# Another take on SWR



## janus10 (Nov 7, 2013)

i have only skimmed this and thought it interesting enough to pass along.

http://portfoliocharts.com/2015/09/08/why-your-safe-withdrawal-rate-is-probably-wrong/


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## james4beach (Nov 15, 2012)

Somehow we all got bitten by the SWR bug? I've been reading material for the last few days. Here's one view:
http://financialmentor.com/retireme...o-i-need-to-retire/safe-withdrawal-rate/13192

The first point that has me really thinking is that the oft-cited work is based on US markets during the years of incredible US expansion. The analysis has also been attempted on international markets:



> Using 109 years of data for each of 17 different developed countries, Pfau determined that a 4% withdrawal rate with a fixed 50/50 asset allocation would have failed in all 17 countries. Yes, a 100% failure rate.


That's obviously a very important result. How come I don't hear this mentioned more often? The US market is unique in the world, as the US has expanded to become a global empire. But here are all of us, basing *all* of our stock market expectations on the US's history of stellar performance.

To me, it seems unlikely to be repeated. I'm getting the impression that SWR models (and stock market projections in general) are wildly optimistic, going forward.


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## james4beach (Nov 15, 2012)

Building more on the international theme, which is relevant both to us as Canadians but also for everyone (since the unique US expansion cannot repeat), see this other article
http://www.mcleanam.com/probability-4-rule-ensure-clients-retire-safely/

This mentions that for the UK, the SWR was 3.43%. Then with more global diversification, he found SWR was 3.26%

I recently exchanged emails with my friend who is an algorithm developer at a major Bay Street investment bank. I described to him my reasoning for why an expected SWR in our situation is *3.3% to 3.5%* and he agreed with that range. I actually made that estimate before I saw the above article about the UK & global results, so now my analysis has confirmation from both my investment banker friend, and the international study.

Therefore I am recommending that my parents plan for SWR of 3.3% to 3.5%


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## GoldStone (Mar 6, 2011)

Yes James, 3% SWR is the new 4%. This is not a big revelation. It's been the consensus in the retirement planning community for a few years now. Future investment returns are very likely to be lower than the past returns. 

Note that academic SWR strategy is very rigid. You withdraw a certain percentage of your portfolio in the first year of retirement. From there on, you index your withdrawal amount to inflation, without paying any attention to investment performance of your portfolio. This model may be correct from the academic point of view, but it looks rather silly in real life. Most of us have the flexibility to withdraw more or less depending on the investment performance. Consume more in the bull markets. Consume less in the bear markets. Staying flexible reduces the risk of grinding your portfolio to zero.


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## GreatLaker (Mar 23, 2014)

*Variable Percentage Withdrawal*

Has anyone investigated Variable Percentage Withdrawal (VPW) strategies?
http://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=117200
http://www.bogleheads.org/wiki/Variable_percentage_withdrawal

It adjusts withdrawal amounts annually based on portfolio value, and puts a rigorous method on the "Consume more in the bull markets. Consume less in the bear markets." approach mentioned by GoldStone. It really lessens the probability of running out of money in retirement. Also fixed percentage withdrawal (like the 4% rule) tends to leave behind a large estate if the retiree experiences a long period of normal or high investment returns.

Using such a method requires that you have the ability to cut back spending when returns are low, which is fine if you have low non-discretionary spending with areas of discretionary spending like travel or hobbies. It would not work well for LBYM people whose non-discretionary spending is high relative to total spending.


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## GoldStone (Mar 6, 2011)

GreatLaker said:


> Has anyone investigated Variable Percentage Withdrawal (VPW) strategies?
> http://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=117200
> http://www.bogleheads.org/wiki/Variable_percentage_withdrawal


No, but it's totally on my radar.  I plan to investigate it in depth when I retire.


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## OnlyMyOpinion (Sep 1, 2013)

In addition to being able to vary spending from your portfolio annually, other decumulation methods will affect a portfolio SWR calculation. For example:
i) Building up a cash wedge to fund your first 5 years or so.
ii) Buying an annuity so that it plus cpp/pension income are enough to cover your basic living costs. Annuities are better bought around age 70. Then withdrawls from your portfolio need only cover your additional discretionary costs.


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## My Own Advisor (Sep 24, 2012)

GoldStone said:


> Yes James, 3% SWR is the new 4%. This is not a big revelation. It's been the consensus in the retirement planning community for a few years now. Future investment returns are very likely to be lower than the past returns.
> 
> Note that academic SWR strategy is very rigid. You withdraw a certain percentage of your portfolio in the first year of retirement. From there on, you index your withdrawal amount to inflation, without paying any attention to investment performance of your portfolio. This model may be correct from the academic point of view, but it looks rather silly in real life. Most of us have the flexibility to withdraw more or less depending on the investment performance. Consume more in the bull markets. Consume less in the bear markets. Staying flexible reduces the risk of grinding your portfolio to zero.


