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As hard as they try, no one has come up with a workable alternative that doesn't involve turning a large portion of your life savings over to an insurance company, with the attendant catastrophically-high commissions, overheads, and costs.

http://finance.yahoo.com/focus-retirement/article/109370/tim...

Meanwhile, Stephen P. Utkus, a principal with the Vanguard Center for Retirement Research, agrees that the 4% rule is flawed. But he also notes, as did Sharpe, that there's no practical mechanism to replace it with and that further research is required.


intercst
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See, that's the useless thing about that article. The takeaway is essentially this: "The 4% rule may not be perfect, but we can't identify anything that's better." Thanks a lot, guys. That was helpful.

#29
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See, that's the useless thing about that article. The takeaway is essentially this: "The 4% rule may not be perfect, but we can't identify anything that's better." Thanks a lot, guys. That was helpful.



o well.

i did find it helpful...

'splained in detail something i'd never really thought about, but
if i had, likely same conclusions (and *i* like having my conclusions supported by 'the Experts

namely :
why isn't it perfect? because 'perfect' means dying with a buck-eighty in your jeans ..but no one has a crystal ball

why is there no better alternative? because no one has a crystal ball


(>:

.... not using the 4% rule
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As I posted yesterday over at Bogleheads, it's past time to replace the 4% rule. I think the data shows that 3.9% or 4.1% is much better. Of course, there's nothing like the good old 2% rule to keep your portfolio moving along.
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why isn't it perfect? because 'perfect' means dying with a buck-eighty in your jeans ..but no one has a crystal ball

I remember years ago a book titled "Die Broke". I skimmed it at the library one day. Nothing fantastic.

JLC
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It has always been is sort of like the pirates code in “Pirates of the Caribbean” ;


“the code is more what you'd call "guidelines" than actual rules” , Barbossa



Greg
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One would hope that people keep in mind the 4% "rule" is only a guideline. It allows a basis to estimate the assets needed for retirement. And if your investments make 8% return, it works quite well.

But the markets are cyclical. In good times, 4% in a good number. In bad times 4% seems way too low. But we hope the cycles will continue making 4% a good average for estimation purposes.

Of course having surplus assets over the 4% minimum is a great idea. Then the precision of the number becomes less important.

People who see 4% as a rule, are in danger of misusing the number.
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"One would hope that people keep in mind the 4% "rule" is only a guideline. It allows a basis to estimate the assets needed for retirement. And if your investments make 8% return, it works quite well.

But the markets are cyclical. In good times, 4% in a good number. In bad times 4% seems way too low. But we hope the cycles will continue making 4% a good average for estimation purposes.

Of course having surplus assets over the 4% minimum is a great idea. Then the precision of the number becomes less important.

People who see 4% as a rule, are in danger of misusing the number. "

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Folks like a quick and dirty way to estimate what they might
need to put aside for retirement.
Life tends to be different than quick and dirty estimates.

Howie52
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"The 4% rule may not be perfect, but we can't identify anything that's better."

Really?

How about your own common sense, your own intelligence, your own research (and perhaps some GOOD advice from sharp advisors), independence, and such?

Bunch of horse pucky is what that "rule" is, except for people who can not -- or will not -- think for themselves.

My two cents.

Vermonter
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That "rule" reminds me of people who proudly say "I am putting X percent of my income into my 401k (or IRA or whatever) for retirement."

So you ask them "Great, but how is it INVESTED within that 401k or whatever?" Many times you'll get the same answer (!) or a puzzled look.

I think people need to spend a bit more time learning how to invest THEIR money in their future, maybe at the loss of time staring at "American Idol" or other junk.

Again, my two cents.

Vermonter
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>> Again, my two cents.

Vermonter
<<

Gee, so what's your take on this issue?

#29
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"I think people need to spend a bit more time learning how to invest THEIR money in their future, maybe at the loss of time staring at "American Idol" or other junk."

Investing for retirement doesn't need to be complicated. Decide on a proper asset allocation, put your money in the appropriate broad based index funds, rebalance regularly, then sit back and enjoy American Idol.

-drip
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#29:

Good morning!

Well, let's start with a question or two.

Situation:

I'm up an honest 8.2 percent on my self-directed IRA since this time in January. Not a big rise, I guess, but that's just after 3 months.

My question:

Do I take my magic 4 percent NOW?

Or do I sit on that 8.2 percent until year's end, maybe working some more on my investments, at which time it may increase more or even end up being lower?

Might I assume that, if invested properly with some other person or group, that might grow, say, to 4 times as much, or 32 percent, by the end of a full year (4 quarter)? If so, could I maybe take 4.5 percent out and be "daring"?

Just wondering.

