Douglas Johnson wrote:
- quote -

It seems like you are arguing both sides, so correct me here where I'm
wrong. On the one hand you argue for the 4% rule or the other to which
you posted a link. These rules were derived from simulations. On the
other it seems you are arguing that simulations have no value because
the inputs (in this case) are unknown and vary wildly. Given this, why
support your two rules? Or are you just worried about black box
solutions? In which case why not use B's hypthetical program, but only
if the author provides the assumptions?

-Will

william dot trice at ngc dot com

On Thu, 13 Dec 2007 17:38:40 -0600, joetaxpayer <joetaxpayer[at]nospam.comwrote:

- quote -

Joe,

Don't be so sure.

Some years ago I cared for a 95 year old man.

He had retired from the Syracuse symphony at 85 but still went to several
old age homes a month giving violin concerts.

He had jogged five miles a day until 91. At that point, he thought he
should "slow down a bit" because of his age. So he cut down to jogging
three miles and walking the last two!

Of course, longevity ran in his family. His father died at the age of 106
from a serious case of mumps.

Best,
--ron

On Dec 13, 6:28 pm, Douglas Johnson <p...[at]classtech.com> wrote:

- quote -

Suppose a planner said that his simulations had convinced him that for
a single man, a reasonable withdrawal rate was X% initially, increased
at the rate of inflation thereafter, and that his formula for X was 4
+ 0.1*(age - 65), working out to 4% for someone retiring at 65, 5% for
someone retiring at 75, etc. I would consider that more sensible than
a 4% suggestion for everyone. If that means he suggests a 4.4%
withdrawal rate to a 69yo, so what? Are you afraid of decimals?

- quote -

I'd say that uncertain inputs make the problem harder and make
simulations more valuable.

- quote -

On Nov 29, 10:06 pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:

- quote -

The "Die Broke" method might work better. The idea is to buy annuities
to get your income (including pensions and SS) to match your expenses,
keeping the remainder of your capital in investments (stocks, mutual
funds, and bonds). If your expenses grow, buy more annuities.

--
Ron

- quote -

I'm reminded of a marketing presentation, guy at the front is building a
case for a certian high tech product. He stars with a China population
of 8 Billion, and ends with a potential sales number. I raise my hand
and tell him the world population wasn't even 6 billion at the time,
there were likely only 800 million China residents. "well, these are all
estimates" he replied, and stuck with his final numbers.

You are right, all of the input isn't known. But there are statistics. I
don't know when I will die, but my insurance guy can tell me that in a
pool of 10,000 45 year olds in my general health, half will live until X
age. The market will not return 20%, nor 0% in the next twenty years. Is
10% right? I don't know, maybe the 8% I've suggested is closer. But
isn't that what Monte Carlo and Statistical approaches are all about?
Trying to quantify a range of outcomes? And the results are at least
better than "I don't know"

JOE

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:1_OdnRThArzWXPzanZ2dnUVZ_u-unZ2d[at]comcast.com...
- quote -

You underestimate the power of compounding. It works in life, too! I
racewalked a 5k in the heat in August, which nearly got me, and beat an 84
year old woman by only 3 minutes. Get in shape now, stay in shape. At 62, I
get my heart rate up to 85% of maximum for an extended time at least once a
week, in addition to several days with an hour or more of lower intensity
aerobic work, add in some weights for an overall fitness routine. I'm hoping
my coach will still be alive and working when I'm 90, 'cause I'm going to
still want to train.

Anyway, thanks for the clarification on the extra allowance for volatility.

Elizabeth Richardson

Elizabeth Richardson wrote:

- quote -

If the portfolio returned precisely 7%, the 4% withdrawal and 3%
inflation would work perfectly. The problem is risk/volatility/standard
deviation. Trinity was done with data looking back for a return of 10%+
and concluded the 4% was good. That extra 3% covered volatility. Given
that I've gone on record that I'd use 8% as a projected market return
for the next decade or two, I may be deluding myself that 4% is the
right number. That's why I figure if I don't count SS, that when it
kicks in for both of us, I am really using a lower rate, maybe 3.5% or
less.

FWIW, a fixed 7% return can allow an initial 4.8% withdrawal, and last
40 years. At 90, I doubt my wife will have the energy to powershop or go
to her trainer.

JOE

beliavsky[at]aol.com wrote:

- quote -

About what? That the 4% rule basically works or my slightly nasty dig at
simulations based on estimates of critical parameters such as date of death?

- quote -

How do you know the results make sense? You need to have some external model to
compare your results to.

