Author Topic: How to Retire Forever on a Fixed Chunk of Money - inflation  (Read 2314 times)

browniedutch

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How to Retire Forever on a Fixed Chunk of Money - inflation
« on: December 17, 2018, 05:08:59 AM »
Hi, I'm working on the numbers from the latest post of MM. How to Retire Forever on a Fixed Chunk of Money. My spreadsheet is a bit different, lasting 19 years with 500K. Comments?

initial balance    500.000,00            
annual spending    40.000,00            
dividend yield   1,80%            
inflation rate   3,00%            
appreciation rate 7,00%            
               
               
year   start balance   dividend   net withdrawel   appreciation    end balance
1    500.000,00    9.000,00    40.000,00    35.000,00    504.000,00
2    504.000,00    9.072,00    41.200,00    35.280,00    498.080,00
3    498.080,00    8.965,44    42.436,00    34.865,60    490.509,60
4    490.509,60    8.829,17    43.709,08    34.335,67    481.136,19
5    481.136,19    8.660,45    45.020,35    33.679,53    469.795,37
6    469.795,37    8.456,32    46.370,96    32.885,68    456.310,09
7    456.310,09    8.213,58    47.762,09    31.941,71    440.489,70
8    440.489,70    7.928,81    49.194,95    30.834,28    422.129,02
9    422.129,02    7.598,32    50.670,80    29.549,03    401.007,25
10    401.007,25    7.218,13    52.190,93    28.070,51    376.886,83
11    376.886,83    6.783,96    53.756,66    26.382,08    349.512,26
12    349.512,26    6.291,22    55.369,35    24.465,86    318.608,76
13    318.608,76    5.734,96    57.030,44    22.302,61    283.880,94
14    283.880,94    5.109,86    58.741,35    19.871,67    245.011,25
15    245.011,25    4.410,20    60.503,59    17.150,79    201.658,45
16    201.658,45    3.629,85    62.318,70    14.116,09    153.455,85
17    153.455,85    2.762,21    64.188,26    10.741,91    100.009,50
18    100.009,50    1.800,17    66.113,91    7.000,67    40.896,26
19    40.896,26    736,13           68.097,32    2.862,74   - 24.338,32
« Last Edit: December 17, 2018, 08:23:49 AM by browniedutch »

nereo

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Re: 4% withdrawel
« Reply #1 on: December 17, 2018, 07:40:39 AM »
Your math is grossly off the mark.  You are using an 8% WR, not a 4% WR.
Hence, why the portfolio runs out of money after only 19 years.


jc4

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Re: 4% withdrawel
« Reply #2 on: December 17, 2018, 08:09:44 AM »
You probably realize this, but the 3% / 7% are averages not fixed. The return could be anywhere from <0% to about 20% for a given year. So your sheet will give you the average outcome, but you could end up better or worse of depending on sequencing.

If you know anything about simulation, you could put some randomly generated return values in and see what outcomes look like to know if you're comfortable with the result distribution.

BUT, good work getting started! It's a big, positive step!

browniedutch

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Re: 4% withdrawel
« Reply #3 on: December 17, 2018, 08:22:50 AM »
I used the same 40.000 annual spending from the blog, but with a different approach to calculation of inflation

Stimpy

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Re: 4% withdrawel
« Reply #4 on: December 17, 2018, 08:33:52 AM »
I used the same 40.000 annual spending from the blog, but with a different approach to calculation of inflation

40k = 8% for 500k in savings.   (500,000 * .08 = 40,000)
Use a withdraw of 20k and the math works better....

Andy R

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Re: 4% withdrawel
« Reply #5 on: December 17, 2018, 08:46:20 AM »
I used the same 40.000 annual spending from the blog, but with a different approach to calculation of inflation

MMM was using 2 x 500k accounts.
One that is accessible now and the other in 20-something years.
The point was the treat it as a whole but withdraw from one and as the years went on, one would draw down to not much while the other would appreciate leaving you an ability to continue drawing down.

So, assuming you realised that -

I would probably be more conservative and put in 5% over inflation based on current market valuations.
I would also think it's completely fucking insane to withdraw 4% of total portfolio without bonds! Bonds will lower your long term returns but will make sure that you HAVE a long term. Without bonds and a 4% withdrawal rate, SOR risk could ruin you very quickly. Have you not seen the bogleheads 2000-2018 thread?

If you are going for a 4% withdrawal rate, you can not afford to leave out bonds because it can crush you.
If you want to go 100% equities, you will need no more than a 3% withdrawal rate.

I would suggest if you are starting retirement and with a 4% withdrawal rate, to consider a bond tent, going from maybe 60/40 gliding up over 10 years to maybe 80/20. This will also mean lower returns for your calculations.
I would plug in an average of 0.5% real for bonds and 5% real for equities and then calculate it. So for 3% inflation that would be something like

yr1 60/40 => 6.20% nominal
yr2 62/38 => 6.29% nominal
yr3 64/36 => 6.38% nominal
yr4 66/34 => 6.47 nominal
yr5 68/32 => 6.56% nominal
yr6 70/30 => 6.65% nominal
yr7 72/28 => 6.74% nominal
yr8 74/26 => 6.83% nominal
yr9 76/24 => 6.92% nominal
yr10 78/22 => 7.01% nominal
yr11 80/20 => 7.10% nominal
yr12 80/20 => 7.10% nominal
yr13 80/20 => 7.10% nominal
...etc



OurTown

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Re: 4% withdrawel
« Reply #6 on: December 17, 2018, 08:56:58 AM »
Your math is grossly off the mark.  You are using an 8% WR, not a 4% WR.
Hence, why the portfolio runs out of money after only 19 years.

