Brianjp18
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Re: Kitces guard rail approach to safe withdrawal

Post by Brianjp18 »

willthrill81 wrote: Thu Sep 23, 2021 6:37 pm
Brianjp18 wrote: Wed Sep 22, 2021 9:50 pm My question is how much do you reduce your withdrawal in this case? Do you simply pull 6% (upper rail) from your portfolio, being 42k in this scenario? Or is there some other approach to reduce your withdrawal for year 2?
I'm not trying to be rude, but this isn't a great withdrawal strategy at all because of the reason you're asking these questions: it isn't clear enough. I'm a fan of Kitces, but the strategies he's put forward for determining withdrawals are subpar, to say the least.

The amortization based withdrawal method (ABW) is far superior in every way except that it requires more effort to set it up initially.
You are not rude at all. This is exactly why I’m posting, for critical feedback, as I’m just diving into these concepts.

I plan to research the ABW method tonight or tomorrow. I briefly glanced at it in the wiki pages, but need to actually read a bit more to fully understand it.
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Re: Kitces guard rail approach to safe withdrawal

Post by milktoast »

The problem I see with this small permanent cut strategy is two fold. First it requires assuming your starting point is somehow good and picking a baseline SWR. And second, the thresholds could be arbitrarily aggressive or conservative. And it's hard to know until you are done.

I'm also looking at ABW. Which at its baseline isn't that complex to understand. At any moment you need three variables: current balance, number of years until you want to deplete the balance, expected real return of your portfolio. Stick that into a PMT function and it tells you the steady real withdrawal rate you can maintain. Withdraw that amount this year.

Only one of those terms is known. But the nice thing is that you reevaluate prior to each withdrawal. Which might be once a year or once a quarter or whatever. If you were wrong about the rate of return you'll pull out too much or too little and that will alter the current balance off the amortization schedule and your next withdrawal will adjust down or up. But if you don't choose wildly incorrect expected returns, the adjustments will be small.
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Re: Kitces guard rail approach to safe withdrawal

Post by EnjoyIt »

Brianjp18,
From what I read in your previous posts and threads, I think you are getting a bit ahead of yourselves. Unless I am mistaken, you are relatively early in the accumulation phase of your portfolio. Meaning, you have many many years to go. Don't get me wrong, its good to learn about all this stuff and fun if you are like me. When I first found out about Bogleheads and early retirement I devoured as much information as I possibly could. But with a relatively small portfolio without experiencing a large equities drop, it is very hard to understand how your brain will react. You just don't know yourself which makes it very difficult to understand what your retirement AA should be or what withdrawal strategy to use. ABW that Willthrill likes to advertise is far superior to a simple 4% withdrawal rate strategy but it is not without its flaws.

Frankly, most retirees don't use a spreadsheet for their withdrawal strategy because they have no clue about them. They just spend what they feel is right and cut back when times are tough. This is how it has been for decades if not centuries. Again, learn the stuff. It is fun. Realize that when it is your time to retire you will know much more about yourself and what is right for you.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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Re: Kitces guard rail approach to safe withdrawal

Post by willthrill81 »

EnjoyIt wrote: Thu Sep 23, 2021 7:54 pm Frankly, most retirees don't use a spreadsheet for their withdrawal strategy because they have no clue about them. They just spend what they feel is right and cut back when times are tough.
The Taylor Larimore 'just wing it' approach to withdrawals has never sat well with me. We recommend that investors create IPSs and stick to them religiously, so it doesn't make sense that we would then tell retirees to not worry about an explicit plan. Such a plan doesn't have to be complicated, but I really believe that retirees who will be dependent on portfolio withdrawals need some type of plan.
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vanbogle59
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Re: Kitces guard rail approach to safe withdrawal

Post by vanbogle59 »

willthrill81 wrote: Thu Sep 23, 2021 6:37 pm
Brianjp18 wrote: Wed Sep 22, 2021 9:50 pm My question is how much do you reduce your withdrawal in this case? Do you simply pull 6% (upper rail) from your portfolio, being 42k in this scenario? Or is there some other approach to reduce your withdrawal for year 2?
I'm not trying to be rude, but this isn't a great withdrawal strategy at all because of the reason you're asking these questions: it isn't clear enough. I'm a fan of Kitces, but the strategies he's put forward for determining withdrawals are subpar, to say the least.

The amortization based withdrawal method (ABW) is far superior in every way except that it requires more effort to set it up initially.
more effort? :confused
P, r, n, B, g (especially if B=g=0)
My problem with ABW is I can make it say whatever I want by chosing a friendly r.
Maybe the effort you are referring to is going through the process of discovering a realistic r for my portfolio? I will never trust myself to do that.
That's what I like about firecalc.
EnjoyIt
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Re: Kitces guard rail approach to safe withdrawal

Post by EnjoyIt »

willthrill81 wrote: Thu Sep 23, 2021 8:00 pm
EnjoyIt wrote: Thu Sep 23, 2021 7:54 pm Frankly, most retirees don't use a spreadsheet for their withdrawal strategy because they have no clue about them. They just spend what they feel is right and cut back when times are tough.
The Taylor Larimore 'just wing it' approach to withdrawals has never sat well with me. We recommend that investors create IPSs and stick to them religiously, so it doesn't make sense that we would then tell retirees to not worry about an explicit plan. Such a plan doesn't have to be complicated, but I really believe that retirees who will be dependent on portfolio withdrawals need some type of plan.
It’s funny. I thought about Taylor Larimore as I wrote the above. I don’t disagree with you. Knowing what your doing is far better than not. There are a few here who have gone off the deep end with knowing too much and it has paralyzed their senses. You know them. The sub 3% withdrawal crowd.
My post above was referring to OP being early in their process and they have a bit to go before thinking about withdrawal strategies.
If you notice, my post recommended to keep learning and it also includes learning thyself which is key to any withdrawal strategy.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
mosilaby
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Re: Kitces guard rail approach to safe withdrawal

Post by mosilaby »

Brianjp18 wrote: Thu Sep 23, 2021 6:34 pm Here’s the article: https://www.kitces.com/blog/url-upside- ... al-wealth/

It’s near the bottom Of the article under the heading dynamic spending rules. Maybe you can make more sense of it, but he doesn’t seem to explain his approach to how much you would cut back in the case that your withdrawal exceeds the 6% guardrail. Basically would you simply pull 6% of your portfolio or would you reduce last years withdrawal a certain percentage? Not really sure.
I believe what you're referring to is the Guyton-Klinger model. I've done a fair amount of research on different withdrawal strategies and have decided I like this Guyton-Klinger guardrail model better than the "Vanguard Dynamic Spending" model.

That article certainly doesn't explain the mechanics and better explanations can be found elsewhere by googling "guyton klinger".

