Watch out for hidden risk tolerance assumptions in SWR claims

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Re: "Stocks increase SWR" assumes a risk-tolerant investor

Post by willthrill81 »

vineviz wrote: Thu Aug 04, 2022 10:30 am
willthrill81 wrote: Thu Aug 04, 2022 10:02 am Statistics can never be used to indicate that there is literally a 0% probability of any event occurring.
There's an oppositional streak in me that is dying to point out something like "well, it depends on how many decimal points you put after the zero in 0%".
Quite true, but even then, the statistics most often used assume simple random sampling of independent events, and those are assumptions rarely, if ever, satisfied in the realm of finance (or any of the social sciences for that matter). That doesn't mean that the statistics are meaningless but only that we can never be as confident in them as the numbers suggest we can.
vineviz wrote: Thu Aug 04, 2022 10:30 am But I'm above that kind of snark, thankfully. ;)
Thankfully. :D
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

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vineviz wrote: Thu Aug 04, 2022 1:45 pm
billaster wrote: Thu Aug 04, 2022 1:41 pm Life expectancy is 50% probability. These people are planning way beyond life expectancy to very small percentages of being alive combined with an even smaller percentage of being broke.
Planning on a retirement which exceeds life expectancy is precisely what people who understand probabilities SHOULD be doing.
I think that the point is that if one is going to start examining probabilities (and I'm very suspect of the accuracy of such long-term probabilities for multiple reasons), one should look at the joint probability of both outliving one's money and living long enough to do so.

A 10% probability of living to age 100 combined with a 10% probability of being broke by then should likely be viewed by all but the most conservative retirees as very safe since the joint probability is only 1%.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by vineviz »

willthrill81 wrote: Thu Aug 04, 2022 3:55 pmsons), one should look at the joint probability of both outliving one's
A 10% probability of living to age 100 combined with a 10% probability of being broke by then should likely be viewed by all but the most conservative retirees as very safe since the joint probability is only 1%.
For planning purposes, you want to using conditional probabilities not joint probabilities.

It might seem counter intuitive, but being alive and broke is much worse than being dead and rich.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by Nestegg_User »

gmaynardkrebs wrote: Thu Aug 04, 2022 1:31 pm
nigel_ht wrote: Thu Aug 04, 2022 1:14 pm
billaster wrote: Thu Aug 04, 2022 1:06 pm It seems rather odd to insist on, say, a 95% success rate for money lasting 30 years when the odds of a 65-year-old even being alive in 30 years is only 10%.

So even with Peter Lynch's 7% withdrawal, which some call "unrealistic", your odds of being a broke 95-year-old are only somewhere around 5% to 10%.

It's sort of like insisting that airplanes be 100% safe when you are more likely to die driving to the airport.
Yes, but who wants to be the unlucky 95 year old who outlived their money?
I agree and under the best of circumstances, the healthcare costs at age 95 year old have got to be much, much higher than at 65 or 70, even if one is not in a nursing home. Seems to me one would want to plan for a "fat tail" of income needs after age 90, at the very latest. I wonder how many people do. I never really thought about myself, and I'm no youngster.
"healthcare" for the significantly elderly, while being much more expensive, is only part of the their expenses (and not even the major expense... witness the govs BLS report (this is for 2014)...
https://www.bls.gov/opub/btn/volume-5/s ... ricans.htm

notice in Table 2 that healthcare doesn't come close to being the most expensive aspect of living expenses (housing was)

This aspect and some others can be somewhat insured against, by CCRC's etc; in addition... the 95 yo would also have to be of sufficient cognitive ability, as well, to be concerned (their relatives might have a different take on that)

In addition, the spending is very skewed:
https://onlinelibrary.wiley.com/doi/ful ... 2016.12106
with actually the poorer of the population spending the most, even after considering that a very large percentage of the costs are borne by the government.
Those with adequate means also can participate in the purchase of SPIA's and other forms of insurance that obviates
most of that concern.


Edit: as for me- - while there's a very high likelihood of my passing in 12 - 20 years, my planning considered my not living past age 92 (which is about two std dev above the mean) and only one person in any of the distant lineage has ever reached that, and my past health history and exposures also likely predispose my making beyond that age. Our planning takes that into consideration while also considering that there is some likelihood of my spouse reaching just above that age.
Hence, this was considered in SS claiming and use of 3.5% as reasonable (max) WR; if we end up with a more favorable return in our later retirement (already retired 7 years) we might adjust upwards... but we needed to start with a conservative expectation and then welcome any upside.
Last edited by Nestegg_User on Thu Aug 04, 2022 4:21 pm, edited 1 time in total.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

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vineviz wrote: Thu Aug 04, 2022 3:59 pm It might seem counter intuitive, but being alive and broke is much worse than being dead and rich.
Considering that millions in the U.S. and many more millions across the world are both alive and broke, I think that they would disagree.
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Re: "Stocks increase SWR" assumes a risk-tolerant investor

Post by afan »

vineviz wrote: Thu Aug 04, 2022 8:53 am

In reality, planning for a truly 0% failure rate using forward-looking estimates would be insanely conservative whereas planning for a 0% failure rate using backward-looking outcomes is probably more aggressive than most people understand.
I agree that planning for a 0% failure rate is conservative. I would hardly call it insane.

No more insane than holding money in an FDIC-insured account due to the zero percent expected risk of loss.

Agree that it would lead to a lower withdrawal rate than more aggressive assumptions. But is it insane to want take to zero the risk of running out of money when one is too old or sick to generate earned income?
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by dboeger1 »

Tamalak wrote: Thu Aug 04, 2022 9:06 am What I don't like about these "odds your money will last" sites is they seem to assume that you're equally likely to retire every year.

But people are much more likely to hit their number when the market was high. Nobody hit it at the bottom of 2008. So I feel like it might be overly optimistic.
This is an excellent point. I've been reading ERN's SWR series recently, and one of the points he frequently mentions is that because stock returns are correlated with CAPE ratio, you may have to adjust SWR lower based on current market conditions. It's easy to get tricked into thinking you have enough money when your paper wealth is inflated by high prices, but that doesn't mean you'll actually get average real returns starting from that point (to be fair, the distribution of outcomes was very wide in all CAPE bands, it just shifted better or worse). So for most people, something like the 4% rule should probably be renamed the "most likely 3.5% but maybe 4% or higher depending on valuations when you retire" rule. Doesn't roll off the tongue quite as well though, does it?

I think you touched on an interesting point too, which is that people like to come up with "their number", but having a CAPE-dependent SWR suggests that there is no single number. The number needs to be adjusted for reasonable equity return assumptions based on current valuations.

I'm increasingly becoming convinced that 3% SWR is a much more reasonable target than 4%, particularly for people on the earlier end of the retirement spectrum. It's sad, but I suppose it's better to end up with more money than to run out of it in retirement. I can see why ERN has been called The Grinch of Early Retirement.

The good news is that it shouldn't take very long to reach 3% SWR from 4%; the required balance is only 1/3 more. With absolutely no new contributions and a 5% real rate of return, it takes just shy of 6 years. Obviously, the exact time depends greatly on market returns and other factors, but with new contributions added into the mix, I don't think it's crazy to assume that difference could be made up in 3-4 years of additional work. Now, is that always a valid option for everybody? No, some people are forced out of work, work in toxic environments, choose to become stay-at-home parents, etc. I don't want to make it sound like it's nothing. But for people of means on the edge of retirement, I think it's comforting to know that just 3-4 more years of work can go from a 4% SWR with a lot of assumptions built in to a 3% SWR which has historically supported very long retirements through pretty rough market conditions. Just something to consider.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

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willthrill81 wrote: Thu Aug 04, 2022 3:55 pm
vineviz wrote: Thu Aug 04, 2022 1:45 pm
billaster wrote: Thu Aug 04, 2022 1:41 pm Life expectancy is 50% probability. These people are planning way beyond life expectancy to very small percentages of being alive combined with an even smaller percentage of being broke.
Planning on a retirement which exceeds life expectancy is precisely what people who understand probabilities SHOULD be doing.
I think that the point is that if one is going to start examining probabilities (and I'm very suspect of the accuracy of such long-term probabilities for multiple reasons), one should look at the joint probability of both outliving one's money and living long enough to do so.

