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No. of Recommendations: 5
Proposal
Add a litmus test for any proposed ER withdrawal strategy to the board FAQ.

Rational
I have noticed that whenever a poster proposes a new withdrawal strategies, the board reactions to analyze and critique it. When reading said critique sometimes it appears to the original poster that the board is not open to new ideas for vis-a-vis withdrawal strategies.

Well, speaking for myself, this is just not true. I am very open to hearing any new ideas. However I need the following information to be included with the presentation of the idea: 1) what percentage of ones portfolio can one withdraw each year and 2) a historical risk analysis to determine the chance that one will run out of money if one follows this strategy.

If this information is not presented, it might be the greatest withdrawal strategy in the world but it simply doesn't do me any good. I need a plan that will allow me to live only on withdrawals from my portfolio—no other income.

I don't mean to pick on any particular poster here when I propose this litmus test. I really haven't read about too many withdrawal strategies that would pass this test. The strategy once recommended to me by a professional financial planner flunked. So did Terhorst's 'retire on CDs' approach as did Dominguez 'retire on long bonds' approach.

Anyway, if this were a board rule, it could make some of the discussions about various ideas more objective and little less contentious, IMHO.

So what does everyone think about this idea??
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No. of Recommendations: 1
truthfully, if I was living on strictly the earnings off of my portfolio, ie, not supplementing a base retirement package, I would consider the following as a minimum:

-I currently am planning on 5 years worth of supplementation being put into a fixed income asset such as CDs, money markets etc. But note, the amount I am putting in is what I will need over the 5 year period, the earnings, what little there would be from whatever vehicle its in, would be additional. But my interest would be in protecting this cash from any market fluctuations.

If I had to rely strictly on my returns from my portfolio, and if it failed, I would be forced to find work, I wouldn't start with anything less than 10 years of assets in a SAFE place. Yes it would make some money, but I also wouldn't want to have to worry about it not being there. And 10 years gives the various money making endeavors time to have its up and downs with some margin to when I would have exhausted my fixed income.

The rest would be in the markets in a fashion that guarantees a return of at least the amount I spent during the year. What its invested in would depend on whats going on.

Note: my interest isn't in having to worry from year to year whether or not I will be ok. My interest is in setting myself up so that I can spread my "worry" out over more than a 1 year period. Also, it gives me some latitude with regard to WHEN I make my w/d from my investments.

note, I don't know anyone personally that is retired solely on their portfolios. If anyone does, I would be curious to know what was the average value of the portfolios when they decided to "give it up".
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No. of Recommendations: 0
orv says
I don't know anyone personally that is retired solely on their portfolios. .

No, me neither. I plan that my income will eventually be supplemented with retirement benefits. However, I also like to do "worse-case" scernario planning--what if my retirement income source dries up?
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No. of Recommendations: 3
Well, speaking for myself, this is just not true. I am very open to hearing any new ideas. However

I like ideas with historical analysis data. I would like it more if it was statistically significant <grin> but we don't seem to have any swr proposals that meet the criteria.

I really haven't read about too many withdrawal strategies that would pass this test. The strategy once recommended to me by a professional financial planner flunked. So did Terhorst's 'retire on CDs' approach as did Dominguez 'retire on long bonds' approach.

But Terhorst and Dominguez successfully retired early.
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No. of Recommendations: 5
ataloss writes,

<<<I really haven't read about too many withdrawal strategies that would pass this test. The strategy once recommended to me by a professional financial planner flunked. So did Terhorst's 'retire on CDs' approach as did Dominguez 'retire on long bonds' approach. >>>

But Terhorst and Dominguez successfully retired early.


But not by taking inflation-adjusted withdrawals from an all-CD or all T-bond portfolio.

Terhorst abandoned the all CD approach after a few years and holds a portfolio dominated by equity index funds today.

Dominguez kept the faith and stayed with his T-Bonds despite the evidence to the contrary. His $7,000 per year withdrawal from a $100,000 portfolio in 1969 dwindled to an inflation-adjusted $1,600 per year by the time he died in 1996. Hardly a recommendation for the all T-bond approach.

But I guess people differ on their measures of "success."

intercst


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No. of Recommendations: 10
But Terhorst and Dominguez successfully retired early.