Smart response.

There is certainly what the academics tout and then there is living in the real world.


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## RBull (Jan 20, 2013)

Good posts GreatLaker and Goldstone. 

I don't like a SWR strategy for the reasons you mentioned. It's too rigid and not really "safe".


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## janus10 (Nov 7, 2013)

This page is part of a larger article where it compares international markets and their ability to successfully sustain a 4% SWR: http://www.fa-mag.com/news/why-4--could-fail-22881.html?section=47&page=2

I've also seen mentioned a few times that as a corollary to sequence of returns risk, one is more likely to be successful if one retires when the markets are in correction mode rather than at all time peaks.


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## janus10 (Nov 7, 2013)

And, while many people see the common sense of belt tightening during market downturns that reduce one's retirement nest egg, here is an article about ratcheting up should you see significant growth in spite of consistent withdrawals.
https://www.kitces.com/blog/the-rat...l-rate-a-more-dominant-version-of-the-4-rule/


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## RBull (Jan 20, 2013)

^Interesting article. 

The other major consideration for many on this web site is they plan/hope to retire younger. 30 years projected for a SWR isn't long enough.


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## OldPro (Feb 25, 2015)

My response to SWR is very simple. Try to find someone who has followed that for 30 years. You won't find anyone. In all of the comments and all the links, I find only one real piece of worthwhile information, ' and then there is the real world.'

Why do people want to find a SWR? Answer, because it would appear to provide a way of knowing if you have enough money to retire on. Why is a 4% SWR so appealing? Answer, because current rates of return are so abysmally low, it looks like most people will never be able to afford to retire unless they can count on making more than they are currently making on investments. Why are people so fixated on stocks and bonds? Are they the only way to invest money? 

When I retired 26 years ago, there is no way I could have managed on a 4% return on investment. Nor is there any way anyone would have planned to do so. Even bank interest after adjusting for inflation paid more than that. So what was the thinking back then? Well SWR as a term did not exist for starters. So what anyone knew was that they wanted X amount of income and had Y amount of capital from which to earn it. So the question was how to invest the capital to provide the income required. NO ONE was thinking I can spend more in a year than I earn because there is a study that says I can do so. Think about it, spending more than you earn. Right now in your working life (as most of you seem to be), what does spending more than you earn result in? 

I knew how much capital I had to invest. I knew what income I would like to earn from that as a minimum but I also knew there was no guarantee that I would earn that much. I knew that inflation had to be taken into account. I knew I did not want to run out of capital and have to try and go back to work. Those factors all had to be dealt with before I decided to pull the plug. 

So here's what I figured. Rule #1. You have to live on what you earn just like you should be doing (but many don't) during your working years. Rule #2. You NEVER spend the capital. Those are the only 2 rules you need to follow. That doesn't make it simple to do of course.

Back then (1989), I could easily count on making 10% nominal (before accounting for inflaltion) in many ways. Even bank interest was around 8%. Bonds, GICs would return more than 10%. Stocks were never on the radar. Stocks are always a gamble and could result in breaking rule #2. Not an option. But interest rates, bonds and GICs would not necessarily provide proof against inflation which could result in a lower income and making it had to stick to rule #1.

So I needed an inflation proof investment that paid 10% or more. As luck would have it, I had an 'in' that allowed me to invest nominal amounts ($25-50k) in commercial and industrial real estate. Rental income is pretty inflation proof in that you can increase rents to cover inflation. Industrial and commercial properties means that you do not have to be a landlord, that is done by property management companies. Smaller investments in multiple properties rather than a large investment in one property means you can average the income without worrying about one property being vacant for a period of time. This is nothing like relying on a couple of rental houses for your income.

That strategy allowed me to pull the plug and it worked fine for several years. But then life took a turn and it was no longer feasible for me to continue in that way. Life has a habit of making changes that you never anticipated. That doesn't stop when you retire. That's also a reason why talking about SWRs makes me laugh. For example, suppose you are a married couple and you retire on your 4% SWR. After a few years, you divorce. What happens to your SWR? Answer, it is down the tubes. There are many things that can happen in life that you cannot predict and that can affect your finances. Where are they in SWR studies?

In the last 26 years, I have never had to return to work but my income has varied and my means of deriving that income has varied as well. I've learned I cannot plan beyond a year financially. Just as I re-visit my budget each year, I re-visit my investment strategy. Some people have commented you can do a 4% SWR but maintain flexibility. That's a laugh. Either you are following a 4% rule OR you are flexible. You can't do both. The answer as far as I am concerned is forget the SWR and just realize you have to be flexible.

