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It appears that the Motley Fool had an "experiment" going several years ago that attempted to answer lots of critical questions for retirees: How to make withdrawals to live on? How to "inflation proof" my withdrawls? How to protect the principal? It seems that the study also made certain recommendations based on the level of risk one was willing to assume. To my dismay, I now read that this "experiment" or "study" or whatever, was discontinued. To me these questions are not casual ones but are critical ones! Does anyone know of any studies or recommendations that have replaced this one?

Thanks!
like2no@aol.com
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Greetings, Like2no, and welcome. You asked:

It appears that the Motley Fool had an "experiment" going several years ago that attempted to answer lots of critical questions for retirees: How to make withdrawals to live on? How to "inflation proof" my withdrawls? How to protect the principal? It seems that the study also made certain recommendations based on the level of risk one was willing to assume. To my dismay, I now read that this "experiment" or "study" or whatever, was discontinued. To me these questions are not casual ones but are critical ones! Does anyone know of any studies or recommendations that have replaced this one?

I discontinued that portfolio in that it showed only an investment in the Foolish Four, a method subsequently shown to be flawed. Scholarly critics claimed, with some justification, that the strategy is simply a random association of variables, and that the FF method is the product of data mining, a grievous statistical error. Further, an internal study lent strong support to those arguments.

As a result of these arguments, I determined that the criticisms leveled against the FF method had substantial merit. Consequently, its continued use as the only component of a retiree's mechanical stock investing strategy seemed inappropriate to me. Also, the addition of any other mechanical stock investing strategies to these portfolios seemed inappropriate due to the lack of long-term historical data for those methods. Accordingly, I decided to discontinue the real-money retiree portfolios.

You seem to be looking for specific investment recommendations, something I do not provide. Those decisions are best left to the individual based on the person's knowledge, willingness to take risk, and willingness to do one's own research.

As to a withdrawal rate, we've said repeatedly that should be no more than 4% to 6% of a person's available stash when it's invested in something like 75% stocks to 25% fixed income. That will allow one to make an inflation-adjusted withdrawal with a reasonable certainty the sum will last for one's lifetime. For a good tool to use in planning your personal withdrawals, see the spreadsheets developed by John Greaney aka Intercst, a frequent poster on these boards, at http://www.geocities.com/WallStreet/8257/safesum.html. They will help you work through your own withdrawal decisions.

Regards..Pixy
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Many thanks for your reply! You have given me much to think about.

Are there other studies underway to tackle the same issues that your study dealt with--i.e, studies that are not flawed as you say yours was?

I 59, already retired..I am not a statistician and find many of the studies/reports I read to be intimidating. Is there any accelerated path to "fooldom"? I am realistic about my expectations and am not looking for a way to quick riches--however, I'd like some "foolish guidance" about ways to invest, realistic expectations about what I may expect to withdraw and protect my principal, etc....I have had "beginner's luck" with several investments but know that I need help with diversification issues, withdrawal issues, etc..I am reading everything I can get my hands on!

Does the MF offer any kind of consulting (fee or otherwise) to individuals with similar situations?

Thanks!
like2no@aol.com
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I'd like some "foolish guidance" about ways to invest, realistic expectations about what I may expect to withdraw and protect my principal

I have attached a link to a series of articles Scott Burns wrote for the Dallas Morning News beginning in 1995. It started with the premise that 7% would be a safe withdrawal rate from an all stock portfolio as once proposed by Peter Lynch. Lynch proposed that, no matter what the market did, such a withdrawal rate would never run the portfolio out of money.

Burns worked with several statisticians and did substantial backtesting going back a long time and determining what would have happened to a portfolio with a variety of fixed withdrawal rates beginning each year under the study and running 30 years forward from that point. He found that a 7% withdrawal rate was not safe 100% of the time. At some starting dates the portfolio would have ended up substantially higher than it had started out, in most cases it would have ended up some acceptable amount more or less than it had started out, but in some cases it would run out of money. It basically depended on where the historical bull and bear markets fell in your withdrawal time scheme.

In testing other withdrawal rates, he came to some conclusions that were quite interesting. While 7% turned out to be too much of a risk, 6% turned out to be much safer and 5% turned out to be quite safe.

He also tested portfolios that were more diversified than 100% stocks and showed "safe" withdrawal rates at various allocations of stocks and bonds. The series of articles is well worth reading:

http://www.scottburns.com/951001su.htm

Good Luck!!

WiseNLucky
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Allow me to make a few corrections to my earlier post. I went back and read the first few articles again - it had been some time since I had read them.

