Author Topic: Forget the 4% SWR, or Any SWR - It's All About Income  (Read 33067 times)

DoubleDown

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Forget the 4% SWR, or Any SWR - It's All About Income
« on: April 02, 2014, 12:56:27 PM »
For anyone who's mystified by the 4% Safe Withdrawal Rate (SWR), or who questions if it's too conservative or not conservative enough, or how they access their 4% annually once they're retired, or if they should include home equity in their net worth and annual withdrawals, or if they can just hit a "Number" and then retire, I suggest perhaps forgetting it and instead looking at it from the other angle: Retirement Income. That might make things a little more straightforward to understand.

I'd venture to say that very few real-life early retirees have paper equities as their sole asset, that they blindly withdraw 4% every year, no matter the circumstances (that scenario forms the basis for the theoretical "4% SWR"). More likely, early retirees will have a variety of income-producing assets or other income streams that they will access at different times. That's why a SWR only goes a little way to understanding what you need to retire, and when you can do so. Really, there are only three basic steps in deciding when you have "enough" to retire:

1. Determine how much you need/want to live on annually once you are retired. If you want to get extra fancy about it, you can break up "how much you will need" into more than one period. Say, you might need more while kids are in college, or when you are in a nursing home, or less while you're backpacking through Asia -- whatever works for your own circumstances.

2. Determine what your assets are worth, and what income (if any) they will or can generate for you in retirement (see below).

3. Decide when and how to tap into those assets during your retirement to cover your expenses. That is, devise income streams from your assets to cover the expenses you anticipated during the different stages in life, in Step 2 above.

We all probably already know that retirement income can come from a variety of sources: pensions, dividends on stocks, rental income on property owned, selling paper equities (stocks, bonds, etc.), Social Security, cash stowed under your mattress, part time work or other income-producing activities like selling stuff on eBay, etc. For each kind of asset you own, or intend to own in retirement, determine how much income it will generate, and when you will start using it to generate income. That's it -- once the income generated from those assets meets or exceeds your annual needs, you're ready to retire. No official SWR is required. You could get all of your income in the form or rents on properties you own, which makes an "SWR" meaningless; or 1/2 from rental property, 1/4 from selling stocks, and 1/4 from Social Security, or any other infinite combinations of things.

This will all be highly dependent on the kind of asset, of course. For example, you obviously can't start taking Social Security until you hit a minimum age, and even then you must decide if you want to take it early or wait until you are older for a higher monthly payment. In that way, you might decide to deplete stocks you own at a rate higher than 4% while you are younger, expecting that you will have additional income in the form of Social Security, 401k withdrawals, or pensions when you are older. Home equity in your primary residence provides Zero income unless you take a reverse mortgage, rent out a room, or sell your home. Again, the goal is to determine income streams for the different stages of your retirement, maximizing each asset for its intended purpose.

The only asset for which I use an "SWR" is equities. Even then, an SWR is not particularly relevant for me, because I intend to use up taxable equities at a rate much higher than 4% between my current age of 47, and then later stages in life when I have some other income streams that will start (401k, pension, rental income, selling rental property, and Soc. Security in my case). That way, I can let my 401k, pension and Soc. Security sit as long as possible, getting the most return when I'm older.

There will undoubtedly be some recalibrating and rebalancing every year along the way, but I've structured things in a way that will provide overall for the amounts of income I want during different stages of life. Personally, I've set it up for a pretty balanced income for the rest of my life, but I've slanted things a little heavily to having more income later in life. I've done this mostly as a risk-mitigation thing, not wanting to find myself doing the proverbial cat food-eating when I'm old. And I'm playing things a little safer for the first year or two to avoid any potential bad sequencing, and because I'm still relatively young and could go back to work if needed, and mostly because all our needs are met and I don't have any particular need to spend more.

Hope this helps, please feel free to poke holes or offer suggestions.

Nords

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #1 on: April 02, 2014, 01:19:46 PM »
An alternative to the 4% SWR (annual expenses x 25) is the "living off the dividends" approach-- which is typically estimated at 3% or 33x.  If you want to be ridiculously conservative then you'd use the S&P500 dividend rate, which puts you up into 40x-50x territory.

Of course if you set up an income stream to cover your expenses-- annuity or rental property-- then SWR is irrelevant.  In any case it's also the dividend approach, and we just debate the value of the assets that create the income stream.

The issue between the two approaches is at least 8x your annual expenses.  Depending on your income, that could require a few more years of working.  Most people saving for ER are not very interested in continuing to work, so they might find the 4% SWR much more compelling. 

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #2 on: April 02, 2014, 01:29:53 PM »
I agree with the OP, in principle.  However, I would recommend changing the title to state: "It is all about cash flow", rather than income.

People aiming to retire early would generally be better served by targeting a sustainable net positive cashflow from passive (or non-employment related) income, rather than a safe withdrawl rate (SWR). SWR studies are only applicable for stock & bond portfolios that are required to last a limited number of years.  Generally, these studies were targeted at "normal" retirees (i.e., people retiring in their 50s and 60s).  These studies also assume no income from other sources or significant increases in annual expenses, beyond general inflation.

Therefore, I highly recommend that anyone considering early retirement project out their future cashflows (until end of life), before electing to fully retire.  I find that spreadsheets are most useful for this purpose. 

arebelspy

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #3 on: April 02, 2014, 01:31:02 PM »
No official SWR is required. You could get all of your income in the form or rents on properties you own, which makes an "SWR" meaningless; or 1/2 from rental property, 1/4 from selling stocks, and 1/4 from Social Security, or any other infinite combinations of things.

...

Hope this helps, please feel free to poke holes or offer suggestions.

The biggest hole is that how do you tell how much stocks to sell?  I.e. what rate is safe to make sure you won't run out of stocks, then have to take a (potentially unsustainable) 25% paycut.

This is where www.cfirsim.com comes in handy, IMO.

Put in any income from rental properties, etc. as an "other saving" input, and see what is sustainable.

Thinking blindly about some X% "SWR" is often too broad because you will have a more specific situation, I agree.

The other big issue with just thinking about it this way is that many who want to FIRE off of income, but don't want rentals, go for dividends.  This can lead to two potential issues:
1) They save way more than is needed (not necessarily a bad thing, but if they work years longer than they wanted to in order to do so, that's far from ideal) because of low dividend yields

or

2) They reach for yield, and pick poor stocks because they have high dividends.  This cases ER failure.

I think just thinking about income (specifically dividends) is actually detrimental to a good FIRE plan.

Again, cfiresim.com is the best way to go, IMO.  It will let you evaluate your specific scenario and AA and let you know what you can withdraw safely from the equities you have.

A 4% SWR is too simplified.  So is an "income only" plan.  Something like this shouldn't be over simplified.
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anisotropy

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #4 on: April 02, 2014, 02:10:02 PM »
or.....have a pre-determined asset allocation and stick with it. For example, if by the time you retire you have 1M liquid asset and your yearly budget is 35k. Then an asset allocation that would work could be :

3.5% cash
30% Bond
66.5% Stock

if your investments make some money during the year and assets increases to 1.05M, rebalance at the beginning of the year and take out the cash.

if your invesetment loses money during the year and assets drops to 0.95M, you do the reverse. It'd be wise to have a nice cushion (20%?) if you use this method, that's what we are planning to do.