A 10% probability of living to age 100 combined with a 10% probability of being broke by then should likely be viewed by all but the most conservative retirees as very safe since the joint probability is only 1%.
This is exactly nisi's point. Each person has to decide how they feel about that 1% risk.

Some people would cheerfully go about their lives pretending 1%=0. Others could not sleep at night.
Depends on how each individual feels about risk.

Of course, there is also some risk, perhaps smaller, of running out of money earlier. But the risk of living to, say, 90, is much higher than of living to 100. One should look at all the probabilities, not focus on one extreme case of an age that is highly unlikely to be attained.
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Re: "Stocks increase SWR" assumes a risk-tolerant investor

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afan wrote: Thu Aug 04, 2022 4:22 pm But is it insane to want take to zero the risk of running out of money when one is too old or sick to generate earned income?
Yes?

First, as others rightly pointed out it is literally impossible to get the true risk all the way to zero.

Second, the amount of risk aversion that would be required to push into that range of outcomes would so far outside the bounds of typically observed risk aversion that I'd be shocked if it weren't associated with levels of anxiety that could be clinically diagnosed.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

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willthrill81 wrote: Thu Aug 04, 2022 4:07 pm
vineviz wrote: Thu Aug 04, 2022 3:59 pm It might seem counter intuitive, but being alive and broke is much worse than being dead and rich.
Considering that millions in the U.S. and many more millions across the world are both alive and broke, I think that they would disagree.
To get a balanced survey, you must include those who are dead and rich.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

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vineviz wrote: Thu Aug 04, 2022 4:30 pm
willthrill81 wrote: Thu Aug 04, 2022 4:07 pm
vineviz wrote: Thu Aug 04, 2022 3:59 pm It might seem counter intuitive, but being alive and broke is much worse than being dead and rich.
Considering that millions in the U.S. and many more millions across the world are both alive and broke, I think that they would disagree.
To get a balanced survey, you must include those who are dead and rich.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

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afan wrote: Thu Aug 04, 2022 4:29 pm
willthrill81 wrote: Thu Aug 04, 2022 3:55 pm
vineviz wrote: Thu Aug 04, 2022 1:45 pm
billaster wrote: Thu Aug 04, 2022 1:41 pm Life expectancy is 50% probability. These people are planning way beyond life expectancy to very small percentages of being alive combined with an even smaller percentage of being broke.
Planning on a retirement which exceeds life expectancy is precisely what people who understand probabilities SHOULD be doing.
I think that the point is that if one is going to start examining probabilities (and I'm very suspect of the accuracy of such long-term probabilities for multiple reasons), one should look at the joint probability of both outliving one's money and living long enough to do so.

A 10% probability of living to age 100 combined with a 10% probability of being broke by then should likely be viewed by all but the most conservative retirees as very safe since the joint probability is only 1%.
This is exactly nisi's point. Each person has to decide how they feel about that 1% risk.

Some people would cheerfully go about their lives pretending 1%=0. Others could not sleep at night.
Depends on how each individual feels about risk.

Of course, there is also some risk, perhaps smaller, of running out of money earlier. But the risk of living to, say, 90, is much higher than of living to 100. One should look at all the probabilities, not focus on one extreme case of an age that is highly unlikely to be attained.
I agree, though as has been pointed out repeatedly, the risk of premature portfolio depletion can never be zero, no matter what any mathematical model indicates. As such, those who would be 'pretending' would not be the those who acknowledge a '1% risk' but rather those that think their risk is 0%.

BTW, some interesting research over a decade ago found that the happiest people surveyed estimated the likelihood that they would personally experience a very negative event like having a heart attack as being substantially lower than the actual likelihood. Those who had an accurate view of such likelihoods were also likely to suffer from mild depression.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

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vineviz wrote: Thu Aug 04, 2022 4:30 pm
willthrill81 wrote: Thu Aug 04, 2022 4:07 pm
vineviz wrote: Thu Aug 04, 2022 3:59 pm It might seem counter intuitive, but being alive and broke is much worse than being dead and rich.
Considering that millions in the U.S. and many more millions across the world are both alive and broke, I think that they would disagree.
To get a balanced survey, you must include those who are dead and rich.
Even then, you'd have to adjust for significantly over-sampling of zombies, most of whom work at at home, often at night, and are thus more likely to answer the phone than mainstream deceased.
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Re: "Stocks increase SWR" assumes a risk-tolerant investor

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vineviz wrote: Thu Aug 04, 2022 4:29 pm
afan wrote: Thu Aug 04, 2022 4:22 pm But is it insane to want take to zero the risk of running out of money when one is too old or sick to generate earned income?
Yes?

First, as others rightly pointed out it is literally impossible to get the true risk all the way to zero.

Second, the amount of risk aversion that would be required to push into that range of outcomes would so far outside the bounds of typically observed risk aversion that I'd be shocked if it weren't associated with levels of anxiety that could be clinically diagnosed.
A clinical diagnosis of anxiety is hardly the same as insane.

No one knows what the realized risk will be.

However, using the same approaches under discussion here, it is quite possible to save and spend to produce an expected failure rate of zero.

To take an extreme example, one can imagine a sequence of events that would render Warren Buffett broke before he dies. But getting there requires postulating events so extreme that nothing close to them has ever occurred. Thus, historical worst case or Monte Carlo with reasonable constraints on parameters would report zero.

And you do not need to be Mr. Buffett to get to zero. A 1% withdrawal rate would get you there, provided you do not wander outside the parameter values usually considered in this sort of planning.

If China conquers the entire world tomorrow, nationalizes all industries and declares all investments worthless, then sure, Buffett's assets could become worthless, along with everyone else's. But we are not talking about these sort of extreme cases.
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Re: "Stocks increase SWR" assumes a risk-tolerant investor

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afan wrote: Thu Aug 04, 2022 4:47 pmAnd you do not need to be Mr. Buffett to get to zero. A 1% withdrawal rate would get you there, provided you do not wander outside the parameter values usually considered in this sort of planning.
That would indeed be a very safe withdrawal strategy as it would most likely result in you working until you died trying to get to 100x your annual expenses. :wink: It would also be a great strategy for maximizing your heirs' happiness.

In all seriousness, there's little need for anyone to set aside more years of annual expenses than you need to reach age 100, at least when TIPS yields are around 0%, unless they want an additional cushion for unplanned expenses.
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Re: "Stocks increase SWR" assumes a risk-tolerant investor

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afan wrote: Thu Aug 04, 2022 4:47 pm A clinical diagnosis of anxiety is hardly the same as insane.
I hope it is apparent to most readers that the phrase "insanely conservative" was not a literal medical diagnosis.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

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70 year old couple.
$13M in financial assets
Each collects the maximum SS benefit
Withdraw 1% per year=$130,000
Total $230,000

Even after taxes, they can have a quite comfortable lifestyle without spending that much.

Would it be even "mildly pathologic" for them to decide not to quadruple their spending, buying a bunch of junk they don't want, just to burn through the money?

And yes, I did interpret "clinically diagnosed" as meaning "clinically diagnosed." What else could it mean?

If our couple is still working, then they may be drawing nothing from savings, rather adding to them. Having had the sorts of jobs that let them reach that asset level, they may be saving more than $230,000 per year.

This hypothetical is not available to most people. On the other hand, there are many who fit this bill. The ones I know seem to be high functioning. If they have clinical depression it does not show.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

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afan wrote: Thu Aug 04, 2022 5:31 pm 70 year old couple.
$13M in financial assets
Each collects the maximum SS benefit
Withdraw 1% per year=$130,000
Total $230,000

Even after taxes, they can have a quite comfortable lifestyle without spending that much.

Would it be even "mildly pathologic" for them to decide not to quadruple their spending, buying a bunch of junk they don't want, just to burn through the money?

And yes, I did interpret "clinically diagnosed" as meaning "clinically diagnosed." What else could it mean?

If our couple is still working, then they may be drawing nothing from savings, rather adding to them. Having had the sorts of jobs that let them reach that asset level, they may be saving more than $230,000 per year.

This hypothetical is not available to most people. On the other hand, there are many who fit this bill. The ones I know seem to be high functioning. If they have clinical depression it does not show.
The low WR in that example is not far too low if it truly provides the couple with all their desired spending.