This explains it in the "Guyton-Klinger Spending Decision Rules" section:
https://www.forbes.com/advisor/retireme ... ing-rules/

FI Calc lets you pick "Guyton-Klinger" as a withdrawal strategy, though it doesn't give you the yearly mechanics:
https://calculator.ficalc.app/

"Guyton and Klinger’s Guardrail Decision Rules":
https://investmentmoats.com/wealth-buil ... -possible/

The above article provides a link to this spreadsheet that has a tab for the model and you can see the mechanics of their calculation. I've found that to be very valuable and have copied and edited a bit for my own needs:
https://docs.google.com/spreadsheets/d/ ... edit#gid=0
MathWizard
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Re: Kitces guard rail approach to safe withdrawal

Post by MathWizard »

Brianjp18 wrote: Thu Sep 23, 2021 6:34 pm
MathWizard wrote: Thu Sep 23, 2021 8:18 am You did not give the reference to the source if your quote, so I can't go back to the source, but my guess is that you take 6% and perhaps stay in that rail, effectively making the WR a constant percentage, which may mean that you are continually cutting your withdrawals.

The other approach is a reset to 5% , like it would be if you had retired one year later with the current balance. That seems a safer approach. I plan assuming a large drop on the day after I retire, so that I know that I can respond that way.

No withdrawal plan is guaranteed.

Another strategy is to not take the inflation adjustment in years where there is a large portfolio decline.
Here’s the article: https://www.kitces.com/blog/url-upside- ... al-wealth/

It’s near the bottom Of the article under the heading dynamic spending rules. Maybe you can make more sense of it, but he doesn’t seem to explain his approach to how much you would cut back in the case that your withdrawal exceeds the 6% guardrail. Basically would you simply pull 6% of your portfolio or would you reduce last years withdrawal a certain percentage? Not really sure.
Thanks for the reference.

If you click on the modified Guyton rules link, you get:

Paraphrasing:
1) Original Guyton rule: Normal inflation adjustment each year, except NO adjustment on years with negative portfolio return
2) Modified Guyton: Modify rule 1 to allow adjustment if the average of the previous two years would support the normal adjustment.

Notice that 1 adjusts only for the downside, and 2 avoids the adjustment due to a whipsaw in returns , negative return followed by
huge positive return, but never adjusts upwards more than inflation.

Now, Kitches' guardrail approach (call it 3)
3) Use #2, but adjust upwards when portfolio has grown a lot.
So chose above the 4% rule (which historically has over a 95% sucess rate with any adjustment)
Then apply rule 2, but if you hit a guardrail, stop at that.

So if you start with WR of 5% of portfolio, and chose guardrails of 4 and 6%,
a) Adjust each year for inflation:
i) Except not if a bad year (negative return) which was not preceded by a great year.
(2 year average return would have given you inflation adjustment both years)
Then:
Test new WR.
a) If new WR exceeds 6% of portfolio, take only 6%, and use that for further adjustments
b) If new WR is lower than 4% , take 4% and use that as a base for further adjustments.

A. So unless once you hit 6%, you will stay there unless you get an inflation adjusted (real) return above 6%
B. Once you hit 4%, you would stay at 4% of portfolio guardrail as long as your real return exceeds 4%.

Consequences:
A. Keeps you from ever running out of money, but withdrawals may keep dwindling if you set too high a guardrail.
B. Lets you capture some upside potential, but you can't set it too high.
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Re: Kitces guard rail approach to safe withdrawal

Post by Thesaints »

A real-dollars, constant withdrawal, amount from a given capital is a well defined target.
As soon as one accepts violations to that rule an almost infinite number of strategies pops up. Some are good for some people, some others are good for other people. It really becomes a very subjective affaire.

Looking for a new "rule" without considering individual circumstances is kind of useless, although following a "rule" can certainly have a beneficial psychological effect regardless on whether it is the optimal (or near-optimal) strategy for that specific investor.
That's actually quite typical in the world of personal finance.
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Brianjp18
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Re: Kitces guard rail approach to safe withdrawal

Post by Brianjp18 »

EnjoyIt wrote: Thu Sep 23, 2021 7:54 pm Brianjp18,
From what I read in your previous posts and threads, I think you are getting a bit ahead of yourselves. Unless I am mistaken, you are relatively early in the accumulation phase of your portfolio. Meaning, you have many many years to go. Don't get me wrong, its good to learn about all this stuff and fun if you are like me. When I first found out about Bogleheads and early retirement I devoured as much information as I possibly could. But with a relatively small portfolio without experiencing a large equities drop, it is very hard to understand how your brain will react. You just don't know yourself which makes it very difficult to understand what your retirement AA should be or what withdrawal strategy to use. ABW that Willthrill likes to advertise is far superior to a simple 4% withdrawal rate strategy but it is not without its flaws.

Frankly, most retirees don't use a spreadsheet for their withdrawal strategy because they have no clue about them. They just spend what they feel is right and cut back when times are tough. This is how it has been for decades if not centuries. Again, learn the stuff. It is fun. Realize that when it is your time to retire you will know much more about yourself and what is right for you.
Yep, definitely at the beginning of my accumulation and have quite sometime before I would have to employ any of these strategies. The main reason I'm researching the strategies is to get a consensus on what a safe withdrawal rate might be based on the context of the mechanics of how one can withdrawal. I feel like seeing the finish line will help me make better decisions at the start of the race. If I just casually assumed 5% was a SWR without knowing how the process of withdrawal worked I might not set my target and saving goal correctly. Plus, it is fascinating stuff :D
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Brianjp18
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Re: Kitces guard rail approach to safe withdrawal

Post by Brianjp18 »

milktoast wrote: Thu Sep 23, 2021 7:43 pm The problem I see with this small permanent cut strategy is two fold. First it requires assuming your starting point is somehow good and picking a baseline SWR. And second, the thresholds could be arbitrarily aggressive or conservative. And it's hard to know until you are done.

I'm also looking at ABW. Which at its baseline isn't that complex to understand. At any moment you need three variables: current balance, number of years until you want to deplete the balance, expected real return of your portfolio. Stick that into a PMT function and it tells you the steady real withdrawal rate you can maintain. Withdraw that amount this year.

Only one of those terms is known. But the nice thing is that you reevaluate prior to each withdrawal. Which might be once a year or once a quarter or whatever. If you were wrong about the rate of return you'll pull out too much or too little and that will alter the current balance off the amortization schedule and your next withdrawal will adjust down or up. But if you don't choose wildly incorrect expected returns, the adjustments will be small.
I like the self-adjusting nature of the ABW approach. Forces you to stay on track.
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Brianjp18
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Re: Kitces guard rail approach to safe withdrawal

Post by Brianjp18 »

mosilaby wrote: Thu Sep 23, 2021 10:33 pm
Brianjp18 wrote: Thu Sep 23, 2021 6:34 pm Here’s the article: https://www.kitces.com/blog/url-upside- ... al-wealth/

It’s near the bottom Of the article under the heading dynamic spending rules. Maybe you can make more sense of it, but he doesn’t seem to explain his approach to how much you would cut back in the case that your withdrawal exceeds the 6% guardrail. Basically would you simply pull 6% of your portfolio or would you reduce last years withdrawal a certain percentage? Not really sure.
I believe what you're referring to is the Guyton-Klinger model. I've done a fair amount of research on different withdrawal strategies and have decided I like this Guyton-Klinger guardrail model better than the "Vanguard Dynamic Spending" model.

That article certainly doesn't explain the mechanics and better explanations can be found elsewhere by googling "guyton klinger".

