Author Topic: CAPE and Safe Withdrawal Rates  (Read 5128 times)

SeattleCPA

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CAPE and Safe Withdrawal Rates
« on: March 12, 2018, 10:04:56 AM »
Siamond, one of the "elder" Bogleheads, has an awfully powerful blog post that talks about the relationship between CAPE and safe withdrawal rates:

https://finpage.blog/2018/02/28/cape-and-safe-withdrawal-rates/

Worth a read...  or two.


Padonak

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Re: CAPE and Safe Withdrawal Rates
« Reply #1 on: March 12, 2018, 11:45:11 AM »
Thanks, this is a great article

sol

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Re: CAPE and Safe Withdrawal Rates
« Reply #2 on: March 12, 2018, 12:11:50 PM »
Summary for the tl;dr crowd:  you should use a 2.9% SWR.

Which I think is ridiculous.  A 3% inflation adjusted SWR has never failed, for any length of time, under any conditions, for a diversified US portfolio.  Valuations have certainly been higher than today, and yet his own charts still show 4% as a safe minimum in those worst case scenarios.  Somehow he thinks the future will be worse than anything since 1927.  Which may be true, but you can't show it with his math.

I do appreciate the effort he's put in, I just disagree with his methodology, and thus with his conclusions.

boarder42

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Re: CAPE and Safe Withdrawal Rates
« Reply #3 on: March 12, 2018, 12:22:38 PM »
this is basically the same thing Kitces threw down that Mad Fientist reviewed awhile ago - while a reasonable indication of if you may want to OMY - thats all it really is to me. 

https://www.madfientist.com/safe-withdrawal-rate/

this keeps coming up on here.

boarder42

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Re: CAPE and Safe Withdrawal Rates
« Reply #4 on: March 12, 2018, 12:28:34 PM »
also if you remove 2009 from the CAPE which was an anomoly - still not even accounting for the changes in accounting practices that drive the Shiller PE higher.  we're at a 30ish PE  or 3.33% SWR

https://dqydj.com/shiller-pe-cape-ratio-calculator/

boarder42

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Re: CAPE and Safe Withdrawal Rates
« Reply #5 on: March 12, 2018, 01:03:44 PM »
I dunno... I tend to concur with @sol -- 3% is probably too conservative.  In my opinion, retirement planning is not an algebraic equation that can be solved in closed form with some sort of quadratic-retirement formula.  There are just two many unknowns.  But, by selecting an overly conservative withdrawal rate that provides 100% success with a 0% failure rate, even under terrible economic conditions, a person will likely be over-saving and over preparing by a long shot for most of the likely future scenarios. Assuming spending is fixed, going from from a 4% rate to a 3% rate means saving 25x spending to 33x spending, or over 30% more, in order to extinguish a 1-2% failure rate that could occur if the 4% rule is used instead of 3%.   I think it is far more reasonable to plan for 4% using a 75/25 or 80/20 stock/bond split while understanding that one needs to remain flexible and adaptable to changes.

In the original Trinity study the authors had this to say:

"What, then, can be done to help the investor in planning for a withdrawal rate? The word planning is emphasized because of the great uncertainties in the stock and bond markets.  Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted down-ward or upward relative the plan.  The investor needs to keep in mind that selecting a withdrawal is not a matter of contract but a matter of planning."

yes starting with a 4% SWR then adding a low cost fixed mortgage - and then being flexible to the point you can adjust your spending down by 10% (or earn that 10%) should the markets perform poorly immediately folloiwng FIRE - creates a longer and safer FIRE than just working to lower an SWR to insanely low levels.

boarder42

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Re: CAPE and Safe Withdrawal Rates
« Reply #6 on: March 12, 2018, 01:52:58 PM »
Also, I think focusing on CAPE, which by extension focuses on the stock market looks in the wrong place for sources of portfolio failure.

Over the long term risk comes primarily from inflation not from volatility.  Held for the long term, stocks are not risky at all they are one of the safest asset classes.  Bonds however become dreadfully risky.  Bonds categorically do not keep up with inflation as well as stocks.

Portfolio failure, when it happens, would likely come from having too much allocated to bonds at the wrong time, not from having too much allocated to a stock index fund.

portfolio failure comes from sequence of returns risk as well as sequence of inflation risk.  its not that its volatile its when it drops based compared to when you started withdrawing. and CAPE tracks so well with SWR's b/c it shows a time in which the market is more likely to drop in the next few years if CAPE is high or go up a bunch in the next few years if CAPE is low.

ChpBstrd

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Re: CAPE and Safe Withdrawal Rates
« Reply #7 on: March 12, 2018, 04:46:44 PM »
Perhaps the signal we're all missing is that we should use CAPE as a rebalancing tool. If CAPE ever reached 50, for example, the logical thing to do would be to hide 100% in bonds or cash and wait out the imminent stock market crash. Likewise, at CAPE = 15 you should be 100% stocks. These things are mean-reverting, although it can take years.

Thus a retiree has two levers: adjust spending to a SWR of their balance and adjust investments based on P/E.

In today's environment, preferred stocks, REITs, MLPs, and options single-digit-return strategies such as bearish spreads and collars are increasingly attractive. There's a very 1999 feel as a handful of tech unicorns are driving up index PEs. Don't think the rest of the market will take a different path than these unicorns; it certainly didn't in 2000. Hell, even the bursting of the bitcoin bubble 2 months ago was soon followed by a stock correction. Still, the next big (e.g. 20+%) correction could be years away, so hiding is probably not a good option. It's tough to not even be able to earn the rate of inflation in fixed income these days.

SeattleCPA

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Re: CAPE and Safe Withdrawal Rates
« Reply #8 on: March 12, 2018, 06:10:51 PM »
When you read Siamond's post, you also come away with sense that valuations matter the "other" way too: E.g., if valuations are low, you really could boost your withdrawal rate.