But the 'problem' in such a situation is that most households would have had to work far longer than necessary to build the assets needed to very conservatively produce the $130k of retirement income. Historically, it would have taken about a decade for a 100% stock allocation to take 25x (i.e., 4% WR) to 50x (i.e., 2% WR), and another decade to take 50x to 100x (i.e., 1% WR). And allocations with more fixed income would have usually taken even longer to get there.

A couple of 70 year olds with $13m and a 1% withdrawal rate will surely make some heirs and/or charities happy though.

However, it seems likely that such a couple probably got there by doing something like selling a business they built, real estate that experienced tremendous appreciation, etc. rather than doing it via regular contributions and investing in a fairly typical portfolio.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by tasteo »

Kevin K wrote: Thu Aug 04, 2022 8:40 am Tyler @ Portfolio Charts has a nifty set of tools for looking at SWR's along with several articles that taken together are far and away the best updating of Bengen's work I've seen. In addition to being able to model SWR and PWR (Perpetual Withdrawal Rate) for any allocation he also provides those numbers for a large number of popular "lazy" portfolios, including Boglehead's classics like the 60:40 and Three Fund.

https://portfoliocharts.com/portfolio/withdrawal-rates/
I agree that Tyler's stuff is "nifty" and what's missing here in this post/analysis is the inclusion of investments other than strictly stocks and bonds (e.g. REITS, gold, etc.) which according to Tyler's analysis on Portfolio Charts website can have a real impact on increasing not only the SWR but the PWR. Now, I realize that alternative investments may be anathema to the some Bogleheads, but a proper allocation to certain alternatives seems to have a real impact, with regular and systematic rebalancing of course, as demonstrated on the Portfolio Charts website. And this year is a good example (so far) of the value of something like Gold in one's balanced portfolio. Ishares Gold Trust Micro Fund (IAUM) is "only" down ~ -2% YTD. Up 1.67% today. I have about a 5-7% total allocation of this across mine and my wife's retirement portfolio. To compare, ITOT (US total stock fund) is ~ -13% YTD and IUSB (total bond fund) is ~ -8%. Gold, isn't really correlated with stocks nor bonds and serves a purpose that has held up through history and likely will continue to. Smooth's things out and according to Tyler's data, can have a positive impact on increasing PWR!

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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by nigel_ht »

willthrill81 wrote: Thu Aug 04, 2022 3:55 pm
vineviz wrote: Thu Aug 04, 2022 1:45 pm
billaster wrote: Thu Aug 04, 2022 1:41 pm Life expectancy is 50% probability. These people are planning way beyond life expectancy to very small percentages of being alive combined with an even smaller percentage of being broke.
Planning on a retirement which exceeds life expectancy is precisely what people who understand probabilities SHOULD be doing.
I think that the point is that if one is going to start examining probabilities (and I'm very suspect of the accuracy of such long-term probabilities for multiple reasons), one should look at the joint probability of both outliving one's money and living long enough to do so.

A 10% probability of living to age 100 combined with a 10% probability of being broke by then should likely be viewed by all but the most conservative retirees as very safe since the joint probability is only 1%.
Not if you follow risk assessment.

If you assume being alive at 100 but broke is a major severity but the probability is rare then the risk is moderate.

Image

Different folks and industries have slightly different matrixes but usually they still want to see a mitigation plan for moderate risks. I pulled this one randomly off the internet but it seems like a pretty standard 5x5 risk matrix.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by willthrill81 »

nigel_ht wrote: Thu Aug 04, 2022 9:33 pm
willthrill81 wrote: Thu Aug 04, 2022 3:55 pm
vineviz wrote: Thu Aug 04, 2022 1:45 pm
billaster wrote: Thu Aug 04, 2022 1:41 pm Life expectancy is 50% probability. These people are planning way beyond life expectancy to very small percentages of being alive combined with an even smaller percentage of being broke.
Planning on a retirement which exceeds life expectancy is precisely what people who understand probabilities SHOULD be doing.
I think that the point is that if one is going to start examining probabilities (and I'm very suspect of the accuracy of such long-term probabilities for multiple reasons), one should look at the joint probability of both outliving one's money and living long enough to do so.

A 10% probability of living to age 100 combined with a 10% probability of being broke by then should likely be viewed by all but the most conservative retirees as very safe since the joint probability is only 1%.
Not if you follow risk assessment.

If you assume being alive at 100 but broke is a major severity but the probability is rare then the risk is moderate.
That's very subjective, and as I noted above, the probability of something that has nothing to do with one's portfolio or spending derailing one's retirement plans is almost certainly higher than even 10%.

But in reality, few here will blindly spend down their portfolio to depletion anyway, reverse mortgages could still be an option, SS benefits are still present, a SPIA might have been purchased along the way, etc. The point is that the probability of actual portfolio depletion is not known, and it likely isn't static anyway since most retirees here have significant control over their expenses and can and will adjust if needed along the way. That's why I don't lend much credence to MC simulations' estimated probabilities of 'success'.
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Re: Watch out for hidden risk tolerance assumptions in SWR cla

Post by PicassoSparks »

I’m continually amazed by people happy with the idea of a 1 in 20 chance of running out of money in retirement (assuming that the worst sequence of returns that will ever happen have already happened). Especially since by the time you figure out that you’ve run out of money it’s probably far too late to re-enter the workforce and make things up.

I’m similarly amazed by people planning to die exactly on their life expectancy date. You have a 50% chance of beating the date and also, the older you get, the longer your life expectancy (every year that you survive pushes your life expectancy back a little further). For Americans with the kind of resources to save excess wealth for retirement, life expectancy continue to improve overall. Medicine keeps advancing etc.

I know that the real answer is: Don’t commit to a fixed SWR rate on your retirement date, but instead plan on adjusting spending up and down depending on how things play out.


I am grateful for the perspective that if I’m not committed to 100% stocks, my AA doesn’t really matter much. My WR will matter much more.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by rossington »

What is certain is that one should strive to achieve as large a portfolio as possible. As a portfolio grows the more flexibility an investor will have for spending in retirement. Obviously tighter constraints are placed on spending in retirement if the pool of resources is too small over a given investment horizon. So IMHO a higher risk tolerance for the decades of one's investing until retirement (at least) makes sense. Being overly conservative can be costly later in life. But there are many determining factors to consider along the way.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by afan »

willthrill81 wrote: Thu Aug 04, 2022 6:46 pm
afan wrote: Thu Aug 04, 2022 5:31 pm 70 year old couple.
$13M in financial assets
Each collects the maximum SS benefit
Withdraw 1% per year=$130,000
Total $230,000

Even after taxes, they can have a quite comfortable lifestyle without spending that much.

Would it be even "mildly pathologic" for them to decide not to quadruple their spending, buying a bunch of junk they don't want, just to burn through the money?

And yes, I did interpret "clinically diagnosed" as meaning "clinically diagnosed." What else could it mean?

If our couple is still working, then they may be drawing nothing from savings, rather adding to them. Having had the sorts of jobs that let them reach that asset level, they may be saving more than $230,000 per year.

This hypothetical is not available to most people. On the other hand, there are many who fit this bill. The ones I know seem to be high functioning. If they have clinical depression it does not show.
The low WR in that example is not far too low if it truly provides the couple with all their desired spending.

But the 'problem' in such a situation is that most households would have had to work far longer than necessary to build the assets needed to very conservatively produce the $130k of retirement income. Historically, it would have taken about a decade for a 100% stock allocation to take 25x (i.e., 4% WR) to 50x (i.e., 2% WR), and another decade to take 50x to 100x (i.e., 1% WR). And allocations with more fixed income would have usually taken even longer to get there.

A couple of 70 year olds with $13m and a 1% withdrawal rate will surely make some heirs and/or charities happy though.

However, it seems likely that such a couple probably got there by doing something like selling a business they built, real estate that experienced tremendous appreciation, etc. rather than doing it via regular contributions and investing in a fairly typical portfolio.
Remember that the total income in this example is $230,000. Their after tax income would be greater than $130,000.

How long did they work to get there? In this hypothetical, they worked to 70, but may continue working.