This explains it in the "Guyton-Klinger Spending Decision Rules" section:
https://www.forbes.com/advisor/retireme ... ing-rules/

FI Calc lets you pick "Guyton-Klinger" as a withdrawal strategy, though it doesn't give you the yearly mechanics:
https://calculator.ficalc.app/

"Guyton and Klinger’s Guardrail Decision Rules":
https://investmentmoats.com/wealth-buil ... -possible/

The above article provides a link to this spreadsheet that has a tab for the model and you can see the mechanics of their calculation. I've found that to be very valuable and have copied and edited a bit for my own needs:
https://docs.google.com/spreadsheets/d/ ... edit#gid=0
Thanks for taking the time to post some links. I appreciate the spreadsheet. Helps me to understand the mechanics of the different strategies.

It is interesting to note the available average spending produced by the different withdrawal methods when using the fiCalc.
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Brianjp18
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Re: Kitces guard rail approach to safe withdrawal

Post by Brianjp18 »

MathWizard wrote: Fri Sep 24, 2021 12:42 pm
Brianjp18 wrote: Thu Sep 23, 2021 6:34 pm
MathWizard wrote: Thu Sep 23, 2021 8:18 am You did not give the reference to the source if your quote, so I can't go back to the source, but my guess is that you take 6% and perhaps stay in that rail, effectively making the WR a constant percentage, which may mean that you are continually cutting your withdrawals.

The other approach is a reset to 5% , like it would be if you had retired one year later with the current balance. That seems a safer approach. I plan assuming a large drop on the day after I retire, so that I know that I can respond that way.

No withdrawal plan is guaranteed.

Another strategy is to not take the inflation adjustment in years where there is a large portfolio decline.
Here’s the article: https://www.kitces.com/blog/url-upside- ... al-wealth/

It’s near the bottom Of the article under the heading dynamic spending rules. Maybe you can make more sense of it, but he doesn’t seem to explain his approach to how much you would cut back in the case that your withdrawal exceeds the 6% guardrail. Basically would you simply pull 6% of your portfolio or would you reduce last years withdrawal a certain percentage? Not really sure.
Thanks for the reference.

If you click on the modified Guyton rules link, you get:

Paraphrasing:
1) Original Guyton rule: Normal inflation adjustment each year, except NO adjustment on years with negative portfolio return
2) Modified Guyton: Modify rule 1 to allow adjustment if the average of the previous two years would support the normal adjustment.

Notice that 1 adjusts only for the downside, and 2 avoids the adjustment due to a whipsaw in returns , negative return followed by
huge positive return, but never adjusts upwards more than inflation.

Now, Kitches' guardrail approach (call it 3)
3) Use #2, but adjust upwards when portfolio has grown a lot.
So chose above the 4% rule (which historically has over a 95% sucess rate with any adjustment)
Then apply rule 2, but if you hit a guardrail, stop at that.

So if you start with WR of 5% of portfolio, and chose guardrails of 4 and 6%,
a) Adjust each year for inflation:
i) Except not if a bad year (negative return) which was not preceded by a great year.
(2 year average return would have given you inflation adjustment both years)
Then:
Test new WR.
a) If new WR exceeds 6% of portfolio, take only 6%, and use that for further adjustments
b) If new WR is lower than 4% , take 4% and use that as a base for further adjustments.

A. So unless once you hit 6%, you will stay there unless you get an inflation adjusted (real) return above 6%
B. Once you hit 4%, you would stay at 4% of portfolio guardrail as long as your real return exceeds 4%.

Consequences:
A. Keeps you from ever running out of money, but withdrawals may keep dwindling if you set too high a guardrail.
B. Lets you capture some upside potential, but you can't set it too high.
Thanks for the paraphrase! That clears up how this method works in my mind. Will add this to my archive list.
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Re: Kitces guard rail approach to safe withdrawal

Post by dcabler »

vanbogle59 wrote: Thu Sep 23, 2021 8:09 pm
willthrill81 wrote: Thu Sep 23, 2021 6:37 pm
Brianjp18 wrote: Wed Sep 22, 2021 9:50 pm My question is how much do you reduce your withdrawal in this case? Do you simply pull 6% (upper rail) from your portfolio, being 42k in this scenario? Or is there some other approach to reduce your withdrawal for year 2?
I'm not trying to be rude, but this isn't a great withdrawal strategy at all because of the reason you're asking these questions: it isn't clear enough. I'm a fan of Kitces, but the strategies he's put forward for determining withdrawals are subpar, to say the least.

The amortization based withdrawal method (ABW) is far superior in every way except that it requires more effort to set it up initially.
more effort? :confused
P, r, n, B, g (especially if B=g=0)
My problem with ABW is I can make it say whatever I want by chosing a friendly r.
Maybe the effort you are referring to is going through the process of discovering a realistic r for my portfolio? I will never trust myself to do that.
That's what I like about firecalc.
Agree about choosing a friendly r. But if somebody is going to make it whatever they want it to be, then they're heading in the direction of just winging it anyway by choosing the final answer.

Plenty of systematic ways to calculate r that are good enough ranging from just using fixed, historical, real stock & bond returns like the original VPW did, to using any of a number of valuation methods for stock, along with current bond fund yields adjusted for expected inflation (which itself has a number of ways it can be calculated or looked up). Perfection is not required but I'd rather have a system that, for example, recognizes that today stock valuations are high and yields are low and calculates a withdrawal amount accordingly. Like anything regarding investing, sticking with a plan is key.

I have my own preferred method to calculate r in my withdrawal spreadsheet, but I also calculate a couple of backup methods in case the data sources I use for my preferred method disappear for some reason or in the event that I pre-decease my DW and she isn't as interested in this stuff as I am.

Cheers.
VanGar+Goyle
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Re: Kitces guard rail approach to safe withdrawal

Post by VanGar+Goyle »

MathWizard wrote: Thu Sep 23, 2021 8:18 am You did not give the reference to the source if your quote, so I can't go back to the source, but my guess is that you take 6% and perhaps stay in that rail, effectively making the WR a constant percentage, which may mean that you are continually cutting your withdrawals.

The other approach is a reset to 5% , like it would be if you had retired one year later with the current balance. That seems a safer approach. I plan assuming a large drop on the day after I retire, so that I know that I can respond that way.
That sounds like simplified Kitces. Barely one point of accuracy, as 5% to 6% is a large jump.
I was hoping for a method with 5% adjustments, perhaps a 3 year moving average.
The "Stay Wealthy" Dynamic Withdrawal Strategies podcast covered
"Decision Rules and Maximum Initial Withdrawal Rates" [Guyton-Klinger, 2006] in some detail,
but it is hard to listen to all the numbers and rules, with no visual aids.
Well, you pay a little bit, we're a little bit tough. | You pay very much, very much tough. | You pay a too much, we're too much a tough. | How much you pay? ... Well, then we're plenty tough. - Marx
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Re: Kitces guard rail approach to safe withdrawal

Post by willthrill81 »

milktoast wrote: Thu Sep 23, 2021 7:43 pm The problem I see with this small permanent cut strategy is two fold. First it requires assuming your starting point is somehow good and picking a baseline SWR. And second, the thresholds could be arbitrarily aggressive or conservative. And it's hard to know until you are done.