They did? Isn't one of them reduced to living in a group home to make ends meet? That could hardly be considered "successful" early retirement. To each his own, but scraping by in a group home with a shared bathroom sure makes me want to keep workin'. I'd have to have the pointiest haired boss imaginable to reduce me to waiting in line to pee.
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No. of Recommendations: 2
orv says
I don't know anyone personally that is retired solely on their portfolios.

WWL: No, me neither.


<small fonts> I am. Is that so bad? </small fonts>

arrete
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No. of Recommendations: 3
So what does everyone think about this idea??

I think it squelches free speech that some of us, even those of us in intercst's corner, have been lobbying for.

A proposal may start out unformed, and someone else may firm it up and make it have the "meat" that intercst's study has. Why on earth would you want to forbid the initial vague idea from being floated? If you don't like the meatless withdrawal proposals, click "Ignore Thread" and move on. Some of the rest of us might want to see them.

-
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No. of Recommendations: 2
Terhorst abandoned the all CD approach after a few years and holds a portfolio dominated by equity index funds today.

Dominguez kept the faith and stayed with his T-Bonds despite the evidence to the contrary. His $7,000 per year withdrawal from a $100,000 portfolio in 1969 dwindled to an inflation-adjusted $1,600 per year by the time he died in 1996. Hardly a recommendation for the all T-bond approach.


Since I won't pay hundreds of dollars for a used copy of Terhorst's book I guess I am not sure what his original recommendation was. I think he was taking advantage of investment opportunities as they were available. Sort of a Hocus type approach.

Obviously Dominguez would have been better off with TIPs had they existed. Still I don't think he ever renounced his approach. Had he been interested in 30 year portfolio survival he could have dipped into principal. Maybe he agreed with Datasnooper that the only 100% SWR from a risky asset portfolio is zero.
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No. of Recommendations: 0
Since I won't pay hundreds of dollars for a used copy of Terhorst's book

On Amazon for $25.
http://www.amazon.com/exec/obidos/tg/stores/offering/list/-/0553052896/all/ref=sr_pb_a/102-7676851-4712164

The Terhorst's change to their investment style.
http://www.geocities.com/TheTropics/Shores/5315/money93.html

Their homepage is interesting, too.
http://www.geocities.com/TheTropics/Shores/5315/

arrete
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No. of Recommendations: 0
<small fonts> I am. Is that so bad? </small fonts>

arrete


No, this is not bad. Contrary, you can be the case study for HOW much does one need to start with. If you don't mind, can you shed some insights into HOW long you have been retired, what you started with, how you have fared since you started in terms of have you exceeded, lived within your expectations when you retired.

Course, this maybe all moot if you were able to quit with say 1.5 Million plus as a starting bankroll... say moot because 1.5 million stashed in CDs at even a lousy 3% is $45K/year and if one draws an extra $30K or so out of the principle yearly, one can live quite nicely at that income level.... for a long time....(approx 50 Years to eat up the principle at that rate)

course, we still have the open question, how much will it more will it cost us to ACTUALLY maintain our standard of living (I know, the worst case is 4%, but sorry, I don't buy that as a going forward rule. I prefer having more than enough to start with and hoping it covers the unexpected).
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No. of Recommendations: 0
From the 2nd link in arrete's post:

In fact, their willingness to travel led them to adopt an
unconventional approach to health insurance. The couple decided to
risk paying health costs out of their own pockets, unless one of them
needs surgery or major medical care. In that case, they intend to fly
to Buenos Aires, where they maintain a $100-a-year HMO membership.



Hmmm....supposing the one who "needs surgery or major medical care" is suddenly seriously ill, making an airplane flight impossible? What if you are in a car accident, are you going to fly to Buenos Aires before you have a surgeon open up your chest to stop the bleeding?

Does anyone else think this approach is completely impractical? You might easily be able to fly to Argentina for elective surgery, but I just don't get how they handle urgent care, which for people in excellent health, is the main threat.

-
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No. of Recommendations: 0
In fact, their willingness to travel led them to adopt an
unconventional approach to health insurance. The couple decided to
risk paying health costs out of their own pockets, unless one of them
needs surgery or major medical care. In that case, they intend to fly
to Buenos Aires, where they maintain a $100-a-year HMO membership.


Hmmm....supposing the one who "needs surgery or major medical care" is suddenly seriously ill, making an airplane flight impossible? What if you are in a car accident, are you going to fly to Buenos Aires before you have a surgeon open up your chest to stop the bleeding?