BTW, I blogged on his post today too and I think there's a pretty easy workaround for many still working folks. I think if you work another couple of years, that fixes the problem.

Siamond Withdrawal Rate Not a Pretty Picture

Also, I felt like he sees that number as a lower bound. So I don't think he's saying "Use 3% rather than 4%".... I think he's saying something more like "Be careful... what's safer may be something in the range 3% to 4%."


boarder42

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Re: CAPE and Safe Withdrawal Rates
« Reply #9 on: March 12, 2018, 07:14:45 PM »
When you read Siamond's post, you also come away with sense that valuations matter the "other" way too: E.g., if valuations are low, you really could boost your withdrawal rate.

BTW, I blogged on his post today too and I think there's a pretty easy workaround for many still working folks. I think if you work another couple of years, that fixes the problem.

Siamond Withdrawal Rate Not a Pretty Picture

Also, I felt like he sees that number as a lower bound. So I don't think he's saying "Use 3% rather than 4%".... I think he's saying something more like "Be careful... what's safer may be something in the range 3% to 4%."

Someone in their 30s or 40s even working another couple years is likely no big deal someone in their late 40s or 50s is really playing with death vs money lasting much more.

chasesfish

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Re: CAPE and Safe Withdrawal Rates
« Reply #10 on: March 12, 2018, 08:00:52 PM »
@boarder42 is spot on, the CAPE won't normalize until 2020 due to wonky accounting and the gains being realized in the private sector

Radagast

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Re: CAPE and Safe Withdrawal Rates
« Reply #11 on: March 12, 2018, 08:07:06 PM »
Nice find! It covers a lot of ground that the FIRE community has already covered, but it adds a couple small twists. Since I like to keep a lot of international stocks around and I believe in rebalancing bonuses I would tend to not go below 3.5% right now, but summarizing the article into a debate over a single number seems facile.

For me, the summary is this:

I'm ok with saving until I reach a SWR equal to 1/CAPE10 as a first approximation. People aren't happy because it gives a low number now, but most of the time it would have told you to give up your day job much earlier than the 4% rule would have indicated.

Radagast

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Re: CAPE and Safe Withdrawal Rates
« Reply #12 on: March 12, 2018, 09:43:57 PM »
Perhaps the signal we're all missing is that we should use CAPE as a rebalancing tool. If CAPE ever reached 50, for example, the logical thing to do would be to hide 100% in bonds or cash and wait out the imminent stock market crash. Likewise, at CAPE = 15 you should be 100% stocks. These things are mean-reverting, although it can take years.
I tried to think of a way to do this. My best guess is to weight your asset allocation according to its future expected real return. Assume valuations from OP link of US stocks CAPE=32.1, International are CAPE=25.2, and say bonds yield 2.8% with 2% expected inflation. That gives forward real return expectations of 3.1%, 4.0%, and 0.8%. Weighting your allocation according to expected return gives 40% US, 50% international, and 10% bonds. Anecdotally this weighting method would have worked pretty well in the past. A few problems:
-You need to rebalance to the expected-return-weighted allocation. Probably annually, every two years, or bands would be best.
-You have to assume reported valuations mean the same thing for both US and international.
-You have to assume that international should be weighted the same in the first place; maybe it should have a lower weighting.
-I haven't actually backtested it
-It's obviously market timing.

boarder42

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Re: CAPE and Safe Withdrawal Rates
« Reply #13 on: March 13, 2018, 04:54:47 AM »
@boarder42 is spot on, the CAPE won't normalize until 2020 due to wonky accounting and the gains being realized in the private sector

And will it even normalize then or will the recent tax changes keep it higher than normal due to the price being higher to reflect the current higher earnings environment due to lower taxes.

SeattleCPA

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Re: CAPE and Safe Withdrawal Rates
« Reply #14 on: March 13, 2018, 08:01:05 AM »
Nice find! It covers a lot of ground that the FIRE community has already covered, but it adds a couple small twists. Since I like to keep a lot of international stocks around and I believe in rebalancing bonuses I would tend to not go below 3.5% right now, but summarizing the article into a debate over a single number seems facile.

For me, the summary is this:

I'm ok with saving until I reach a SWR equal to 1/CAPE10 as a first approximation. People aren't happy because it gives a low number now, but most of the time it would have told you to give up your day job much earlier than the 4% rule would have indicated.

Agree with points made by Radagast above.

Siamond, as I read him, isn't saying use a 3% or 3.5% withdrawal rate. I think he's saying a "1/CAPE" rate sets a very safe lower bound. And that this rate works the other way too: A median or low valuation pushes up his lower bound.

Two other messages I took away: First, his charts show you often get a higher SWR than "1/CAPE". So you could safely nudge up his rate in almost every case if you apply common sense and apply a variable withdrawal rate. Second, the correlation between the 10 to 25 year return and CAPE is moderate and not strong so you don't let CAPE drive all your decision making.

boarder42

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Re: CAPE and Safe Withdrawal Rates
« Reply #15 on: March 13, 2018, 10:39:36 AM »

I'm ok with saving until I reach a SWR equal to 1/CAPE10 as a first approximation. People aren't happy because it gives a low number now, but most of the time it would have told you to give up your day job much earlier than the 4% rule would have indicated.

this is relative right.  b/c most people here have assets tied up in the market a crash in the market results in a higher SWR based on 1/cape but also results in a crash in your assets ... similarly with an aggressive rise.  It'd be interesting to run multiple different start of saving scenarios at a 50% savings rate to see if there was ever any real difference in the FIRE date when 1/cape was assumed to be the proper SWR. 

DreamFIRE

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Re: CAPE and Safe Withdrawal Rates
« Reply #16 on: March 13, 2018, 06:37:26 PM »
Someone in their 30s or 40s even working another couple years is likely no big deal someone in their late 40s or 50s is really playing with death vs money lasting much more.
Hmmmm.   I've never heard anyone state that retiring in their 40's or 50's is "playing with death."  Maybe that was supposed to be 80's and 90's.

