Author Topic: How much does a 1-year buffer improve the 4% SWR?  (Read 17344 times)

arebelspy

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Re: How much does a 1-year buffer improve the 4% SWR?
« Reply #50 on: June 15, 2014, 06:55:05 PM »
Too bad I don't have a military pension. :p

Have you tried enlisting?

;)
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Workinghard

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Re: How much does a 1-year buffer improve the 4% SWR?
« Reply #51 on: June 15, 2014, 07:22:14 PM »
You mean I have to work for a pension? I tried once, but I didn't have a bachelors and now I'm too old and I still not have a bachelors.  :( 

Too bad I don't have a military pension. :p

Have you tried enlisting?

;)

Nords

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Re: How much does a 1-year buffer improve the 4% SWR?
« Reply #52 on: June 15, 2014, 09:22:22 PM »
Too bad I don't have a military pension. :p
My usual response to that comment is "Go buy an inflation-adjusted annuity." 

In your case, however, you're pretty close to Social Security-- and that's all the inflation-adjusted annuity income that you're likely to need.

Workinghard

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Re: How much does a 1-year buffer improve the 4% SWR?
« Reply #53 on: June 16, 2014, 03:15:58 AM »
Agreed! That's also why we decided to wait on dh's SS. Course I didn't know about waiting and the benefit until I started reading here and on another board.

Too bad I don't have a military pension. :p
My usual response to that comment is "Go buy an inflation-adjusted annuity." 

In your case, however, you're pretty close to Social Security-- and that's all the inflation-adjusted annuity income that you're likely to need.

k9

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Re: How much does a 1-year buffer improve the 4% SWR?
« Reply #54 on: June 16, 2014, 03:49:29 AM »
I don't really get the point. You have to choose : amazing returns with the risk of losing a lot if you're unlucky, *or* lower returns with a buffer of cash/bonds that will be safe not matter what Mr. Market thinks. Sorry, you can't have both, there's no free lunch.

If you want to play it safe, the permanent portfolio has a 25% cash portion that is supposed to protect you in these situations. If you prefer roller coasters, you can go with 80% stocks - 20% bonds, or even more stocks. If you're unsure, go for the middle way. A 50/50 has proved quite efficient.

But you can be sure of one thing : when you start trying to micro-optimize things, with AA that sums up to 104% (!) and a tentative to do market timing without the expert knowledge (either fundamental or technical analysis), you're on the wrong way.

TomTX

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Re: How much does a 1-year buffer improve the 4% SWR?
« Reply #55 on: June 16, 2014, 05:56:50 PM »

But you can be sure of one thing : when you start trying to micro-optimize things, with AA that sums up to 104% (!) and a tentative to do market timing without the expert knowledge (either fundamental or technical analysis), you're on the wrong way.

4% more than the base scenario was the original proposal. ie - how much safer am I if I work another 6 months and stash a "cash" cushion over my 25x annual expenses?

This was explained earlier.

arebelspy

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Re: How much does a 1-year buffer improve the 4% SWR?
« Reply #56 on: June 16, 2014, 06:10:48 PM »

But you can be sure of one thing : when you start trying to micro-optimize things, with AA that sums up to 104% (!) and a tentative to do market timing without the expert knowledge (either fundamental or technical analysis), you're on the wrong way.

4% more than the base scenario was the original proposal. ie - how much safer am I if I work another 6 months and stash a "cash" cushion over my 25x annual expenses?

This was explained earlier.

I do believe K9 understood that, but way trying to point out how it is a bit nonsensical.  :)
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warfreak2

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Re: How much does a 1-year buffer improve the 4% SWR?
« Reply #57 on: June 17, 2014, 03:18:51 AM »

But you can be sure of one thing : when you start trying to micro-optimize things, with AA that sums up to 104% (!) and a tentative to do market timing without the expert knowledge (either fundamental or technical analysis), you're on the wrong way.

4% more than the base scenario was the original proposal. ie - how much safer am I if I work another 6 months and stash a "cash" cushion over my 25x annual expenses?