If you want to know if you have enough to retire, the answer is that no one can answer that. What you can answer is if you will have enough income for the next year. Beyond that is crysal ball time. This is no different than when you are working for a living. Is there anyone who could not lose their job tomorrow? What then? If there is no guarantee in your working life, why would anyone think they can get a guarantee in retirement? Yet that is in fact what people are looking for when they want to believe in a SWR.


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## agent99 (Sep 11, 2013)

Yet another take on SWR as it applies to Canada by Morningstar:

http://cawidgets.morningstar.ca/ArticleTemplate/ArticleGL.aspx?culture=en-CA&id=796865

Only scanned it, but if you want $50k pa of investment income (plus inflation), you need about $1.5 $Million when you retire at 65 (based on a couple and not running out of money in 30 years.

The full report is here: http://video.morningstar.com/ca/Safe_WithdrawalRates_ForRetirees_CA_010517.pdf

One thing pops out - you need a good equity allocation if you use the suggested withdrawal rates.


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## AltaRed (Jun 8, 2009)

Some people would say you can get $50k/annum from a 100% dividend stock portfolio of $1.5 millon yielding 3.33%, potentially with dividend growth exceeding inflation. And not touch the capital. And not including CPP/OAS. I'd suggest something closer to $1 million is all one needs IF one uses a very cost efficient dividend stock portfoio. Even something like XDV might give that to you.


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## agent99 (Sep 11, 2013)

So you still think the 4% SWR rule works? What is a cost efficient dividend stock portfolio? XDV currently has a yield of about 3.7% or $37,000 on a $1million portfolio. So we draw dividends and some capital for 30 years and don't run out of money?


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## My Own Advisor (Sep 24, 2012)

I personally believe, rightly or wrongly, a tax efficient dividend portfolio worth $1 M, will churn out a healthy $35,000 or so as cash for life. You would not need to touch the capital since stocks such as RY, TRP, CSH.UN, CIBC, etc. that raised their dividends in February, will raise them again to help fight inflation. TD raised theirs in early March and a host of others have raised their dividend since the new year. Will this happen every year for every blue chip stock going forward? Maybe not, probably not but many will raise their dividends over time and you'll get some capital appreciation as well.

Don't want to go this income route? Most of these stocks are in the ETF XIU, a very tax efficient ETF itself that could reasonably churn out $30k per year every year for life. 

Top considerations for Canadian dividend ETFs include the one AR pointed out, and XEI, CDZ, VDY, ZDV, and a few others - most of them yielding between 3-4%.

Add in CPP and OAS and for most 60-somethings, that's $50k per year after tax or about $4,000 per month without touching the capital or selling their house (yet). That's pretty good.


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## OnlyMyOpinion (Sep 1, 2013)

^+1 I expect james will come out swinging soon, but that is our (limited) experience so far.


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## agent99 (Sep 11, 2013)

From the last few posts, it seems you guys would go with a 100% equity portfolio for a 65 year old?? Not exactly mainstream thinking


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## AltaRed (Jun 8, 2009)

agent99 said:


> From the last few posts, it seems you guys would go with a 100% equity portfolio for a 65 year old?? Not exactly mainstream thinking


No, it isn't mainstream thinking AND not something the vast majority of people could, or would, take a risk on. Most investors need a balanced portfolio in retirement to be able to sleep at night AND avoid the inevitable roller coaster rides of financial crises, etc. 

That said, there are at least a few here that believe strongly in a 'very high' dividend stock portfolio and further believe the dividend income stream (and some growth in it) will carry the day. It is not for the faint of heart AND it will take a cast iron stomach when (or if) bond yields significantly rise. We all know that dividend growth rate on many dividend stock sectors will stall in event of material interest rate increases. [Think capital intensive sectors like telecoms, pipelines and utilities for some examples]. Others like banks and insurers will continue to grow their dividends.


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## OnlyMyOpinion (Sep 1, 2013)

Well, I wasn't implying you wouldn't have a fixed income component to your retirement savings. Either directly (and perhaps in an RRSP) or by proxy in a company pension or cpp.
Interesting article btw.


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## AltaRed (Jun 8, 2009)

OnlyMyOpinion said:


> Well, I wasn't implying you wouldn't have a fixed income component to your retirement savings. Either directly (and perhaps in an RRSP) or by proxy in a company pension or cpp.
> Interesting article btw.


For sure. I carry about a 15-20% component in FI (bonds, debentures, GICs, HISA) to supplement withdrawals in 'bad' years in the equity markets. Also circa 8% of my equity is pretty reliable REIT income, and another 7% in preferreds. That is about as secure as I feel I need to be.


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## agent99 (Sep 11, 2013)

OnlyMyOpinion said:


> Interesting article btw.


Yes, I thought so, and conclusions not to far removed from the original SWR studies. Seems part of the reason for the more conservative SWR, is the low return they used for fixed income. Which no doubt is justified. (It's the part I have trouble with. I have had a series of bonds mature and can't come up with good way to re-invest.)


