The actuarial toolkit can help us explore how much extra risk we're actually talking about, so we aren't making the decision based on gut feelings or arbitrary rules of thumb. Let's assume that blindly following your spreadsheet tells you the 35 years of retirement withdrawals look like this:
Code: Select all
-$49,581.35
-$39,771.50
-$28,897.07
-$32,712.39
-$36,564.45
-$32,662.52
-$30,529.42
-$30,372.92
-$31,388.71
-$27,856.95
-$32,035.54
-$34,460.89
-$34,258.65
-$41,060.55
-$45,666.00
-$42,809.42
-$44,776.90
-$50,931.24
-$46,051.02
-$54,745.74
-$55,465.87
-$57,734.08
-$53,111.12
-$64,683.60
-$68,338.21
-$54,817.24
-$39,828.97
-$45,087.63
-$50,396.95
-$45,018.90
-$42,078.84
-$41,863.13
-$43,263.20
-$38,395.36
-$44,154.73
What if a $21,000 spending cut in 24 months is too much to swallow? Or what if sub-$35,000 for a decade is too much to swallow?
So just give yourself a floor of $35,000! It isn't like the ABW Police are going to come arrest you for doing that.
Code: Select all
-$49,581.35
-$39,771.50
-$35,000.00
-$35,000.00
-$35,985.99
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$37,215.25
-$41,389.40
-$38,800.34
-$40,583.57
-$46,161.56
-$41,738.37
-$49,618.83
-$50,271.52
-$52,327.31
-$48,137.29
-$58,626.01
-$61,938.37
-$49,683.63
-$36,099.00
-$40,865.20
-$45,677.30
-$40,802.90
-$38,138.18
-$37,942.67
-$39,211.62
-$35,000.00
-$39,780.74
But just picking a number out of thin air for the floor feels a tad unsatisfactory. Why not $40,000? Heck, why not $45,000?
We can use our spreadsheet's Goal Seek in combination with the PMT function to find out what expected return is implied by a different withdrawal. And by looking at that implied expected return, we can see how much risk we are taking by adding a floor at a certain level and the decide whether we are comfortable with it or not.
edit: You also actually just use the spreadsheet function =RATE() to do this even easier in many simple scenarios. Which I swear I knew about but totally blanked on while writing this post.
In this case, let's say in that third year we decide that cutting spending from $39,000 to $29,000 is just too much. Especially since we just cut from $49,000 to $39,000 the year before. Sure there's been a massive stock market crash and high inflation...but who wants to cut $20,000 in spending in the first 2 years of retirement? You could have just kept working if you're going to do nothing but stay at home and eat cheese & bologna sandwiches while watching free-to-air TV.
If we withdraw $35,000 instead of $29,000 in Year 3...what does that mean? Goal Seek tells us that it means we are assuming a 5.35% expected (real) return. And we can repeat that same calculation every single year. These are the implied expected returns assuming a $35,000 spending floor:
Code: Select all
5.35%
4.37%
3.46%
4.47%
5.19%
5.39%
5.21%
6.73%
5.43%
4.78%
4.97%
3.01%
Maybe you decide that an implied expected return of 5.35% is way too much Riverboat Gambler for your tastes. And 6.73% is definitely way too much; might as well just invest in Bitcoin if you're that crazy, right? (Especially since these are the expected return for the entire remainder of your retirement; e.g. 20+ years.)
1) But keep in mind that your original 3.7% expected return was based on assuming future market crashes. At this point, we're sitting at -40% returns, so the market crash is in the past. Of course, there are no guarantees of mean reversion (though SWR assumes it) but a lot people are pretty comfortable assuming future expected returns will be higher after one of the largest market crashes in US history. (And, as we saw with the actual withdrawals, it worked out that way.)
2) But the even bigger point is that now you have the information to understand how much risk you are taking! You aren't just blindly following "increase withdrawals by $1,230 because that's what Guyton-Klinger said to do".
And my gut feeling is that when most Bogleheads see the implied risk that they are actually signing up for, they'll be more hesitant to just blindly follow some other withdrawal scheme. Because actually nothing I did above actually has anything to do with ABW per se. You could apply exactly the same analysis to SWR withdrawals or Guyton-Klinger withdrawals or McClung's EM or anything else that has some kind of floor or guardrails. Because when SWR tells you to keep withdrawing $40,000 after a 40% market crash, it is also making an implicit expected return forecast. But now you can open up the black box and see if you're comfortable with its assumptions.
The actuarial toolkit allows us to make the implicit explicit and then use that to make more informed decisions.