This was explained earlier.
But it's not an apples-to-apples comparison. You're conflating two questions: "Should I work an extra 6 months for additional safety?" and "Should I allocate 4% to a cash buffer for additional safety?". Once you've decided to work those extra 6 months, you still have to ask whether keeping that extra 4% in cash is safer than splitting it between stocks and bonds.

dadof4

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Re: How much does a 1-year buffer improve the 4% SWR?
« Reply #58 on: June 25, 2014, 02:32:45 PM »
A study was actually done using most of your assumptions regarding a cash buffer.
http://www.onefpa.org/journal/Pages/Sustainable%20Withdrawal%20Rates%20The%20Historical%20Evidence%20on%20Buffer%20Zone%20Strategies.aspx

TL;DR:
"[T]he use of a buffer zone strategy of any sort—one year, two years, three years, or four years—is more likely than not to leave the investor worse off than if he or she simply set up an investment portfolio with a static asset allocation."

The only advantage of the buffer zone method is psychological:

"the use of a buffer zone may be merited if it will impact one’s investment portfolio choice. To elaborate, it may provide a psychological mechanism to induce clients to accept stock exposure."

TomTX

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Re: How much does a 1-year buffer improve the 4% SWR?
« Reply #59 on: June 28, 2014, 08:48:06 AM »
A study was actually done using most of your assumptions regarding a cash buffer.
http://www.onefpa.org/journal/Pages/Sustainable%20Withdrawal%20Rates%20The%20Historical%20Evidence%20on%20Buffer%20Zone%20Strategies.aspx

TL;DR:
"[T]he use of a buffer zone strategy of any sort—one year, two years, three years, or four years—is more likely than not to leave the investor worse off than if he or she simply set up an investment portfolio with a static asset allocation."

The only advantage of the buffer zone method is psychological:

"the use of a buffer zone may be merited if it will impact one’s investment portfolio choice. To elaborate, it may provide a psychological mechanism to induce clients to accept stock exposure."

The study is looking at the buffer technique, and initially it looked pretty exciting to me - the methodology for withdrawals is "close enough" to what I was proposing.

Unfortunately it looks like the study was set up to cause the buffer method to fail, based on their data set choices. At the very least, the useful data is swamped with crap.

A huge fraction (Okay, 71%) of the data is irrelevant, primarily because they mostly look at withdrawal rates over 4%, which has been pretty much debunked.... everywhere... for any reasonably long withdrawal timeframes. Their range of withdrawal rates used is 3-9% - higher withdrawal rates will pretty much require higher amounts of stock to have even a chance of survival.

Additionally, they are looking at much higher buffer amounts (1-4 years) - only their lowest matches my supposition.

Combine the two (9% and 4 years) and you have a 36% cash position.  Of course it fails over 30 years. 36% cash is ridiculous.

...then we have other silly things like having 100% of the "investment" portfolio in bonds.

So, throw out 71% of their data from the overly high to super-high withdrawal rates (5% to 9%)

...we're down to 28% of their data

Throw out 75% of the remaining for high to super-high buffer amounts. (2 years to 4 years)

...we're down to 7% of their data being applicable to the supposition.

Might also throw out the 75% bond and 100% bond scenarios, as I don't know anyone rational advocating this position for 30+ year timeframes.

...we're down to 4% of their data being applicable to the supposition.

They look at both 15 year and 30 year survival rates. 15 year is pretty irrelevant too.

...we're down to 2% of their data being applicable to the supposition.

Yes, they do a fair amount of breakout, but when they (for example) break out 3% SWR, the interesting data is conflated with the other crap data (15 year and 100% bond for example). When they break out 30 years, the interesting data is conflated with the remaining crap data  (9% withdrawal rate, 100% bond) et cetera.

Finally, they seriously lowball returns on cash. "Cash"  should be earning something close to inflation (longer term CDs, I-bonds) as these instruments can be cashed out with minimal or no penalty - with some restrictions. They instead chose 1-month treasuries, which even under-perform money markets to a serious degree.

5 year CD: 2.25% (BankRate shows 4 banks offering this rate or better)
Money Market: 0.95%
1-month Treasury: 0.02%

Yes, they lowballed returns by 200x

I'll send a nice note to one of the authors and see if they will do a breakout of the more useful data.

That being said, a quick view makes buffers look pretty bad. However, I can't parse the presented data finely enough to actually clearly see what I'm looking for and throw out the ridiculous scenarios.