There are many ways to do this, i feel they are all more or less the same.

DoubleDown

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #5 on: April 02, 2014, 03:48:36 PM »

The biggest hole is that how do you tell how much stocks to sell?  I.e. what rate is safe to make sure you won't run out of stocks, then have to take a (potentially unsustainable) 25% paycut.


I'd argue that as far as stocks go, there is no certain answer, only educated guesses based on historical data. If we're going to have money in stocks (and we should), then we never know with 100% certainty what will be absolutely safe to withdraw in the future. My best guess is "$ in stocks divided by the number of years you expect to live, recalibrated every year (then you die with $0 in stocks)." Or you could go with "4%" as a super safe bet. For me personally, I would never have a 70 - 100% stock ER portfolio -- far too much volatility for my tastes. I want a decent standard of living covered by much safer income streams like rental income, annuities/pensions, social security, so that I don't have to stress over the years about your good question. Then if stocks do indeed perform as I expect them to, with a 4% SWR, that will be bonus money so to speak. But I realize this approach might not be for others, and it could lead to working longer than you had to if you had perfect knowledge of the future.

This is where www.cfirsim.com comes in handy, IMO.
...

A 4% SWR is too simplified.  So is an "income only" plan.  Something like this shouldn't be over simplified.

Yes, +1 for cfiresim. I see it as one tool in the arsenal, though. The challenge with any plan is the assumptions that go into it. For example, we make assumptions about how our stock portfolio will perform over the long run (which cfiresim does using historical data); we make assumptions about inflation in the future; about whether our pension or Soc. Sec. will still be there 20 years from now; and so on. You have to go into this with the understanding that some assumptions may turn out to be wrong, and hopefully have enough safety margins and diversification to survive that.

I really don't mean to imply that an "income plan" is the only way to go, and that SWR is meaningless. Like Nords points out, they're really just two sides of the same coin. I'm really just trying to help those confused by the SWR, offering up another way of thinking about the "how do I pay for things in retirement" question.

DoubleDown

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #6 on: April 02, 2014, 03:51:00 PM »

Therefore, I highly recommend that anyone considering early retirement project out their future cashflows (until end of life), before electing to fully retire.  I find that spreadsheets are most useful for this purpose.

Amen, brother/sister! Same for me, good ol' spreadsheets give me exactly the picture I want of how to create income streams over the future years.

DoubleDown

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #7 on: April 02, 2014, 03:57:11 PM »
or.....have a pre-determined asset allocation and stick with it. For example, if by the time you retire you have 1M liquid asset and your yearly budget is 35k. Then an asset allocation that would work could be :

3.5% cash
30% Bond
66.5% Stock

if your investments make some money during the year and assets increases to 1.05M, rebalance at the beginning of the year and take out the cash.

if your invesetment loses money during the year and assets drops to 0.95M, you do the reverse. It'd be wise to have a nice cushion (20%?) if you use this method, that's what we are planning to do.

There are many ways to do this, i feel they are all more or less the same.

I think that's a sound approach too, but personally I'm too much of a wuss to have an all-paper portfolio. I think I would not enjoy my freedom if we were going through a 2- or 3-year+ market downturn, and I'm selling stocks at bargain basement prices in order to convert to cash to live off. Yeah, I know that historically, they should go back up, I just would not enjoy going through that volatility. Meanwhile, I would have unexpected funeral and burial expenses because my wife would have died of a stroke or heart attack in the first month of a downturn!

Another Reader

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #8 on: April 02, 2014, 04:07:25 PM »
DoubleDown is on the right track in my view.  Most folks I know that have retired or will soon retire with a portfolio of paper assets and a decumulation plan are spending a lot of time looking over their shoulder at the stock and bond markets.  It looks like the plan ought to work, but then there's that pesky sequence of returns risk to worry about and some valid reservations about the projected stock market growth rates in a mature economy being sustainable in the future.  Call it the bucket approach or the multi-legged stool, but I think acquiring assets that throw off sufficient income to support you without significant decumulation is the only was to feel secure about 40 years of retirement.  Pensions, real estate, dividend paying stocks, IRA RMD's and a general stock portfolio all work together to provide the income.  And the income plan is key.
« Last Edit: April 02, 2014, 04:23:13 PM by Another Reader »

aj_yooper

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #9 on: April 02, 2014, 04:32:35 PM »
Excellent discussion.  I like to think in terms of buckets over time. 

Always good to have two years of ER expenses covered (cash and other income as from a pension) as a way of managing a dismal sequence of returns.  Always good to have rental income as an inflation hedge, a cash flow, and to dampen market risks.  But the SWR% provides the motivation to save the money and a way to quantify when you are ready.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #10 on: April 02, 2014, 04:34:34 PM »
Depends on the audience.  Just guessing, but I'd be willing to bet the OP and commenters so far in this thread all have retirement plans much better detailed than the average person's.

For folks who are lower on the learning curve (e.g., don't know historical spending), however, something simple like the "4% rule" can be used for gross range finding.

As some pretty smart folks once said, "...all models are approximations. Essentially, all models are wrong, but some are useful. However, the approximate nature of the model must always be borne in mind."  From the book: Empirical Model-Building and Response Surfaces (1987, p 424), by Box and Draper.  The quote is often shortened to the underlined portion, and is one of my favorites.

If we are discussing how to improve on the approximate 4% model, then good points from all previous posts.

anisotropy

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #11 on: April 02, 2014, 04:46:38 PM »
DoubleDown is on the right track in my view.  Most folks I know that have retired or will soon retire with a portfolio of paper assets and a decumulation plan are spending a lot of time looking over their shoulder at the stock and bond markets.  It looks like the plan ought to work, but then there's that pesky sequence of returns risk to worry about and some valid reservations about the projected stock market growth rates in a mature economy being sustainable in the future.  Call it the bucket approach or the multi-legged stool, but I think acquiring assets that throw off sufficient income to support you without significant decumulation is the only was to feel secure about 40 years of retirement.  Pensions, real estate, dividend paying stocks, IRA RMD's and a general stock portfolio all work together to provide the income.  And the income plan is key.

agree

brewer12345

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #12 on: April 02, 2014, 05:30:45 PM »
*Sigh*

OP, what are you selling?  I feel compelled to ask because this sort of thing is so often the prelude to such.

Now that that is out of the way, I will say that A) it is unwise to throw out 50 years of scholarly efforts on this subject and B) I do not like the income approach because it tends to drive people to do stupid yield chasing.  I have watched a variety of retirement implosions due to various forms of idiot yield chasing (high dividend stocks, highly concentrated junk bond portfolios, various dopey options strategies, Venezuelan Beaver Cheese Futures...).  If you are trying to simplify, beware that those that prefer simple often are simple.

happy

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #13 on: April 02, 2014, 05:50:52 PM »
Great thread. I can't but agree how important planning in advance is.