For people retiring in their mid 50's, everything else being equal, they've worked more years to build up a larger SS benefit, plus they're less than 10 years from being able to add a SS benefit on top of whatever their stash provides them, so there's less time of relying strictly on the stash, and less need to work an extra year as someone younger might under the same conditions.  But the devil is in the details.  I'm fine with a 4% WR but have room to cut back to about half that if needed by cutting back to bare bones (goodbye $30k/yr fun & travel).  I'm certainly not delaying my FIRE beyond next year simply because of the CAPE arguments.  That whole topic has already been debated in the 4% sticky thread.

boarder42

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Re: CAPE and Safe Withdrawal Rates
« Reply #17 on: March 13, 2018, 07:20:02 PM »
Someone in their 30s or 40s even working another couple years is likely no big deal someone in their late 40s or 50s is really playing with death vs money lasting much more.
Hmmmm.   I've never heard anyone state that retiring in their 40's or 50's is "playing with death."  Maybe that was supposed to be 80's and 90's.

For people retiring in their mid 50's, everything else being equal, they've worked more years to build up a larger SS benefit, plus they're less than 10 years from being able to add a SS benefit on top of whatever their stash provides them, so there's less time of relying strictly on the stash, and less need to work an extra year as someone younger might under the same conditions.  But the devil is in the details.  I'm fine with a 4% WR but have room to cut back to about half that if needed by cutting back to bare bones (goodbye $30k/yr fun & travel).  I'm certainly not delaying my FIRE beyond next year simply because of the CAPE arguments.  That whole topic has already been debated in the 4% sticky thread.

The risk of death once you reach those later ages out weighs the risk of portfolio failure prior to death.  @Retire-Canada has some good takes on this.

ChpBstrd

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Re: CAPE and Safe Withdrawal Rates
« Reply #18 on: March 13, 2018, 10:20:56 PM »
@boarder42 is spot on, the CAPE won't normalize until 2020 due to wonky accounting and the gains being realized in the private sector

And will it even normalize then or will the recent tax changes keep it higher than normal due to the price being higher to reflect the current higher earnings environment due to lower taxes.

@chasesfish: It is easy to change the CAPE calculation to account for a different number of years than the standard 10. The result is slightly different, but our relative ranking as being in an expensive market stays true. E.g. 10y CAPE=34, 8y CAPE=30, 5y CAPE=30. Any way we measure it, that's an expected earnings yield just over 3% unless extraordinary GDP growth is on the way! In a nutshell, the great recession is not to blame; markets actually are historically expensive.  https://dqydj.com/shiller-pe-cape-ratio-calculator/

@boarder42: One narrative to explain late 2017- early 2018's market whipsaw is that markets rallied on the news of tax cuts and corrected on insider rumors of trade wars. I suspect there will be enough misfortune and stupid moves in the coming years to offset the benefits of lower taxes and then some. The most positive external event for stocks has already happened, and is fully priced in. Recent White House firings/resignations indicate the direction things will be going from here.

All that said, 2017 demonstrated that an expensive market can keep getting more expensive. We have yet to meet the CAPE=40 high water mark from 2000, but we exceeded 1929's CAPE=32 in December! I'm personally struggling with how to affordably hedge my exposure while remaining invested. My leading idea is a collared position or protected put in SPY rolled to a higher year annually, starting with the 2020 expirations. This would cost my portfolio around 2% per year to protect 90% of my portfolio while tying up the other 10% in the hedge. The competing idea is to simply buy long-dated calls with 10-15% of my portfolio and put the rest in short-term bonds. This would limit my losses to 10-15%. I've been talking about this for a while, but have yet to take action. Regardless of how we read CAPE, the odds of a hedge being profitable are higher in years when CAPE is spiking upward.

rxmurphy

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Re: CAPE and Safe Withdrawal Rates
« Reply #19 on: March 14, 2018, 01:36:00 PM »
Someone in their 30s or 40s even working another couple years is likely no big deal someone in their late 40s or 50s is really playing with death vs money lasting much more.
Hmmmm.   I've never heard anyone state that retiring in their 40's or 50's is "playing with death."  Maybe that was supposed to be 80's and 90's.

For people retiring in their mid 50's, everything else being equal, they've worked more years to build up a larger SS benefit, plus they're less than 10 years from being able to add a SS benefit on top of whatever their stash provides them, so there's less time of relying strictly on the stash, and less need to work an extra year as someone younger might under the same conditions.  But the devil is in the details.  I'm fine with a 4% WR but have room to cut back to about half that if needed by cutting back to bare bones (goodbye $30k/yr fun & travel).  I'm certainly not delaying my FIRE beyond next year simply because of the CAPE arguments.  That whole topic has already been debated in the 4% sticky thread.

The risk of death once you reach those later ages out weighs the risk of portfolio failure prior to death.  @Retire-Canada has some good takes on this.

Thanks folks, making me feel real good at 62.

Please get off my lawn.

boarder42

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Re: CAPE and Safe Withdrawal Rates
« Reply #20 on: March 14, 2018, 06:04:49 PM »
Someone in their 30s or 40s even working another couple years is likely no big deal someone in their late 40s or 50s is really playing with death vs money lasting much more.
Hmmmm.   I've never heard anyone state that retiring in their 40's or 50's is "playing with death."  Maybe that was supposed to be 80's and 90's.

For people retiring in their mid 50's, everything else being equal, they've worked more years to build up a larger SS benefit, plus they're less than 10 years from being able to add a SS benefit on top of whatever their stash provides them, so there's less time of relying strictly on the stash, and less need to work an extra year as someone younger might under the same conditions.  But the devil is in the details.  I'm fine with a 4% WR but have room to cut back to about half that if needed by cutting back to bare bones (goodbye $30k/yr fun & travel).  I'm certainly not delaying my FIRE beyond next year simply because of the CAPE arguments.  That whole topic has already been debated in the 4% sticky thread.