Then again, I actually watch what my investments are doing and make changes from time to time (buying or selling along the way), and even cash some out at times, unmindful of anyone else's "rules".

I hope to do better than 8 percent for the year.

Vermonter
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drip:

Well said.

Truly, nothing wrong with going ahead and entrusting your money to someone else, if they are dependable, and then enjoying whatever TV show you like!

IF you can manage to not pay attention to what is happening to your money, of course. I find that hard to do.

Vermonter
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>> I'm up an honest 8.2 percent on my self-directed IRA since this time in January. Not a big rise, I guess, but that's just after 3 months.

My question:

Do I take my magic 4 percent NOW?

Or do I sit on that 8.2 percent until year's end, maybe working some more on my investments, at which time it may increase more or even end up being lower?

Might I assume that, if invested properly with some other person or group, that might grow, say, to 4 times as much, or 32 percent, by the end of a full year (4 quarter)? If so, could I maybe take 4.5 percent out and be "daring"?
<<

My answer would be: save the surpluses in "good years" so you don't have to decimate your portfolio or sell stocks at low prices during "down years."

I think it's a mistake to crank up spending and retirement income because of a couple of good years unless you are willing and able to withdraw a lot less in a bear market like 2000-02 and 2007-09. Governments and pension funds have a bad habit of doing that, and because of it they get into big trouble trying to cope with down markets.

#29
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"nothing wrong with going ahead and entrusting your money to someone else"

Just out of curiosity, how does one NOT entrust their money to someone else without putting it all under the mattress?

Paying attention to what is happening to one's money can be as active or as passive as one cares for it to be. One can day trade with one's retirement money or one can sit back and watch it grow like the grass with an occasional mowing. Or anywhere in between.

-drip
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...except for people who can not -- or will not -- think for themselves.

You have summed up the main reason the US is in the trouble its in today.

As a tangent, just finished reading an article about the savings rates/debt rates of various countries. One big trend stuck out. Many asian countries have higher savings rates and lower debt rates per person vs. GDP than USA/Europe. Why? No social security/entitlements, people have to depend/think for themselves.

JLC
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Might I assume that, if invested properly with some other person or group, that might grow, say, to 4 times as much, or 32 percent, by the end of a full year (4 quarter)? If so, could I maybe take 4.5 percent out and be "daring"?

What that means is that you don't understand how to use the 4% rule of thumb, or the assumptions that went into it's development.

If you don't understand those things, then you're like a 3 year old wielding a butcher's knife. It's a handy tool, but dangerous when mis-used.

On the other hand, if you do understand those things but prefer to mis-use it anyway, you're more like a man with a hammer. Every thing he sees looks like a nail.

Again, the problem is not with the tool, it's with how it's used.

--Peter
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drip:

Just out of curiosity, how does one NOT entrust their money to someone else without putting it all under the mattress?

Well, you can direct how it's invested on your own, of course.

Within an IRA, one need not go nuts and day trade (hopefully not), but, if you have a modicum of intelligence and some studying under your belt, do some due diligence before buying or selling, and have a reasonably low commission rate to work with, you CAN do SOME trading and/or investing on your own within an IRA or 401k, with no fear of dealing with capital gains or any other taxes, until you withdraw any of it.

Paying attention to what is happening to one's money can be as active or as passive as one cares for it to be. One can day trade with one's retirement money or one can sit back and watch it grow like the grass with an occasional mowing. Or anywhere in between.

Bingo!

You've got it right there!

Vermonter
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JLC:

... people who can not -- or will not -- think for themselves.

You have summed up the main reason the US is in the trouble its in today.


Drives me nuts to see seemingly witless people scurrying around like lemmings out there sometimes. But, unless they are willing to stand up and be "different" (a la "Jonathan Livingston Seagull"), what choice do they have?

Time was when we HAD to think for ourselves. We got burned, yes, but we tried to learn from that and act smarter next time -- right?

Now we say "Here, take my life savings and... uh... do sumpin' with it, okay? I'm gonna go suck my thumb." (!)

Gag.

Vermonter
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Peter:

You miss my sarcasm! Obviously, one cannot go around and just toss out a 4% rule -- without replacing it with something perhaps better.

All I was trying to point out was that, if we study and learn and TRY a few things, sometimes we CAN deal with our own lives -- and our own investments.

As a small example, today, one of my investments, Eastman Kodak (symbol EK) has jumped up nicely. Last time I checked, it was up over $1 a share, or some 13% today.

Since it is already up to almost double what I paid for it about 4 months ago, I put in a Trailing Stop Loss at some comfortable level below that for SOME of my shares, to ensure some profit, should it suddenly drop obscenely, while still following it on up, as long as it goes up!