Does anyone else think this approach is completely impractical? You might easily be able to fly to Argentina for elective surgery, but I just don't get how they handle urgent care, which for people in excellent health, is the main threat.


Some other things to consider about the Terhorts. After they retired, they became perpetual travelers with a home base sometimes in the US and sometimes not. So the likelihood that they would be outside the US if something happened to them is pretty high. Also, they are very familiar and comfortable with medical care outside of the US--in their book they noted how affordable it is. So they could very likely handle out of pocket emergency costs.

So while this approach is impractical for most people, they have weighted the risks and feel comfortable with it.
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No. of Recommendations: 0
Just out of curiosity, does anyone know how foreign travelers in the United States handle health insurance?

Jerrmeh is Canadian I believe and trusts to being able to get back to the Canadian health care system if he is ill or injured. Do European travelers depend on this or is there traveler's health insurance people commonly buy should they fall ill in the United States?


Perhaps there are european health insurance plans for those who plan to be globe trotters which could be investigated?
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No. of Recommendations: 0
Dominguez kept the faith and stayed with his T-Bonds despite the evidence to the contrary. His $7,000 per year withdrawal from a $100,000 portfolio in 1969 dwindled to an inflation-adjusted $1,600 per year by the time he died in 1996. Hardly a recommendation for the all T-bond approach.

Dominguez had an interesting theory about inflation. He thought that the Consumer Price Index had very little relationship to ones actual retirement cost of living due to a combination of failing prices on certain products and services, and a conscious effort to shift to a lower priced alternative. Another buffer against inflation's impact would be the savings would one realize by getting rid of work-related costs.

While I believe that this theory could be true, I think it was irresponsible of him to use it to justify his withdrawal strategy. Can you imagine if the price of meat goes up so you have to switch to cat food???

Ironically he said in his book "The fact remains there is no guaranteed way to stay ahead of the Consumer Price Index. One decade's financial fad will be the next decade's fiscal flop..." Sounds like the best arguement for a more diversified approach than his.

Where I do see his theory as useful--to the extent that I can beat the CPI in certain areas then it positions me to better handle those areas where I cannot.
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No. of Recommendations: 3
OK, orv, I'll produce the data, though I hope you will understand that I prefer not to use actual dollar amounts. I hope the following will make sense and answer your questions. BTW, the only reason I can do this is because I'm completely anal and have years of budget and portfolio data. I've been retired 4 years. Not a long time, but it's been a bumpy one portfolio-wise, and I'm still comfortable. I think I've gotten more experience in those 4 years than I would have if I had retired in a "quieter" decade.


HOW much does one need to start with

I started with 29 times my budget (at the time). I'm a bit risk adverse, so I padded my budget and my portfolio. I didn't want to do bare bones on 4%. Besides, I plan to live more than 30 years and my portfolio does not match the S&P 500. Both of those aspects lowers the max withdrawal rate.

how you have fared since you started

Yep, my portfolio is down a bit, just like lots of people's. Right now I'm at about 26.5 times budget, but remember, my budget is still padded. I haven't stinted my lifestyle in any way, though, over time, my spending tends to go down. As with most people, the scary things are unknown costs coming out of the blue. This is one reason for the budget padding. For instance, my spending is down 12% from last year. Even though we've added a family member (adorable grandson) other costs didn't materialize: pet costs were normal (no amputated tails this year) and my 14 year old Acura (135,000 miles) was a good girl among others. I did spend more on charity and a new dining room table (growing family). Taxes were way down, and I wouldn't be surprise if this goes with the economic cycle. Like a lot of people, I prefer to sell stocks near their tops <g>, so I didn't have a lot of capital gains this year - mostly dividend income. I'm part of the LTBF school (long term buy and forget). Taxes are actually the hardest thing to budget because it can be so erratic year to year.

So I'm still perfectly comfortable with living off my portfolio. And I think I'm reasonably covered for the future - DH agrees (he does his own stock analysis), and he's never heard of intercst. Something catastrophic would change that, of course, but I don't think any percentage would be "safe" then.

arrete


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No. of Recommendations: 0
I started with 29 times my budget (at the time). I'm a bit risk adverse, so I padded my budget and my portfolio.