The risk of death once you reach those later ages out weighs the risk of portfolio failure prior to death.  @Retire-Canada has some good takes on this.

Thanks folks, making me feel real good at 62.

Please get off my lawn.

Should make you want to retire earlier if you haven't already.

DreamFIRE

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Re: CAPE and Safe Withdrawal Rates
« Reply #21 on: March 14, 2018, 07:12:07 PM »

I referenced some life expectancy data from 2014.

The "late 40's" person "playing with death" who is 48 years old has a life expectancy of 35 years and a 0.26% (~ 1/4 of 1%) chance of dying in the next year.

SeattleCPA

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Re: CAPE and Safe Withdrawal Rates
« Reply #22 on: March 14, 2018, 07:40:00 PM »
All that said, 2017 demonstrated that an expensive market can keep getting more expensive. We have yet to meet the CAPE=40 high water mark from 2000, but we exceeded 1929's CAPE=32 in December! I'm personally struggling with how to affordably hedge my exposure while remaining invested. My leading idea is a collared position or protected put in SPY rolled to a higher year annually, starting with the 2020 expirations. This would cost my portfolio around 2% per year to protect 90% of my portfolio while tying up the other 10% in the hedge. The competing idea is to simply buy long-dated calls with 10-15% of my portfolio and put the rest in short-term bonds. This would limit my losses to 10-15%. I've been talking about this for a while, but have yet to take action. Regardless of how we read CAPE, the odds of a hedge being profitable are higher in years when CAPE is spiking upward.

My thought...

Plan for a correction (and stress test the plan)
Try to include some less correlated assets in the portfolio where practically possible: direct real estate, private equity, etc.
Don't worry about stuff I can't predict or do anything about

ChpBstrd

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Re: CAPE and Safe Withdrawal Rates
« Reply #23 on: March 14, 2018, 10:18:13 PM »
All that said, 2017 demonstrated that an expensive market can keep getting more expensive. We have yet to meet the CAPE=40 high water mark from 2000, but we exceeded 1929's CAPE=32 in December! I'm personally struggling with how to affordably hedge my exposure while remaining invested. My leading idea is a collared position or protected put in SPY rolled to a higher year annually, starting with the 2020 expirations. This would cost my portfolio around 2% per year to protect 90% of my portfolio while tying up the other 10% in the hedge. The competing idea is to simply buy long-dated calls with 10-15% of my portfolio and put the rest in short-term bonds. This would limit my losses to 10-15%. I've been talking about this for a while, but have yet to take action. Regardless of how we read CAPE, the odds of a hedge being profitable are higher in years when CAPE is spiking upward.

My thought...

Plan for a correction (and stress test the plan)
Try to include some less correlated assets in the portfolio where practically possible: direct real estate, private equity, etc.
Don't worry about stuff I can't predict or do anything about
My thought with rolling a long-term hedge with LEAPs is to be able to ignore corrections and not even need less-correlated but traditionally lower-yielding assets. A put provides a guaranteed price floor that will keep me in the market through whatever. In practical terms, that would mean I'd know a severe correction wouldn't add years of work to my life.

The hard part is spending a five-figure sum of money on a derivative that (a) will be worthless if all goes as well as it possibly could, and (b) is guaranteed to decay simply due to the passage of time. Rolling the longest-available LEAPS every year instead of shorter-term options is a method that ties up more money but loses less to time decay.

E.g.
December 2018 SPY $275 put: $14.72 (insurance costs 5.35% of amount protected)
December 2019 SPY $275 put: $21.80 (insurance costs 7.93% of amount protected)
December 2020 SPY $275 put: $28.50 (insurance costs 10.36% of amount protected)

So the plan of buying the 2020 puts and selling them in a year when (all things being equal) they have decayed to what the 2019 puts are worth today would cost 10.36-7.93=2.43% of my portfolio per year. If, however, I bought the 2019 puts and sold them a year later, time decay would consume 2.58%. With the 2019s, time decay would be 0.15% more, but I would tie up 2.43% less of my money. The 2019's are a better deal if I can invest that 2.43% of my portfolio and earn greater than 6.17% ROI. The 2020's are a better deal if my best alternative is lower than that.

I think the 2020's are a better deal for strategic reasons. Bear markets destroy portfolios over the course of years, and I would not want to be forced to renew my hedge in a high-volatility environment when it would cost a lot more. The 2020s mean I could wait out a nasty bear market or panic and roll in 2 years or later if options prices were too high.

boarder42

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Re: CAPE and Safe Withdrawal Rates
« Reply #24 on: March 15, 2018, 01:02:54 AM »

I referenced some life expectancy data from 2014.

The "late 40's" person "playing with death" who is 48 years old has a life expectancy of 35 years and a 0.26% (~ 1/4 of 1%) chance of dying in the next year.

It's not just about your chance of dying the year after you fire. It's the overall likelihood you'll die before you run out of money @maizeman had a pretty sweet graph of this. RC quotes it alot. Basically the older you get your risk of FIRE is one not often talked about and that is working too long.  And starting in your late 40s and increasing considerably in your early 50s the overall chance of death considerably out weighs the chance of running out of money

DreamFIRE

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Re: CAPE and Safe Withdrawal Rates
« Reply #25 on: March 15, 2018, 03:21:02 PM »

I referenced some life expectancy data from 2014.

The "late 40's" person "playing with death" who is 48 years old has a life expectancy of 35 years and a 0.26% (~ 1/4 of 1%) chance of dying in the next year.

