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Post by mozart522 on Mar 31, 2024 12:41:58 GMT
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Post by Chahta on Mar 31, 2024 13:11:28 GMT
What if inflation was 5% for several years, and spiked like it did in 2022? Was bis assumption 2%?
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Post by mozart522 on Mar 31, 2024 13:55:28 GMT
What if inflation was 5% for several years, and spiked like it did in 2022? Was bis assumption 2%? Who is "His" |
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Post by steelpony10 on Mar 31, 2024 14:01:01 GMT
mozart522 , This is one of the primary reasons I chose a modified income method of investing. I know ahead of time what’s coming in each month regardless of the thousands of scenarios making any reasonable amount of spending optional. For anything else there’s plenty of slop being created each month for unknowns and/or increases in monthly spending relatively seamless.
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Post by retiredat48 on Mar 31, 2024 14:12:18 GMT
I'm generally OK with article. Although I don't recall the certainty being 100%....but above 99%. I notice the "new" SWR may be more like 4.75%. And stuff like the studies assume retiring 1 Jan, when others may have differing date, is nit-picking.
I never constrained myself to absolutely 4%, even though I lived off of IRA/401K monies for 30+ years now. And the RMD withdrawal rates also dictates a certain amount of withdrawal /going to cash, as well. I do not support the wait-to-age-70 to take SS, as improving things.
I had to project age 48 to age 88, and had a 20% chance of running out of money. However, portfolio much higher now than when started.
Thanks moz
Edit to add: Glad we have some retirement guru posters such as you moz on this forum! Keep up the good work.
R48
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Post by mozart522 on Mar 31, 2024 15:15:26 GMT
I'm generally OK with article. Although I don't recall the certainty being 100%....but above 99%. I notice the "new" SWR may be more like 4.75%. And stuff like the studies assume retiring 1 Jan, when others may have differing date, is nit-picking. I never constrained myself to absolutely 4%, even though I lived off of IRA/401K monies for 30+ years now. And the RMD withdrawal rates also dictates a certain amount of withdrawal /going to cash, as well. I do not support the wait-to-age-70 to take SS, as improving things. I had to project age 48 to age 88, and had a 20% chance of running out of money. However, portfolio much higher now than when started. Thanks moz Edit to add: Glad we have some retirement guru posters such as you moz on this forum! Keep up the good work. R48 Hi R48, I'm not a retirement guru by any means, but thanks for the kind words. I don't follow any of the traditional strategies: Starting at age 45 or so I began to save my ass off, basically living off my wife's salary. By the time I was 60, I had 25 times my expenses but my with was still working. I retired then and now have over 40 times my expenses. I follow no withdrawal plan; sometimes 6% and sometimes 2%. I look at the average after each 5 years (it has been about 3%) but only for entertainment. But I have a very low key lifestyle and most of my extra spending goes to things like funding my grandkids future education, or taking them on trips with us. So far, I have had more portfolio value each year than the last. I'm a very conservative investor and would be considered a market timer. I will leave the market completely sometimes. Last year I was 100% MM. I have no FOMO and know I will never spend what I have so I have no need to always be pushing for more. |
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Post by fritzo489 on Mar 31, 2024 15:32:49 GMT
retiredat48, "I had to project age 48 to age 88, and had a 20% chance of running out of money. However, portfolio much higher now than when started."
I'm finding the same thing, more money than when I retired.
Inflation or Mr. Market causing this increase ? Probably a little of both ! Plus rate of withdrawals. In my case minimum RMD.
Have a good Easter Sunday, fritzo489
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Post by Chahta on Mar 31, 2024 16:43:58 GMT
What if inflation was 5% for several years, and spiked like it did in 2022? Was bis assumption 2%? Who is "His" Bengen. If the initial 4% rises b by inflation each year, what did Bengen assume for inflation? Surely not 5%. |
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Post by yogibearbull on Mar 31, 2024 16:56:46 GMT
Chahta, Bengen used historical return data, not Monte Carlo method. So, he found what worked for 30-yr rolling periods.