Being one of Brewer's simple, I have arrived at NW 25x projected retirement expenses i.e. 4%SWR in theory, but due to lack of knowledge and planning prior to MMMing I am not able to retire due to lack of cash flow.  I could make a few radical changes right now and pull the trigger but the retirement would be lean and making those abrupt changes would mean some loss of efficiency. If I work another 4 and a half years or so part-time , reconfiguring, I can optimise taxes and a few other things and get a lot more margins of safety. I too plan on a combination of  income streams, that will change over time. The govt will likely keep tweaking rules as I go along, so I want to have the flexibility to rebalance or move in a few different directions.

So I think the "Just save 25x expenses and retire!" is great to get people started and moving, and stop analysis paralysis and so forth. Once you are up and running, use the accumulation time that seems oh so long to learn everything you can about finances and make detailed plans. I've found the complexity and sophistication of my plan and projections has hugely increased in the 2years+ I've been MMMing.

(Thanks everyone here who has helped as well as Mr MM).







Another Reader

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #14 on: April 02, 2014, 07:03:50 PM »
I have the utmost respect for Brewer12345's knowledge, but I can't follow how he came to his conclusion.  What DoubleDown says is not prefatory to a sales pitch.  He is merely recognizing the risks of focusing on the wrong thing.  So many people hear about the 4 percent withdrawal rate and the 25 x income savings goal, but they don't have a clue about what to do if and when they reach that target.  Usually some financial advisor/salesman gives them a piece of paper describing how to decumulate or tells them to buy an annuity, i.e. not a lot of real help.  I see this among the retirees and pre-retirees I know with large paper nest eggs but no pensions.  They are fearful and do not have a concrete plan for producing income that makes them feel secure.

Fifty years of scholarly efforts are interesting, but not reassuring when it comes to converting assets into income that shows up at regular intervals.  After all, haven't we all learned that past performance is not predictive of future results?  Sequence of returns risk is forefront in many peoples' minds because of what we just went through in the last 6 years.  Security is difficult to achieve with these thoughts running through your head.

The people that lead happy retirements from what I have seen generally have multiple streams of income - pensions, dividends, interest (ok, not so much of that right now), real estate income, residual income from the sale of a business or intellectual property, that sort of thing.  They are not feverishly running FIREcalc three times a day to "make sure."  They are not worried about running out of money because they are not planning a large decumulation.  They are also not investing in the exotic yield chasing investments Brewer12345 describes.  They don't have to, because they planned their income.

So, yeah, I think what DoubleDown says is right, spot on right.  Diversify your income streams because income, not assets, is what you eat.

brewer12345

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #15 on: April 02, 2014, 07:15:45 PM »
Fifty years of scholarly efforts are interesting, but not reassuring when it comes to converting assets into income that shows up at regular intervals.  After all, haven't we all learned that past performance is not predictive of future results?  Sequence of returns risk is forefront in many peoples' minds because of what we just went through in the last 6 years.  Security is difficult to achieve with these thoughts running through your head.

Plop your assets into a low cost 60/40 balanced fund, don't draw more than 4% inflation adjusted of your starting value, live a long and full life.  I just said it in one sentence which I had to make longer with comments about life because this isn't that complicated.

ShortInSeattle

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #16 on: April 02, 2014, 07:33:21 PM »
Fifty years of scholarly efforts are interesting, but not reassuring when it comes to converting assets into income that shows up at regular intervals.  After all, haven't we all learned that past performance is not predictive of future results?  Sequence of returns risk is forefront in many peoples' minds because of what we just went through in the last 6 years.  Security is difficult to achieve with these thoughts running through your head.

Plop your assets into a low cost 60/40 balanced fund, don't draw more than 4% inflation adjusted of your starting value, live a long and full life.  I just said it in one sentence which I had to make longer with comments about life because this isn't that complicated.

Yeah, that's basically how I view it too.  I know some folks feel more comfy with real estate income, or dividends only, or whatever, but so long as you asset allocation puts you at a rate of return that covers your withdrawal rate plus inflation, you're in pretty good shape I think.

Knowing your risk tolerance is important. I know plenty of ppl are comfy at 4% WR. I'm shooting for 3%.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #17 on: April 02, 2014, 07:42:15 PM »
Even your friend Nords is hedging his bets by keeping the rental and juicing his stock returns by writing options.  The MM's live primarily on rental income, allowing the stock portfolio to grow for later and feeding it with work income.  Their retirement is likely going to be "overfunded."

You are an exception because of your professional knowledge and skill.  You can find a way to make your portfolio work under almost any scenario.  The average retiree has no clue how or if the conversion of assets to income is going to work, and is scared to death.  Most are in Happy's position - I achieved the asset target, now what do I do?  What DoubleDown is saying is plan the income while you are accumulating assets.  Focusing on acquiring assets and structuring them to provide long term income (with very low taxes and no decumulation) has worked well for me, and I retired a year before the SHTF in 2008.

Stop back when you and your friends are 65 so we 80 year-olds can ask "How's that working for ya?"  You may be fine, but I'll bet a lot of of your friends will not be.

brewer12345

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #18 on: April 02, 2014, 07:56:29 PM »
Even your friend Nords is hedging his bets by keeping the rental and juicing his stock returns by writing options.  The MM's live primarily on rental income, allowing the stock portfolio to grow for later and feeding it with work income.  Their retirement is likely going to be "overfunded."

You are an exception because of your professional knowledge and skill.  You can find a way to make your portfolio work under almost any scenario.  The average retiree has no clue how or if the conversion of assets to income is going to work, and is scared to death.  Most are in Happy's position - I achieved the asset target, now what do I do?  What DoubleDown is saying is plan the income while you are accumulating assets.  Focusing on acquiring assets and structuring them to provide long term income (with very low taxes and no decumulation) has worked well for me, and I retired a year before the SHTF in 2008.

Stop back when you and your friends are 65 so we 80 year-olds can ask "How's that working for ya?"  You may be fine, but I'll bet a lot of of your friends will not be.

Nope, I take my beatings along with every other investor.  No magic to anything I am invested in.  Actually I have moved a lot closer to a balanced fund approach as I transitioned to ER.  I'll likely annuitize a chunk as I get older and if the poop hits the fan in the next few years I will probably resume generating income for a while, but that is about it.

Again, you are tossing 50 years of scholarly research in favor of I am not sure what.  Paranoia?


Nords

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #19 on: April 02, 2014, 11:07:55 PM »
Even your friend Nords is hedging his bets by keeping the rental and juicing his stock returns by writing options.  Their retirement is likely going to be "overfunded."
Here, let me put my own words in my mouth.

1.  We have a rental property.  We "acquired" it in 2000 by upgrading to our dream home.  (In retrospect, that was the worst period in 15 years to be selling real estate-- but a fantastic time to upgrade.)  We were both on active duty in 2000 and too busy to FSBO our old home in a buyer's market, so we rented it out for a few months while we waited for our lives to settle down and the market to recover.  After eight months our military tenants moved out of our rental and into base housing. 

Then my parents-in-law moved into our rental and stayed there for nearly six years.  Hint for new landlords:  this does not cashflow, and it will not enrich your net worth.

When they finally moved back to the Mainland, we put a great set of (military) tenants in there while we rehabbed the property to put it on the market.  Then my spouse pointed out that it's a very elderly-friendly property (single level, one block from stores & doctor's offices) and that our daughter might someday want to take over our "dream house" (with its kid-friendly neighborhood and great schools) while we geezers could move into the rental to age in place.