Not everyone retires at the earliest opportunity. Some work far past the point at which they could afford to retire, c.f. Nancy Pelosi.
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Re: Watch out for hidden risk tolerance assumptions in SWR cla

Post by afan »

PicassoSparks wrote: Thu Aug 04, 2022 10:01 pm I’m continually amazed by people happy with the idea of a 1 in 20 chance of running out of money in retirement (assuming that the worst sequence of returns that will ever happen have already happened). Especially since by the time you figure out that you’ve run out of money it’s probably far too late to re-enter the workforce and make things up.

I’m similarly amazed by people planning to die exactly on their life expectancy date. You have a 50% chance of beating the date and also, the older you get, the longer your life expectancy (every year that you survive pushes your life expectancy back a little further). For Americans with the kind of resources to save excess wealth for retirement, life expectancy continue to improve overall. Medicine keeps advancing etc.

I know that the real answer is: Don’t commit to a fixed SWR rate on your retirement date, but instead plan on adjusting spending up and down depending on how things play out.


I am grateful for the perspective that if I’m not committed to 100% stocks, my AA doesn’t really matter much. My WR will matter much more.
Excellent points. Instead of "Anything that can happen will happen", they assume that "Anything that can happen has happened, in the last 150 years, in the US."

I would view going broke at age 90 as catastrophic. Pascal's wager as to how to respond to that.
Last edited by afan on Fri Aug 05, 2022 6:54 am, edited 1 time in total.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by nisiprius »

vineviz wrote: Thu Aug 04, 2022 1:45 pm
billaster wrote: Thu Aug 04, 2022 1:41 pm Life expectancy is 50% probability. These people are planning way beyond life expectancy to very small percentages of being alive combined with an even smaller percentage of being broke.
Planning on a retirement which exceeds life expectancy is precisely what people who understand probabilities SHOULD be doing.
Indeed.

In fact, the whole point of SPIAs, which are pure insurance, is that an individual must plan and budget based on their maximum credible time in retirement, while an insurance company, paying out to a pool of policyholders, can prudently base its monthly payments on average life expectancy.

The difference isn't small. You can of course slice and dice the numbers many ways, but at a rough ballpark back-of-the-envelope number, the SSA table shows about a 20-year life expectancy for a 65-year-old woman, and a 3,021/87,807 = 3,4% chance of reaching age 100, higher than the chances of landing on the "Go To Jail" space in Monopoly. Female centenarians are not rare. For age 105, 382/87,807 = 0.4%, which may or may not be within a prudent planning range. It certainly isn't a "black swan" probability.

In other words, the required planning time frame for an individual is not-quite-double average life expectancy.

As we know from amortization-type calculations, a forty-year payment period is almost the same as a perpetuity. But a twenty-year period is not. Planning based on average life expectancy will lead to significant overspending.

The reasoning behind (prudent) SWR strategies is that you have built in enough of a margin of safety between investment earnings and spending that you can afford to "leave money on the table" (or leave it to your kids--leave a fluctuating, possibly steadily-shrinking amount to your kids).

"Margin of safety" is always problematical. Engineers tend to want more, financiers tend to want less.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by retiringwhen »

Nestegg_User wrote: Thu Aug 04, 2022 3:33 pm When one reaches a similar condition in their own retirement, do they just assume "well, in this other simulation the markets gave them enough additional returns that it didn't fail" or do they do the more prudent action and find a "Plan B" adjustment that might actually work.
Most of them stop buying plane tickets and beg their kids to come visit instead.
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Re: Watch out for hidden risk tolerance assumptions in SWR cla

Post by nigel_ht »

PicassoSparks wrote: Thu Aug 04, 2022 10:01 pm I’m continually amazed by people happy with the idea of a 1 in 20 chance of running out of money in retirement (assuming that the worst sequence of returns that will ever happen have already happened).
You can pick a SWR that had 100% success rate. This might only be 3.5%.
I’m similarly amazed by people planning to die exactly on their life expectancy date.
You can also adjust a SWR for any desired duration. It might end up being closer to 3% than 4%.

This is before SS is factored in.
I know that the real answer is: Don’t commit to a fixed SWR rate on your retirement date, but instead plan on adjusting spending up and down depending on how things play out.
SWR is a ceiling and not a floor…no one is forced to withdraw the full SWR value…but if you go above there has been at least one historical sequence that ran out of money.
I am grateful for the perspective that if I’m not committed to 100% stocks, my AA doesn’t really matter much. My WR will matter much more.
I believe most bogleheads are lucky enough that between SS and portfolio they don’t need to withdraw at the SWR rate.

So most bogleheads can do any of the various withdrawal strategies and be fine.

But if your savings is low then your WR tends to get pegged at or above the SWR rate.

For folks that want to FIRE $1m might be low savings…
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by ScubaHogg »

vineviz wrote: Thu Aug 04, 2022 3:59 pm
willthrill81 wrote: Thu Aug 04, 2022 3:55 pmsons), one should look at the joint probability of both outliving one's
A 10% probability of living to age 100 combined with a 10% probability of being broke by then should likely be viewed by all but the most conservative retirees as very safe since the joint probability is only 1%.
For planning purposes, you want to using conditional probabilities not joint probabilities.

It might seem counter intuitive, but being alive and broke is much worse than being dead and rich.
You want to expand on that? I’ve often thought it’s weird we don’t talk about joint probability of living a long time AND having a terrible SORR/running out of enough money (as always, in real dollars).
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Re: Watch out for hidden risk tolerance assumptions in SWR cla

Post by PicassoSparks »

nigel_ht wrote: Fri Aug 05, 2022 7:02 am SWR is a ceiling and not a floor…no one is forced to withdraw the full SWR value…but if you go above there has been at least one historical sequence that ran out of money.
It is a ceiling only if you commit to never reducing your WR after your retirement date, which is a level of inflexibility that I find unrealistic.

In an episode of the Rational Reminder devoted to the 4% rule, Michael Kitces points out that since small adjustments compound, if you slightly adjust your rate up and down depending on market conditions, you can start with a higher withdrawal rate and stay safe.
But when I look at this over time, if I just trim like a 3% inflation-adjustment out, not only does it mean you don't lift your spending this year, it means your baseline spending is now ever so slightly lower for every future year as well. If I lift your spending up, that compounds. If I don't lift your spending up, that compounds. And so if I just take out 3% inflation adjustment writ large over 30 years, the impact of that is actually five to 10 times more beneficial for your long-term retirement than doing that ((large but temporary)) cut for two years. And so the irony is it's both five to 10 times better for the longevity of your portfolio and hurts far less, like we barely even notice the inflation adjustment that doesn't happen. 10% or 20% cut for my spending for two years, like I'm going to notice that. That's a lifestyle change.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by H-Town »

willthrill81 wrote: Thu Aug 04, 2022 3:55 pm
vineviz wrote: Thu Aug 04, 2022 1:45 pm
billaster wrote: Thu Aug 04, 2022 1:41 pm Life expectancy is 50% probability. These people are planning way beyond life expectancy to very small percentages of being alive combined with an even smaller percentage of being broke.
Planning on a retirement which exceeds life expectancy is precisely what people who understand probabilities SHOULD be doing.
I think that the point is that if one is going to start examining probabilities (and I'm very suspect of the accuracy of such long-term probabilities for multiple reasons), one should look at the joint probability of both outliving one's money and living long enough to do so.

A 10% probability of living to age 100 combined with a 10% probability of being broke by then should likely be viewed by all but the most conservative retirees as very safe since the joint probability is only 1%.
Looking at it differently, the 90% of dying younger than 100 year old is the likely outcome. One also should take into account the declining quality of life as one gets over 60, 70, 80, or 90.

But dying old is not the biggest risk of SWR failure in my mind. Risk or divorce is. What is the going rate right now? 50% of marriage ends up in divorce? 2nd marriage and 3rd marriage even have more chance of divorce? Divorce means you divide everything in half after paying lawyers’ fees.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by vineviz »

ScubaHogg wrote: Fri Aug 05, 2022 7:34 am You want to expand on that? I’ve often thought it’s weird we don’t talk about joint probability of living a long time AND having a terrible SORR/running out of enough money (as always, in real dollars).
I think it is safe to say that a majority of people are averse to outliving their wealth.

Creating a financial plan that only extends the length of your expected life means that there a 50% chance of outliving your wealth. Because most people are loss averse, it must follow that most people should plan for some smaller probability than 50/50 of outliving their wealth.