1) The periods back tested were only 15 years, not 30 years.

2) The withdrawal rate was not a fixed 7% per year, it was a fixed amount equal to 7% of the original portfolio balance. Obviously, if you limit your withdrawal rate to 7% each year you will never run out of money, but the amount you withdraw could go down (or up) rather substantially.

Still, I believe the articles are full of useful information.

WiseNLucky
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The one big assumption, glossed over a little too easily for me, is to NOT loose principle. Obviously you don't want to spend it all but not everyone cares to die with millions and not enjoy some of it while there here.

JLC
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Does the MF offer any kind of consulting (fee or otherwise) to individuals with similar situations?


Funny you should ask. The Motley Fool just today has announced the launch of our new TMF Money Advisor service, where, among other services, you can get one-on-one counseling with a financial advisor to get answers to your specific personal finance questions. Get information for that at:

http://www.fool.com/ma/index.htm?source=csbo03127

Top Fool David Gardner describes the service in more detail at:

http://www.fool.com/Specials/2001/sp010904advisor.htm

Of course, there are lots of resources on this and other websites that you can explore, and I encourage you to become as informed as you can be about making your financial decisions. From the tone of your comments, it looks to me like you're well on your way toward that goal.

Good luck and stay Foolish,

Cheeze
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The one big assumption, glossed over a little too easily for me, is to NOT loose principle. Obviously you don't want to spend it all but not everyone cares to die with millions and not enjoy some of it while there here.

I'm not sure exactly where you are driving with this comment. The only way to never risk losing principal is to have your retirement funds in some sort of money market account, which will possibly not keep up with inflation, or to buy inflation protected bonds, which will require a much higher retirement nest egg to provide sufficient income.

I seem to see here more often the recommendation that at least some of your retirement funds remain in equities to boost returns over the term of retirement and provide some protection against inflation. We also can't forget, though, that bonds are subject to principal loss if interest rates rise. It seems to me that the safest course is to plan for withdrawal at rates low enough that the portfolio will be able to recover when stock prices go through an appreciation phase.

Or, of course, you could alter the amount of withdrawals each year based on what's going on in the market. But that puts you at risk of not having enough to live on in bear markets.

WiseNLucky
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"bonds are subject to principal loss if interest rates rise. "

No. The owner of a bond only loses principal if he sells the bond. But bonds mature, and it matures at face. It may be called early at a premium, or at face. If interest rates rise a whole lot, the bond still matures at face. Now, if the company defaults, that is a different matter.
The owner of a bond fund loses principal if interest rates rise. If he holds a long-term bond fund for 40 years, he still has a long-term bond fund.
This distinction is why I like bonds much better than bond funds.
Best wishes, Chris
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WiseNLucky: "bonds are subject to principal loss if interest rates rise. "

Crosenfield: "No. The owner of a bond only loses principal if he sells the bond."


This is correct and is a very important distinction.

Chris' comment about liking bonds better than bond funds is right on for this reason. For those of us who are limited to bond funds early on, we need to be ready to sacrifice (or gain) principal due to fluctuations in interest rates. But there are a number of ways to ladder real bonds when the portfolio is ripe and ready for withdrawals, allowing the owner to hold the bonds to maturity.

WiseNLucky

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The one big assumption, glossed over a little too easily for me, is to NOT loose principle. Obviously you don't want to spend it all but not everyone cares to die with millions and not enjoy some of it while there here.
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I'm not sure exactly where you are driving with this comment. The only way to never risk losing principal is to have your retirement funds in some sort of money market account, which will possibly not keep up with inflation, or to buy inflation protected bonds, which will require a much higher retirement nest egg to provide sufficient income.


I think the original poster was making a comment on the fact that the article was worried about loss of principal rather than on the withdrawals from growth/income+principal being able to be sustained for a certain amount of time. It doesn't matter if my funds drop completely to zero on the day I die unless I wish to leave it to somebody otherwise at that point I no longer have any need for money.
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The one big assumption, glossed over a little too easily for me, is to NOT loose principle. Obviously you don't want to spend it all but not everyone cares to die with millions and not enjoy some of it while there here.
---------------
I'm not sure exactly where you are driving with this comment. The only way to never risk losing principal is to have your retirement funds in some sort of money market account, which will possibly not keep up with inflation, or to buy inflation protected bonds, which will require a much higher retirement nest egg to provide sufficient income.
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I think the original poster was making a comment on the fact that the article was worried about loss of principal rather than on the withdrawals from growth/income+principal being able to be sustained for a certain amount of time. It doesn't matter if my funds drop completely to zero on the day I die unless I wish to leave it to somebody otherwise at that point I no longer have any need for money.