Our cash-on-cash return is about 4%, which on Oahu is considered "studly".  Our return is calculated on the money we'd have left after selling the place and paying off the mortgage, minus federal/state taxes and AMT and depreciation recapture.  (Oahu's median price for a single-family home is over $650K and our neighborhood's market rents are about $2900/month.)  Today we're happy to be beating CD rates, but in 2006 our rental property looked pretty sad alongside 6% CDs.

If you can help me craft a spouse-friendly exit strategy for this situation then I'm all eyeballs.  However this was not even a glimmer in our ER planning, and I'm not hedging anything with it.

Of course my attitude is perhaps biased by the fact that I'm currently working on Schedule E.  Or at least that's what I'm supposed to be doing instead of posting here...

2.  I've been writing options since 2010.  I've made $36K (before taxes) and been exercised once.  My last batch of options expired in January and I haven't sold any since then.

The reason we write options is to minimize our perpetual debate about rebalancing.  Our retirement portfolio is over 90% equities in Berkshire Hathaway and three ETFs, all of which have an options market (especially BRK and the small-cap value ETF IJS).  When our asset allocation used to reach the limit of its bands then we'd debate the subject ad nauseum infinitum:  "But it might go up/down some more."  "But we'll pay a lot in taxes."  "But we LIKE that asset!"  "But this is a TERRIBLE time to buy!" and so on.  Now, when our AA reaches a limit, we simply sell a call option or a put option.  We get a little money from the premium and raise a toast to all the reading & studying I did to figure out how to make this work.  If we're exercised, then we're brilliant.  If we're not exercised then we probably sell the same option all over again and keep waiting. 

These days our assets are all sitting near the middle of their bands and there's no reason to rebalance.  I might get a chance to sell some puts on the international value ETF (EFV) or to sell a few calls on BRK, but the options prices suck-- nobody thinks that either asset is moving any further. 

In the last 12 years my military pension has received a cumulative 27% COLA (despite a couple of zeros in that series).  However in the last 12 years we've refinanced our mortgages on our home and our rental and reduced our monthly P&I payments by 40%.  When we bought our "dream home" in 2000 we were thrilled to get a 30-year fixed mortgage at "just" 8%.  Today it's at 3.625% and it won't be paid off until I'm 80 years old.

My pension covers most of our expenses these days, and our portfolio dividends (Dow dividend ETF, DVY) are very nice too.  But we still sell off a few stock or ETF shares every year to replenish our two-year cash stash, and so far we're staying within a 4% SWR.  That's because we've really whittled our expenses down in ER, and partially because we have unexpected cash flow from an unplanned rental property.  If you'd told me in 1999 what our asset allocation and finances would look like in 2014, I would not have believed it.

So, sure, income streams are great-- especially when you're happy to keep slaving away in a cubicle for however much longer it takes to reach that elevated level of the FI game.  Or if you're hard-wired (or hard-taught) to be a landlord.  Or own your business.  Or love being in the military.

But 50 years of history & analysis (or whatever appropriate number of decades) has shown that a 95% probability of success tends to fund 19 out of 20 ERs.  In 1999 I couldn't tell you what our net worth would be today, but I was 95% confident that it'd be positive.  I was right, and by a honkin' big margin of error.  I agree that the 4% SWR might be hard for many investors, and if they're stupid then it's impossible.  But it's also reasonable to give responsible, informed investors a good set of thumbrules and guidelines, especially when they can consult their best anonymous Internet buddies to make sure they're on the right track.

By the way, my friend Brewer helped me figure out how to analyze stocks and where to learn about selling options.  He seems pretty good with bonds, too, and he can even teach you how to build an indexed annuity at a very low cost.  I am eagerly anticipating his "tell all" memoirs about his years of his financial career that he won't talk about.  He's seen enough to be justifiably cynical & paranoid about the financial industry.  DoubleDown is probably not selling anything, but Brewer and I have been posting to ER forums for years and have seen plenty of pitches which started out this way.
« Last Edit: April 02, 2014, 11:17:45 PM by Nords »

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #20 on: April 03, 2014, 05:57:12 AM »
Fifty years of scholarly efforts are interesting, but not reassuring when it comes to converting assets into income that shows up at regular intervals.  After all, haven't we all learned that past performance is not predictive of future results?  Sequence of returns risk is forefront in many peoples' minds because of what we just went through in the last 6 years.  Security is difficult to achieve with these thoughts running through your head.

Plop your assets into a low cost 60/40 balanced fund, don't draw more than 4% inflation adjusted of your starting value, live a long and full life.  I just said it in one sentence which I had to make longer with comments about life because this isn't that complicated.

Agree.  In the 401k world, I think the predominant retirement income vehicles for most will be their 401k and Social Security.  The 4% SWR is a very important tool.  While only a 19-year sample size, I think John Greaney's "Real Life Retiree Investment Returns" annual updates (the last one being 2012; 2013's should be out next month) is very instructive.  Consider the huge swings in the market we've had since 1994 (dot.com bust, 9/11, 2008), including the worst recession since the Great Depression, and yet look how the 4% SWR has fared:

http://www.retireearlyhomepage.com/reallife13.html

I'll take that as pretty ample proof that it works pretty damn well.  For a sequence of returns risk, as I've stated elsewhere, having 2-3 years' worth of living expenses in cash on hand should more than suffice to get one through a market downturn early in retirement (or simply cut expenses until the market rebounds).  Dismissing the 4% SWR -- a heavily researched subject -- out of hand smacks a bit of hubris.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #21 on: April 03, 2014, 08:24:09 AM »
Nords:

The MM's retirement is likely to be "overfunded" because their spending rate is so low and they continue to invest a large percentage of their income.  No idea whether yours is.  I'm sorry if that was not clear.

I have nothing but the utmost respect for both you and Brewer12345.  You are two of the most knowledgeable posters on these forums.  I pay close attention to what both of you write.  Your and my "early retirement" investing styles are not dissimilar, except I am just fine with being a landlord and real estate is the bulk of my portfolio.  Real estate is my area of professional expertise, so it comes with the territory.  It might not be appropriate for everyone.  I have refinanced my house several (seems like countless) times since buying it in 1989.  I pulled out equity to buy rentals, but the last refi was to reduce expenses.  Like you, my exit strategy for my house is probate, if for no other reason than my basis (that was rolled from a previous house under the old rules) is so low.

I'm also older than both of you, and I see people every day that have met the "target number" by diligently saving and investing.  Ummmm...now what?  They are not really sure.  You and I have pensions, these folks don't.  They don't have your level of skill and knowledge or your confidence.  They have to rely on the advisors and salespeople that got them to the target.  In the last few years, folks like Fidelity and Vanguard have started selling annuities and giving seminars on retirement income, because good decumulation plans are few and far between.   

The retirees and pre-retirees I know that feel secure are the ones with pensions and/or income producing assets.  The ones that don't have pensions or income producing assets are scared.  They are like some of the folks over at earlyretirement.org, wondering if they have enough because different retirement calculators give different results, and if they should work one more year (or five) to "make sure."  I'm not saying "toss 50 years of research."  I'm saying that 50 years of research is not making folks feel secure, especially in light of recent market gyrations and "newly discovered" sequence of returns risk.