This is my plan. I am essentially at x25 of current spending but some expenses will rise at a rate higher than cpi so I want to be able to pad the budget and have a >25 multiple. (So I am still working) Although I am hoping for 6-7% real returns from the stock market but not counting on this:

Well, perhaps we need to question the current universal assumption of high expected equity returns. Over the past 200 years English speaking investors have been very lucky indeed, earning real equity returns of about 6%. If were you a stock investor elsewhere in the world (say, Germany, Japan, or South America) you weren't so lucky, with long term returns not greatly exceeding inflation.

W Bernstein
http://www.efficientfrontier.com/ef/198/returns.htm


I think that Dominguez went to far in dismissing cpi changes. There is, I think, widespread agreement that cpi overstates the rise in living costs (due to quality improvements substitution and other factors.) Dominguez developed his approach and was teaching classes possibly making it awkward for him to revise his thinking. (One of the disadvantages to being a "guru") Gillette Edmunds suggests in his ER book that homeowners anticipate a lower rise in the cost of living vs. the cpi since they aren't subject to rising housing costs.
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No. of Recommendations: 0
ataloss writes,

I think that Dominguez went to far in dismissing cpi changes. There is, I think, widespread agreement that cpi overstates the rise in living costs (due to quality improvements substitution and other factors.) Dominguez developed his approach and was teaching classes possibly making it awkward for him to revise his thinking. (One of the disadvantages to being a "guru") Gillette Edmunds suggests in his ER book that homeowners anticipate a lower rise in the cost of living vs. the cpi since they aren't subject to rising housing costs.

Gillette Edmunds is obviously not paying for homeowner's insurance in Texas (up 200%-300% for many homeowner's due to the "toxic-mold" problem)

intercst
(glad he's a renter who can move if it gets moldy <grin>)
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No. of Recommendations: 0
arrete


thanks for the insight. Sorry, didn't expect you to use actual dollars in your response.

but see you are doing what we are planning to do with regard to padding the "budgetary needs". And in using the padded budget, yes it will require a bit more to be accumulated before fully retiring, but it also adds a margin of error. I know some swear by the 4% SWR, but not me. Its a good guide, but since we are pulling the plug early and like you say, plan on living many years beyond the nominal 30, there is just too much room for hiccups that can turn a minimal plan into failure.

again, thanks for the insights. Wish you luck and longevity.

otter
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Gillette Edmunds is obviously not paying for homeowner's insurance in Texas (up 200%-300% for many homeowner's due to the "toxic-mold" problem)

Good thing they wouldn't have mortgage payments.


(glad he's a renter who can move if it gets moldy <grin>)

You can move to avoid mold but you might not be able to outrun rising rent due to increased insurance costs for landlords ;)





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No. of Recommendations: 1
But Terhorst and Dominguez successfully retired early.

They did? Isn't one of them reduced to living in a group home to make ends meet? That could hardly be considered "successful" early retirement. To each his own, but scraping by in a group home with a shared bathroom sure makes me want to keep workin'. I'd have to have the pointiest haired boss imaginable to reduce me to waiting in line to pee.


Either that, or teenage kids.

Vickifool
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No. of Recommendations: 0
Jerrmeh is Canadian I believe and trusts to being able to get back to the Canadian health care system if he is ill or injured. Do European travelers depend on this or is there traveler's health insurance people commonly buy should they fall ill in the United States?

There is short term (< 1 year) traveller's insurance out there as well as longer term ex-pat type insurance. I have used the traveller's variety before (though it was a while ago) and it was about twice the cost if your travel included more than 48 hours at a time in the US (enough for changing planes etc.). The ex-pat/perpetual traveller's insurance seems to also have a price spike if you are based in the US though I don't know if there are limitations on US travel if you are based elsewhere.

This is something I will have to look more into in the future as I plan to spend the first n years of retirement travelling and not with (almost) no medical insurance as the Terhorsts do (did?). Some others here look to be heading in such a direction and possibly earlier than me so any info on this kind of insurance would be useful.

Jammerh is, I believe, Canadian (as am I). The Canadian health insurance will cover your costs out of Canada for up 6 months out of Canada in any one year block of time. I don't recall the coverage rate though - it may be pegged at Canadian costs. There are top up insurance policies available.

Hyperborea - back from XMas in the frozen wastes of Toronto ;->

P.S. Some of you must not have got any cool XMas gifts since you've been posting so many messages for me to catch up on.
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