OK - now the question makes sense! In reply, I will quote my Dad (who was probably quoting someone else) when he said: "You tell me the day I will die and I promise I will spend every penny. Seeing as I don't know, I expect you will end up with a pretty nice inheritance."

The problem in our family is that we have some family members that are currently over 100 years old. We have others who died of "natural causes" in their 50s. My Dad, who has never spent a day in the hospital, is on no medication and won't even take an aspirin, and is healthier than I am even though he is nearly 70, realizes that you have to worry about running out of money. The only way to not worry about running out of money is to have enough principal and an adequate withdrawal plan to ensure you don't - even if another 1929 happens. He has both, and I plan to as well without any money from him.

While he has a family to leave money to if there is any left, I do not. My wife and I have even discussed what to do IF we are successful in our investment plans and IF we manage to make our money outlive us. It will be a nice problem to have if it comes to that, but the last thing we want to do is run out!

WiseNLucky
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<<<I'm not sure exactly where you are driving with this comment. >>>

If you read the article mentioned in this thread, it repeatedly mentions safetest maximum withdrawl rate WITHOUT loosing principle. Then goes on spouting off numbers and statistics. A good article. But when people refer from this paper, they just mention the same withdrawl rate numbers, no mention that this is considered the saftest rate where you wouldn't loose principle. And therefore, the take home message gets skewwed. Not everyone wants to die with money left over, thus, they could incurre a higher withdrawl rate. A whole different animal.

JLC
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<<If you read the article mentioned in this thread, it repeatedly mentions safetest maximum withdrawl rate WITHOUT loosing principle. Then goes on spouting off numbers and statistics.>>

Nowhere in any of the articles does it say that you will not lose principal. Depending on what returns your portfolio provides, your principal will go up or down over the life of the withdrawal period.

The problem happens when your portfolio goes to ZERO and you are still alive. That would have been the outcome in almost half of the projections at a withdrawal rate of 7% of the original portfolio amount using the historical rates of equity returns for the total stock market (and we all know that you have a slim chance of equalling the return of the total market). The only differing factor was the date on which the withdrawals began (effectively, the retirement date). The late 70s/early 80s were good, the late 60s/early 70s were bad.

Each person is free to take their portfolio down however quickly they want, but must face the consequences that they could run out of money. As I said, the only alternative is to end up with plenty of money, no matter how long you live.

Again, I want to stress that these studies were based on a fixed dollar rate of withdrawal, set as a percent of the original portfolio. In a sense, they related to dollar cost averaging in reverse. If you want to take your portfolio down by a fixed percent each year, you will not run out of money unless you choose a percent that consisitently exceeds your average return over the withdrawal period. But the amount you take out each year will go up or down based on your portfolio balance each year. I would personally find this worrisome, not knowing how much I have to live on until right before the year starts. I think that's why there are so many proponents of the five years worth of living expenses in cash theory for those in the withdrawal period. But, as I said before, to each his or her own.

WiseNLucky
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JLC:

<<<I'm not sure exactly where you are driving with this comment. >>>

"If you read the article mentioned in this thread, it repeatedly mentions safetest maximum withdrawl rate WITHOUT loosing principle. Then goes on spouting off numbers and statistics. A good article. But when people refer from this paper, they just mention the same withdrawl rate numbers, no mention that this is considered the saftest rate where you wouldn't loose principle. And therefore, the take home message gets skewwed. Not everyone wants to die with money left over, thus, they could incurre a higher withdrawl rate. A whole different animal."

wisenlucky:

Nowhere in any of the articles does it say that you will not lose principal. Depending on what returns your portfolio provides, your principal will go up or down over the life of the withdrawal period.

If the article that is referred to is the Retire Early Home Page at geocities (run by John Greaney a/k/a intercst), then wisenlucky is entirely correct and JLC has entirely missed the point. The proof is looking at the terminal value --- in some cases it approaches zero and in any number of cases it is below the starting value of the portfolio.

The problem happens when your portfolio goes to ZERO and you are still alive. That would have been the outcome in almost half of the projections at a withdrawal rate of 7% of the original portfolio amount using the historical rates of equity returns for the total stock market (and we all know that you have a slim chance of equalling the return of the total market). The only differing factor was the date on which the withdrawals began (effectively, the retirement date). The late 70s/early 80s were good, the late 60s/early 70s were bad.