The folks reaching their 60's now are the first generation with a large group having paper asset accounts instead of guaranteed pensions.  Pensions are income "plans," 401k's are not.  So, yeah, I agree with DoubleDown.    An income plan is critical.  That plan is best formulated well before you need it.  And for a lot of folks, that plan should and will include assets other than their paper 401k's.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #22 on: April 03, 2014, 08:41:38 AM »
Nothing special about a pension, IMO.  There are any number of insurers panting and drooling to sell you one in the form of a SPIA or other alphabet soup product.  Some of them are even insurers that meet my credit standards.  If you have a pile of assets and want to turn some of them to a stream of payments, it is easily done.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #23 on: April 03, 2014, 08:47:43 AM »
Just posting to follow along, very interesting discussion!

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #24 on: April 03, 2014, 09:09:08 AM »
You have a very different perspective.  You have 20 years or more of experience with this.  You have the knowledge and confidence to decide to annuitize and to pick an insurance company.  You understand the product being sold.  Most folks do not.  They have to rely on financial "advisors" and salespeople, most of whom get a commission on these products.  Even Vanguard collects a fee/commission when you buy an annuity from them.

Pensions are black and white, and there are generally not a lot of decisions to be made about them.  The word "pension" means security to most people, even with the occasional Detroit or PBGC disaster.  That's especially true if you are a government employee.  You have a pretty good idea of what you are going to get early on.   Annuities?  Most folks don't understand what they are buying or how to shop.   Add in the long term uncertainty from buying at today's low interest rates, and no one is happy.

For me?  I'd rather take my chances with my income producing assets.  They have served me very well so far.

brewer12345

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #25 on: April 03, 2014, 09:15:34 AM »
Frankly, squabbling over the value of pensions is a moot point for the under 50 crowd.  Most of us will not have one or will have one that pays a pittance (I am in the latter bucket).  So if you are under 50 and want a pension you will probably have to buy one.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #26 on: April 03, 2014, 09:21:25 AM »
I wrote a provocative title, glad it got some discussion! Like I said in the OP, I'm hoping people who are confused about how to turn the 4% SWR into income will benefit from looking at things from another perspective, demystifying the process a bit. When planning my own ER, it would have been anything but useful to have a plan that was simplified down to "withdraw 4%." You might as well have answered my question about how to change my oil with, "just do it."

Thanks AnotherReader for your added voice and perspective, definitely helps convey what I was thinking about.

Although my subject title was provocative, I don't really think the 4% SWR guideline should be tossed. But it's inadequate by itself -- we clearly get a lot of posters on this forum who don't understand how it's supposed to work once you're retired, or what assets go into it (like home equity), and so on. I agree it's a neat motivating tool to help figure out what is "enough", but it's too simple to just say "withdraw 4% each year, and you're safe." How do you withdraw it? By reaping dividends that aren't reinvested? By selling stocks? Then which stocks are sold? You need more information, you need a plan for where your income will come from.

I'm with AnotherReader that I want a more refined plan, where I'm drawing on different asset classes at different times to meet my own needs, and where I feel safe and confident that I'll be covered at all stages of life. I get that that approach might be more complicated than some want to deal with, but I don't see that as much different than any other choice where someone forgoes maximizing efficiency in the name of "convenience." Or some people might not have any trouble sleeping through market ups and downs with an all-paper portfolio, but that's not me.

Maybe looking at it this way helps: By thinking about how you will generate income in retirement (beyond the over-simplified "withdraw x%"), you are forced to think about deeper questions such as your asset allocation, how favorable those assets are for cash flow, risk you are comfortable with, tax implications, potential uneven expenses over your life, etc. That's partly what I mean about forgetting about an SWR, and instead thinking about where your income will come from.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #27 on: April 03, 2014, 09:26:39 AM »
That makes sense DD.  Thanks for the explanation.

I think everyone should do those things, even with a simple 4% 60/40 portfolio.

The idea of income streams is incidental to this.  I think re-framing it as "it's all about income" is what confused some of us.  But putting it into a "How will you use the 4% SWR to generate income" as a question makes more sense.
« Last Edit: April 03, 2014, 09:51:39 AM by arebelspy »
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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #28 on: April 03, 2014, 09:36:07 AM »
*Sigh*

OP, what are you selling?  I feel compelled to ask because this sort of thing is so often the prelude to such.

Now that that is out of the way, I will say that A) it is unwise to throw out 50 years of scholarly efforts on this subject and B) I do not like the income approach because it tends to drive people to do stupid yield chasing.  I have watched a variety of retirement implosions due to various forms of idiot yield chasing (high dividend stocks, highly concentrated junk bond portfolios, various dopey options strategies, Venezuelan Beaver Cheese Futures...).  If you are trying to simplify, beware that those that prefer simple often are simple.

That's funny it would have appeared I was possibly leading up to selling something! That never would have occurred to me. But sir, I for one would like to buy your Venezuelan Beaver Cheese Futures.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #29 on: April 03, 2014, 10:41:42 AM »
This post makes no sense to me. "Forget the 4% SWR, or Any SWR - It's All About Income"? That's like saying "forget about miles-per-gallon, it's all about fuel costs!" Huh? 

Yes, of course it's all about income, that's no surprise. But why the heck would we forget about SWR? The whole point of SWR research is to let you know the amount of income that the stock/bond portion of your portfolio can safely generate! Your Step 2 is "Determine what your assets are worth, and what income (if any) they will or can generate for you in retirement". SWR is the very mechanism we use to determine that!

Someone with $1m in cash and a 50-year retirement might think "that can produce $1m/50 = $20k of income for me per year". SWR research tells them, no, that's a bad fucking idea.

Someone with $1m in a stock/bond portfolio who gets $20k per year in dividends/interest might think "that $20k is all I can safely spend per year". SWR research tells them, no, if that's all you're spending, you've oversaved, and spent unnecessary years working.

Yes, if your income sources in retirement are entirely from pensions, Social Security, and annuities, then you can forget about SWR. But that's only because the people managing those income sources for you have calculated the SWR on your behalf! They sure as hell aren't forgetting about it!

In terms of confusing people, I fail to see how reading a couple of paragraphs explaining the mechanism by which to sell assets in retirement is any more complex or difficult than it would be to acquire a real-estate portfolio, pensions, and an ironclad Social Security guarantee.

To me, this whole thread just sounds like another version of "I'm very conservative, and don't believe that the historically-safe WR of 4% will hold going forward." That's totally fine, but don't throw out the very useful SWR research for the rest of us.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #30 on: April 03, 2014, 12:42:17 PM »
This post made a lot of sense to me in that I have not stumbled across a canned calculator that begins to appreciate the financial position we are in. The missus is retiring with a pension in a few years and will also get Social Security in 2-10 years depending on when we take it (hopefully 10).

I am at the point that if I want a pension as well, I need to get back into a state job on the hurry-up so I can get 20 years in by age 60. Not my first choice, but damned near impossible to approximate on a retirement calculator.