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Post by mozart522 on Mar 31, 2024 18:09:35 GMT
Bengen. If the initial 4% rises b by inflation each year, what did Bengen assume for inflation? Surely not 5%. He didn't use an assumption, just actual data. For example in the high years of the 70's and 80's you would have taken as much as 7-9% more because of high inflation. Once inflation cooled down, you still would be taking a withdrawal based on that higher inflation plus adjusting it for new inflation. I have never believed most retirees usually need a full inflation adjustment because we don't always buy the things with the highest inflation in any given year. |
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Post by retiredat48 on Mar 31, 2024 18:28:51 GMT
Bengen. If the initial 4% rises b by inflation each year, what did Bengen assume for inflation? Surely not 5%. He didn't use an assumption, just actual data. For example in the high years of the 70's and 80's you would have taken as much as 7-9% more because of high inflation. Once inflation cooled down, you still would be taking a withdrawal based on that higher inflation plus adjusting it for new inflation. I have never believed most retirees usually need a full inflation adjustment because we don't always buy the things with the highest inflation in any given year. Remember boys and girls, during the late 70's, Money Market Funds were yielding 13+%; treasuries 15% or more. I couldn't teach my mother the concept of duration; she just loved her MM Fund. Luckily she had monies in Vanguards Junk Bond Fund as well. When rates began falling she then loved her junk bond fund! R48 |
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Post by catdog on Mar 31, 2024 19:29:12 GMT
Retirement spending is such a personal and individual thing. I could live on $20,000 a year, but throw my wife in and that figure goes up to about $80,000.
The same with an emergency fund, 6 months wages for one person could be very different than the next person.
catdog
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Post by Mustang on Mar 31, 2024 22:29:32 GMT
I think there is a lot Rob Berger doesn't understand about the 4% Rule. This paper is about half right. I wrote down some of his comments.
1. He criticizes 4% saying it changes depending on when retirement starts. That is patently false. It is based on the worst economic period in history with retirement starting in 1966. If I remember correctly Bengen's actual calculation was 4.15%. He used historical data on the SP500 and intermediate treasury bonds. He used actual historical inflation rates--no assumptions at all, just actual historical data. Several years inflation was double digit.The paper used stock allocations from zero to 100% in 25% increments. (You wouldn't believe the number of critiques I've read talking about 60/40. He later increased the initial withdrawal rate when he added small caps into the equation. His results were verified my a number of follow on studies including the Trinity Study (1998) and Wade Pfau's update of the Trinity Study (2018).
2. Yes, a 4% initial withdraw is specifically for a 30-year payout. It takes someone 65 to 95. But other payout periods were also included in thes studies: 3% works for 40 years, 5% for 20 and 6% for 15.
3. Almost all retirement studies start on January 1st. How else is the retiree suppose to live during his first year of retirement? Portfolio Visualizer uses a December 31st withdrawal for the following year's spending. Not much of a difference.
4. No invest fees (or taxes for that matter). Of course not. These change depending on state, type of investment and brokerage house. Consider the withdrawal gross income. Fees and taxes are taken from the withdrawal not the portfolio.
5. Every study I've ever read used annual re-balancing. If you don't want it, you have to turn it off in Portfolio Visualizer. But, without annual re-balancing the retiree could face a lot more risk than originally intended as one asset class does better than the others.
6. 100% success rate--yes. Here is where the author seems to be confused. There is a huge difference between a study using historical data and one using Monte Carlo computer simulations. A study using historical data is reporting ACTUAL success rate. One based on 10,000 computer simulations is based on PROBABLE success rates. Inputs make a huge difference in outputs. Using the same model, Morningstar said the initial withdrawal should be 3.3% for a 90% probability of success over 30 years. Two years later using the same model they said 4% should be used for a 90% probability for success over 30 years. What was the difference? Their assumptions concerning returns and inflation in the future. Not only that but in 10,000 simulation some scenarios border on the extreme. Because of these and other problems with Monte Carlo simulations a lot of advisors believe an 80% probability of success is acceptable. Michael Kitces once wrote that a 50% probability of success was acceptable but he redefined failure. This is a 50% probability of failure but a 50% probability that changes would be needed. Again, historical data produced actual success rates. Simulations produce probable success rates.
7. Historically, the average rate of return is 6.5%. In the last couple of decades it approached 10%. When Bengen conducted the original study advisors were using averages and retirees were running out of money. The maximum safe withdrawal rate is based on the worst economic period in history. It's easier for a retiree to make his savings last if he starts low and increases it later. It awfully hard to start high and drop it a lot later.