- quote -

My skepticism comes at two levels. First, if I were sitting across from a
planner and his program spits out "you can spend 4.523% the first year and
adjust up for the CPI (Urban) after that." How can I have any confidence?

Second, it ain't that hard a problem. All the important factors are unknown:
date of death, market performance, inflation, taxes, health care costs... The
benefit of any really detailed analysis is going to be swamped by uncertainty in
the input data.

-- Doug

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:1Z-dneDI76feOfzanZ2dnUVZ_o2vnZ2d[at]comcast.com...
- quote -

Guys, do you realize how valuable is the older wife/younger husband
scenario? The lower health costs of a married life versus a single/widowed
life are just the tip of the iceberg.

Anyway, if I understand this discussion, a projected portfolio return of 7%,
would, in fact, provide for your wife's request of keeping your lifestyle
the same, would it not?

Elizabeth

Elizabeth Richardson wrote:

- quote -

I was planning to go with my understanding of Trinity, 4% of initial
balance, and add inflation each year. FWIW, I am 45, the missus is 51.
She plans to retire in 4 years, and I would follow when we hit the
number, about 2 years after. SS is not in the equation at all. So that's
alot of wiggle room, I'd think.
I am open to working longer, if needed, and if the market blows up, a
black swan event, I have a few things I can go back to, to make up the
difference.
JOE

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:1ZWdnebd6YS4sv3anZ2dnUVZ_urinZ2d[at]comcast.com...
- quote -

Joe, do you expect your retirement portfolio to have average returns of at
least 4% plus 3% inflation, or 7%? Were you planning on using the Trinity 4%
of the beginning balance or the BWS 4% ever-adjusting balance?

As you know, we have pension income, what amounts to a fixed annuity in this
conversation, but what we need/want over and above that is affected by this
4% discussion. But I don't think most of you pre-retirees realize that being
on a "fixed" income, isn't really a fixed income. What we're doing is
drawing on our IRA to the extent we need to, which is a different amount
from month to month. Vanguard IRAs allow you to sell shares whenever, so I'm
not stuck deciding in January how much I'll want/need in October (or even
February). Periodically, but not on a rigid schedule, I monitor these
withdrawals against the portfolio balance to ensure we're not living too
high on the hog. So far, so good, as the market has been very kind. At some
point, I'll look at starting social security - another factor in the
equation.

Elizabeth Richardson

On Dec 12, 2:45 pm, Douglas Johnson <p...[at]classtech.com> wrote:

- quote -

We disagree.

- quote -

Yes, but unless you can run simulations or you have an analytical
justification for the 4% rule, how do you know *how much* to adjust
the 4% up or down based on the relevant circumstances?

- quote -

If I can run a simulation for various parameter sets and the results
make sense as each parameter is changed, that would give me some
confidence that the program is working properly.

- quote -

I write programs for fairly complicated simulations myself.

- quote -

"Douglas Johnson" <post[at]classtech.com> wrote
- quote -

Nit pick: Not well-known.

I do continue to think the crude guidelines are useful with
even the "not well-known" inputs, whether the guidelines
derive from a program like B suggests above; the 4% rule;
what Douglas suggests from the fpanet article below; living
off dividends until D-day (that is, catastrophic medical
costs) arrives; or maybe something else.

- quote -

Indeed, the key words to me being "to the extent that is
possible." Time and again I think that, once one realizes a
change in assumptions is needed, it may be too late, and she
or he may have spent too much of her or his portfolio to
avoid financial ruin and living in some gosh-forsaken
poorhouse of a nursing home. At least one may be enough out
of sorts at this point not to care much, I guess.

- quote -

I would say the one disadvantage of both proposals is the
costs one might pay a financial planner for such services.
Maybe these costs are trivial. Maybe not, especially given
that, if one is not smart enough to pick and choose a
suitable crude gage for withdrawals in retirement, gosh
knows how much other stuff said financial planner can sell
him/her. Just a little caveat, and not that all financial
planners are nefarious.

Lately I wish financial planning academia would pursue a
study of what educational approaches work best to keep
people invested safely and with a view towards retirement
and/or other needs. I wonder at the number of seemingly
smart folks I know who take a momentary hit in their stock
portfolios and then exit, hook line and sinker, for a few
years, missing gains for the long term, and trusting gambles
on, say, real estate over stocks.

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
- quote -

Tables 1 and 2 of the paper are devoted to withdrawals where
the annual amount withdrawn is not adjusted for inflation.
In these instances, it's truly a fixed income, based
strictly on (for a withdrawal rate of say 4%) 4% of the
/initial/ portfolio value and not subsequent values of the
portfolio. So we see the line after the section titled "What
About Inflation?" referring to purchasing power being halved
after 25 years of 3% inflation. Table 3 shows the outcome
where the annual withdrawal rate is adjusted for inflation
and deflation.