Then there is the rental, when we pay both mortgages off, anticipated 401K amounts, do we acquire more rental property, etc. etc.

I keep it as simple as possible on a spreadsheet. X is the amount we expect to come in from all sources. Y are our expected normal expenses. And then I aim high for everything else, because I have no idea what curve balls life may throw at us going forward.

So yes, the idea that you need XYD in assets or some kind of "number" isn't particularly helpful for me. My two biggest concerns are how much cash flow will be coming in from various sources compared to what I can conservatively and reasonably expect to spend in retirement.   

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #31 on: April 03, 2014, 01:43:31 PM »
The more I think about it, the more I'm convinced that there isn't likely a prototypical early retiree that will have a steady expenses/income need from now until they die. One obvious breakdown is the "old man vs. young man money" scenario if you're retiring early -- you break up your retirement into phases where you're living largely off taxable accounts, then you start tapping 401k's and IRAs once you're 59.5. I'll bet most people find themselves in situations more complicated than that. I'm not a complicated guy, but I've got at least 6-7 different periods I foresee where my spending or income sources could vary a lot, and I need a plan to accommodate: My wife decides to stop working; putting kids through college; ceasing child support payments to my ex-wife; kids grow up and are out on their own; potentially moving to a low cost area; doing a long travel period; able to start drawing a pension; able to draw social security.

There's no way I could just come up with a safe withdrawal rate from now until I die, and live off that (except of course by saving way more than needed so no matter what expenses come up, I'd have more than enough). I'd also be concerned about really young people naively guessing that their expenses are likely to remain completely steady over their lives, without considering the numerous curveballs life could throw.

Plus, I do not expect my assets to appreciate at the same rates over time. One example is that real estate will appreciate at a rate different than stocks, and it's leveraged. My good ol' spreadsheets have to keep track of how those assets will accumulate and be used separately. Maybe I'm just restating the obvious here and those in the know are saying "Duh." But I've gotten the impression from many of the questions typically posted in this forum that a lot of folks don't get it.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #32 on: April 03, 2014, 04:04:08 PM »
I love it when the big boys come out and rumble :)  I learn a lot.

Quote
This post made a lot of sense to me in that I have not stumbled across a canned calculator that begins to appreciate the financial position we are in.

I found Todd Tresidder's ultimate retirement calculator financialmentor.com/calculator/retirement-calculator‎will cover a lot of variables such as you're describing. The only variable I had difficulty with is that you can only set a single tax rate, which maybe works in US, but Down Under different sources may be taxed differently.  He goes into some detail about the assumptions/methods behind the calculator but I am not geeky enough to critique them. He seems well researched. Happy to be corrected.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #33 on: April 03, 2014, 05:51:52 PM »
The more I think about it, the more I'm convinced that there isn't likely a prototypical early retiree that will have a steady expenses/income need from now until they die. One obvious breakdown is the "old man vs. young man money" scenario if you're retiring early -- you break up your retirement into phases where you're living largely off taxable accounts, then you start tapping 401k's and IRAs once you're 59.5. I'll bet most people find themselves in situations more complicated than that. I'm not a complicated guy, but I've got at least 6-7 different periods I foresee where my spending or income sources could vary a lot, and I need a plan to accommodate: My wife decides to stop working; putting kids through college; ceasing child support payments to my ex-wife; kids grow up and are out on their own; potentially moving to a low cost area; doing a long travel period; able to start drawing a pension; able to draw social security.

There's no way I could just come up with a safe withdrawal rate from now until I die, and live off that (except of course by saving way more than needed so no matter what expenses come up, I'd have more than enough). I'd also be concerned about really young people naively guessing that their expenses are likely to remain completely steady over their lives, without considering the numerous curveballs life could throw.

Plus, I do not expect my assets to appreciate at the same rates over time. One example is that real estate will appreciate at a rate different than stocks, and it's leveraged. My good ol' spreadsheets have to keep track of how those assets will accumulate and be used separately. Maybe I'm just restating the obvious here and those in the know are saying "Duh." But I've gotten the impression from many of the questions typically posted in this forum that a lot of folks don't get it.

I can see what you're saying. But isn't that the eternal YMMV?

When starting people off and someone asks the question "how do I FIRE?" I still think the quick and dirty is appropriate with a caveat of continual education about the matters, so that the quick and dirty becomes something more nuanced and knowledgeable regarding the risks and variables that come with life and planning for FIRE.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #34 on: April 03, 2014, 08:28:33 PM »
I can see what you're saying. But isn't that the eternal YMMV?

Maybe. But now that I'm thinking it's probably far more common to have these different phases with different drawdown strategies, the single SWR is appearing more and more irrelevant and ill-advised to me. I mean, no doubt some are comfortable with a simple 60/40 asset allocation and 4% withdrawal strategy forever, and that's great for them. But I'm now thinking that may be more of an exception rather than the rule.

When starting people off and someone asks the question "how do I FIRE?" I still think the quick and dirty is appropriate with a caveat of continual education about the matters, so that the quick and dirty becomes something more nuanced and knowledgeable regarding the risks and variables that come with life and planning for FIRE.

Then I think that the "how do I FIRE" question has not been concisely and sufficiently answered here, at least not since I've been around this site. If it was so straightforward, we wouldn't see so many questions about it. I feel like the quick and dirty answer is too little, and a long explanation tailored to each person's circumstances is too much, so maybe there's a Goldilocks answer somewhere in the middle. That's why I'm suggesting that in addition to paying attention to the Trinity study, that the primary answer is to figure out how you will meet your income needs. Once someone does that, it becomes a lot clearer if they're adequately prepared (or even able) to FIRE.

In his blog posts, MMM described the Trinity study and the 4% SWR which is all great -- but then we see he's not really following that model at all. Rather, his income primarily comes from rental property, plus some side work, and now lots of unexpected-at-the-time blog income while his paper assets grow even larger. I don't mean to suggest he pulled a fast one or anything -- he had an excellent strategy for ER, and described it in detail. It is anything but a 4% withdrawal strategy though. His spending has remained constant apparently. I guess he does not foresee any significant change in that, like having any more kids, moving to a lower cost of living area, and so on.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #35 on: April 03, 2014, 10:05:29 PM »
Then I think that the "how do I FIRE" question has not been concisely and sufficiently answered here, at least not since I've been around this site. If it was so straightforward, we wouldn't see so many questions about it.

Are you kidding?  We see questions about pay off the mortgage vs. invest, and every angle of that has been discussed a million ways and times.  How about the question "how do I access funds from a retirement account"?  That's been fully answered multiple times.  We still see it, a lot.

People don't read or search.  Doesn't matter how sufficiently or concisely it's been answered, you'll still see lots of questions about it.  Welcome to the internet.

The problem is you are trying to add complications people aren't ready for.  One needs to start with understanding the Trinity study, and the 4% SWR, and then progress to an individualized plan.

If they try to jump to the end before understanding and knowledge, they'll fuck it up.  Like people who just want to know what to invest in, without wanting to bother figuring out an IPS or AA.  And fucking up your ER plan is a bad, bad idea.

Simple at first ("Withdraw 4% annually from a 60/40 portfolio") then customize later as one learns.  Anyone who has been around ER forums for awhile will run across all the strategies.