Each person is free to take their portfolio down however quickly they want, but must face the consequences that they could run out of money. As I said, the only alternative is to end up with plenty of money, no matter how long you live.


If you explore the REHP further, you can find discussions about the pay-out reset method to deal with adjusting withdrawals if the early years of withdrawals were good years in the market.

Again, I want to stress that these studies were based on a fixed dollar rate of withdrawal, set as a percent of the original portfolio.

Partially correct, assuming that this is REHP stuff. After the first year the withdrawal amount was (is) adjusted for inflation (or deflation), so that nominal dollars withdrawn are likely rising (or possibly falling if deflation is occurring).

If you want to take your portfolio down by a fixed percent each year, you will not run out of money unless you choose a percent that consisitently exceeds your average return over the withdrawal period.

Actually, as long as the fixed percentage rate is less than 100%, you likely will never actually run out of money, but you will likley suffer teh fate of the dollar amount being withdrawn being inadequate for the purpsoes it was intended to serve for teh reason that wisenlucky described:

But the amount you take out each year will go up or down based on your portfolio balance each year.

I would personally find this worrisome, not knowing how much I have to live on until right before the year starts. I think that's why there are so many proponents of the five years worth of living expenses in cash theory for those in the withdrawal period. But, as I said before, to each his or her own.


I agree with the concluding paragraph.

Regards, JAFO



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JAFO,

If the article that is referred to is the Retire Early Home Page at geocities (run by John Greaney a/k/a intercst), then wisenlucky is entirely correct and JLC has entirely missed the point. The proof is looking at the terminal value --- in some cases it approaches zero and in any number of cases it is below the starting value of the portfolio.

I think the article that was the subject of the oblique reference was probably <www.scottburns.com/951001su.htm>. The series of articles starting at this URL does dwell on the idea of losing versus not losing principal, including the extreme case of having your principal reach zero.

Burns criticizes what he describes as a Peter Lynch strategy that he says has a "50 percent chance of losing principal and a small chance of leaving the investor stone broke." And he recommends an alternative strategy in which you would "have historical certainty of retaining your principal over 20 years, a 50/50 shot at doubling your money, and a small chance of seeing your original $100,000 investment balloon to over $900,000."

I hadn't seen the Scott Burns material until I followed the link from earlier in this thread, and I was at a loss for how to deal with it -- I am so used to the rational approach of intercst and many of the other frequent posters on the TMF retirement-oriented boards that when I read it, to see what JLC was talking about, Burns's hang-up on the goal of not losing principal seemed really strange.

Like you, I am used to intercst's approach of starting with a portfolio and tracking its results through various types of markets for various amounts of time, and reporting its likelihood of surviving over that interval: 100%, 92%, 90%, etc. The Scott Burns articles seemed so hung up on total preservation of principal that I found it hard to figure out what was the idea behind it -- some sort of "Die Rich" mantra???? What's the deal with that?

So, I don't disagree with what you say in your post, but I think JLC was talking about something other than intercst's material, and I agree with JLC that I cannot see the point in trying to maximize the amount of the estate you are able to pass to your heirs.

Just my 2¢,
Phooley in Phoenix
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phooley:

JAFO-- <<<<<If the article that is referred to is the Retire Early Home Page at geocities (run by John Greaney a/k/a intercst), then wisenlucky is entirely correct and JLC has entirely missed the point. The proof is looking at the terminal value --- in some cases it approaches zero and in any number of cases it is below the starting value of the portfolio.>>>>

"I think the article that was the subject of the oblique reference was probably <www.scottburns.com/951001su.htm>. The series of articles starting at this URL does dwell on the idea of losing versus not losing principal, including the extreme case of having your principal reach zero."

It was a little hard to tell. I did go back to some of the early posts and found a direct reference to the REHP.

"So, I don't disagree with what you say in your post, but I think JLC was talking about something other than intercst's material, and I agree with JLC that I cannot see the point in trying to maximize the amount of the estate you are able to pass to your heirs."

I generally like Scott Burns, but if the article is as you desribe, then I agree with you and JLC (unless of course there are heirs, personal or institutional, that you intend to leave money). Too each his/her own.

Regards, JAFO




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phooley and JAFO31:

Thanks for your comments. I posted the link to Scott Burns. I haven't yet seen the comments on the retire early board but think I will go look at them later.