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## My Own Advisor (Sep 24, 2012)

AltaRed said:


> No, it isn't mainstream thinking AND not something the vast majority of people could, or would, take a risk on. Most investors need a balanced portfolio in retirement to be able to sleep at night AND avoid the inevitable roller coaster rides of financial crises, etc.
> 
> That said, there are at least a few here that believe strongly in a 'very high' dividend stock portfolio and further believe the dividend income stream (and some growth in it) will carry the day. It is not for the faint of heart AND it will take a cast iron stomach when (or if) bond yields significantly rise. We all know that dividend growth rate on many dividend stock sectors will stall in event of material interest rate increases. [Think capital intensive sectors like telecoms, pipelines and utilities for some examples]. Others like banks and insurers will continue to grow their dividends.


Well put.

If I didn't have a small pension at work, I would certainly own more bonds. If (rather when) I see my portfolio go down 30% in value, when the next market crashes, it will be tough to watch but I will absolutely have to hang on. More bonds would help my portfolio when this happens. They are like Andrew Hallam says "parachutes" for your portfolio. 

Yes, some interest-rate sensitive sectors will take a small hit when rates rise, eventually, someday, maybe. Then again, other sectors like financials will rejoice. You take the good with the bad per se as an investor. The only free lunch that helps you is stock and asset diversification.

I personally believe holding most of the top-30 stocks in XIU, or just XIU itself, is likely as good as it gets for Canadian dividend investors. Otherwise, just index everything and sleep easy knowing you'll get market returns for the rest of your life.

This means SWR is well-executed by "living off dividends" with those stock holdings or spending some of your capital if you're an indexer or a small combination of both.

There are no good long-term returns to be had for bonds really. Just protection against bad, prolonged, equity markets.


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## agent99 (Sep 11, 2013)

agent99 said:


> XDV currently has a yield of about 3.7% or $37,000 on a $1million portfolio. So we draw dividends and some capital for 30 years and don't run out of money??


This type of analysis should really be done after tax, which is of course different for each person/couple. Dividends payed within registered accounts will be taxed same as interest when withdrawn. And once retirees get to 71, they are _required_ to start withdrawals. The minimum withdrawal was reduced, but if taxpayer has a substantial RRIF, those taxes can be significant.

So just trying to say that a 3.7% equity yield doesn't give you $37,000. It gives you substantially less, so withdraw at 4% and you will likely run out of money sooner than later. CPP/OAS will of course help and can be in region of $30k pa (before tax) if both have worked. A million might get you by, IF you are able to live off family income of under $50k.


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## AltaRed (Jun 8, 2009)

I agree it depends on one's definition when they talk about annual cash flow needs. When I consider numbers like $37k or $45k as mentioned in this thread, I assume BT dollars and I have to pay income tax out of that. IOW, income taxes are a 'spend' just like property taxes, food, etc.


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## Karlhungus (Oct 4, 2013)

OldPro said:


> My response to SWR is very simple. Try to find someone who has followed that for 30 years. You won't find anyone. In all of the comments and all the links, I find only one real piece of worthwhile information, ' and then there is the real world.'
> 
> Why do people want to find a SWR? Answer, because it would appear to provide a way of knowing if you have enough money to retire on. Why is a 4% SWR so appealing? Answer, because current rates of return are so abysmally low, it looks like most people will never be able to afford to retire unless they can count on making more than they are currently making on investments. Why are people so fixated on stocks and bonds? Are they the only way to invest money?
> 
> ...


Nothing wrong with spending capital. Also, you can find property managers for residential real estate as well. 

People are talking about low rates of return. What are these people investing in? TSX returned 20% last year and the US market has tripled since the collapse in '08. Back test the 4% for your portfolio and see if it worked out. I bet it would have. 

For those interested, here is Mr money mustaches take on it: http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/


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## steve41 (Apr 18, 2009)

AltaRed said:


> IOW, income taxes are a 'spend' just like property taxes, food, etc.


The problem is that income taxes are variable, they jump around as various income streams and forms of capital come in and out of play over time. Food, gas, property taxes stay constant.


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## AltaRed (Jun 8, 2009)

steve41 said:


> The problem is that income taxes are variable, they jump around as various income streams and forms of capital come in and out of play over time. Food, gas, property taxes stay constant.


Getting it approximately right is all one can do. The government changes tax rates too. Is not much different with a number of consumables. Food and fuel cost vary widely depending on the value of the loonie for example. I just don't see where hand wringing over various income streams is any different.


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## steve41 (Apr 18, 2009)

AltaRed said:


> The government changes tax rates too.


 Well, not exactly. When Paul Martin indexed the tax brackets, the tax rate (adjusted for inflation) has stayed pretty much the same.