Buckets of money, for example, I'm sure you're familiar with?  That's a semi-popular one that helps explain and simplify the part you think people are confused on.  People like Brewer probably don't see the point.

But I get where you're going with it.  I just think you're going to have people jumping the gun in your efforts to help, because they don't know what you know.
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okonumiyaki

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #36 on: April 04, 2014, 03:06:50 AM »
Yep, I quite like the bucket of money idea because we hope to move to Indonesia, so have to deal with currency risk as well.

Current decumulation plan is:

12.5% of assets in laddered IDR government bonds, 1/5 maturing each year.
25% in international bond ETF
Rest in equities. (most in ETF, but allocation for self invested play money as well)

"refill" the bond ladder every year with 2.5% of assets on a 5 year bond during rebalancing.

Possibility of buying shares in decent local gas stations though, which might alter things

Basically a 3% SWR as will use some USD dividend income for foreign travel etc.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #37 on: April 04, 2014, 06:24:21 AM »
It is definitely a complex calculations with a lot of unknowns. I myself prefer firecalc to cfiresim but they both lack a lot of variables I'd like to use.
I definitely prefer the monte-carlo or historical period approach to the gradual average historical return calculations so that makes firecalc much better than any financial planner
tool.

What financial planners have that is lacking from firecalc:
Calculations based on tax sheltered and non-sheltered accounts. Having 1mil$ that you have to pay taxes on at withdrawal is very different from 1mil$ in a normal account. Here the max rate can go above 50% so that's actually less than 500k$ if I withdraw it all at once.
Gov pension and the impact of starting to withdraw early or late instead of 67.

I do my planning mostly with firecalc but I also have a few of my own spreadsheets I play with. I don't want to go into real estate or plan for part time work once I declare myself "free" so the 4% rule very much applies to me. Difference is that I plan to adjust my spending and retirement date to the situation; I won't retire on a year where the stock market did 20%+ and I just then barely made my number. I will spend less if the market does badly in the first few years.

And then there's the expense planning. If someone had asked me 5 years ago what I would need to spend money on in 2014 I would have been seriously wrong; I expect the same trying to guess what I will be doing with my life at 50,60 or 70+

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #38 on: April 04, 2014, 08:01:53 AM »
Buckets of money, for example, I'm sure you're familiar with?  That's a semi-popular one that helps explain and simplify the part you think people are confused on.  People like Brewer probably don't see the point.

I don't see the point in it and view as a behaviral finance trap.  The shyster who came up with it also got nailed for faking the data/research that supposedly showed buckets as a good/valid withdrawal scheme.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #39 on: April 04, 2014, 08:03:20 AM »
I myself prefer firecalc to cfiresim

Huh?  Why?
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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #40 on: April 04, 2014, 08:07:30 AM »
I myself prefer firecalc to cfiresim

Huh?  Why?

I think it's mostly presentation. They both seem to do about the same thing and give similar results. I just find that firecalc is easier to follow maybe because I used this one first.
- Portfolio value today
- Added to portfolio from now to x years later
- Withdrawn from portfolio x years later to life expectancy
- Some gov pension thrown in at year y
Both take those kind of numbers but I prefer how firecalc does it. Also I had fun playing with options in the spending models(Bernicke and % of portfolio)

Is there something I am missing that cfiresim does better?

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #41 on: April 04, 2014, 08:18:44 AM »
Is there something I am missing that cfiresim does better?

Two off the top of my head: more up to date with data, I like the individual lines to trace the paths, saving simulations (though you can do this with a paid FIRECalc account), flexible spending/saving inputs, etc..  Essentially cFIREsim does everything FIRECalc does but also adds more.  Plus the creator actually takes requests and interacts with people and improves it.  FIRECalc stagnated with bugs for years. (I'm still not sure the bond issue is fixed.)

I'm sure bo_knows, the creator of cFIREsim (you can message him on these forums or contact him through the cfiresim site) can add more to the differences/enhancements list as well.

Buckets of money, for example, I'm sure you're familiar with?  That's a semi-popular one that helps explain and simplify the part you think people are confused on.  People like Brewer probably don't see the point.

I don't see the point in it and view as a behaviral finance trap.  The shyster who came up with it also got nailed for faking the data/research that supposedly showed buckets as a good/valid withdrawal scheme.

I agree, but some people need decide to think of it in a different way.  My point wasn't to advocate for the buckets strategy, but to point out that there are numerous methods like this floating around the ER community.  Starting with a basic "4% of total assets" withdrawal strategy is good to introduce the topic, and then more strategies will be found and discussed and learned as one dives into ER and can choose which strategy is right for them.
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matchewed

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #42 on: April 04, 2014, 09:04:52 AM »
I can see what you're saying. But isn't that the eternal YMMV?

Maybe. But now that I'm thinking it's probably far more common to have these different phases with different drawdown strategies, the single SWR is appearing more and more irrelevant and ill-advised to me. I mean, no doubt some are comfortable with a simple 60/40 asset allocation and 4% withdrawal strategy forever, and that's great for them. But I'm now thinking that may be more of an exception rather than the rule.

Right but isn't that the nuance that I spoke about? As people become more educated in these matters it is easy to see how inadequate the 4% SWR is when framed as "Just hit 25x expenses and you're FIRE." But for those who are walking into this telling them that it is inadequate from the get go and then throwing them into the deep end of the financial pool is a great way to discourage them from trying something that is actually doable and has a foundation in the 4% SWR and the Trinity study. And that's all those things really are; foundations. You don't start figuring out how to build a house with calculating load bearing walls or whatever (I've obviously never built a house). You start by knowing how to use a hammer, how to measure and cut...etc.

When starting people off and someone asks the question "how do I FIRE?" I still think the quick and dirty is appropriate with a caveat of continual education about the matters, so that the quick and dirty becomes something more nuanced and knowledgeable regarding the risks and variables that come with life and planning for FIRE.

Then I think that the "how do I FIRE" question has not been concisely and sufficiently answered here, at least not since I've been around this site. If it was so straightforward, we wouldn't see so many questions about it. I feel like the quick and dirty answer is too little, and a long explanation tailored to each person's circumstances is too much, so maybe there's a Goldilocks answer somewhere in the middle. That's why I'm suggesting that in addition to paying attention to the Trinity study, that the primary answer is to figure out how you will meet your income needs. Once someone does that, it becomes a lot clearer if they're adequately prepared (or even able) to FIRE.

In his blog posts, MMM described the Trinity study and the 4% SWR which is all great -- but then we see he's not really following that model at all. Rather, his income primarily comes from rental property, plus some side work, and now lots of unexpected-at-the-time blog income while his paper assets grow even larger. I don't mean to suggest he pulled a fast one or anything -- he had an excellent strategy for ER, and described it in detail. It is anything but a 4% withdrawal strategy though. His spending has remained constant apparently. I guess he does not foresee any significant change in that, like having any more kids, moving to a lower cost of living area, and so on.

What I said above applies to your first paragraph here as well. Just saying you need enough income to meet your expenses and you're FIRE is just as overly simplistic as 25x expenses or the SWR. All they happen to be are simple rules of thumb so that people can start to wrap their heads around FIRE and get out of the "exploding volcano of wastefulness" lifestyle; buying your future and all that.