No "hammer" on a nail. More like a scalpel, carefully ready to cut, if and when needed.

Again, the problem is not with the tool, it's with how it's used.

You got it.

Vermonter
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You miss my sarcasm!

I guess it was buried pretty deep. If you intended sarcasm, I indeed missed it.

I supposed that would make this a case of sarchasm.

--Peter
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>> I guess it was buried pretty deep. If you intended sarcasm, I indeed missed it. <<

As did I, apparently...

#29
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Peter:

I said:

"Here, take my life savings and... uh... do sumpin' with it, okay? I'm gonna go suck my thumb." (!)

Surely you did not think I was serious...?

But then, I guess, if the shoe fits, and all that!

Vermonter
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I said:

"Here, take my life savings and... uh... do sumpin' with it, okay? I'm gonna go suck my thumb." (!)


Not in the post to which I was responding.

--Peter
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Not in the post to which I was responding.

From previous posts on the subject on this board, I think it's fairly clear that RV retired with less money than he wanted to, and has been searching for a way to justify spending more than 4%. Hence the various rationalizations.

- Gus
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Not in the post to which I was responding.
===========
From previous posts on the subject on this board, I think it's fairly clear that RV retired with less money than he wanted to, and has been searching for a way to justify spending more than 4%.



sheesh.

Just Do It.



... working for me so far <g>
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"drip:

Just out of curiosity, how does one NOT entrust their money to someone else without putting it all under the mattress?

Well, you can direct how it's invested on your own, of course."


I may be splitting hairs, and if so, I apologize. I didn't mean entrust the decision on how to invest the money, just the money itself. Even if you buy shares of stock directly from the company that issues it, you are entrusting it to the management and directors of that company.

If I put my retirement money in some broad based index funds and rebalance regularly to maintain my asset allocation, I am directing how the money is invested (on a macro level), while entrusting to the mutual fund company and its fund managers.

-drip
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while entrusting it to the mutual fund company and its fund managers.
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Come on, Gus:

From previous posts on the subject on this board, I think it's fairly clear that RV retired with less money than he wanted to, and has been searching for a way to justify spending more than 4%. Hence the various rationalizations.

Don't we ALL retire with perhaps less than we'd like to have in an ideal world? However, we do fine, thanks. LOL!

The truth is that I started managing my own 401k years ago (within the limits of the company's 401k framework), found out that I could do fairly well with it that way, and then rolled it over to a self-directed IRA when I retired.

I'm simply not a lemming, to put it bluntly. As Frank Sinatra used to sing "I did it my way..." and I have pretty much lived my life that way, when I could.

My whole message is this:

It's YOUR life -- and YOUR money.

If you prefer to invest it and let it ride, and perhaps don't want to have to deal with managing your money, and you want to obey a 4 percent (or some other) "rule", and that WORKS for you, then by all means go ahead and do that!

However, if you perhaps feel, as I do, that you'd prefer to think about what your money is doing, and prefer to learn about how to manage it yourself, why not do that, instead?

Vermonter
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If you prefer to invest it and let it ride, and perhaps don't want to have to deal with managing your money, and you want to obey a 4 percent (or some other) "rule", and that WORKS for you, then by all means go ahead and do that!

However, if you perhaps feel, as I do, that you'd prefer to think about what your money is doing, and prefer to learn about how to manage it yourself, why not do that, instead?


Well said. I think it a mistake to assume that there is only one way to achieve financial security. I think there are many ways, some work better than others, but a person always should consider the possibility that there's more than one way to skin a cat.
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ResNullius:

Thanks. That was well stated.

When I put forth my views on investing, as I have done before, I usually try to say clearly that whatever I do is not necessarily what I think everyone else should do. Sorry if I did not say that clearly this time.

Deep down inside, I simply wish for people to stand up, think for themselves, and do what THEY think they should do, and not do it because "everyone else does this" or "everyone else thinks this", but because THEY think or feel that!

Vermonter
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Well said. I think it a mistake to assume that there is only one way to achieve financial security. I think there are many ways, some work better than others, but a person always should consider the possibility that there's more than one way to skin a cat.

I usually lurk but feel compelled to make a comment.

There are indeed many ways to approach withdrawal rates, BUT the underlying figures used for the 4% SAFE withdrawal rate "rule" at least need to be acknowledged (as the article suggests). You can also use a 7% rate adjusting with inflation and the historical numbers indicate that could be fine except you run about a 60-40 chance of running out of money. The de-accumulation phase of retirement suggests a need for consideration of worst case scenarios. There are many other options on Intercst's site that also discuss variable withdrawal rates for operating. But those underlying numbers and consideration of them are VERY compelling and IMO one deviates from those with risk.