But Dave Ramsey sez you can take 8%! 

nereo

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Re: 4% withdrawel
« Reply #7 on: December 17, 2018, 09:16:55 AM »
Your math is grossly off the mark.  You are using an 8% WR, not a 4% WR.
Hence, why the portfolio runs out of money after only 19 years.

But Dave Ramsey sez you can take 8%!
The original thread subject (since changed) referenced using a '4% withdrawel [sic] rate'.  Hence the confusion.

Quote from: Andy R link=topic=100374.msg2232343#msg2232343 date=1545061580
If you are going for a 4% withdrawal rate, you can not afford to leave out bonds because it can crush you.
If you want to go 100% equities, you will need no more than a 3% withdrawal rate.

Why do you say this?  Every analysis I've run shows a 100% success rate with 100% equities with a WR in the upper 3.x% range.  Are you assuming the near future will be considerably worse than our worst historical periods of the last 125 years?

Andy R

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Re: How to Retire Forever on a Fixed Chunk of Money - inflation
« Reply #8 on: December 17, 2018, 10:17:45 AM »
Why do you say this?  Every analysis I've run shows a 100% success rate with 100% equities with a WR in the upper 3.x% range.

https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

At 30 years and 4% withdrawal rate you have a higher chance of failure with 100% stocks than 75%, and the reason is SOR risk.

I would agree that 3.5% would probably be ok, but I'd still want a bond tent during the first 10 years.

nereo

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Re: How to Retire Forever on a Fixed Chunk of Money - inflation
« Reply #9 on: December 17, 2018, 11:03:03 AM »
Why do you say this?  Every analysis I've run shows a 100% success rate with 100% equities with a WR in the upper 3.x% range.

[chart]
At 30 years and 4% withdrawal rate you have a higher chance of failure with 100% stocks than 75%, and the reason is SOR risk.

I would agree that 3.5% would probably be ok, but I'd still want a bond tent during the first 10 years.

Interesting chart, thanks for sharing. 
It reinforces my personal preference for a ~4% WR, but everyone's personal risk tolerance and time horizon is different. 
We've got several additional layers of safety built in that others might not have.

Andy R

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Re: How to Retire Forever on a Fixed Chunk of Money - inflation
« Reply #10 on: December 17, 2018, 07:33:29 PM »
Interesting chart, thanks for sharing. 
It reinforces my personal preference for a ~4% WR, but everyone's personal risk tolerance and time horizon is different. 
We've got several additional layers of safety built in that others might not have.

Yes for sure. There are a whole host of ways to reduce your risks. Part time work, bond tent, variable withdrawal rate, investing in something unaffected by the stock market (property), pension, etc

shinn497

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Re: How to Retire Forever on a Fixed Chunk of Money - inflation
« Reply #11 on: December 19, 2018, 11:11:24 PM »
This is going to sound unintuitive but a bond tent can increase your risk since bonds have a lower rate of return than stocks.

Andy R

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Re: How to Retire Forever on a Fixed Chunk of Money - inflation
« Reply #12 on: December 20, 2018, 12:59:50 AM »
This is going to sound unintuitive but a bond tent can increase your risk since bonds have a lower rate of return than stocks.

It doesn't sound unintuitive, it sounds like you're missing the difference between bonds and a bond tent.

There needs to be a balancing of 2 risks, short term risk and long term risk. A permanently high allocation of bonds increases long term risk but decreases short term (SOR) risk. A permanently low/no allocation of bonds decreases long term risk but increases short term (SOR) risk. The point of a bond tent is to mitigate both of these by reducing short term risk with higher bonds during the early years and then moving back up to more equities after that to mitigate long term risk.

You can't have your cake and eat it too. If you don't want to deal with short term risk and go with all stocks, you need to pay the piper somehow, either with a sub 3% withdrawal rate and/or a variable withdrawal rate and/or have an income unaffected by the market such as property or a pension or a part time job, etc..

Classical_Liberal

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Re: How to Retire Forever on a Fixed Chunk of Money - inflation
« Reply #13 on: December 20, 2018, 01:27:47 AM »
@shinn497

Bond tent is the new cool way of saying reverse glidepath.

Goldielocks

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Re: How to Retire Forever on a Fixed Chunk of Money - inflation
« Reply #14 on: December 20, 2018, 02:06:38 AM »
I don't understand the second line.

$504k + $9.072k - $41.2k +$35.28k = $498.1k?... Shouldn't it equal $507k?

Line one's math:
$500k + $9k - $40k +$35k = $504  check.

Line two?