It's not just about your chance of dying the year after you fire. It's the overall likelihood you'll die before you run out of money @maizeman had a pretty sweet graph of this. RC quotes it alot. Basically the older you get your risk of FIRE is one not often talked about and that is working too long.  And starting in your late 40s and increasing considerably in your early 50s the overall chance of death considerably out weighs the chance of running out of money

Good, that's what people should be doing, planning for their money to outlast them, not the other way around.  Why would I want to run out of money first???  The general idea is that your money should last as long as you do or longer, not coming up short.  I don't consider that playing with death, that's merely planning appropriately.

Scortius

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Re: CAPE and Safe Withdrawal Rates
« Reply #26 on: March 15, 2018, 03:44:42 PM »

I referenced some life expectancy data from 2014.

The "late 40's" person "playing with death" who is 48 years old has a life expectancy of 35 years and a 0.26% (~ 1/4 of 1%) chance of dying in the next year.

It's not just about your chance of dying the year after you fire. It's the overall likelihood you'll die before you run out of money @maizeman had a pretty sweet graph of this. RC quotes it alot. Basically the older you get your risk of FIRE is one not often talked about and that is working too long.  And starting in your late 40s and increasing considerably in your early 50s the overall chance of death considerably out weighs the chance of running out of money

Good, that's what people should be doing, planning for their money to outlast them, not the other way around.  Why would I want to run out of money first???  The general idea is that your money should last as long as you do or longer, not coming up short.  I don't consider that playing with death, that's merely planning appropriately.

Yes, of course. I think the nuance here is in just how skewed the trade-offs are once you get to this point. The chance of running out of money varies on the order of tenths of a percent whereas the chance of ending up with way 'too much' money becomes extremely likely. Essentially, people are trading an extra year or more of working for a minuscule reduction in their risk of running out of money.

DreamFIRE

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Re: CAPE and Safe Withdrawal Rates
« Reply #27 on: March 15, 2018, 05:43:14 PM »

I referenced some life expectancy data from 2014.

The "late 40's" person "playing with death" who is 48 years old has a life expectancy of 35 years and a 0.26% (~ 1/4 of 1%) chance of dying in the next year.

It's not just about your chance of dying the year after you fire. It's the overall likelihood you'll die before you run out of money @maizeman had a pretty sweet graph of this. RC quotes it alot. Basically the older you get your risk of FIRE is one not often talked about and that is working too long.  And starting in your late 40s and increasing considerably in your early 50s the overall chance of death considerably out weighs the chance of running out of money

Good, that's what people should be doing, planning for their money to outlast them, not the other way around.  Why would I want to run out of money first???  The general idea is that your money should last as long as you do or longer, not coming up short.  I don't consider that playing with death, that's merely planning appropriately.

Yes, of course. I think the nuance here is in just how skewed the trade-offs are once you get to this point. The chance of running out of money varies on the order of tenths of a percent whereas the chance of ending up with way 'too much' money becomes extremely likely. Essentially, people are trading an extra year or more of working for a minuscule reduction in their risk of running out of money.
And that's just the way of the 4% rule.  Back testing shows that you are most likely to end up with more than enough money, sometimes more than you started with.  And personally, I'm fine with the 4% rule, it was some earlier posters that brought up the lower WR's due to high CAPE.

There are some withdrawal strategies that can help reduce the odds of an excessively large stash later in retirement by taking larger distributions depending on other factors other than just adjusting your distribution by inflation each each.  I remember someone recently posted asking about this because they were concerned with leaving money on the table.
« Last Edit: March 15, 2018, 05:49:11 PM by DreamFIRE »

Classical_Liberal

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Re: CAPE and Safe Withdrawal Rates
« Reply #28 on: March 15, 2018, 10:42:02 PM »
There are some withdrawal strategies that can help reduce the odds of an excessively large stash later in retirement by taking larger distributions depending on other factors other than just adjusting your distribution by inflation each each.  I remember someone recently posted asking about this because they were concerned with leaving money on the table.

I disagree that  A) quality of life would somehow be improved with more spending and B) having excess money is a good thing.

Rich old people have to deal with a ton of BS.  Excess capital, if it happens completely accidentally is one thing; but purposely putting oneself in a position that statistically almost guarantees excess capital by working more than wanted will create headaches later in life, not solve them.  OTOH if someone believes "A", then safe away.

GOFU

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Re: CAPE and Safe Withdrawal Rates
« Reply #29 on: March 16, 2018, 09:35:58 AM »
Rich old people have to deal with a ton of BS.  Excess capital, if it happens completely accidentally is one thing; but purposely putting oneself in a position that statistically almost guarantees excess capital by working more than wanted will create headaches later in life, not solve them.  OTOH if someone believes "A", then safe away.

Can you offer some examples of the BS and headaches we need to avoid or address?

ChpBstrd

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Re: CAPE and Safe Withdrawal Rates
« Reply #30 on: March 16, 2018, 10:56:22 AM »
Rich old people have to deal with a ton of BS.  Excess capital, if it happens completely accidentally is one thing; but purposely putting oneself in a position that statistically almost guarantees excess capital by working more than wanted will create headaches later in life, not solve them.  OTOH if someone believes "A", then safe away.

Can you offer some examples of the BS and headaches we need to avoid or address?

Tax complexity (depending on investments)
Being a target of scams
Relations with relatives strained
Friends/relatives begging for help
Oversized house maintenance
Isolation from less-wealthy friends during retirement years

GOFU

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Re: CAPE and Safe Withdrawal Rates
« Reply #31 on: March 16, 2018, 12:26:03 PM »
Rich old people have to deal with a ton of BS.  Excess capital, if it happens completely accidentally is one thing; but purposely putting oneself in a position that statistically almost guarantees excess capital by working more than wanted will create headaches later in life, not solve them.  OTOH if someone believes "A", then safe away.

Can you offer some examples of the BS and headaches we need to avoid or address?