Joint probabilities don't help us get to the answer we want here, because you can't be both dead and not dead at the same time.

Weighting consumption strictly by mortality would create a retirement consumption path that spends much more heavily early on and much less later on, without any regard to actual need or desire. Indeed, I could argue that the whole point of saving and investing is to smooth lifetime consumption: any approach that intentionally makes consumption LESS smooth should immediately be suspect.

Instead, most planners will use the loss aversion (or risk aversion) to help decide on the length of the fixed planning horizon that is appropriate for a client. Based on research and observation, it seems most people should pick their planning horizon based on a 10% or 25% chance of outliving wealth instead of the 50% chance that a pure "life excpectancy" approach would yield. Some extremely very loss averse households might plan on a 5% or even lower, but this seems to be an exception.

Upshot: a health 65 year old couple should almost surely be planning for at least a 30 year retirement. And as they age, they will continually (but gradually) push out the plan such that if both are alive and health at age 90 they are planning for a solid chance that at least one of them will live 8-10 more years.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by nisiprius »

vineviz wrote: Fri Aug 05, 2022 8:24 am...Upshot: a health 65 year old couple should almost surely be planning for at least a 30 year retirement. And as they age, they will continually (but gradually) push out the plan such that if both are alive and health at age 90 they are planning for a solid chance that at least one of them will live 8-10 more years...
Yes. It reminds me seriously of the time I was perusing a copy of the World Almanac and Book of Facts* at perhaps age ten. It had a table of life expectancies for each age. I asked my mom to explain it. She said your life expectancy was the number of years you could reasonably expect to live at that age. So I interpreted recursively... I figured at birth you could "expect" to live 70 years (or whatever the number was then), but at age 70 you could "expect" to live another 15 years, so you but at age 85 you could still "expect" to live another 6 years... and at age 91, another 3... so I thought it was saying that your life expectancy at birth was really 94 years.



*Ah, the World Almanac. Rendered obsolete by the Internet, but what a wonderful thing it once was. Still in print, I guess. Printed on newsprint, about the size of a trade paperback but about 1.5 inches thick, and the most clever selection of "facts..." "World" didn't mean "global," it meant the name of a newspaper... that became the "World-Telegram" and then the "World-Telegram and Sun" and then the "World Journal Tribune" and then nothing.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by nigel_ht »

H-Town wrote: Fri Aug 05, 2022 8:17 am
willthrill81 wrote: Thu Aug 04, 2022 3:55 pm
vineviz wrote: Thu Aug 04, 2022 1:45 pm
billaster wrote: Thu Aug 04, 2022 1:41 pm Life expectancy is 50% probability. These people are planning way beyond life expectancy to very small percentages of being alive combined with an even smaller percentage of being broke.
Planning on a retirement which exceeds life expectancy is precisely what people who understand probabilities SHOULD be doing.
I think that the point is that if one is going to start examining probabilities (and I'm very suspect of the accuracy of such long-term probabilities for multiple reasons), one should look at the joint probability of both outliving one's money and living long enough to do so.

A 10% probability of living to age 100 combined with a 10% probability of being broke by then should likely be viewed by all but the most conservative retirees as very safe since the joint probability is only 1%.
Looking at it differently, the 90% of dying younger than 100 year old is the likely outcome. One also should take into account the declining quality of life as one gets over 60, 70, 80, or 90.

But dying old is not the biggest risk of SWR failure in my mind. Risk or divorce is. What is the going rate right now? 50% of marriage ends up in divorce? 2nd marriage and 3rd marriage even have more chance of divorce? Divorce means you divide everything in half after paying lawyers’ fees.
If you have similar assets what you primarily lose is economy of reduced expenses as a couple vs a single...
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Re: Watch out for hidden risk tolerance assumptions in SWR cla

Post by nigel_ht »

PicassoSparks wrote: Fri Aug 05, 2022 8:08 am
nigel_ht wrote: Fri Aug 05, 2022 7:02 am SWR is a ceiling and not a floor…no one is forced to withdraw the full SWR value…but if you go above there has been at least one historical sequence that ran out of money.
It is a ceiling only if you commit to never reducing your WR after your retirement date, which is a level of inflexibility that I find unrealistic.
Um...that it is a ceiling implies that your actual WR is likely lower most of the time...which isn't inflexible.

The primary inflexibility is you shouldn't go above your SWR value without thinking about it...if the market looks good and you're almost out of that initial SORR period then yeah, you can probably splurge a bit a year or two and not run into issues.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by H-Town »

nigel_ht wrote: Fri Aug 05, 2022 9:29 am
H-Town wrote: Fri Aug 05, 2022 8:17 am Looking at it differently, the 90% of dying younger than 100 year old is the likely outcome. One also should take into account the declining quality of life as one gets over 60, 70, 80, or 90.

But dying old is not the biggest risk of SWR failure in my mind. Risk or divorce is. What is the going rate right now? 50% of marriage ends up in divorce? 2nd marriage and 3rd marriage even have more chance of divorce? Divorce means you divide everything in half after paying lawyers’ fees.
If you have similar assets what you primarily lose is economy of reduced expenses as a couple vs a single...
That sounds like it will result in a decrease in your standards of living to a certain extent. The 25x will become 12.5x. You will either find a way to reduce your x or to accumulate more to get back to 25x. If you are young and have high income, it's doable. But if you are close to retirement age, it's an uphill battle.

40% - 50% probabilities is too high to ignore in financial planning.
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Re: Watch out for hidden risk tolerance assumptions in SWR cla

Post by PicassoSparks »

nigel_ht wrote: Fri Aug 05, 2022 9:32 am Um...that it is a ceiling implies that your actual WR is likely lower most of the time...which isn't inflexible.
No. The SWR that's used for the calculations of the Trinity study and the charts we saw upthread is extremely mechanical.

On the day you retire, you take out X% of your portfolio. That percentage becomes a nominal number of $ that you continue to take out year after year, adjusting for inflation, no matter what the market does. The test is: Do you run out of money?

The % figure of the SWR calculations is true only in the first year. Then it decouples from the dollars. That's how it's possible for the WR to fail. You bloody-mindedly kept taking the (inflation-adjusted) same amount out of your portfolio even as it shrank and shrank, year after year. Towards the end, by percentage, your WR was climbing to 100%.

SWR is a decent tool for comparing like against like, but an extremely unrealistic model of how a retiree would manage their funds. Most of the time, most people end up with huge amounts of leftover money when they die in order to protect against the few circumstances where things cause serious trouble. If you loosen the withdrawal rules even just bit, you can consume far more of your savings and still be able to steer clear of disaster.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by ScubaHogg »

vineviz wrote: Fri Aug 05, 2022 8:24 am
Joint probabilities don't help us get to the answer we want here, because you can't be both dead and not dead at the same time.
I realized I misspoke. I was really curious why we don't consider conditional probabilities on here more. There will be threads to the nth page about reducing the likelihood of running out of money for a 30 year retirement from 2% to 1%. However, we almost never talk about the probability of running out of money after 30 years AND living more than 30 years, which is definitionally less likely than simply hitting a bad sequence such that you would have run out of money after 30 years.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by nigel_ht »

H-Town wrote: Fri Aug 05, 2022 9:42 am
nigel_ht wrote: Fri Aug 05, 2022 9:29 am
H-Town wrote: Fri Aug 05, 2022 8:17 am Looking at it differently, the 90% of dying younger than 100 year old is the likely outcome. One also should take into account the declining quality of life as one gets over 60, 70, 80, or 90.

But dying old is not the biggest risk of SWR failure in my mind. Risk or divorce is. What is the going rate right now? 50% of marriage ends up in divorce? 2nd marriage and 3rd marriage even have more chance of divorce? Divorce means you divide everything in half after paying lawyers’ fees.
If you have similar assets what you primarily lose is economy of reduced expenses as a couple vs a single...
That sounds like it will result in a decrease in your standards of living to a certain extent. The 25x will become 12.5x. You will either find a way to reduce your x or to accumulate more to get back to 25x. If you are young and have high income, it's doable. But if you are close to retirement age, it's an uphill battle.

40% - 50% probabilities is too high to ignore in financial planning.
Two don't exactly live as cheaply as one...and when you divorce someone usually downsizes. So if the couple had $2M in assets and that turns in to $1M each then if you can live on less than $40K + SS you still both have close to 25X...