The news is bad for those who adust for inflation and start
with a high withdrawal rate. But staying at a withdrawal
rate of 3-4% still suggests, if history is a guide, that a
retiree will be fine.

I presume the much quoted 4% rule uses as its basis Table 3.
But the WD rate does not depend on portfolio size; it
depends on inflation, at least according to the study's
authors. Whether that's good or not remains to be seen.
Merriman's proposal (as quoted by Bread with Spam) may be
superior.

At the moment, I lean towards the rainy day plan, due in
particular to the uncertainty in health care costs. My heirs
may be very wealthy, or I'll be in ruins and on Medicaid
yada when I die.

beliavsky[at]aol.com wrote:

- quote -

So what we'll then have is exquisitely analyzed output based on exquisitely
guessed input. The beauty of the 4% rule is that is simple and basically works.
Obviously, there are good reasons for adjusting it up or down. My current
favorite approach is here:
http://www.fpanet.org/journal/articl...p0806-art6.cfm

It has the advantage that it is transparent -- you can see the assumptions you
are making and how they are affecting the results. Computerized black boxes
worry me because I spent years developing such.

-- Doug

Elizabeth Richardson wrote:
- quote -

I am not advocating a position, just answering the question:

BWS quote states 4% withdrawal each year, whether it's 1%/qtr, or 4% of
prior 12/31 balance, it's a fluctuating number.

I believe Trinity used a $40K withdrawal on a million dollar sum, and
each year that $40K was adjusted for inflation regardless of market
return or current value of portfolio.

I personally think BWS quote is appealing to those who can break out the
'needed' income from the 'extra' that can be skipped in down years. When
my wife and I discuss this, she asks for the number that can keep our
lifestyle the same, no skipping anything in a down year. So we shall
work a bit longer and go closer to my interpretation of Trinity, the
ever increasing withdrawals.
JOE
www.joetaxpayer.com

<BreadWithSpam[at]fractious.net> wrote in message
news:yob3au9fcqk.fsf[at]panix2.panix.com...
- quote -

When did the 4% rule become something other than the above?

Elizabeth Richardson

On Nov 28, 10:08 am, beliav...[at]aol.com wrote:
- quote -

I had a reply which must have been lost.

Here goes:

1) Everything I understand about 4% is that it is a starting withdraw
rate (SWR) and not a fixed withdraw rate (FWR). The 4% needs to be
adjusted for inflation, market performance and spending.

For example, if someone needs a new car in retirement (show me a car
which lasts 30 or 40 years...), the spending the year of a car
purchase will increase.

2) The final comment suggests rules of thumb (4% SWR) are not as
effective as tailored results and detailed financial planning.
Agreed. 4% is a basic planning tool. Someone might want more cash,
so a 3% or 3.5% SWR is needed. Someone might plan on dying young, so
a 5% or 10% SWR could be used. An annuity might allow a FWR to be
used as well.

On Dec 11, 10:59 am, BreadWithS...[at]fractious.net wrote:
- quote -

I think it is helpful to demonstrate that certain commonly recommended
strategies are poor.

- quote -

I think proportion-of-current-capital withdrawal scheme is better than
the 4% rule based on initial capital, but as I have written before,
the proportion should depend on life expectancy. If annually consuming
4% of capital is optimal for an 80-year-old widower, it almost
certainly is not optimal for a healthy couple of 65-year-olds -- the
money must last for both of them. There is no simple analytical
solution to this problem. What's needed is a computer program that
takes inputs such as life expectancy, expected mean returns and
volatilities, and risk aversion and generates suggested spending/
investment plans based on these. Many retirees would not be able to
use such a program directly, so a financial planner could run it for
them. Elle would remind us that the inputs for such a program must be
estimated and are not known. Because of this, one would want a plan
that is robust to changes in assumptions, to the extent that is
possible.

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:Ss-dnZlry8vFn8LanZ2dnUVZ_j-dnZ2d[at]comcast.com...

- quote -

If your withdrawals are bounded by a fixed percentage of each year's total,
then the order in which the returns occur doesn't matter.

In other words, suppose that one year your portfolio drops 20% and the next
year it rises 30%. Then your balance at the end of that period will be
exactly the same as it would have been if it rose 30% and then dropped 20%,
even after withdrawals. Of course, your total withdrawals will be less in
the first scenario than they would have been in the second, but that's to be
expected.

The notion that an early run of bad luck might exhaust your portfolio goes
away if you let the portfolio's value determine how much you're willing to
withdraw.