Tax complexity (depending on investments)
Being a target of scams
Relations with relatives strained
Friends/relatives begging for help
Oversized house maintenance
Isolation from less-wealthy friends during retirement years
I don't believe any of these issues, in isolation or in the aggregate, are in any way unmanageable. I agree with you that unhealthy excess is, well, unhealthy. But when the alternative is the risk of not having enough, I'll take the problems on your list in a heartbeat.

sol

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Re: CAPE and Safe Withdrawal Rates
« Reply #32 on: March 16, 2018, 03:16:42 PM »
Rich old people have to deal with a ton of BS.  Excess capital, if it happens completely accidentally is one thing; but purposely putting oneself in a position that statistically almost guarantees excess capital by working more than wanted will create headaches later in life, not solve them.  OTOH if someone believes "A", then safe away.

Can you offer some examples of the BS and headaches we need to avoid or address?

Tax complexity (depending on investments)
Being a target of scams
Relations with relatives strained
Friends/relatives begging for help
Oversized house maintenance
Isolation from less-wealthy friends during retirement years
I don't believe any of these issues, in isolation or in the aggregate, are in any way unmanageable. I agree with you that unhealthy excess is, well, unhealthy. But when the alternative is the risk of not having enough, I'll take the problems on your list in a heartbeat.

It's all a matter of perspective.  I suspect that being 85 years old with three million dollars in investments is significantly less stressful than being 85 with a billion dollars.  Rich old people are targets.  The extra money doesn't really get you anything except stress and abuse and trust issues.  You're not going to spend it all either way.

Similarly, having one million is probably better than having three million.  Is having 500k left at that age (in today's dollars) better than 1mil?  Now we're getting down to the point where you could theoretically want to spend that money on nursing care or medical care if you live too long. 

The whole point of this website, gofu, is to help you make the mental leap away from the scarcity mindset. Fear of poverty is a bad motivator.  What is really "enough" in a world where millions die each year of starvation or bad sanitation services but jeff bezos can spend $42million on a clock, as a hobby?  You are already fabulously wealthy compared to almost every human who has ever lived, and you will never be as wealthy as someone like jeff.  Why do you really want more?  Why isn't today "enough"?

In reality, doubling your next egg from today's value will have essentially zero impact on your quality of life.  You will still have a home, and food, and a car, and an approximately middle class American lifestyle.  Arguably, the extra years spent sitting in cubicle for a high stress job are much more detrimental to your quality of life than is not having more money.

FiveSigmas

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Re: CAPE and Safe Withdrawal Rates
« Reply #33 on: March 16, 2018, 04:57:01 PM »
It's all a matter of perspective.  I suspect that being 85 years old with three million dollars in investments is significantly less stressful than being 85 with a billion dollars.  Rich old people are targets.  The extra money doesn't really get you anything except stress and abuse and trust issues.  You're not going to spend it all either way.

Heck, even 10 million sounds pretty stressful. It's an unfortunate fact that our brains don't work the same when we're 65+ (and financial reasoning is particularly susceptible to decline). The worst part is that we probably won't even notice our loss of cognitive function as we age, putting us at even greater risk.

Invest in good friends and strong family relationships while you're young!

DreamFIRE

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Re: CAPE and Safe Withdrawal Rates
« Reply #34 on: March 16, 2018, 05:49:05 PM »
And that's just the way of the 4% rule.  Back testing shows that you are most likely to end up with more than enough money, sometimes more than you started with.  And personally, I'm fine with the 4% rule, it was some earlier posters that brought up the lower WR's due to high CAPE.  I have not argued for any excesses beyond what the 4% rule might provide.

There are some withdrawal strategies that can help reduce the odds of an excessively large stash later in retirement by taking larger distributions depending on other factors other than just adjusting your distribution by inflation each each.  I remember someone recently posted asking about this because they were concerned with leaving money on the table.

I disagree that  A) quality of life would somehow be improved with more spending and B) having excess money is a good thing.

Rich old people have to deal with a ton of BS.  Excess capital, if it happens completely accidentally is one thing; but purposely putting oneself in a position that statistically almost guarantees excess capital by working more than wanted will create headaches later in life, not solve them.  OTOH if someone believes "A", then safe away.
But again, that's how the 4% rule works.  In order to have a very good chance of having your money last though your retirement using the widely recommended 4% rule, you are statistically most likely to have an excess by the time of your death, and in some cases, more than you started with when you FIREd.   The alternative withdrawal mechanisms are one way to minimize the excess.

Here's the thread I was referring to where someone posted their concern with leaving money on the table:
https://forum.mrmoneymustache.com/welcome-to-the-forum/how-do-you-make-sure-you-don%27t-leave-money-on-the-table-after-you-die-87785/

DreamFIRE

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Re: CAPE and Safe Withdrawal Rates
« Reply #35 on: March 16, 2018, 06:52:15 PM »
Arguably, the extra years spent sitting in cubicle for a high stress job are much more detrimental to your quality of life than is not having more money.

Ahhh.... the dreaded cubicle again.  Fortunately, I don't have to contend with that.

https://forum.mrmoneymustache.com/post-fire/when-you've-won-the-game!/msg1906475/#msg1906475

GOFU

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Re: CAPE and Safe Withdrawal Rates
« Reply #36 on: March 16, 2018, 07:01:52 PM »
Rich old people have to deal with a ton of BS.  Excess capital, if it happens completely accidentally is one thing; but purposely putting oneself in a position that statistically almost guarantees excess capital by working more than wanted will create headaches later in life, not solve them.  OTOH if someone believes "A", then safe away.

Can you offer some examples of the BS and headaches we need to avoid or address?