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## james4beach (Nov 15, 2012)

My Own Advisor said:


> I personally believe, rightly or wrongly, a tax efficient dividend portfolio worth $1 M, will churn out a healthy $35,000 or so as cash for life.


Since SWR refers to an initial amount that's inflation adjusted upwards, if you're talking about 35K (constant and not inflation adjusted) out of 1M that's less challenging than 3.5% SWR.

Let's say you add inflation adjustment to the initial 35K, then you are exactly talking about a 3.5% SWR. Yeah, I'd say that's feasible but remember the SWR studies only say that the money lasts for 30 years -- not forever. If your aim is to have the money last 30 years, then I agree with My Own Advisor that this is doable.

The part of MOA's statement that I will challenge is the part about not needing to touch the capital of the stocks, and also the "cash for life" part. Again -- this is not what the SWR studies say. If you're taking 3.5%, the studies don't assure that you will be left with capital. You may or may not totally deplete the portfolio down to zero by the time 30 years is up.

If the aim is to actually preserve capital and not deplete the portfolio, you probably need to go closer to 3.0% SWR

However I retract that statement if MOA literally meant $35,000 without inflation adjustment. Since that is less than 3.5% SWR, it's more doable and I can see how it can continue for life.


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## AltaRed (Jun 8, 2009)

steve41 said:


> Well, not exactly. When Paul Martin indexed the tax brackets, the tax rate (adjusted for inflation) has stayed pretty much the same.


Cap gains inclusion rates have changed over the years, capital gains exemptions have changed over the years, dividend grossup has changed. Everything changes over time. IOW, effective tax rates for the various types of income have varied relative to each other over time. You know that.


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## james4beach (Nov 15, 2012)

OnlyMyOpinion said:


> ^+1 I expect james will come out swinging soon, but that is our (limited) experience so far.


And here I am! I almost didn't see this because I've been on flights all day. How lucky that I saw it, eh?

I can see the reactions forming in people's heads, to my post. "If you're only taking out 3.5% using the dividend, then how on earth would you deplete capital given that many stocks easily pay dividends of that size?"

(1) there's still a pervasive misunderstanding of dividends, treating them like newly generated free money. That's not what dividends are. SWR studies don't treat dividends in any special way... they are analyses of total returns, because that's all that matters. Dividends are not free money; they are part of total return.

(2) sequence of return risk and LUCK. This is the reason that capital doesn't last forever even though you're extracting less than the average long term growth rate. If you get unlucky and get a bad series of losses, then you can deplete the capital even at 3.5%. Heck, you can even deplete capital at 3.0% withdrawal. It's a matter of luck... SWR studies sweep a very wide range of probable outcomes.

*(3) the sad reality is that the SWR studies have told us that "portfolio failure" (capital depletion) is a possibility even if you're only extracting 3.0% to 4.0% of the initial amount, plus inflation adjustment. Yes, I really do mean capital depletion... you are NOT assured to preserve your capital, despite dividend growth, despite long term high stock returns. But it's about probability of portfolio failure. Then the question becomes, how confident do you want to be that your money will last? Maybe 90% probability that your money will last 30 years is good enough for you.*

(4) Remember that the studies look at 30 years of capital preservation. Not indefinite. If their simulation shows that you end up with $2 left in year 30, that's considered success. This is probably not what many people interpret when they hear the term "sustainable withdrawal rate"

(5) because sequence of return risk is an important factor, and it's not all about high returns, fixed income is also recommended. Taking a pure stock allocation does not make your capital last longer. Source: SWR studies. People around here seem to love the idea of outlandishly high stock allocations, even though SWR studies say that your money will last longer if you have some fixed income. Maybe as much as 50% fixed income.

(6) the good news is that you will be OK as long as you can be flexible about how much you extract from the portfolio. If you reduce your withdrawals in bad years of the stock market, the money will last longer. Taking a dividend is a form of extracting cash from the portfolio. Reinvesting the dividend instead would be leaving the money in the portfolio.

(7) let me add this just to stir up more trouble. Taking a cash dividend is just as destructive to a portfolio as selling shares during a steep drop in prices. They are equivalent. So dividends do not add inherent safety or sustainability to a withdrawal regime, nor do they insulate you from a market crash. If you have a stock that pays big dividends, and you take those dividends as cash _instead of reinvesting_ during depressed prices, you are causing harm to your portfolio.

Proof of (7) is, what would happen if you reinvested those dividends instead of taking them out as cash? At the very depressed stock prices, your reinvestment of the dividend will produce a very high return going forward. This is the return you deprive yourself of by taking the dividend out as cash.


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## AltaRed (Jun 8, 2009)

James, you're taking the discussion too literally. $1million today generating $35/yr of income a year will climb each year too.... i.e. the $1 mil will grow with capital appreciation and the $35k/yr will grow with dividend growth, likely outpacing inflation. If a person does not have to tap into capital (and that is the caveat), the portfolio will only get bigger over time!