I'm also looking at ABW. Which at its baseline isn't that complex to understand. At any moment you need three variables: current balance, number of years until you want to deplete the balance, expected real return of your portfolio. Stick that into a PMT function and it tells you the steady real withdrawal rate you can maintain. Withdraw that amount this year.

Only one of those terms is known. But the nice thing is that you reevaluate prior to each withdrawal. Which might be once a year or once a quarter or whatever. If you were wrong about the rate of return you'll pull out too much or too little and that will alter the current balance off the amortization schedule and your next withdrawal will adjust down or up. But if you don't choose wildly incorrect expected returns, the adjustments will be small.
While it's true that only one of those three variables is known, the others can be adjusted as desired. For one, most retirees will want to plan for a significantly longer withdrawal period than they are likely to experience. And an 'adjustable' assumed growth rate can be beneficial on multiple fronts. Dynamic growth rate assumptions can help to reduce the variability of annual withdrawals; by comparison static growth rate assumptions result in your withdrawals becoming as volatile as your portfolio. But beyond that, retirees who desired to frontload their withdrawals, such as I intend to do, can accomplish this by simply increasing the assumed return by an appropriate percentage (e.g., 1-2%). Since most retirees' spending declines around 1% in real dollars throughout retirement anyway, this may better match reality than a static growth rate.

And yes, it's a very nice feature about ABW that if you withdraw too much now, you'll naturally withdraw less later, but the reduced withdrawal won't come in one fail swoop; rather, it will be spread over your remaining years of withdrawals.
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MathWizard
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Re: Kitces guard rail approach to safe withdrawal

Post by MathWizard »

VanGar+Goyle wrote: Sat Sep 25, 2021 8:18 am
MathWizard wrote: Thu Sep 23, 2021 8:18 am You did not give the reference to the source if your quote, so I can't go back to the source, but my guess is that you take 6% and perhaps stay in that rail, effectively making the WR a constant percentage, which may mean that you are continually cutting your withdrawals.

The other approach is a reset to 5% , like it would be if you had retired one year later with the current balance. That seems a safer approach. I plan assuming a large drop on the day after I retire, so that I know that I can respond that way.
That sounds like simplified Kitces. Barely one point of accuracy, as 5% to 6% is a large jump.
I was hoping for a method with 5% adjustments, perhaps a 3 year moving average.
The "Stay Wealthy" Dynamic Withdrawal Strategies podcast covered
"Decision Rules and Maximum Initial Withdrawal Rates" [Guyton-Klinger, 2006] in some detail,
but it is hard to listen to all the numbers and rules, with no visual aids.
See my later post. I was making a guess based on the OP's description.

Once OP posted the link to the article, which referenced an article by Guyton, I could read and interpret what Kitchen was saying .

I may be incorrect in my interpretation, but I think it is correct.
It is interesting, and I am considering a ratcheting approach
where I loosen the reins if the portfolio performs fantastically in retirement, but as with most, I am more concerned about the downside. I can always deal with too much money, the opposite not do much.
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Re: Kitces guard rail approach to safe withdrawal

Post by vanbogle59 »

dcabler wrote: Sat Sep 25, 2021 6:43 am Agree about choosing a friendly r. But if somebody is going to make it whatever they want it to be, then they're heading in the direction of just winging it anyway by choosing the final answer.
I desperately do NOT want to wing it. I am trying to build walls that insulate me from my own behavioral errors.
Thus the fear of picking a friendly r. I don't trust the guy doing the picking. :happy

My current solution is to stick with constant dollar, but re-evaluate once a year.
I'm even willing to front-load for specific expenses (like say a travel budget for the first 10 years). I'm lucky to have enough extra for that.
This tool allows that sort of analysis using the tried and true "what happened in the past" method: https://calculator.ficalc.app/

I'm hoping the combination of yearly re-evaluation, built-in cushion and delayed SS will naturally handle both SORR and the desire to spend more earlier. If I'm unnecessarily leaving some money on the table, I'm OK with that too.
It's comforting to know other methods predict higher SWRs than I will be choosing.

:sharebeer
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Re: Kitces guard rail approach to safe withdrawal

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This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
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Re: Kitces guard rail approach to safe withdrawal

Post by wrongfunds »

Every one of these spreadsheet method should have a Mike Tyson caveat aka they all go out the window when the market throws a punch in your direction!
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Re: Kitces guard rail approach to safe withdrawal

Post by willthrill81 »

wrongfunds wrote: Sun Sep 26, 2021 9:45 am Every one of these spreadsheet method should have a Mike Tyson caveat aka they all go out the window when the market throws a punch in your direction!
Hopefully, the withdrawal method one uses explicitly accounts for market downturns.
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Re: Kitces guard rail approach to safe withdrawal

Post by nisiprius »

This stuff isn't worth the effort of reading unless there is a way to automate the withdrawal system.

Indeed, if I leave Vanguard it may be well because of Schwab's "Intelligent Income" withdrawal system.

I thought Vanguard was at least moving in the right direction with their Managed Payout Fund, which incorporated a reasonably attractive withdrawal system with a quirky and aggressive portfolio I wanted nothing to do with. But after over a decade of problems, they actually canned the withdrawal feature.

Now there is really nothing from Vanguard beyond the automated RMD service.

I don't know what the idea behind these complex systems (Kitces, Guyton-Klinger) is. I consider myself to have more spreadsheet energy than average, but there's no way I'm going to maintain a spreadsheet and debugging and auditing it to make sure it matches the strategy, and make an monthly ceremony of running the numbers to figure out how much I can withdraw each month.

Is this supposed to be an opportunity for advisors to earn revenue by doing this for you as a fee-based service?

Is everybody but Schwab scared that people will ignore all the disclaimers and get upset and sue if the system doesn't perform as expected?
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Re: Kitces guard rail approach to safe withdrawal

Post by willthrill81 »

nisiprius wrote: Sun Sep 26, 2021 10:03 amI consider myself to have more spreadsheet energy than average, but there's no way I'm going to maintain a spreadsheet and debugging and auditing it to make sure it matches the strategy, and make an monthly ceremony of running the numbers to figure out how much I can withdraw each month.
Have you considered moving to annual withdrawals? The tiny reduction in expected returns might be worth only doing the work once a year instead of 12 times.
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Re: Kitces guard rail approach to safe withdrawal

Post by nisiprius »

willthrill81 wrote: Sun Sep 26, 2021 9:58 am
wrongfunds wrote: Sun Sep 26, 2021 9:45 amEvery one of these spreadsheet method should have a Mike Tyson caveat aka they all go out the window when the market throws a punch in your direction!
Hopefully, the withdrawal method one uses explicitly accounts for market downturns.
The Vanguard Managed Payout Fund is one of the few real-world examples of an automated SWR supposedly based on sustainable smoothing of a fluctuating portfolio. The formula involved a three-year moving average of past results.

In 2013, Vanguard cut the target payout percentage of the Vanguard Managed Payout Growth & Distribution Fund from 5% to 4%.

It certainly looks to me as if Vanguard must not have accounted properly for the possibility of a market downturn.