Tax complexity (depending on investments)
Being a target of scams
Relations with relatives strained
Friends/relatives begging for help
Oversized house maintenance
Isolation from less-wealthy friends during retirement years
I don't believe any of these issues, in isolation or in the aggregate, are in any way unmanageable. I agree with you that unhealthy excess is, well, unhealthy. But when the alternative is the risk of not having enough, I'll take the problems on your list in a heartbeat.

It's all a matter of perspective.  I suspect that being 85 years old with three million dollars in investments is significantly less stressful than being 85 with a billion dollars.  Rich old people are targets.  The extra money doesn't really get you anything except stress and abuse and trust issues.  You're not going to spend it all either way.

Similarly, having one million is probably better than having three million.  Is having 500k left at that age (in today's dollars) better than 1mil?  Now we're getting down to the point where you could theoretically want to spend that money on nursing care or medical care if you live too long. 

The whole point of this website, gofu, is to help you make the mental leap away from the scarcity mindset. Fear of poverty is a bad motivator.  What is really "enough" in a world where millions die each year of starvation or bad sanitation services but jeff bezos can spend $42million on a clock, as a hobby?  You are already fabulously wealthy compared to almost every human who has ever lived, and you will never be as wealthy as someone like jeff.  Why do you really want more?  Why isn't today "enough"?

In reality, doubling your next egg from today's value will have essentially zero impact on your quality of life.  You will still have a home, and food, and a car, and an approximately middle class American lifestyle.  Arguably, the extra years spent sitting in cubicle for a high stress job are much more detrimental to your quality of life than is not having more money.

I suspect that being 85 years old with a hundred bucks is significantly more stressful than being 85 with a billion. Whether 3 million is better than one million at that age would I suspect depend mainly on your health, but in many cases I agree it might make no difference.

But I disagree that someone who wants to retire in 2018 at age 40, or even 50 or 60, is in the same position with 1 million as he is with 2 million. As if that extra million dollars makes no difference to a sense of financial security, let alone the ability to take care of family and do some good in the world. A lot of people would have no need or use for the extra million, but a lot of people would. Maybe Iíll do a poll and ask people if, all else being equal, they would rather retire with 1 million or 2 million.

This is not to suggest that people should pursue the extra million (or any other amount) without regard to the cost in time, opportunity to do other things or diminution in mental or physical health. Everyone is different and if the time and effort to earn money are not worth it then by all means stop that activity and conform your life to your resources.

I donít think it betrays a scarcity mindset or fear of poverty to take a conservative or even cautious approach to making sure oneís accumulation is sufficient to last the rest of oneís days. Nobody can predict down to the dollar how much will be needed and my humble view is that it is better to err on the side of too much rather than too little. Quite to the contrary of a scarcity mindset I am pursuing a life of abundance both now and with preparations for the future. 

In any case, a properly channeled fear of poverty can indeed be a very good motivator. We all have that fear to one degree or another. That is why we save and plan and optimize, to make sure we can achieve and maintain a certain quality of life and to ensure we donít end up on the street or burdening others. Just like a fear of dark alleys in a bad part of town, at the right time, in the right place and to the right degree the right fear is a most healthy and useful thing.

Much less healthy and useful is comparing oneís situation to the needs, desires and resources of others. What difference does it make how rich or poor I am compared to anyone else? If I compared myself to my next-door neighbor I would get pilloried on this site for it and rightly so. Why then should I evaluate my needs and desires by the standards of mud hut villagers or multibillionaires who buy ridiculous clocks? They have nothing to do with me in terms of how much money I require to live and to properly and securely fund my retirement.

As I said before, unhealthy excess is axiomatically unhealthy. That includes the excessive pursuit of wealth accumulation, and it also includes an excessive fear of the potential pitfalls of having too much money in decrepitude. I would counsel against either excess.

The point of this thread is safe withdrawal rates. I would prefer to be in a financial position to not have to worry too much about whether I am withdrawing 3.5% or 5% in any given year regardless of almost any circumstance. And I prefer to be in a financial position where I donít need to stay ready to jump back into the work force to ride out tough times if they hit. I see nothing wrong with pursuing that in a manner consistent with my own contentment and physical and mental well being.   
« Last Edit: March 16, 2018, 09:32:25 PM by GOFU »

Classical_Liberal

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Re: CAPE and Safe Withdrawal Rates
« Reply #37 on: March 17, 2018, 12:51:28 AM »
I see nothing wrong with pursuing that in a manner consistent with my own contentment and physical and mental well being.

I don't either, it's your life.  re the poll,  that extra mil ain't free.  Depending on obligations, preferences, risk tolerances, hedonistic adaptation, etc, a million has different meanings. I'd be a fun poll, but you'd have to figure out a way to make it an apples to apples comparison, and add in the sacrifice to make that extra $. Even then, results would likely be mostly dependent on how satisfied someone is with life and work in the moment.

I laugh to myself about the splitting hairs in models/equations for WR's. What my life, spending preferences, security needs, etc, are going to be in 40 or even 10 years in the future... It's an educated guess, at best.  When a few thousand dollars of spending (or a few tenth's of a percent in WR) can change success rates of 50 year Cfiresim run's by 10% or more, it seems pointless to worry.  Shit isn't gonna work out exactly the way I think and a few grand a year for a wealthy westerner is peanuts.  I know it won't have any material impact on my happiness if I need to earn it or not spent it. This is the mindset change @sol is writing about.  Once money is, essentially, a solved problem, it's time to move up Maslow's Pyramid, or risk a pathology.

And that's just the way of the 4% rule.  Back testing shows that you are most likely to end up with more than enough money, sometimes more than you started with.  And personally, I'm fine with the 4% rule, it was some earlier posters that brought up the lower WR's due to high CAPE.  I have not argued for any excesses beyond what the 4% rule might provide.