Added: There will be some down years in capital of course, i.e. the vagarities of the market. It is highly unlikely the dividend stream will decrease in a bear market and even if it does, it does so marginally.... easily within the retiree's ability to adjust living expenses to compensate.

Added: What any smart retiree will do is to use the VPW methodology, i.e. Variable Percentage Withdrawal. Easy enough to play with $1 million that way.


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## james4beach (Nov 15, 2012)

AltaRed, why are you eyeballing this stuff when several people have done detailed simulations on exactly this, in studies that have been repeated multiple times? I know it _feels_ like dividend growth will make the capital last forever, but that's not what the simulations show.

In other words, don't take my word for it. Read the studies. And those studies are the basis for all the wealth management and retirement planning... they are important results, especially because the results are somewhat counterintuitive.


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## james4beach (Nov 15, 2012)

AltaRed said:


> James, you're taking the discussion too literally. $1million today generating $35/yr of income a year will climb each year too.... i.e. the $1 mil will grow with capital appreciation and the $35k/yr will grow with dividend growth, likely outpacing inflation. If a person does not have to tap into capital (and that is the caveat), the portfolio will only get bigger over time!


Counter-example to show that this is not assured:

Let's say that you start this withdrawal regime at the beginning point of a 10 year bear market. Let's say this plays out as a 50% stock decline, followed by depressed prices for 10 years before any recovery happens.

Portfolio is 1000K
Portfolio is down to 965K after you take out your 35K in the first year
Portfolio crashes to 482K because you refuse to own bonds
Now you have nine more years of a sideways market and no stock gains.
Your 482K shrinks to about 160K after the withdrawals.
Portfolio is now 160K
And now there's explosively high stock growth, huge bull market
Ten years later, average stock growth is still the usual 7% annual

This is a damned ugly scenario, and like it or not, this is a possibility. Just 10 years into this retirement, your 1000K portfolio is down to 160K.

That's why it's not true that "the portfolio will only get bigger over time". There are a wide range of possible outcomes.


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## AltaRed (Jun 8, 2009)

Not true if one is also getting a $35k dividend stream. There is no decrease of capital to 965k for that reason at all. It might be due to a bear market, but then one is not touching capital, or at least not that much.

And it is not nearly as bad if you use VPW methodology because the withdrawal would drop substantially if the capital value of that portfoilo went down. IOW, one learns to cut back their spending and intuitively, anyone with more functioning brain cells than Trump would cut back spending anyway. VPW is a logical common sense approach to withdrawals. I'd be willing to go with an all equity portfolio with that concept starting at 3.5% withdrawal rate.

Added: Eyeballing is crystal clear when I have looked at VPW work extensively. Success does depend on what withdrawal rate you start with of course, and what one has their investments in. If my starting point is a dividend stream of 3.5% yield and my starting withdrawal is 3.5%, the only way that can go south at all is if the dividend stream falls and I don't march lockstep with that. Basic arithmetic.

Added yet again: James, I am among the group that cheerleads appropriate asset allocations, re-balancing and (some) traditional (or modified) rules of thumb for the bulk of investors. Which is why VPW is much better than the classic SWR. But those who can set themselves up with a realistic dividend stream that is not reaching stupidly for yield, i.e. blue chips only, and don't have to touch capital really don't need anything else in their portfolio. I will have to check final numbers but I think I am almost dead on 3% yield on my entire portfolio allowing me to pretty much NOT have to touch capital except for discretionary extras.


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## james4beach (Nov 15, 2012)

AltaRed said:


> $1million today generating $35/yr of income a year will climb each year too.... i.e. the $1 mil will grow with capital appreciation and the $35k/yr will grow with dividend growth, likely outpacing inflation. If a person does not have to tap into capital (and that is the caveat), the portfolio will only get bigger over time!


Here's a simulation showing an ugly, but possible, market scenario. This illustrates why stock price appreciation and dividend growth does not assure that your "portfolio will only get bigger over time"

Simulation shows
- 1 million starting value
- dividend based withdrawals of 35K, with dividend growth that increases withdrawals with inflation
- a 50% market crash near the start, and depressed prices for the first 10 years
- very rapid recover, 17% annual growth for next 10 years

If there were no withdrawals or dividend extractions (i.e. if you reinvested all dividends), this 1M portfolio would grow to well above 2M over the 20 years, returning 5% average annual growth. No big deal right?

Here's what happens with the withdrawal regime

Yr1	1000
Yr2	965
Yr3	447
Yr4	411
Yr5	374
Yr6	337
Yr7	300
Yr8	262
Yr9	224
Yr10	186
Yr11	178
Yr12	169
Yr13	158
Yr14	145
Yr15	130
Yr16	111
Yr17	88
Yr18	61
Yr19	30
Yr20	-7

That's portfolio failure in year 20. Your capital is gone.