Hockeypop
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Well, back about a decade ago when all of the 4% discussion got a lot of traction on TMF, I think the longest flat span in the S&P was 8 years or so. Now we've had that interstitial flat decade. Does that bump it down to 3%? 2 1/2%?
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I'm a simplistic guy.

$2,000,000 @ 4% = $80,000 / yr.

Keep it reasonably diversified and you'll never need to eat Alpo.
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My answer would be: save the surpluses in "good years" so you don't have to decimate your portfolio or sell stocks at low prices during "down years."

I think it's a mistake to crank up spending and retirement income because of a couple of good years unless you are willing and able to withdraw a lot less in a bear market like 2000-02 and 2007-09. Governments and pension funds have a bad habit of doing that, and because of it they get into big trouble trying to cope with down markets.


Here is how I try to avoid having to cope with down markets:

On retirement I set aside 20% of my retirement savings to fund the next five years. 4% cash to last the first year and the other 16% in laddered CDs.

The other 80% is kept invested and every year I take 4% of my total portfolio and put it into the five year pot. I divide that pot by 60 months and that is my withdrawal for the next year.

I always have five years of withdrawals in cash and CDs and if the market goes down in one fo those years then I am covered with the funds to continue at my withdrawal rate for the next year.

So far this has worked out good for me ( I have been retired for 15 years and have not once failed to give myself a raise). I now have a balance that is 150% of what I started with.

This is actually very conservative and when I run it through the retirement planning computer at fidelity it shows my balance growing by 300% and me dieing with a lot of money to leave to my heirs.

Your mileage may vary.

OxBeaux
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Here is how I try to avoid having to cope with down markets:

On retirement I set aside 20% of my retirement savings to fund the next five years. 4% cash to last the first year and the other 16% in laddered CDs.

The other 80% is kept invested and every year I take 4% of my total portfolio and put it into the five year pot. I divide that pot by 60 months and that is my withdrawal for the next year.

I always have five years of withdrawals in cash and CDs and if the market goes down in one fo those years then I am covered with the funds to continue at my withdrawal rate for the next year.

So far this has worked out good for me ( I have been retired for 15 years and have not once failed to give myself a raise). I now have a balance that is 150% of what I started with.

This is actually very conservative and when I run it through the retirement planning computer at fidelity it shows my balance growing by 300% and me dieing with a lot of money to leave to my heirs.

Your mileage may vary.

OxBeaux


My hat's off to you for providing such an easy to understand and easy to implement withdrawal strategy. I'm doing something similar, but not worth rattling on about, because it's the same basic idea, only done a little differently. Bravo.
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I'm in my 1st year of retirement. I set up my retirement based on the 4% rule.
However, because of the economy, I ended up selling my office and my home for far less than I had anticipated. The proceeds from those sales were supposed to be used for paying off the mortgage on my new home.
Consequently, I have a mortgage payment to make monthly for the next 12 years.

Is there a way to calculate a safe retirement withdrawal based on a 2 tier system, i.e. a higher withdrawal for the next 12 years and a reduced amount, thereafter, based on the mortgage being paid off.

piranha1 (milt)


cross posted on the Rule Your Retirement board.
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I have a mortgage payment to make monthly for the next 12 years.

Is there a way to calculate a safe retirement withdrawal based on a 2 tier system, i.e. a higher withdrawal for the next 12 years and a reduced amount, thereafter, based on the mortgage being paid off.


There possibly is, but I haven't heard of one. I suspect that any such study would be essentially useless. This sounds pretty close to the "party hard and hope I die before the money runs out" scenario.

I further suspect that such a study wouldn't tell you what you are wanting to know. The 4% rule is based on the goal of not running out of money in the long term (usually 30 years). Problem for you, is that, IMHO, 12 years is indeed long term (just not quite as long as 30). The death-spiral of a retirement portfolio happens when the withdrawals are too large, thereby reducing the value of the portfolio. This lowered amount results in lower (dollar) returns; the next too-large withdrawal reduces the value even more, so the dollar return is even smaller. This results in an exponential decay----and exponential curves drop breathtakingly fast at the end.

You might want to look at something like a Guyton-Klinger withdrawal method. (FPA Journal, Aug 2007 issue, et. al.) Basically, when you get ready to make your annual withdrawal, if the ratios are outside of a tolerance band, then you REDUCE the amount of the withdrawal.
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Thanks Rayvt.

This is a big help.

piranha1 (Milt)
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Is there a way to calculate a safe retirement withdrawal based on a 2 tier system, i.e. a higher withdrawal for the next 12 years and a reduced amount, thereafter, based on the mortgage being paid off.


I think firecalc lets you do this, www.firecalc.com
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