Agreed, which is why 25X  spending is really an upper limit of wealth for me.  Anything more just stacks the odds too far into the excess/hassle category.  Besides, where's the fun in life if some type of failure isn't possible?  Hormesis is real folks!  Increasing spending beyond inflation (or for needs to maintain lifestyle; think hearing aids someday) would only serve to add convenience.  Convenience leads to less self-sufficiency and challenge; which, IMO, leads to a less enjoyable life.  So that's not really a solution for me either.

ChpBstrd

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Re: CAPE and Safe Withdrawal Rates
« Reply #38 on: March 17, 2018, 06:41:51 AM »
Returning to the example of the 85 year old who has either just run out of money or has millions socked away:

Would the person (i.e. you) at 85 with millions socked away trade the entire remainder of their life to get back those 3 extra years they worked in a cubicle surrounded by asshats their 40's? Keep in mind, the remainder of this life involves a lot of difficulty getting around, perhaps a broken hip, followed by bedsores, accompanied by a bit of dementia and a battle to push back depression, accompanied by a series of surgeries....etc.


Bateaux

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Re: CAPE and Safe Withdrawal Rates
« Reply #39 on: March 17, 2018, 12:53:50 PM »
Portfolio failure may come not from the easy things which you can control.  It may come from the hard things which you cannot.  Depressions, wars and health are some examples. 

ChpBstrd

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Re: CAPE and Safe Withdrawal Rates
« Reply #40 on: March 17, 2018, 08:01:08 PM »
Portfolio failure may come not from the easy things which you can control.  It may come from the hard things which you cannot.  Depressions, wars and health are some examples.
Thinking about the national debt and recalling the experiences of Argentina and Greece makes me wonder if offshore accounts and foreign currencies are prudent even for the slightly rich.

GOFU

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Re: CAPE and Safe Withdrawal Rates
« Reply #41 on: March 17, 2018, 09:05:12 PM »
Portfolio failure may come not from the easy things which you can control.  It may come from the hard things which you cannot.  Depressions, wars and health are some examples.
Thinking about the national debt and recalling the experiences of Argentina and Greece makes me wonder if offshore accounts and foreign currencies are prudent even for the slightly rich.
Where would you go? What would you hold?

ChpBstrd

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Re: CAPE and Safe Withdrawal Rates
« Reply #42 on: March 17, 2018, 09:31:39 PM »
Portfolio failure may come not from the easy things which you can control.  It may come from the hard things which you cannot.  Depressions, wars and health are some examples.
Thinking about the national debt and recalling the experiences of Argentina and Greece makes me wonder if offshore accounts and foreign currencies are prudent even for the slightly rich.
Where would you go? What would you hold?
I am increasing my financial literacy reading finance textbooks and exploring tax laws, but for now the exact moves to survive such a situation are unclear.

Probably something like a hedged equity position with a series of futures contracts to offset currency risk, in accounts of banks based in several countries.

That and never let a passport expire.

Radagast

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Re: CAPE and Safe Withdrawal Rates
« Reply #43 on: March 20, 2018, 08:51:07 PM »
One thing I notice about the figure above is that it seems to be a conservative forward-looking estimate of SWR with just one exception. It seems to fail during periods of unexpectedly high inflation. The few years in the 1930's where it failed presumably resulted from deflation ending. Then of course there was unexpected high inflation from 1964 to 1981. It seems like that might be useful.

I want to test this on my own but it takes some time to figure out especially for Excel-bound people like me. I think I know a general approach (which I think is what Tyler uses), but iteratively calculating minimum SWR's monthly from 1880 or 1900 seems like it will take tens of millions of cells.


SeattleCPA

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Re: CAPE and Safe Withdrawal Rates
« Reply #44 on: March 21, 2018, 07:21:14 AM »
Portfolio failure may come not from the easy things which you can control.  It may come from the hard things which you cannot.  Depressions, wars and health are some examples.
Thinking about the national debt and recalling the experiences of Argentina and Greece makes me wonder if offshore accounts and foreign currencies are prudent even for the slightly rich.
Where would you go? What would you hold?
I am increasing my financial literacy reading finance textbooks and exploring tax laws, but for now the exact moves to survive such a situation are unclear.

Probably something like a hedged equity position with a series of futures contracts to offset currency risk, in accounts of banks based in several countries.

That and never let a passport expire.

Chpbstrd, if you haven't perused the Rate of Return of Everything working paper, you would probably really find that interesting, actionable and (I think) uplifting.

Here's thread with link to article and discussion on off chance you're interested:

https://forum.mrmoneymustache.com/real-estate-and-landlording/rate-of-return-on-everything-a-150-year-history/

CorpRaider

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Re: CAPE and Safe Withdrawal Rates
« Reply #45 on: March 21, 2018, 07:36:40 AM »
Good stuff.  Mad Fientist has a visual tool somewhere in his lab section where he inverts the CAPE to give a SWR/yield.  He also has a floor and cap built into the tool.

SeattleCPA

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Re: CAPE and Safe Withdrawal Rates
« Reply #46 on: March 21, 2018, 02:08:54 PM »
Good stuff.  Mad Fientist has a visual tool somewhere in his lab section where he inverts the CAPE to give a SWR/yield.  He also has a floor and cap built into the tool.

Maybe this post: https://www.madfientist.com/safe-withdrawal-rate/

boarder42

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Re: CAPE and Safe Withdrawal Rates
« Reply #47 on: March 21, 2018, 02:11:20 PM »
Good stuff.  Mad Fientist has a visual tool somewhere in his lab section where he inverts the CAPE to give a SWR/yield.  He also has a floor and cap built into the tool.

Maybe this post: https://www.madfientist.com/safe-withdrawal-rate/

thats the post that sparked the calculator - he updates that guage looking thing every few months in the laboratory section

DreamFIRE

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Re: CAPE and Safe Withdrawal Rates
« Reply #48 on: March 21, 2018, 04:44:31 PM »

Following the OP, it looks it's time to lower those SWR's.  2.2% to 2.9% ought to do it!