The fact that Vanguard messed up doesn't mean that all such systems are faulty, but it certainly raises a doubt.
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Re: Kitces guard rail approach to safe withdrawal

Post by dcabler »

vanbogle59 wrote: Sat Sep 25, 2021 10:52 am
dcabler wrote: Sat Sep 25, 2021 6:43 am Agree about choosing a friendly r. But if somebody is going to make it whatever they want it to be, then they're heading in the direction of just winging it anyway by choosing the final answer.
I desperately do NOT want to wing it. I am trying to build walls that insulate me from my own behavioral errors.
Thus the fear of picking a friendly r. I don't trust the guy doing the picking. :happy

My current solution is to stick with constant dollar, but re-evaluate once a year.
I'm even willing to front-load for specific expenses (like say a travel budget for the first 10 years). I'm lucky to have enough extra for that.
This tool allows that sort of analysis using the tried and true "what happened in the past" method: https://calculator.ficalc.app/

I'm hoping the combination of yearly re-evaluation, built-in cushion and delayed SS will naturally handle both SORR and the desire to spend more earlier. If I'm unnecessarily leaving some money on the table, I'm OK with that too.
It's comforting to know other methods predict higher SWRs than I will be choosing.

:sharebeer
Totally understand. After all, a lot of what is preached here on BH are things to help avoid behavioral errors!
FYI - something like ABW doesn't guarantee higher withdrawal rates (I deliberately used the term "withdrawal rates" rather than the term SWR because SWR has a specific meaning that doesn't apply to ABW). The one thing that ABW does do is to guarantee that you won't run out of money before you planned to. The price paid for that is that your withdrawals will be variable with no guarantee that they won't fall below what you need to live on. Choose your poison - running out of money too soon (SWR) or at any point in time not being able to withdraw enough. In the case of SWR, you mitigate by being adaptable - which means you're now no longer doing SWR. In the second case, it's already adaptable but you can do more - like not withdrawing the full amount when the PMT math tells you that you can withdraw significantly more than you need. Or withdrawing the full amount and putting the excess in a rainy day account to be pulled from later if a too-low withdrawal calculation happens. The reality is regardless of your withdrawal method, being adaptable and perhaps not always strictly following a calculation might not be a bad idea.

Cheers.

Cheers.
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Re: Kitces guard rail approach to safe withdrawal

Post by willthrill81 »

nisiprius wrote: Sun Sep 26, 2021 10:09 am
willthrill81 wrote: Sun Sep 26, 2021 9:58 am
wrongfunds wrote: Sun Sep 26, 2021 9:45 amEvery one of these spreadsheet method should have a Mike Tyson caveat aka they all go out the window when the market throws a punch in your direction!
Hopefully, the withdrawal method one uses explicitly accounts for market downturns.
The Vanguard Managed Payout Fund is one of the few real-world examples of an automated SWR supposedly based on sustainable smoothing of a fluctuating portfolio. The formula involved a three-year moving average of past results.

In 2013, Vanguard cut the target payout percentage of the Vanguard Managed Payout Growth & Distribution Fund from 5% to 4%.

It certainly looks to me as if Vanguard must not have accounted properly for the possibility of a market downturn.

The fact that Vanguard messed up doesn't mean that all such systems are faulty, but it certainly raises a doubt.
IMHO, starting their payout ratio at 5% was very problematic. Bengen's study, the Trinity study, and others were old news by the time Vanguard started the MPGD fund, never mind that Vanguard should have analyzed the data themselves nine ways to Sunday beforehand. Starting at 4% withdrawals would have been much more prudent with the information Vanguard had at the time, and I see no need for them to have had as many problems implementing it as they did. They explicitly told investors that withdrawals might include a return of their starting capital, so unless investors were uncomfortable actually seeing that play out for a time, it baffles me why they had to shudder the fund.
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Re: Kitces guard rail approach to safe withdrawal

Post by iceport »

willthrill81 wrote: Thu Sep 23, 2021 8:00 pm
EnjoyIt wrote: Thu Sep 23, 2021 7:54 pm Frankly, most retirees don't use a spreadsheet for their withdrawal strategy because they have no clue about them. They just spend what they feel is right and cut back when times are tough.
The Taylor Larimore 'just wing it' approach to withdrawals has never sat well with me. We recommend that investors create IPSs and stick to them religiously, so it doesn't make sense that we would then tell retirees to not worry about an explicit plan. Such a plan doesn't have to be complicated, but I really believe that retirees who will be dependent on portfolio withdrawals need some type of plan.
I'm glad to see I'm not the only one that takes exception to Taylor's approach. Taylor's circumstances were extremely favorable for winging it: federal pension (reduced for early retirement); large portfolio relative to needs; retiring in 1982, which historically it turns out supported a roughly 9% withdrawal rate; and possibly a working spouse... I don't think those are the kinds of things most of us should count on.
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Re: Kitces guard rail approach to safe withdrawal

Post by willthrill81 »

iceport wrote: Sun Sep 26, 2021 1:00 pm
willthrill81 wrote: Thu Sep 23, 2021 8:00 pm
EnjoyIt wrote: Thu Sep 23, 2021 7:54 pm Frankly, most retirees don't use a spreadsheet for their withdrawal strategy because they have no clue about them. They just spend what they feel is right and cut back when times are tough.
The Taylor Larimore 'just wing it' approach to withdrawals has never sat well with me. We recommend that investors create IPSs and stick to them religiously, so it doesn't make sense that we would then tell retirees to not worry about an explicit plan. Such a plan doesn't have to be complicated, but I really believe that retirees who will be dependent on portfolio withdrawals need some type of plan.
I'm glad to see I'm not the only one that takes exception to Taylor's approach. Taylor's circumstances were extremely favorable for winging it: federal pension (reduced for early retirement); large portfolio relative to needs; retiring in 1982, which historically it turns out supported a roughly 9% withdrawal rate; and possibly a working spouse... I don't think those are the kinds of things most of us should count on.
Indeed, those who retired in the early 1980s could have implemented virtually any withdrawal method they wanted, including withdrawing 7% of their inflation-adjusted starting balance every year, and still come out fine. Throw in a pension with an inflation-linked COLA, and those in Taylor's position were absolutely golden.
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Re: Kitces guard rail approach to safe withdrawal

Post by LilyFleur »

DIY is fine. But I meet with my Schwab advisor yearly (it's complementary), and the monte carlo simulation using the Schwab proprietary software comes up with a different plan than any I've seen discussed here.

The recommended spend is lower in the early years of withdrawal. (The Schwab plan gives an after-tax recommended spend). I retired at age 57.5, but recently started working part-time. This spring we added my part-time income into the plan for only two years, and it greatly affected the predicted success of the plan, in a positive way, I think by 10%. My advisor explained that this was because we were at the beginning of the estimated 30 years of retirement, and not having to withdraw early on was a positive move.

I think the Schwab plan is a really great data point to have. My advisor has not ever tried to sell me anything. He just recommends a fairly standard asset allocation, similar to what is recommended here. A good friend who has his accounts at Fidelity ended up buying an annuity from his advisor, and I was not pleased.
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Re: Kitces guard rail approach to safe withdrawal

Post by heyyou »

Just another topic drift because the OP did post that he/she is far from retiring and is just looking at spending methods to see a target savings amount as the reciprocal of a spending %.