As for your second paragraph -
Why does it matter if MMM is doing specifically the 4% SWR strategy or not? Did Jacob over at ERE? How about the folks at earlyretirement.org did they all have to be using that strategy in order to discuss it? MMM has laid out an initial foundation for people to grasp and begin a path for FIRE. I'd  venture a guess that this forum is for or represents a middle range of that path. Some individuals are further down it, some are still at that beginning, that is why it is important to keep discussing these basics even as repetitive as it can get for those further down the path. Or how "useless" (maybe inadequate?) the basics are for those further down the path.

Eudo

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #43 on: April 04, 2014, 09:17:42 AM »
As I see it, the income and SWR methods are joined at the hip. They are two viewpoints that are mathematically equivalent, or rather the SWR picture is a simple corollary to the income method.

I'm in a situation like DoubleDown in that my cost structure in the future will have almost no resemblance to what it is now. In a case like that, you need to

1) project out your costs for each year of your life

2) use a present value method to calculate how much money in a lump sum today you need to generate that income.

If you've never heard of present value, you should really look it up. It's not too difficult and should really be the minimum knowledge you should have if you're going to embark on an out-of-the-mainstream project like extremely early retirement. All you do is take each year's desired cash flow and multiply by 1/(1+4%)^n, where n is the number of years away that cash flow is. Then you sum up these discounted cash flows and you end up with the lump sum amount of cash you need today to get those cash flows. Why the 4%? You can put whatever rate you want in there, but it should be the rate of return you expect on your assets going forward. In this case I'm assuming that we are using inflation adjusted cash flows, so I'm using an inflation adjusted return as well. I'm assuming you can get a 4% real rate of return.

The magic of mathematics being what it is, if you have constant cash flows going out forever, this whole procedure simply says the lump sum amount is equal to the yearly cash flow divided by the discount rate (4%). The proof is not trivial, but can be done by a good math student.

In other words, using an SWR of 4% is mathematically the same as using DoubleDown's income method, assuming constant cash flows and a 4% real return on investment.

The income method is just more flexible in that you can use varying cash flows over time, and in principle could use different discount rates at different times and so on).

oldtoyota

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #44 on: April 04, 2014, 09:40:54 AM »
or.....have a pre-determined asset allocation and stick with it. For example, if by the time you retire you have 1M liquid asset and your yearly budget is 35k. Then an asset allocation that would work could be :

3.5% cash
30% Bond
66.5% Stock

if your investments make some money during the year and assets increases to 1.05M, rebalance at the beginning of the year and take out the cash.

if your invesetment loses money during the year and assets drops to 0.95M, you do the reverse. It'd be wise to have a nice cushion (20%?) if you use this method, that's what we are planning to do.

There are many ways to do this, i feel they are all more or less the same.

I think that's a sound approach too, but personally I'm too much of a wuss to have an all-paper portfolio. I think I would not enjoy my freedom if we were going through a 2- or 3-year+ market downturn, and I'm selling stocks at bargain basement prices in order to convert to cash to live off.

My plan to deal with that would be to have enough cash to live on so I don't have to withdraw cash during inopportune times. I have a multi-layered approach to this retirement business. My first "layer" is cash and income. The second is easy-to-get investments like a taxable IRA. The third is the money I'll use later down the line, if needed, and which is not as easy to get or has age restrictions.




oldtoyota

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #45 on: April 04, 2014, 09:42:20 AM »
An alternative to the 4% SWR (annual expenses x 25) is the "living off the dividends" approach-- which is typically estimated at 3% or 33x.  If you want to be ridiculously conservative then you'd use the S&P500 dividend rate, which puts you up into 40x-50x territory.


This is a question I've thought about and need to think about more as I get closer to FI--and one that I find challenging to forecast.

foobar

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #46 on: April 04, 2014, 12:08:55 PM »
What problem does living off dividends solve? It sure doesn't give you a stable income or one that is indexed to inflation.  I guess it does remove your "choice" in spending ability. The guys in corporate finance will decide every year how much you get to spend.

An alternative to the 4% SWR (annual expenses x 25) is the "living off the dividends" approach-- which is typically estimated at 3% or 33x.  If you want to be ridiculously conservative then you'd use the S&P500 dividend rate, which puts you up into 40x-50x territory.


This is a question I've thought about and need to think about more as I get closer to FI--and one that I find challenging to forecast.

Eudo

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #47 on: April 04, 2014, 12:26:58 PM »
Quote
What problem does living off of dividends solve?

It solves the sequence of returns risk, roughly. If you're holding a non-dividend paying stock, and it's price gets cut in half, you're forced to sell at those low prices to pay your living expenses. So you just had to sell twice as many shares as you had budgeted for. Sure, the price might come back, but that's not much consolation when you're holding fewer shares than you were planning on. The stock might later even go higher, but the problem is that it doesn't cancel. You can show that volatility reduces your average return when you're taking money out for living. Up and down price movements don't have a symmetric effect.

If you're paid dividends then you don't sell shares at the bottom and at the end of the day the volatility doesn't matter.

Of course, living off dividends giveth and it taketh away. You expect stock prices to rise more than inflation, and the cost of that is a low dividend rate (2% today). So you have to save more money to live off of it.

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #48 on: April 04, 2014, 12:38:07 PM »
If you're holding a non-dividend paying stock, and it's price gets cut in half, you're forced to sell at those low prices to pay your living expenses.
If you're holding a dividend-paying stock, and the dividend gets cut in half, you're forced to sell some of the stock to make up the difference - and the price when you sell will be low because the dividend just got cut in half.

Quote
If you're paid dividends then you don't sell shares at the bottom and at the end of the day the volatility doesn't matter.
Functionally, you do. Collecting a dividend is equivalent to selling that amount of the stock, because your holdings in that stock go down by (the market's expected value of) the dividend received. If the stock price is low that day, then your dividend is equivalent to "selling low".

If you sell 4% of a stock every year, it's totally equivalent to the stock paying you a 4% dividend every year (differing tax treatments of dividends and capital gains aside).

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Re: Forget the 4% SWR, or Any SWR - It's All About Income
« Reply #49 on: April 04, 2014, 01:06:31 PM »
If you're holding a non-dividend paying stock, and it's price gets cut in half, you're forced to sell at those low prices to pay your living expenses.
If you're holding a dividend-paying stock, and the dividend gets cut in half, you're forced to sell some of the stock to make up the difference - and the price when you sell will be low because the dividend just got cut in half.

Quote
If you're paid dividends then you don't sell shares at the bottom and at the end of the day the volatility doesn't matter.
Functionally, you do. Collecting a dividend is equivalent to selling that amount of the stock, because your holdings in that stock go down by (the market's expected value of) the dividend received. If the stock price is low that day, then your dividend is equivalent to "selling low".

If you sell 4% of a stock every year, it's totally equivalent to the stock paying you a 4% dividend every year (differing tax treatments of dividends and capital gains aside).

Thank you for being someone who understands math wf2.  I appreciate your posts (from the one in the "bet 50k on red thread" and a bunch since then, including this one).
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.