8. Spending less as we age is true. Roughly its 1% less per year in our 60, 2% less per year in our 70s and 1% less per year in our 80s. Both Kitces and Morningstar have written about this. If more is needed than a 4% initial withdrawal (30 year payout), the initial withdrawal can be increased 10-20% if the annual inflation increase is inflation minus 1 percentage point. If inflation is 5% take a 4% increase.
Paul Harvey used to say that is the rest of the story.
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Post by mozart522 on Apr 1, 2024 0:32:59 GMT
I think there is a lot Rob Berger doesn't understand about the 4% Rule. This paper is about half right. I wrote down some of his comments. 1. He criticizes 4% saying it changes depending on when retirement starts. That is patently false. It is based on the worst economic period in history with retirement starting in 1966. If I remember correctly Bengen's actual calculation was 4.15%. He used historical data on the SP500 and intermediate treasury bonds. He used actual historical inflation rates--no assumptions at all, just actual historical data. Several years inflation was double digit.The paper used stock allocations from zero to 100% in 25% increments. (You wouldn't believe the number of critiques I've read talking about 60/40. He later increased the initial withdrawal rate when he added small caps into the equation. His results were verified my a number of follow on studies including the Trinity Study (1998) and Wade Pfau's update of the Trinity Study (2018). 2. Yes, a 4% initial withdraw is specifically for a 30-year payout. It takes someone 65 to 95. But other payout periods were also included in thes studies: 3% works for 40 years, 5% for 20 and 6% for 15. 3. Almost all retirement studies start on January 1st. How else is the retiree suppose to live during his first year of retirement? Portfolio Visualizer uses a December 31st withdrawal for the following year's spending. Not much of a difference. 4. No invest fees (or taxes for that matter). Of course not. These change depending on state, type of investment and brokerage house. Consider the withdrawal gross income. Fees and taxes are taken from the withdrawal not the portfolio. 5. Every study I've ever read used annual re-balancing. If you don't want it, you have to turn it off in Portfolio Visualizer. But, without annual re-balancing the retiree could face a lot more risk than originally intended as one asset class does better than the others. 6. 100% success rate--yes. Here is where the author seems to be confused. There is a huge difference between a study using historical data and one using Monte Carlo computer simulations. A study using historical data is reporting ACTUAL success rate. One based on 10,000 computer simulations is based on PROBABLE success rates. Inputs make a huge difference in outputs. Using the same model, Morningstar said the initial withdrawal should be 3.3% for a 90% probability of success over 30 years. Two years later using the same model they said 4% should be used for a 90% probability for success over 30 years. What was the difference? Their assumptions concerning returns and inflation in the future. Not only that but in 10,000 simulation some scenarios border on the extreme. Because of these and other problems with Monte Carlo simulations a lot of advisors believe an 80% probability of success is acceptable. Michael Kitces once wrote that a 50% probability of success was acceptable but he redefined failure. This is a 50% probability of failure but a 50% probability that changes would be needed. Again, historical data produced actual success rates. Simulations produce probable success rates. 7. Historically, the average rate of return is 6.5%. In the last couple of decades it approached 10%. When Bengen conducted the original study advisors were using averages and retirees were running out of money. The maximum safe withdrawal rate is based on the worst economic period in history. It's easier for a retiree to make his savings last if he starts low and increases it later. It awfully hard to start high and drop it a lot later. 