Not ideal but not as catastrophic as dropping to 12.5X 10 years before retirement.
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Re: Watch out for hidden risk tolerance assumptions in SWR cla

Post by nigel_ht »

PicassoSparks wrote: Fri Aug 05, 2022 10:20 am
nigel_ht wrote: Fri Aug 05, 2022 9:32 am Um...that it is a ceiling implies that your actual WR is likely lower most of the time...which isn't inflexible.
No. The SWR that's used for the calculations of the Trinity study and the charts we saw upthread is extremely mechanical.

On the day you retire, you take out X% of your portfolio. That percentage becomes a nominal number of $ that you continue to take out year after year, adjusting for inflation, no matter what the market does. The test is: Do you run out of money?
You have to be mechanical to determine the SWR amount. So when calculating SWR you always remove the X% from the portfolio.

When using SWR as a retirement guide then SWR is a ceiling. You know as long as you take out less than X% a year you don't have to worry UNLESS you happen to be in a cohort that is worse than 1966...
The % figure of the SWR calculations is true only in the first year. Then it decouples from the dollars. That's how it's possible for the WR to fail. You bloody-mindedly kept taking the (inflation-adjusted) same amount out of your portfolio even as it shrank and shrank, year after year. Towards the end, by percentage, your WR was climbing to 100%.
Not for any case less severe than the worst historical case. For the vast majority of cases you end up with a very large ending portfolio value.

If anything SWR is too conservative for the nominal case.
SWR is a decent tool for comparing like against like, but an extremely unrealistic model of how a retiree would manage their funds. Most of the time, most people end up with huge amounts of leftover money when they die in order to protect against the few circumstances where things cause serious trouble. If you loosen the withdrawal rules even just bit, you can consume far more of your savings and still be able to steer clear of disaster.
Or you calculate your expected retirement spend, pad it and then determine using SWR the portfolio size required to support this expenditure. Then you can use the difference in required portfolio and actual portfolio for other stuff like toys and travel.

Like I outline here.

viewtopic.php?p=6809482#p6809482

I don't see why folks think SWR is terribly unrealistic for folks used to collecting a salary. For most of us late career folks the rapid salary increases are behind us and mostly what we get are cost of living adjustments. That's pretty much what a constant dollar withdrawal strategy gives you. A base salary with cost of living adjustments. Just like SS.

SWR replicates the payout for a pension with a COLA. Only it's self managed. Would you want your pension to pay you less in bad market years? Probably not unless there was a significant risk of insolvency if it doesn't.

My actual WR should be lower than the SWR even with padding so even if I retire in a slightly worse than historical worst case I can safely just keep spending my money out as planned without much worries. I plan to reevaluate things every few years anyway and I have my fun money as more reserves if SORR hits but I plan to spend that even if it does. I have to really feel, man, this is going to be worse than 1929 or 1966 to dip in to that.
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Re: "Stocks increase SWR" assumes a risk-tolerant investor

Post by AerialWombat »

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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: "Stocks increase SWR" assumes a risk-tolerant investor

Post by petulant »

AerialWombat wrote: Fri Aug 05, 2022 11:33 am
muffins14 wrote: Thu Aug 04, 2022 7:23 am I’d recommend removing everything you have on the 7% withdrawal rate to make the post more concise. No one here is going to plan for 7%, so it’s a bit of a distraction
Dave Ramsey would like to interject and discuss an 8% SWR.
Very sustainable when your mutual funds are getting 12% per year.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by billaster »

nisiprius wrote: Fri Aug 05, 2022 6:35 am
vineviz wrote: Thu Aug 04, 2022 1:45 pm
billaster wrote: Thu Aug 04, 2022 1:41 pm Life expectancy is 50% probability. These people are planning way beyond life expectancy to very small percentages of being alive combined with an even smaller percentage of being broke.
Planning on a retirement which exceeds life expectancy is precisely what people who understand probabilities SHOULD be doing.
Indeed.

In fact, the whole point of SPIAs, which are pure insurance, is that an individual must plan and budget based on their maximum credible time in retirement, while an insurance company, paying out to a pool of policyholders, can prudently base its monthly payments on average life expectancy.

The difference isn't small. You can of course slice and dice the numbers many ways, but at a rough ballpark back-of-the-envelope number, the SSA table shows about a 20-year life expectancy for a 65-year-old woman, and a 3,021/87,807 = 3,4% chance of reaching age 100, higher than the chances of landing on the "Go To Jail" space in Monopoly. Female centenarians are not rare. For age 105, 382/87,807 = 0.4%, which may or may not be within a prudent planning range. It certainly isn't a "black swan" probability.

In other words, the required planning time frame for an individual is not-quite-double average life expectancy.

As we know from amortization-type calculations, a forty-year payment period is almost the same as a perpetuity. But a twenty-year period is not. Planning based on average life expectancy will lead to significant overspending.

The reasoning behind (prudent) SWR strategies is that you have built in enough of a margin of safety between investment earnings and spending that you can afford to "leave money on the table" (or leave it to your kids--leave a fluctuating, possibly steadily-shrinking amount to your kids).

"Margin of safety" is always problematical. Engineers tend to want more, financiers tend to want less.
Nowhere did I say that one should only plan for their life expectancy. But on the other extreme, I think that everyone withdrawing assuming they are going to live to 100 with a 100% "SWR" is just nuts. Most of these extreme planners are going to live lives of deprivation and die with gobs of unused money. There is always Social Security and Medicare and Medicaid and later withdrawal adjustments for the worst cases.

Everyone has to decide their own comfort with risks. Dying broke at 100 is way, way down the list of all the other risks that might happen in the next 30 or 40 years.
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by nigel_ht »

billaster wrote: Fri Aug 05, 2022 11:43 am But on the other extreme, I think that everyone withdrawing assuming they are going to live to 100 with a 100% "SWR" is just nuts. Most of these extreme planners are going to live lives of deprivation and die with gobs of unused money.
Or maybe we had decent jobs, LBYMs, saved in a prudent manner and invested in index funds during one of the most significant bull markets in US history.

You know, like a lot of other Bogleheads.

So planning to live to 100 using 100% SWR for a comfortable retirement doesn’t require a life of deprivation.

Nah. We just must be nuts and extreme planners. Gosh, at least we have decent company here in Bogleheads.

Now hopefully we will die with gobs of money because we have children and charity and hopefully a step up in basis with which to save on taxes. Because, not everyone wants to die spending their last dollar and with our “extreme planning skillz” we can be reasonably certain it won’t go unused.

Now how about we not think folks who disagree with us are total idiots?
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by marcopolo »

dboeger1 wrote: Thu Aug 04, 2022 4:26 pm
Tamalak wrote: Thu Aug 04, 2022 9:06 am What I don't like about these "odds your money will last" sites is they seem to assume that you're equally likely to retire every year.

But people are much more likely to hit their number when the market was high. Nobody hit it at the bottom of 2008. So I feel like it might be overly optimistic.
This is an excellent point. I've been reading ERN's SWR series recently, and one of the points he frequently mentions is that because stock returns are correlated with CAPE ratio, you may have to adjust SWR lower based on current market conditions. It's easy to get tricked into thinking you have enough money when your paper wealth is inflated by high prices, but that doesn't mean you'll actually get average real returns starting from that point (to be fair, the distribution of outcomes was very wide in all CAPE bands, it just shifted better or worse). So for most people, something like the 4% rule should probably be renamed the "most likely 3.5% but maybe 4% or higher depending on valuations when you retire" rule. Doesn't roll off the tongue quite as well though, does it?

I think you touched on an interesting point too, which is that people like to come up with "their number", but having a CAPE-dependent SWR suggests that there is no single number. The number needs to be adjusted for reasonable equity return assumptions based on current valuations.

I'm increasingly becoming convinced that 3% SWR is a much more reasonable target than 4%, particularly for people on the earlier end of the retirement spectrum. It's sad, but I suppose it's better to end up with more money than to run out of it in retirement. I can see why ERN has been called The Grinch of Early Retirement.