I still say that Burns' point was not concern about a temporary loss of principal, but a 100% loss of principal. His backtesting simply determined what would have happened to a $100,000 portfolio if a fixed $7,000 were withdrawn each year (7% of the original portfolio). He based the results on actual market results for every fifteen year period going back for some time. He found that, in some cases, the portfolio would have dropped to zero. In another case, the portfolio would have grown to almost $1 million. He was merely pointing out that one could not guarantee a safe withdrawal of a fixed dollar amount from a portfolio each year if that dollar amount was 7% of the original portfolio. He then backtested using lower fixed amounts and discovered that, given historical returns, there is a safe fixed withdrawal rate that might have taken the principal down pretty far during the 15 year period, but would not have run it to zero before the end of the 15 years.

I haven't said it as well as Burns did. It is obvious that no one would intentionally let their portfolio grow into the stratosphere if they needed the money, or for that matter merely wanted the money. And just as obviously, no one would stick to their fixed withdrawal amount if their portfolio had substantially decreased or increased. He was just pointing out that if you need $70,000 every year no matter what, you better have more than $1,000,000 on hand to start. IF returns equal what they have in the past, you might do fine with your $70,000 withdrawal on your $1,000,000 starting portfolio and even end up with nearly $10,000,000 after 15 years. The problem is that you might run yourself down to zero if you hit a sustained bear market. All of this discounting inflation, of course, which you absolutely cannot discount.

WiseNLucky
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wisenlucky:

"phooley and JAFO31:

Thanks for your comments. I posted the link to Scott Burns. I haven't yet seen the comments on the retire early board but think I will go look at them later."


Your welcome.

"I still say that Burns' point was not concern about a temporary loss of principal, but a 100% loss of principal. His backtesting simply determined what would have happened to a $100,000 portfolio if a fixed $7,000 were withdrawn each year (7% of the original portfolio). He based the results on actual market results for every fifteen year period going back for some time. He found that, in some cases, the portfolio would have dropped to zero. In another case, the portfolio would have grown to almost $1 million. He was merely pointing out that one could not guarantee a safe withdrawal of a fixed dollar amount from a portfolio each year if that dollar amount was 7% of the original portfolio. He then backtested using lower fixed amounts and discovered that, given historical returns, there is a safe fixed withdrawal rate that might have taken the principal down pretty far during the 15 year period, but would not have run it to zero before the end of the 15 years.

I haven't said it as well as Burns did. It is obvious that no one would intentionally let their portfolio grow into the stratosphere if they needed the money, or for that matter merely wanted the money. And just as obviously, no one would stick to their fixed withdrawal amount if their portfolio had substantially decreased or increased. He was just pointing out that if you need $70,000 every year no matter what, you better have more than $1,000,000 on hand to start. IF returns equal what they have in the past, you might do fine with your $70,000 withdrawal on your $1,000,000 starting portfolio and even end up with nearly $10,000,000 after 15 years. The problem is that you might run yourself down to zero if you hit a sustained bear market. All of this discounting inflation, of course, which you absolutely cannot discount."


Actually, I suspect that Burns knew the answer even before starting; I have read his articles discussing the Trinity Study.

Regards, JAFO
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wisenlucky: "His backtesting simply determined what would have happened to a $100,000 portfolio if a fixed $7,000 were withdrawn each year (7% of the original portfolio)."

Actually 7k x 15 years is only 105k; assuming 15 year period, I suspect that a fixed 7k withdrawal could be assured with a money market account and ladder of government bonds. One would need to make 5k over 14 years in order to survive a 15 year period.

Beginning year one, withdraw 7k, place 28k in a MM account and buy 5 year bond with 65k. Even if MM earns only 1% and bond pays 3% per year, the necessary 5k would be made during the first five years. Thereafter, a straight MM account would suffice, although the one more 5 year ladder and 5-year bond could be arranged.

No assurances about the size of the portfolio after year 15.

Regards, JAFO
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JAFO31:

Your solution is a good one.

Burns' articles were based originally on a 100% stock portfolio because that's where Peter Lynch's original premise came from. Burns subsequently backtested a series of various allocations between stock and bonds, discovering that pretty much the same withdrawal rates would work with much less variation of principal.

I found the articles educational, but would probably not try this at home. My Dad, who only reads the Fool in the newspaper, has been successful using a few years of cash and a conservative bond/equity allocation with the rest. He also has lower needs from his portfolio with a military and corporate pension to add to his social security check. I'm planning on needing a larger portfolio since I have no guaranty of any pension money, or even for social security for that matter,being myself planted in the later part of the baby boom.

WiseNLucky
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