8. Spending less as we age is true. Roughly its 1% less per year in our 60, 2% less per year in our 70s and 1% less per year in our 80s. Both Kitces and Morningstar have written about this. If more is needed than a 4% initial withdrawal (30 year payout), the initial withdrawal can be increased 10-20% if the annual inflation increase is inflation minus 1 percentage point. If inflation is 5% take a 4% increase. Paul Harvey used to say that is the rest of the story. If someone retires in June instead of January using the 4% rule, how do they figure inflation adjustment the next June? They can't use the year end, and if they combine the two months then their results will be different than someone retiring on Jan 1. Isn't that all Berger was saying? What I found interesting wasn't the comments on the Bengen study. I find the Bengen rule pretty useless to almost all investors as does Berger. It was the Spend Safely in Retirement study that Wade Pfau expanded on that is actually safer than the 4% rule and easier to follow, particularly in a large market drawdown. |
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Post by Mustang on Apr 1, 2024 11:32:05 GMT
Prorating an inflation adjustment isn't hard. A mid-year retirement would require both the initial withdrawal and the following inflation adjustment to be prorated. A $40,000 retirement income for a half year is a $20,000 withdrawal. If inflation is 4% then the inflation adjustment would be 1.02 times $40,000 for the following year's withdrawal (assuming an annual withdrawal from investments to a money market in January). You brought up annuities (Spend Safely in Retirement): howardbailey.com/resources/podcasts/121-the-safety-first-approach-to-retirement-income-with-wade-pfau "Wade Pfau: So, the safety-first approach is really part of the academic research and the investment-based approach really is more of based on rules of thumb developed by financial advisors. I kind of say that the investments-only style approach really goes back to Bill Bengen’s research that led to the 4% rule in the 1990s. There's just, "Well, let's look at historical data and see how much you could have spent over different periods in history and kind base our guidance on retirement around that.” Whereas the safety-first approach is based on academic research. And really the conclusion of the academic research is you build a floor so that your basics are going to be covered with some sort of contractually-protected income. And then from your remaining assets, you can spend it's more for the upside in the lifestyle so kind of the rules around required minimum distributions provide an example of what you could do with your remaining investment assets. It's, as you get older, you spend an increasing percentage of what's left every year for upside. And that's really the core academic approach, build a floor to cover the basics and then be more aggressive and spend with an increasing percentage to cover more discretionary types of expenses beyond that core floor." Depending on the retiree's assets and spending needs, I think annuities and reverse mortgages are great ways to augment retirement income. I own two annuities. An income annuity that pays my wife a steady, inflation adjusted income when I'm gone and a variable annuity which I dislike completely because of very high fees. Annuities are pooled risks based on mortality rates. Everyone pays in and those that die early provide the income stream for those that don't. Nothing is left behind for heirs. I treat them in my succession plan just like I treat pensions and social security. They are subtracted from budgeted expenses before turning to retirement investments for additional income. Pfau wrote that book several years ago when bonds were paying next to nothing. (I haven't read the book only articles about it.) That situation has changed a little. I thought his idea of completely replacing the bonds in a diversified portfolio with an annuity and marrying it with a 100% stock mutual fund for growth an interesting idea. Whether its simpler or not depends upon the annuity and whether it, the pension, and social security cover all core living expenses. But then the retiree will still need a withdrawal method for taking money from the mutual fund or funds. I think 100% stock funds are too risky if withdrawal are planned. Planning a vacation next year? Sorry the market went down. Even after getting the annuity I would think a retiree would want a diversified investment portfolio. A variable withdrawal method from that portfolio would mean extra spending would have peaks and valleys. Want a little more stable income for those additional expenses then a fixed dollar method like the 4% Rule would be used.
P.S. The Trinity Study (1998) which backed up Bengen's findings was academic research. I'm assuming Pfau's 2018 update was academic research as well.
