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Even Easier Data Analysis

 
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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Thu Dec 11, 2003 7:47 am    Post subject: Even Easier Data Analysis Reply with quote

Even Easier Data Analysis

I was planning to improve the summary information of the Retire Early Safe Withdrawal (Rate) Calculator. I found out that intercst has done what I wanted already! He just didn't tell me where to look.

Starting with column S and cell S15, you will see the start years listed. S15 is for 1871 and S144 is for 2000. To the right of each start year, you will see the nominal balance, inflation index and real balance that remain after 10, 20, 30, 40, 50 and 60 years have ended. If the balance is positive, the portfolio for that start year has survived for that length of time.

The start years correspond to the December 31st balance. These are the same start years that FIRECalc identifies. (Most of my investigations have used the following year corresponding to January 1st. The balances are the same. I have routinely provided the corresponding FIRECalc year because that is what you should use when looking at dividend yields, P/E10 and so forth.)

None of my changes have affected any of these summary numbers. This means that we can examine switching of portfolio allocations (with two thresholds and with commercial paper or TIPS or ibonds to go along with stocks) and we can exclude the 1881-1920 anomaly if we so choose. (I recommend excluding it. I recommend looking at it occasionally so as to see what difference it has made.)

There are some investigations that need greater detail. But in most cases, the summary tables are sufficient.

Have fun.

John R.


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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Sun Dec 14, 2003 2:18 pm    Post subject: Reply with quote

These readouts are especially valuable if you are withdrawing a constant percentage of the current balance or some combination that uses both the current balance and the initial balance (plus inflation).

You can use the Retire Early Safe Withdrawal (Rate) Calculator along with all of my modifications to make such calculations. I have reported how to do that on a companion thread about Withdrawing a Percentage of the Current Balance today (Sunday, Dec 14, 2003 5:06 pm CST).

Simply put in your withdrawal conditions and read the balances at 10, 20, 30 and 40 years (and even 50 or 60 years if you like). That gives you a good snapshot of how your portfolio is holding up. Pay special attention to the real balances (i.e., adjusted for inflation).

Have fun.

John R.


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Mike
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Joined: 06 Jul 2003
Posts: 278

PostPosted: Mon Dec 15, 2003 5:29 am    Post subject: Reply with quote

Whether using a constant 50% equity, or a switching model, the portfolio falls by half in the worst of times with 4% of the portfolio balance withdrawn. This would lead to living on half of the original purchasing power. Tips produce a little better results than commercial paper, but hard times would lead to a dramatic drop in purchasing power under this type of plan.


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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Mon Dec 15, 2003 3:15 pm    Post subject: Reply with quote

Here is a discussion that you might find interesting.

I pulled this link from a post by ataloss on Gummy's board. It refers back to a write up at Gummy's own web site.
http://home.golden.net/~pjponzo/withdrawal-strategies.htm

It gives you a good idea of how withdrawals based on the current balance behave when compared to withdrawals based on the initial balance. It does not include switching. It does include some stressful conditions.

Gummy's results and your complement each other. Having both gives us better insights as to what can happen and why.

Have fun.

John R.


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Mike
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Posts: 278

PostPosted: Tue Dec 16, 2003 11:07 am    Post subject: Reply with quote

To a degree, the choice of withdrawal strategies depends upon what you are trying to accomplish. For example, Gummy wrote on the above linked web page regarding inflation adj. withdrawals as a percentage of the original portfolio:

"Indeed, what will often happen with the strategy is that your portfolio has grown from $500K to several million dollars but you're still withdrawing $20K (for example)."

This is a result that I am entirely comfortable with. I like my relatives, and my favorite charity, and would be quite happy if there was something left over for them. OTOH, someone who had the goal of spending everything before they died would maximize their odds of success by spending more when their portfolio rises. I do like Gummy's spreadsheets. They provide additional ways of looking at the situation.


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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Thu Dec 18, 2003 12:30 pm    Post subject: Reply with quote

The most frequently recommended withdrawal rates are 5% of the current balance or 4% of the initial balance plus adjustments to match inflation. Using the current balance has an advantage in that you never run out of money. The balance can get uncomfortably low with withdrawal rates above 5%.

Another consideration is how an actual retiree is likely to respond to portfolio losses. Most retirees cut back when the market falls in spite of themselves. I know that I did even though my retirement income needs are satisfied entirely by my (Federal Government) pension, which increases to match inflation.

It turns out that a very small reduction in the withdrawal percentage based on an initial balance adds decades to the portfolio's lifetime (as extrapolated from Historical Database Rates). If your plans are to withdraw 4% of the initial balance plus inflation and if that would last 30 years, cutting back to 3.7% would extend your portfolio lifetime by two decades (to 50 years)! That is true for all high stock allocations (above 50% in stocks and for historical survival rates ranging from 90% to 100%).

There are many people who believe that they should draw out more money in their earlier retirement years because they will derive more satisfaction when they are younger. Yet, I do not see people really doing that. Real retirees are very much concerned about running out of money. They are quite cautious at first. They loosen their purse strings only after they have seen their portfolios grow (or, possibly, after they are confident that their portfolios will not decline too rapidly). Many are willing to work part time for a few years after they first retire if the markets go against them. They are looking for security first, much more than fun money (i.e., anything beyond necessities).

Have fun.

John R.


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