My preference is the RMD spending method. It is the RMD % for your age, times your recent annual portfolio value, plus spending your annual dividends and interest. I like its relatively small, embedded annual changes instead of my needing to monitor for a threshold, if a more substantial reduction is needed. There are RMD % for all ages due to the required slow withdrawals on inherited IRAs, so early retirees have noticeably lower initial WD percentages, but spending the dividends and interest do help boost early retirement income.

As your portfolio value varies this year, that is an early warning about next year's spending amount when using the RMD method.
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Re: Kitces guard rail approach to safe withdrawal

Post by willthrill81 »

heyyou wrote: Sun Sep 26, 2021 4:26 pm My preference is the RMD spending method. It is the RMD % for your age, times your recent annual portfolio value, plus spending your annual dividends and interest. I like its relatively small, embedded annual changes instead of my needing to monitor for a threshold, if a more substantial reduction is needed. There are RMD % for all ages due to the required slow withdrawals on inherited IRAs, so early retirees have noticeably lower initial WD percentages, but spending the dividends and interest do help boost early retirement income.
The RMD method, while certainly viable, is extremely conservative, even by BH standards. Also, it results in the volatility of one's withdrawals being nearly identical to that of the portfolio. Some view that as a feature since it means that they will not prematurely deplete their portfolio, but others view such volatility as a bug.

Further, there's not been a historically driven need, in terms of long-term portfolio viability, for withdrawals to ever be below 3% of the current balance. But for early retirees, that could certainly happen if they used the RMD method.
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Re: Kitces guard rail approach to safe withdrawal

Post by EnjoyIt »

iceport wrote: Sun Sep 26, 2021 1:00 pm
willthrill81 wrote: Thu Sep 23, 2021 8:00 pm
EnjoyIt wrote: Thu Sep 23, 2021 7:54 pm Frankly, most retirees don't use a spreadsheet for their withdrawal strategy because they have no clue about them. They just spend what they feel is right and cut back when times are tough.
The Taylor Larimore 'just wing it' approach to withdrawals has never sat well with me. We recommend that investors create IPSs and stick to them religiously, so it doesn't make sense that we would then tell retirees to not worry about an explicit plan. Such a plan doesn't have to be complicated, but I really believe that retirees who will be dependent on portfolio withdrawals need some type of plan.
I'm glad to see I'm not the only one that takes exception to Taylor's approach. Taylor's circumstances were extremely favorable for winging it: federal pension (reduced for early retirement); large portfolio relative to needs; retiring in 1982, which historically it turns out supported a roughly 9% withdrawal rate; and possibly a working spouse... I don't think those are the kinds of things most of us should count on.
Not that I am advocating it, but most retirees still wing it. They aren't bogleheads, they just spend what they feel is reasonable. I too prefer a bit more math and history in my approach, but then again, most bogleheads are not everybody.
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Re: Kitces guard rail approach to safe withdrawal

Post by EnjoyIt »

willthrill81 wrote: Sun Sep 26, 2021 1:21 pm
iceport wrote: Sun Sep 26, 2021 1:00 pm
willthrill81 wrote: Thu Sep 23, 2021 8:00 pm
EnjoyIt wrote: Thu Sep 23, 2021 7:54 pm Frankly, most retirees don't use a spreadsheet for their withdrawal strategy because they have no clue about them. They just spend what they feel is right and cut back when times are tough.
The Taylor Larimore 'just wing it' approach to withdrawals has never sat well with me. We recommend that investors create IPSs and stick to them religiously, so it doesn't make sense that we would then tell retirees to not worry about an explicit plan. Such a plan doesn't have to be complicated, but I really believe that retirees who will be dependent on portfolio withdrawals need some type of plan.
I'm glad to see I'm not the only one that takes exception to Taylor's approach. Taylor's circumstances were extremely favorable for winging it: federal pension (reduced for early retirement); large portfolio relative to needs; retiring in 1982, which historically it turns out supported a roughly 9% withdrawal rate; and possibly a working spouse... I don't think those are the kinds of things most of us should count on.
Indeed, those who retired in the early 1980s could have implemented virtually any withdrawal method they wanted, including withdrawing 7% of their inflation-adjusted starting balance every year, and still come out fine. Throw in a pension with an inflation-linked COLA, and those in Taylor's position were absolutely golden.
Interestingly enough, I have done a budget for many years. Actually, it's not a budget, I just go back every several months and see how much we spent. I also do a total tally for the year every year. Somehow every year we sort of seam to just hang around the same numbers. It doesn't matter if we have an expensive home repair or maxing out a health insurance deductible, it just sort of works. I think one of the reasons why this happens is because our natural psyche when we have a big expense month, we naturally spend less elsewhere for a few months. We are effectively winging it, and it is working out.

When Februray/March 2020 hit looking back we just happened to spend less and when we realized we were ok, we just happened to spend more. And guess what, our 2020 spending just sort of fell in line with every other year. Maybe a few thousand less.

Despite that, I will still keep coming back and will run our numbers year in and year out. I'm sure I will keep doing it till the day I physically or mentally can't.
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Re: Kitces guard rail approach to safe withdrawal

Post by water2357 »

Out of curiosity, do any of these plans consider the impact of high medical inflation (insurance premiums and cost sharing) and the possibility of requiring a decade or more of skilled care in a long term care facility that currently costs more than $10,000 per month just for the facility? This includes having to sell assets to pay for the facility regardless of the market, as well as the expenses of e.g. a spouse still in the community or a spouse also in a facility, including Medicaid regulations?

Working up scenarios that withdraw assets by simulating the withdrawal of an increasing annuity taking into account inflation, various rates of return over time, tax rates, RMDs, IRA conversions, estate planning, etc. etc. still needs to have beside it the real scenario and real possibility that medical issues may at any point severely diminish funds or lead to bankruptcy.

One can always adjust the assumptions for the increasing (inflationary) annuity and the number of years of assumed life expectancy, etc, but without the "worst" case scenario beside the more or less steady withdrawal pattern, one can fool oneself into thinking all will be fine forever. But in the real world, you can't count on it. Medical inflation and long term care are the scariest things out there when it comes to providing for one's retirement, unless assets at retirment are well into the millions.
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Re: Kitces guard rail approach to safe withdrawal

Post by EnjoyIt »

water2357 wrote: Sun Sep 26, 2021 11:15 pm Out of curiosity, do any of these plans consider the impact of high medical inflation (insurance premiums and cost sharing) and the possibility of requiring a decade or more of skilled care in a long term care facility that currently costs more than $10,000 per month just for the facility? This includes having to sell assets to pay for the facility regardless of the market, as well as the expenses of e.g. a spouse still in the community or a spouse also in a facility, including Medicaid regulations?

Working up scenarios that withdraw assets by simulating the withdrawal of an increasing annuity taking into account inflation, various rates of return over time, tax rates, RMDs, IRA conversions, estate planning, etc. etc. still needs to have beside it the real scenario and real possibility that medical issues may at any point severely diminish funds or lead to bankruptcy.