The good news is that it shouldn't take very long to reach 3% SWR from 4%; the required balance is only 1/3 more. With absolutely no new contributions and a 5% real rate of return, it takes just shy of 6 years. Obviously, the exact time depends greatly on market returns and other factors, but with new contributions added into the mix, I don't think it's crazy to assume that difference could be made up in 3-4 years of additional work. Now, is that always a valid option for everybody? No, some people are forced out of work, work in toxic environments, choose to become stay-at-home parents, etc. I don't want to make it sound like it's nothing. But for people of means on the edge of retirement, I think it's comforting to know that just 3-4 more years of work can go from a 4% SWR with a lot of assumptions built in to a 3% SWR which has historically supported very long retirements through pretty rough market conditions. Just something to consider.

You see no irony in saying people should work longer to get to 3% because poor returns are likely when markets are near their highs, and then saying it should only take a few years to get there because of the good market returns?!?

If you got 5% real over 6 years after retiring, you probably are past the SORR risk, and didn't need to work those extra years...
Once in a while you get shown the light, in the strangest of places if you look at it right.
marcopolo
Posts: 8445
Joined: Sat Dec 03, 2016 9:22 am

Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by marcopolo »

afan wrote: Fri Aug 05, 2022 6:12 am
willthrill81 wrote: Thu Aug 04, 2022 6:46 pm
afan wrote: Thu Aug 04, 2022 5:31 pm 70 year old couple.
$13M in financial assets
Each collects the maximum SS benefit
Withdraw 1% per year=$130,000
Total $230,000

Even after taxes, they can have a quite comfortable lifestyle without spending that much.

Would it be even "mildly pathologic" for them to decide not to quadruple their spending, buying a bunch of junk they don't want, just to burn through the money?

And yes, I did interpret "clinically diagnosed" as meaning "clinically diagnosed." What else could it mean?

If our couple is still working, then they may be drawing nothing from savings, rather adding to them. Having had the sorts of jobs that let them reach that asset level, they may be saving more than $230,000 per year.

This hypothetical is not available to most people. On the other hand, there are many who fit this bill. The ones I know seem to be high functioning. If they have clinical depression it does not show.
The low WR in that example is not far too low if it truly provides the couple with all their desired spending.

But the 'problem' in such a situation is that most households would have had to work far longer than necessary to build the assets needed to very conservatively produce the $130k of retirement income. Historically, it would have taken about a decade for a 100% stock allocation to take 25x (i.e., 4% WR) to 50x (i.e., 2% WR), and another decade to take 50x to 100x (i.e., 1% WR). And allocations with more fixed income would have usually taken even longer to get there.

A couple of 70 year olds with $13m and a 1% withdrawal rate will surely make some heirs and/or charities happy though.

However, it seems likely that such a couple probably got there by doing something like selling a business they built, real estate that experienced tremendous appreciation, etc. rather than doing it via regular contributions and investing in a fairly typical portfolio.
Remember that the total income in this example is $230,000. Their after tax income would be greater than $130,000.

How long did they work to get there? In this hypothetical, they worked to 70, but may continue working.

Not everyone retires at the earliest opportunity. Some work far past the point at which they could afford to retire, c.f. Nancy Pelosi.
It seems to me that this exchange largely misses the point.

It seems extremely unlikely that either Nancy Pelosi or the hypothetical couple is still working because they are thinking about SWR or the risk of running out of money.

They are still working because that is what they want to do with their lives. Which is great, but has no real relavence to discussions about portfolio survivability, risk tolerance, etc. It is simply irrelevant to them.

The discussions and analysis of portfolio survival and associated risk seems only applicable to people who want to retire, and are trying to figure out where on the spectrum between "take on more risk" and "continue to work longer" they are, or should be, comfortable.
Once in a while you get shown the light, in the strangest of places if you look at it right.
dboeger1
Posts: 1411
Joined: Fri Jan 13, 2017 6:32 pm

Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by dboeger1 »

marcopolo wrote: Fri Aug 05, 2022 12:40 pm
dboeger1 wrote: Thu Aug 04, 2022 4:26 pm
Tamalak wrote: Thu Aug 04, 2022 9:06 am What I don't like about these "odds your money will last" sites is they seem to assume that you're equally likely to retire every year.

But people are much more likely to hit their number when the market was high. Nobody hit it at the bottom of 2008. So I feel like it might be overly optimistic.
This is an excellent point. I've been reading ERN's SWR series recently, and one of the points he frequently mentions is that because stock returns are correlated with CAPE ratio, you may have to adjust SWR lower based on current market conditions. It's easy to get tricked into thinking you have enough money when your paper wealth is inflated by high prices, but that doesn't mean you'll actually get average real returns starting from that point (to be fair, the distribution of outcomes was very wide in all CAPE bands, it just shifted better or worse). So for most people, something like the 4% rule should probably be renamed the "most likely 3.5% but maybe 4% or higher depending on valuations when you retire" rule. Doesn't roll off the tongue quite as well though, does it?

I think you touched on an interesting point too, which is that people like to come up with "their number", but having a CAPE-dependent SWR suggests that there is no single number. The number needs to be adjusted for reasonable equity return assumptions based on current valuations.

I'm increasingly becoming convinced that 3% SWR is a much more reasonable target than 4%, particularly for people on the earlier end of the retirement spectrum. It's sad, but I suppose it's better to end up with more money than to run out of it in retirement. I can see why ERN has been called The Grinch of Early Retirement.

The good news is that it shouldn't take very long to reach 3% SWR from 4%; the required balance is only 1/3 more. With absolutely no new contributions and a 5% real rate of return, it takes just shy of 6 years. Obviously, the exact time depends greatly on market returns and other factors, but with new contributions added into the mix, I don't think it's crazy to assume that difference could be made up in 3-4 years of additional work. Now, is that always a valid option for everybody? No, some people are forced out of work, work in toxic environments, choose to become stay-at-home parents, etc. I don't want to make it sound like it's nothing. But for people of means on the edge of retirement, I think it's comforting to know that just 3-4 more years of work can go from a 4% SWR with a lot of assumptions built in to a 3% SWR which has historically supported very long retirements through pretty rough market conditions. Just something to consider.

You see no irony in saying people should work longer to get to 3% because poor returns are likely when markets are near their highs, and then saying it should only take a few years to get there because of the good market returns?!?

If you got 5% real over 6 years after retiring, you probably are past the SORR risk, and didn't need to work those extra years...
That is an important point, although 5% real is not a terrible projection either for a moderately expensive market, as the long term US average is something like 6.6%. Regardless of current PE ratios, there is always a very wide distribution of outcomes with stocks; valuations just shift those distributions better or worse, but they don't really get much tighter. You are right that if they work those extra years and returns are great, they're probably really well off and didn't need that extra savings... but that's not the worst problem in the world to have. The whole 3% SWR suggestion was not about minimizing work, it was about being safe enough for even very long retirements through historically bad conditions, which I think is relevant because a lot of people mistakenly believe the 4% SWR is sufficient for longer retirements. Unfortunately, there is no reliable way to pinpoint exactly how long you need to work and how much you need to save in order to work the least amount possible and die with $0. Almost all reasonable retirement plans will err on the side of caution to some extent. This discussion was mostly about whether the oft-cited 4% rule is really as safe as many people believe it is, and my belief (mostly thanks to ERN's SWR series, none of the thoughts are originally mine) is that it's not. I wish it weren't true because I'd love to retire by 40, but 3% SWR realistically pushes us out well past that, unless we relocate to a LCOL area and invest any difference in house price, so it's absolutely an inconvenient truth for me.
nigel_ht
Posts: 4742
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Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by nigel_ht »

dboeger1 wrote: Thu Aug 04, 2022 4:26 pm
Tamalak wrote: Thu Aug 04, 2022 9:06 am What I don't like about these "odds your money will last" sites is they seem to assume that you're equally likely to retire every year.

But people are much more likely to hit their number when the market was high. Nobody hit it at the bottom of 2008. So I feel like it might be overly optimistic.
This is an excellent point. I've been reading ERN's SWR series recently, and one of the points he frequently mentions is that because stock returns are correlated with CAPE ratio, you may have to adjust SWR lower based on current market conditions.
I’d rather discount my portfolio if I was feeling antsy rather than reduce my SWR because SWR is computed based on historical worst case.