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## GreatLaker (Mar 23, 2014)

steve41 said:


> The problem is that income taxes are variable, they jump around as various income streams and forms of capital come in and out of play over time. Food, gas, property taxes stay constant.


Agreed. Getting a consistent after-tax income (inflation adjusted) means the amount that must be withdrawn from a portfolio will vary over time, as other income streams like CPP & OAS kick in, and mandatory RRIF withdrawals may force income tax up.

For my example, retiring at 60, a lot of income will initially come from non-registered accounts, so dividends and capital gains taxed at very low tax rates. Then assume that both CPP and OAS are started at age 65, so the amount needed to withdraw from portfolio drops by about $20k, assuming max CPP & OAS, less the tax that they incur. Then at 72 when mandatory RRIF withdrawals take effect, income will shift from non-registered withdrawals to RRIF withdrawals that incur tax at full marginal rate instead of lower capital gains and dividend tax rates.

Following are my rough projected tax rates pre-retirement and after retirement (average tax rate, marginal tax rate):
Pre retirement: average 22%, marginal 43%
Age 61 (first full year of retirement): average 6%, marginal 20% (very low tax because of negative tax on eligible dividends)
Age 72 (first year of RRIF withdrawals): average 18%, marginal 31% (mandatory RRIF withdrawals shift withdrawals from non-registered to RRIF, so income is taxed as other income instead of dividends and capital gains, and CPP/OAS also taxed as other income).

To have a level amount of spending money each year (inflation adjusted), the portfolio withdrawals will drop when CPP and OAS kick in. Offsetting this, tax on RRIF withdrawals will mean more will have to be withdrawn from the portfolio to pay the tax on those mandatory withdrawals.

Or alternatively, if a retiree always removes a fixed amount from the portfolio in real dollars, the amount available to spend each year will fluctuate significantly as government pensions kick in and tax rates change.

I believe the inflation adjusted SWR concept is valid for evaluating roughly how much $ is needed to support projected retirement spending. But it does not accurately reflect how much a retiree will need to withdraw from their portfolio to have consistent real dollar spending money throughout retirement. A lot of work to evaluate this accurately, even with a spreadsheet.


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## AltaRed (Jun 8, 2009)

james4beach said:


> That's portfolio failure in year 20. Your capital is gone.


You forgot to maintain the $35k dividend stream each and every year. To make it simple for you, imagine a $1000k capital portfolio with a 3.5% yield and assume withdrawal rate is 3.5%. Capital is not touched in year 1. So year two is still $1000k.

Let's say there is a market crash in yr 3 of 50%. Capital has dropped to $500k but it is still spinning off that $35k in dividends and withdrawal is still $35k. Capital still is not tapped nor depleted. No big deal.... Ride the market down and ride it back up. There is no capital being touched.

Realistically though, it is unlikely that in a such a devastating crash that the $35k dividend stream will remain intact. Some companies will have to cut dividends, but we know from history that dividends in the overall market do not get cut that much. But let's say they get cut to $30k. The intuitive investor/retiree will drop his/her spending to about the $30k range that year. Don't even need VPW methodology (or a spreadsheet) to calculate that. IOW, just spend the dividend (income) stream.

Lastly.... we have pretty much gone off-topic here because only a small percentage of retirees can live off their income streams alone. Which is why I have mentioned VPW methodology here as an alternative to the classic (and in my opinion) foolish SWR methodology.


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## james4beach (Nov 15, 2012)

I didn't forget. The dividend is just part of total return. My numbers are with total return, i.e. 0% total return followed by -50% total return. And then the good side of the recovery, with a whopping 17% total return in the recovery years. All those numbers are plausible and within the range of what the market has delivered in the past.

The 50% crash that occurred in 2008 was still -50% _even including dividends_

As mentioned, this sequence of returns I demonstrated ends up giving about +5% average annual return. Very feasible.

So in my numbers, the dividends still exist, and they still pay out as you expect, but the total return goes from 0% to -50% to +17%.

And you're right of course, variable strategies give a ton of flexibility and are the best solution. But I post this stuff at midnight because I worry about what happens if people think that dividends guarantee preservation of capital. As I demonstrated in post #38, there are sequences of returns that can happen, even with dividends doing their expected thing, that deplete your capital awfully quickly.


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## AltaRed (Jun 8, 2009)

I can see where you and I have passed each other in the night. The data stream I was using was capital only, not the income stream thrown off by it and that is how a number of folk who work on the 'dividend stream' concept do it. They pay attention only to the cash flow thrown off by the portfolio and don't spend more than that. Cannew will go on and on about that exact methodology.