One can always adjust the assumptions for the increasing (inflationary) annuity and the number of years of assumed life expectancy, etc, but without the "worst" case scenario beside the more or less steady withdrawal pattern, one can fool oneself into thinking all will be fine forever. But in the real world, you can't count on it. Medical inflation and long term care are the scariest things out there when it comes to providing for one's retirement, unless assets at retirment are well into the millions.
You bring up a tough subject because the future is unknown.
Historically most people don't last more than 3 years in a nursing home though the 10 years you worry about is a possibility, it is a low risk possibility.
Historically as we age we spend less money until expensive assistance and end of life care is needed allowing you to save a bit extra to pay for such expenses if they arise.
The fact remains is that there is no way to know how much you will need if any at all. You may die in your sleep or be healthy except for sever dementia that can last over a decade as you alluded to.

In your instance you have a few ways to mitigate those costs.
1) Buy expensive long term care insurance
2) Live on less so that you save enough for the small chance of needing such extended care
3) Eventually sell the house to cover some of those costs
4) Go broke and allow Medicaid to cover those costs.

For one thing, everyone in my family has agreed that we will not be performing any life extending procedures if there is no quality of life for that person. That will for sure decrease though not eliminate our risk of prolonged end of life care expenses. Next, we accept the possibility that we may need to use up all our money to cover end of life care and we are okay with not leaving an inheritance if that happens. It is not ideal, but that is a possible eventuality we are ok with.

Edit: Just wanted to add one more thing. If you find yourself in one of these facilities that also means you are not spending on going out to restaurants or traveling. Your other expenses will go down allowing to divert finances towards end of life care expenses.
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Re: Kitces guard rail approach to safe withdrawal

Post by Marseille07 »

willthrill81 wrote: Sun Sep 26, 2021 10:08 am
nisiprius wrote: Sun Sep 26, 2021 10:03 amI consider myself to have more spreadsheet energy than average, but there's no way I'm going to maintain a spreadsheet and debugging and auditing it to make sure it matches the strategy, and make an monthly ceremony of running the numbers to figure out how much I can withdraw each month.
Have you considered moving to annual withdrawals? The tiny reduction in expected returns might be worth only doing the work once a year instead of 12 times.
I think annual withdrawals are too infrequent. Ideally, if you overspend then you want to catch & correct it sooner rather than next year.
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Re: Kitces guard rail approach to safe withdrawal

Post by Derpalator »

MathWizard wrote: Fri Sep 24, 2021 12:42 pm
Brianjp18 wrote: Thu Sep 23, 2021 6:34 pm
MathWizard wrote: Thu Sep 23, 2021 8:18 am You did not give the reference to the source if your quote, so I can't go back to the source, but my guess is that you take 6% and perhaps stay in that rail, effectively making the WR a constant percentage, which may mean that you are continually cutting your withdrawals.

The other approach is a reset to 5% , like it would be if you had retired one year later with the current balance. That seems a safer approach. I plan assuming a large drop on the day after I retire, so that I know that I can respond that way.

No withdrawal plan is guaranteed.

Another strategy is to not take the inflation adjustment in years where there is a large portfolio decline.
Here’s the article: https://www.kitces.com/blog/url-upside- ... al-wealth/

It’s near the bottom Of the article under the heading dynamic spending rules. Maybe you can make more sense of it, but he doesn’t seem to explain his approach to how much you would cut back in the case that your withdrawal exceeds the 6% guardrail. Basically would you simply pull 6% of your portfolio or would you reduce last years withdrawal a certain percentage? Not really sure.
Thanks for the reference.

If you click on the modified Guyton rules link, you get:

Paraphrasing:
1) Original Guyton rule: Normal inflation adjustment each year, except NO adjustment on years with negative portfolio return
2) Modified Guyton: Modify rule 1 to allow adjustment if the average of the previous two years would support the normal adjustment.

Notice that 1 adjusts only for the downside, and 2 avoids the adjustment due to a whipsaw in returns , negative return followed by
huge positive return, but never adjusts upwards more than inflation.

Now, Kitches' guardrail approach (call it 3)
3) Use #2, but adjust upwards when portfolio has grown a lot.
So chose above the 4% rule (which historically has over a 95% sucess rate with any adjustment)
Then apply rule 2, but if you hit a guardrail, stop at that.

So if you start with WR of 5% of portfolio, and chose guardrails of 4 and 6%,
a) Adjust each year for inflation:
i) Except not if a bad year (negative return) which was not preceded by a great year.
(2 year average return would have given you inflation adjustment both years)
Then:
Test new WR.
a) If new WR exceeds 6% of portfolio, take only 6%, and use that for further adjustments
b) If new WR is lower than 4% , take 4% and use that as a base for further adjustments.

A. So unless once you hit 6%, you will stay there unless you get an inflation adjusted (real) return above 6%
B. Once you hit 4%, you would stay at 4% of portfolio guardrail as long as your real return exceeds 4%.

Consequences:
A. Keeps you from ever running out of money, but withdrawals may keep dwindling if you set too high a guardrail.
B. Lets you capture some upside potential, but you can't set it too high.
Above is why I prefer ABW/TPAW: just a few things to think about (expected real returns of equities for next year, and 10 year TIPs yield) and then just a simple amortization calculation. Attempting to read about Guyton-Klinger guardrails somehow always leads to my eyes crossing and my brain cramping. Do love Kitces though. Cheers.
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Re: Kitces guard rail approach to safe withdrawal

Post by sixtyforty »

I also use ABW and prefer it over the other withdrawal systems. The downside, if there is one, is choosing an accurate r. Just a %0.5 variation can make a huge difference in the withdrawal amount. I'm tempted to create a separate thread to find out what others are using for r and how it's derived.
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Re: Kitces guard rail approach to safe withdrawal

Post by willthrill81 »

sixtyforty wrote: Mon Sep 27, 2021 8:14 am I also use ABW and prefer it over the other withdrawal systems. The downside, if there is one, is choosing an accurate r. Just a %0.5 variation can make a huge difference in the withdrawal amount. I'm tempted to create a separate thread to find out what others are using for r and how it's derived.
I suspect that the most common means for bonds will be starting real yields (i.e., TIPS of appropriate duration) and for stocks will be either using a historic average or a CAPE-derived estimate (e.g., 1/CAPE, regression estimate of CAPE as shown in this thread). Based on what I know right now, for stocks I'd probably use an average of a regression estimate of CAPE and an estimate from the average equity allocation. Also, I'd cap the growth rate in the ABW model at something like 6% real.
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Re: Kitces guard rail approach to safe withdrawal

Post by WoodSpinner »

heyyou wrote: Sun Sep 26, 2021 4:26 pm Just another topic drift because the OP did post that he/she is far from retiring and is just looking at spending methods to see a target savings amount as the reciprocal of a spending %.

My preference is the RMD spending method. It is the RMD % for your age, times your recent annual portfolio value, plus spending your annual dividends and interest. I like its relatively small, embedded annual changes instead of my needing to monitor for a threshold, if a more substantial reduction is needed. There are RMD % for all ages due to the required slow withdrawals on inherited IRAs, so early retirees have noticeably lower initial WD percentages, but spending the dividends and interest do help boost early retirement income.

As your portfolio value varies this year, that is an early warning about next year's spending amount when using the RMD method.
Query ….

Do you find the RMD withdrawal approach matches your desired spending pattern?

In my case, we plan to spend a lot more at ages 60-70 than 70-80 etc. OurGoGo Years are really important to our vision of a successful Retirement.

