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SWR and portfolio size ? mistake?

 
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ataloss
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PostPosted: Mon Sep 22, 2003 6:28 am    Post subject: SWR and portfolio size ? mistake? Reply with quote

Hocus from the post he mentioned at TMF

For one person to take his or her definition of investment success and impose it as dogma on the rest of the board is a receipe for frustrated and unproductive dialogue. It may or may not be that the 4 percent number is the true Safe Withdrawal Rate for intercst. He has a lot more assets than me, and I believe that having more assets moves your Safe Withdrawal Rate up, so I am willing to accept that his Safe Withdrawal Rate on a stock allocation of 80 percent at today's prices may be somewhere in the neighborhood of 4 percent. I know that mine is nothing close to that figure.

I had not seen a portfolio size adjustment factor for swr so I had assumed that swr was independent of portfolio size. Thus if the SWR was 4% the person with the million dollar portfolio would have a withdrawal of $40,000 and the person with the 10 million portfolio would have a $400,000 annual safe withdrawal. I think that given the same investment returns the risk of going to zero before year 30 would be the same. Most of us can probably imagine getting by comfortably on less than $400,000/year in retirement so we might think that the person with the bigger portfolio could take a few more chances than the person who needs $40k to survive. Still I haven't seen much discussion of this hocusian insight. Maybe someone could point me in the right direction to find the correction factor?

Also from that post:

Perhaps there are ways that the majority of this board could agree to allow a minority to have their discussions in peace, without regular assertions of the presumed greater wisdom of the majority position

Well, that came to pass but not in the way hocus had planned

ataloss
asking politely



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Last edited by ataloss on Mon Sep 22, 2003 8:34 pm; edited 1 time in total
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therealchips
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Location: Henderson, Nevada, USA

PostPosted: Mon Sep 22, 2003 9:41 am    Post subject: Other topics? Reply with quote

You have amazing patience for hocusology. How about a rousing discussion of the logarithmic utility function instead? Mathematical optimization using Solver in Excel? Income tax planning in retirement? The construction of a personal spread sheet for retirement planning? Whether it is advisable to enrich your heirs? The merits of two-row barley rather than four-row barley in brewing?

Oh, well.

Certainly it is interesting to contemplate a post from Hocus in which he opposes dogmatism. He strikes me as quite dogmatic himself. I speculated that he learned it as a boy, having his knuckles rapped by stern-faced old ladies who didn't mind drawing blood with their rulers. He tells me I'm wrong about that. WDIK? Rolling Eyes

You might find an adjustment for portfolio size somewhere in Hocus commentary on SWR, but I doubt it. His usual position seems to be that SWR comes solely from analyzing the data on market performance and is an objective fact, the same for everyone, like the square roots of 2. This evidently leaves no room to consider portfolio size or any other personal characteristic such as life expectancy or income tax situation. Maybe hocus considers this under some other acronym that I don't recognize but that has to do with a personal withdrawal rate.

I'm all in favor of considering portfolio size in determining SWR. This implicitly recognizes that the planner's utility function for money is not linear, that money has diminishing marginal utility, and its utility may vary from person to person or over time, contrary to the usual assumptions in SWR work.

(Is it OK by now to use the expression "diminishing marginal utility" without explaining it? I mean only that each additional dollar is useful but not quite so useful as the one that came in just before.)

A possible point of universal agreement: Anyone would feel foolish lecturing Bill Gates on his SWR.



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Chips
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ataloss
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PostPosted: Mon Sep 22, 2003 11:03 am    Post subject: Reply with quote

I think we can handle diminishing marginal utility. Interestingly the post that stimulated the hocus coin toss post assumed a lower withdrawal rate from the $10 million portfolio. This would be my preference as well if I had that problem to deal with.

There is some terminology on the other board for withdrawal rates that are safe but not meeting the definition of swr (whatever that is) perhaps personal withdrawal rate or year's withdrawal rate. IMHO if 4% (or whatever) is what the swr is then 2% is a safe withdrawal rate.

I am not retired and have a goal of finding some pt work in early "retirement" both to keep my options open and take advantage of lower tax rates. I haven't looked at the issue of ira distributions. In general is it always (or under a broad range of circumstances usually) best to defer IRA distributions. I was thinking of starting them relatively early to spread the tax burden over more years in an effort to get a lower marginal tax rate.

I didn't know that you were a logician!



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ataloss
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PostPosted: Mon Sep 22, 2003 4:50 pm    Post subject: Reply with quote

actually if someone other than hocus has an idea how to adjust swr for portfolio size I am interested in hearing their thoughts.



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peteyperson
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PostPosted: Mon Sep 22, 2003 5:24 pm    Post subject: Reply with quote

Okay, that one made me laugh. Stop that!! This isn't supposed to be fun dammit.

Laughing

Petey
ataloss wrote:
actually if someone other than hocus has an idea how to adjust swr for portfolio size I am interested in hearing their thoughts.


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therealchips
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Location: Henderson, Nevada, USA

PostPosted: Mon Sep 22, 2003 6:03 pm    Post subject: Reply with quote

I don't claim that my work establishes a SWR. I don't have a brief label for what I compute either. I use mathematical optimization to find a current after-tax budget that stabilizes the purchasing power of the retirement boodle, er, stash until I'm 95, while providing a constant after-tax standard of living. (No acronyms apply.)

Let me ask my spread sheet what increasing my stash would do to my withdrawals. Here are last week's numbers on my planned withdrawal rates for various age brackets:

63 to 69 1.47%
70 to 79 1.61%
80 to 89 1.79%
90 to 94 1.90%

You recall that these increases in withdrawal rates are solely for the purpose of paying increased income taxes with increasing IRA withdrawals, while after tax standard of living remains constant.

I will address your question now by blatantly lying to my spread sheet, telling it that the Good Fairy has instantly boosted all my asset values by a factor of ten. (Whoa! The graduated income tax will eat poor Chips alive!) Here are the new results:

63 to 69 1.31%
70 to 79 1.85%
80 to 89 2.01%
90 to 94 2.08%

Most of the withdrawal rates went up, but mainly to cover the resulting income tax burden.

Now, I must make it a point to unlie to my spread sheet, trusty companion that it has been.

I think if I were really rich, I would abandon the idea of stabilizing the stash by my spending, and just tolerate it growing faster than I want to spend the money. Happy thought.

(Some of my logic classes were part of my math major, but most were in the philosophy department. I loved 'em. Symbolic logic, set theory, foundations of mathematics or metamathematics, transfinite arithmetic or Kantorian set theory, Gödel's theorem -- sheer bliss. In my senior year, all my classes were math, music or philosophy. Then after graduating, sad to say, I found myself cast as Ensign Pulver due to male-pattern genetically-determined defective color vision. Don't ask.)

Here, let me sing you a cheerful tune . . .

[He walks off, singing while completely sober:

Long live the merry merry heart
That laughs by night and day,
Like the Queen of Mirth,
No matter what some folks say. ]



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Chips
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