That means that SWR is based on the outcome of folks that would have retired in 1929 and 1966. When we have enough data also 2008 and 2000…

Folks don’t always get to choose when they retire.
It's easy to get tricked into thinking you have enough money when your paper wealth is inflated by high prices, but that doesn't mean you'll actually get average real returns starting from that point (to be fair, the distribution of outcomes was very wide in all CAPE bands, it just shifted better or worse). So for most people, something like the 4% rule should probably be renamed the "most likely 3.5% but maybe 4% or higher depending on valuations when you retire" rule. Doesn't roll off the tongue quite as well though, does it?
This is solved by reaching FI by age 50 and waiting for the next recession and bear. If you still have your number and want to retire then that’s a good time.

FIRE is even more voluntary.
I'm increasingly becoming convinced that 3% SWR is a much more reasonable target than 4%, particularly for people on the earlier end of the retirement spectrum.
SWR is based on duration as well as AA. For FIRE folks the SWR number is much lower.

In fact ERN has a chart (although I think it’s from 2016) and almost all of the FI/FIRE tools can give you a withdrawal rate with 100% success rate based on your AA.

Depending on which tool the data may only be since 1972 but some will go back to sometime in the 1800s.

Now I suggest you do some additional analysis and figure out a contingency reserve and a management reserve on top of your spending estimates.

This is what I’m doing:

viewtopic.php?t=383126&start=50
marcopolo
Posts: 8445
Joined: Sat Dec 03, 2016 9:22 am

Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by marcopolo »

dboeger1 wrote: Fri Aug 05, 2022 12:59 pm
marcopolo wrote: Fri Aug 05, 2022 12:40 pm
dboeger1 wrote: Thu Aug 04, 2022 4:26 pm
Tamalak wrote: Thu Aug 04, 2022 9:06 am What I don't like about these "odds your money will last" sites is they seem to assume that you're equally likely to retire every year.

But people are much more likely to hit their number when the market was high. Nobody hit it at the bottom of 2008. So I feel like it might be overly optimistic.
This is an excellent point. I've been reading ERN's SWR series recently, and one of the points he frequently mentions is that because stock returns are correlated with CAPE ratio, you may have to adjust SWR lower based on current market conditions. It's easy to get tricked into thinking you have enough money when your paper wealth is inflated by high prices, but that doesn't mean you'll actually get average real returns starting from that point (to be fair, the distribution of outcomes was very wide in all CAPE bands, it just shifted better or worse). So for most people, something like the 4% rule should probably be renamed the "most likely 3.5% but maybe 4% or higher depending on valuations when you retire" rule. Doesn't roll off the tongue quite as well though, does it?

I think you touched on an interesting point too, which is that people like to come up with "their number", but having a CAPE-dependent SWR suggests that there is no single number. The number needs to be adjusted for reasonable equity return assumptions based on current valuations.

I'm increasingly becoming convinced that 3% SWR is a much more reasonable target than 4%, particularly for people on the earlier end of the retirement spectrum. It's sad, but I suppose it's better to end up with more money than to run out of it in retirement. I can see why ERN has been called The Grinch of Early Retirement.

The good news is that it shouldn't take very long to reach 3% SWR from 4%; the required balance is only 1/3 more. With absolutely no new contributions and a 5% real rate of return, it takes just shy of 6 years. Obviously, the exact time depends greatly on market returns and other factors, but with new contributions added into the mix, I don't think it's crazy to assume that difference could be made up in 3-4 years of additional work. Now, is that always a valid option for everybody? No, some people are forced out of work, work in toxic environments, choose to become stay-at-home parents, etc. I don't want to make it sound like it's nothing. But for people of means on the edge of retirement, I think it's comforting to know that just 3-4 more years of work can go from a 4% SWR with a lot of assumptions built in to a 3% SWR which has historically supported very long retirements through pretty rough market conditions. Just something to consider.

You see no irony in saying people should work longer to get to 3% because poor returns are likely when markets are near their highs, and then saying it should only take a few years to get there because of the good market returns?!?

If you got 5% real over 6 years after retiring, you probably are past the SORR risk, and didn't need to work those extra years...
That is an important point, although 5% real is not a terrible projection either for a moderately expensive market, as the long term US average is something like 6.6%. Regardless of current PE ratios, there is always a very wide distribution of outcomes with stocks; valuations just shift those distributions better or worse, but they don't really get much tighter. You are right that if they work those extra years and returns are great, they're probably really well off and didn't need that extra savings... but that's not the worst problem in the world to have. The whole 3% SWR suggestion was not about minimizing work, it was about being safe enough for even very long retirements through historically bad conditions, which I think is relevant because a lot of people mistakenly believe the 4% SWR is sufficient for longer retirements. Unfortunately, there is no reliable way to pinpoint exactly how long you need to work and how much you need to save in order to work the least amount possible and die with $0. Almost all reasonable retirement plans will err on the side of caution to some extent. This discussion was mostly about whether the oft-cited 4% rule is really as safe as many people believe it is, and my belief (mostly thanks to ERN's SWR series, none of the thoughts are originally mine) is that it's not. I wish it weren't true because I'd love to retire by 40, but 3% SWR realistically pushes us out well past that, unless we relocate to a LCOL area and invest any difference in house price, so it's absolutely an inconvenient truth for me.
I don't disagree with what you are saying. We are at sub 3% WR in our early retirement.

I was just pointing out a common contradiction I often see in these discussions.

People insist that because we are likely to get poor results, one should work longer to lower their WR. And then immediately turn around and claim doing so should be a piece of cake because the good market returns will get them there in no time. You can't have it both ways.

If you are worried about 4% not working because of low returns going forward, then the alternative is not working just a few more years to get to 3% (which might be an easy trade off), but rather working a decade or longer to lower your risk somewhat (maybe not such an easy decision now).

In one case you are shifting your assumptions to make working longer seem like an easy decision. When using consistent assumptions, the trade-off is a much tougher call.
Once in a while you get shown the light, in the strangest of places if you look at it right.
marcopolo
Posts: 8445
Joined: Sat Dec 03, 2016 9:22 am

Re: Watch out for hidden risk tolerance assumptions in SWR claims

Post by marcopolo »

nigel_ht wrote: Fri Aug 05, 2022 1:03 pm
dboeger1 wrote: Thu Aug 04, 2022 4:26 pm
Tamalak wrote: Thu Aug 04, 2022 9:06 am What I don't like about these "odds your money will last" sites is they seem to assume that you're equally likely to retire every year.

But people are much more likely to hit their number when the market was high. Nobody hit it at the bottom of 2008. So I feel like it might be overly optimistic.
This is an excellent point. I've been reading ERN's SWR series recently, and one of the points he frequently mentions is that because stock returns are correlated with CAPE ratio, you may have to adjust SWR lower based on current market conditions.
I’d rather discount my portfolio if I was feeling antsy rather than reduce my SWR because SWR is computed based on historical worst case.

That means that SWR is based on the outcome of folks that would have retired in 1929 and 1966. When we have enough data also 2008 and 2000…

Folks don’t always get to choose when they retire.
It's easy to get tricked into thinking you have enough money when your paper wealth is inflated by high prices, but that doesn't mean you'll actually get average real returns starting from that point (to be fair, the distribution of outcomes was very wide in all CAPE bands, it just shifted better or worse). So for most people, something like the 4% rule should probably be renamed the "most likely 3.5% but maybe 4% or higher depending on valuations when you retire" rule. Doesn't roll off the tongue quite as well though, does it?
This is solved by reaching FI by age 50 and waiting for the next recession and bear. If you still have your number and want to retire then that’s a good time.

FIRE is even more voluntary.
I'm increasingly becoming convinced that 3% SWR is a much more reasonable target than 4%, particularly for people on the earlier end of the retirement spectrum.
SWR is based on duration as well as AA. For FIRE folks the SWR number is much lower.

In fact ERN has a chart (although I think it’s from 2016) and almost all of the FI/FIRE tools can give you a withdrawal rate with 100% success rate based on your AA.

Depending on which tool the data may only be since 1972 but some will go back to sometime in the 1800s.

Now I suggest you do some additional analysis and figure out a contingency reserve and a management reserve on top of your spending estimates.

This is what I’m doing:

viewtopic.php?t=383126&start=50
What is the difference between these two?
You arrive at the same dollar number in either case for the first year. From there it is just a inflation adjustment of that dollar amount.

I am not seeing how the two would differ in any way.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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