WoodSpinner
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Brianjp18
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Re: Kitces guard rail approach to safe withdrawal

Post by Brianjp18 »

MathWizard wrote: Sat Sep 25, 2021 10:36 am It is interesting, and I am considering a ratcheting approach
where I loosen the reins if the portfolio performs fantastically in retirement, but as with most, I am more concerned about the downside. I can always deal with too much money, the opposite not do much.
When Kitces speaks of ratcheting, he assumes the 4% rule is a safe floor income based on Bengen's work showing that you would make it 30 years, even retiring during the worst possible times. If you go with the 4% rule and adjust a bit during bad markets, seems there would be minimal risk in ratcheting up when your portfolio grows above the initial amount. Seems like he suggests if your portfolio grows 50% above your initial amount, pull an extra 10% out. Would you follow something along those lines if you followed some form of ratcheting? If you plan to pull more out when things are doing well, what would you set in place to adjust for the bad years?
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Brianjp18
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Re: Kitces guard rail approach to safe withdrawal

Post by Brianjp18 »

vanbogle59 wrote: Sat Sep 25, 2021 10:52 am I desperately do NOT want to wing it.

My current solution is to stick with constant dollar, but re-evaluate once a year.

What would be your red flag triggers and how would you adjust when you re-evaluate each year?

I'm even willing to front-load for specific expenses (like say a travel budget for the first 10 years). I'm lucky to have enough extra for that.
This tool allows that sort of analysis using the tried and true "what happened in the past" method: https://calculator.ficalc.app/

If someone retiring decides they need to generate 40K a year from their investments (general expenses...not including vacation) and they hit 1million and decide to retire using the 4% constant dollar....I was wondering how one would plan to travel in early retirement. Is the key to just include expected travel expenses into what you need a year? or create a specific travel fund?

What would be your technique to front-load, as you mention in your post? Does that mean taking a bit more out in the earlier years of retirement? How would you systematically go about that?


I'm hoping the combination of yearly re-evaluation, built-in cushion and delayed SS will naturally handle both SORR and the desire to spend more earlier. If I'm unnecessarily leaving some money on the table, I'm OK with that too.
It's comforting to know other methods predict higher SWRs than I will be choosing.

:sharebeer
randomguy
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Re: Kitces guard rail approach to safe withdrawal

Post by randomguy »

Brianjp18 wrote: Tue Sep 28, 2021 10:32 pm
vanbogle59 wrote: Sat Sep 25, 2021 10:52 am I desperately do NOT want to wing it.

My current solution is to stick with constant dollar, but re-evaluate once a year.

What would be your red flag triggers and how would you adjust when you re-evaluate each year?

I'm even willing to front-load for specific expenses (like say a travel budget for the first 10 years). I'm lucky to have enough extra for that.
This tool allows that sort of analysis using the tried and true "what happened in the past" method: https://calculator.ficalc.app/

If someone retiring decides they need to generate 40K a year from their investments (general expenses...not including vacation) and they hit 1million and decide to retire using the 4% constant dollar....I was wondering how one would plan to travel in early retirement. Is the key to just include expected travel expenses into what you need a year? or create a specific travel fund?

What would be your technique to front-load, as you mention in your post? Does that mean taking a bit more out in the earlier years of retirement? How would you systematically go about that?


I'm hoping the combination of yearly re-evaluation, built-in cushion and delayed SS will naturally handle both SORR and the desire to spend more earlier. If I'm unnecessarily leaving some money on the table, I'm OK with that too.
It's comforting to know other methods predict higher SWRs than I will be choosing.

:sharebeer
Your vacations need to come out of your 40k if you only have 1 million dollars. If you have more money you can make vacation funds or just shove the money into the main account and have more income.

If you want to front load expenses, you might want to split stuff up since the money you are spending in 5-10 years has to be a more conservative than money you don't need for 15-30. For example, if you have say 1.5 million, you could plan on 60k/year for the next 30 years. But you could also do like 70k/year for 10 years , and then like 50k for the next 20. A reasonable way of doing that would be something like 1.3 million in a 50/50 fund and 200k in a bond ladder.

The thing with SWR is that by definition, the odds are they are way too conservative. You are planning for a bottom 5% situation but 95% of the time, that situation isn't going to show up. Odds are our bond ladder guy above will be able to take out 60-70k from their portfolio after 10 years if they are on a normal path where that 1.3million has grown in real dollars to like 1.6m. But you also have to accept that you might have to cut the spending to 50k if your first 10 years aren't good.
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vanbogle59
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Re: Kitces guard rail approach to safe withdrawal

Post by vanbogle59 »

Brianjp18 wrote: Tue Sep 28, 2021 10:32 pm
vanbogle59 wrote: Sat Sep 25, 2021 10:52 am I desperately do NOT want to wing it.

My current solution is to stick with constant dollar, but re-evaluate once a year.

What would be your red flag triggers and how would you adjust when you re-evaluate each year?

I'm even willing to front-load for specific expenses (like say a travel budget for the first 10 years). I'm lucky to have enough extra for that.
This tool allows that sort of analysis using the tried and true "what happened in the past" method: https://calculator.ficalc.app/

If someone retiring decides they need to generate 40K a year from their investments (general expenses...not including vacation) and they hit 1million and decide to retire using the 4% constant dollar....I was wondering how one would plan to travel in early retirement. Is the key to just include expected travel expenses into what you need a year? or create a specific travel fund?

What would be your technique to front-load, as you mention in your post? Does that mean taking a bit more out in the earlier years of retirement? How would you systematically go about that?


I'm hoping the combination of yearly re-evaluation, built-in cushion and delayed SS will naturally handle both SORR and the desire to spend more earlier. If I'm unnecessarily leaving some money on the table, I'm OK with that too.
It's comforting to know other methods predict higher SWRs than I will be choosing.

:sharebeer
"how would you adjust when you re-evaluate each year?"
DW and I will meet on 11/1 each year. Fill in the calculator with our current numbers, and decide on next year's "salary".
If all is going well, we would hope to actually get a raise. But if things are going poorly, we would consider a haircut.
Just like we have with my actual salary for the last 30 years :D
Only difference is it is now a choice.

"If someone retiring decides they need to generate 40K a year from their investments...and they hit 1million and decide to retire ..."
2 ideas:
1) I remind myself over and over (I think one of the firecalc pages uses this analogy): The tools are like shovels. Useful. But don't mistake them for scalpels. They just are NOT that precise.
2) I am lucky enough to have built a substantial cushion. I don't actually NEED all 4%.

Important caveat: I'm not a zealous believer in a literal interpretation of 25X. Neither the 25, nor the X.
X:
How much do we "need"? It actually varies quite a bit.
What is the minimum we could get by on? WAY less than we actually spend.
How much do we "want"? I mean, come on. :moneybag :moneybag :moneybag
25:
The actual risks in the next 30 years that are NOT reflected in these projections are very large (personal, familial, societal, even global).
I have no real idea. All I have is a plan that I think is sensible, and the commitment to be flexible.


"What would be your technique to front-load"
e.g. 1M. Constant dollar SWR is 40K, which makes me comfortable to retire at 65.
What is the minimum I need to feel comfortable at 80? If that number is actually only 30K, then I can withdraw quite a bit more at 65.
And the calculators are useful for modelling that, I think.

Best of luck.
:beer
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