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Post by yogibearbull on Apr 1, 2024 12:40:37 GMT
Bengen's 4% w/COLA SWRThing to remember is that before-Bengen (BB!), the conventional wisdom was to use average point-to-point TRs and to decrease those some to get a margin of safety. BTW, Dave Ramsey is still foolishly stuck to that notion in 2024 - and was called out for that recently. It turns out that there is no predictable margin of safety for doing this and this notion has to be discarded entirely. In came Bengen 1994. Remember that Portfolio Visualizer (PV) wasn't around in 1994 to instantly run almost any withdrawal scenario. Bengen quantified SWR withdrawals to "4% w/COLA" using historical data (also, $300 lump-sum per $1/mo income). That inspired many other studies, including those using Monte Carlo. It doesn't make sense to critic the specific details of Bengen's 1994 work. It made a huge impact in the thinking about SWR, SOR, etc (including the recent YBB SWRM). Bengen himself has tinkered with his rule a bit but it remains standing in essential ways. Being a financial advisor (retired in 2013), he never recommended it for everybody (legally, he couldn't), but told people to contact him or his firm for applications in their specific situations. BTW, before becoming a financial advisor, Bengen was an engineer (MIT BS - Aero & Astro), and even wrote a book on model rockets, and then ran a family franchise business of soft drink bottling. Certainly, a very interesting fellow, and not very old at 76. web.archive.org/web/20120417135441/http://www.retailinvestor.org/pdf/Bengen1.pdfen.wikipedia.org/wiki/William_Bengen
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Post by Chahta on Apr 3, 2024 12:33:58 GMT
Bengen. If the initial 4% rises b by inflation each year, what did Bengen assume for inflation? Surely not 5%. He didn't use an assumption, just actual data. For example in the high years of the 70's and 80's you would have taken as much as 7-9% more because of high inflation. Once inflation cooled down, you still would be taking a withdrawal based on that higher inflation plus adjusting it for new inflation. I have never believed most retirees usually need a full inflation adjustment because we don't always buy the things with the highest inflation in any given year. I guess that was too obvious, since he did the study over historical years. However, I have never read the study and probably should have. I am into my 5th retirement year and have yet to take an IRA withdrawal. But next year with be my first to satisfy my RMD. |
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Post by retiredat48 on Apr 3, 2024 14:20:31 GMT
He didn't use an assumption, just actual data. For example in the high years of the 70's and 80's you would have taken as much as 7-9% more because of high inflation. Once inflation cooled down, you still would be taking a withdrawal based on that higher inflation plus adjusting it for new inflation. I have never believed most retirees usually need a full inflation adjustment because we don't always buy the things with the highest inflation in any given year. I guess that was too obvious, since he did the study over historical years. However, I have never read the study and probably should have. I am into my 5th retirement year and have yet to take an IRA withdrawal. But next year with be my first to satisfy my RMD.Doesn't even need his IRA to live on! The boards are dominated by "wealthy people."  R48 |
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Post by Mustang on Apr 3, 2024 18:39:57 GMT
He didn't use an assumption, just actual data. For example in the high years of the 70's and 80's you would have taken as much as 7-9% more because of high inflation. Once inflation cooled down, you still would be taking a withdrawal based on that higher inflation plus adjusting it for new inflation. I have never believed most retirees usually need a full inflation adjustment because we don't always buy the things with the highest inflation in any given year. I guess that was too obvious, since he did the study over historical years. However, I have never read the study and probably should have. I am into my 5th retirement year and have yet to take an IRA withdrawal. But next year with be my first to satisfy my RMD. You can find it here: robberger.com/research/determining-withdrawal-rates-using-historical-data/ |
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Post by Chahta on Apr 4, 2024 0:38:50 GMT
I guess that was too obvious, since he did the study over historical years. However, I have never read the study and probably should have. I am into my 5th retirement year and have yet to take an IRA withdrawal. But next year with be my first to satisfy my RMD.Doesn't even need his IRA to live on! The boards are dominated by "wealthy people." R48 I am spending my taxable account first. My 94 YO mother has been gifting her 3 kids for the last 5 years so that helps. I'll take a WAG and say I am average portfolio size. True 'wealthy people' retire at 48, not 66 like me. |
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Post by bb2 on Apr 4, 2024 19:36:49 GMT
I don't believe in forecasts. Historical data, sure, FWIW. Expert judgement, FWIW, maybe but I'd need an expanation to which I'd think, "That makes sense.", for the short term only and remain vigilant.
Only thing I trust is a huge flush, sending prices crashing. The rest : survival mode.
As the M*/advisor crowd says, after they explain the 4% rule, stay flexible. Have cash so you don't need to sell at a low. Even they know that blindly following a "rule" is probably ill advised.
Best retirement advice I've seen: have a lot of money. As much as you can.
And swing with your body, not your arms. (Golf, IKYDK)
Final edit for the young reading this: Start or buy a business. Start if you're a tech. Buy if not. (Or even if.)
Buy a small struggling biz and make improvements. There's a golf driving range/9 hole course I know. The guy who owned it, I knew well. Great guy but didn't care. He died and a few years later a couple young guys bought it. They went from 80 people/day at the range to over 200. A few speakers with music, beer in the fridges, taco truck, redo the bathrooms, the cafe. It's booming.
I know other stories. You'll end up with millions and you've worked for yourself.
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