For myself, I look at total return of course, but I sure do look at my total income for the year and measure my spend against it....so that I know when/if I am dipping into true capital, and can decide if that fits my 'plan'.


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## GreatLaker (Mar 23, 2014)

The 4% SWR determined by the Bengen and Trinity studies is based on the maximum portfolio withdrawal rates from a low-cost balanced portfolio that had a high probability of surviving 30 year retirements during the *worst* investment returns of the study periods, for people that retired in years from 1926 through 1976. Those worst periods were retirees in 1929, 1937, and several years in 1963 through 1969. Portfolios of people that retired in most other years could have survived a much higher SWR. 

Interesting dichotomy is some people saying 4% is no longer a sustainable safe withdrawal rate because current valuation levels and interest rates mean future portfolio returns will be lower than the Bengen & Trinity study periods. Other people say no-problemo... have a 4 or 5% dividend yield so assuming dividends grow at least at inflation I can withdraw that much and never spend any capital. But remember that SWR is determined on what is needed to not exhaust a portfolio through really bad economic times, not the current sunshine and roses 8th year of a bull market always increasing yields return environment.

During the study periods, most people that set an initial 4% WR and adjusted it for inflation each year would have ended their retirement with way more money than they started. They would over-save before retirement and under-spend during retirement, just in case they hit a really bad patch early in retirement. Which demonstrates the strength of variable withdrawal strategies, especially VPW.


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## agent99 (Sep 11, 2013)

GreatLaker said:


> Interesting dichotomy is some people saying 4% is no longer a sustainable safe withdrawal rate because current valuation levels and interest rates mean future portfolio returns will be lower than the Bengen & Trinity study periods. Other people say no-problemo...


The posters here may have said that, but I would go back and read the Morningstar report that we were discussing. I don't think everyone here did. It is a Canada oriented update on the B&T studies and worth reading. For those in retirement with say 10-30 yr outlook, using current yields on equity and FI and adjusting the 4% down a bit, seems to me to make more sense that data from the past century.

It's not surprising that we have different views on a forum like this. Some here likely have enough saved that they can live off their dividend and interest income (plus CPP/OAS). Others won't have saved enough to do that, and will have to spend some of their capital. The latter group are the ones that need to adjust their lifestyle to suit expected income. And use a more conservative withdrawal rate.


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## AltaRed (Jun 8, 2009)

+1^ GreatLaker, good post to put things back into perspective. 

A person's view of the world and where they sit with respect to SWR, VPW, etc. depends partly on where they are at on the spectrum of accumulation (or withdrawal), their investing acumen, the size of their portfolio and their safety net of CPP and OAS in particular. Those with DBs are in yet another domain. That said, I am not a fan of classic SWR since few qualify its use, e.g. low cost balanced portfolio, 30 years, etc. and few understand the rigidity of its classic interpretation. The vast majority of investors who likely would adopt it 'hook, line and sinker' are also likely the ones with high cost portfolios of MFs and/or portfolio churn, and that could be its undoing. 

We also need to understand the wealth management and retirement planning industry have a conflict of interest in perpetuating investor fear and dependence.


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## AltaRed (Jun 8, 2009)

agent99 said:


> The posters here may have said that, but I would go back and read the Morningstar report that we were discussing. I don't think everyone here did. It is a Canada oriented update on the B&T studies and worth reading. For those in retirement with say 10-30 yr outlook, using current yields on equity and FI and adjusting the 4% down a bit, seems to me to make more sense that data from the past century.


Indeed, I read the Morningstar report carefully and while it validates what I have also been 'soundbiting' friends and family (to some degree), and inspires some confidence, it appears targeted to the mainstream investor in Canada with (in my opinion) with high(er) cost portfolios. The average Canadian investor stuck in actively managed mutual funds who also doesn't have a geographically diverse portfolio outside of Canada is also behind the 8 ball, i.e. Canada (in a broad market sense) is just not as productive as some other jurisdictions. In which case, reducing the classic 4% SWR approach to the 3-3.5% range will at least be a conservative approach.


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## hboy54 (Sep 16, 2016)

Hi:

Meh, I like the 4% and adapt method: If you get unlucky with sequence of returns, then adapt by bumping a 16 YO from her job at Tim's for a year or 3.

If at age 65 your conditional probability of surviving to 95 is whatever it is, 10 or 15% maybe, it seems to me a gross disservice to try to sell a 90% success rate of having the money last 30 years. I wonder where is the study that marries longevity probability with portfolio "success" probability? What one needs to model is the combination of running out of money while alive, not having the money last 30 years when you last ... 20. Either factor in isolation is just silliness in my view.

hboy54


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## agent99 (Sep 11, 2013)

hboy54 said:


> Hi:
> 
> Meh, I like the 4% and adapt method: If you get unlucky with sequence of returns, then adapt by bumping a 16 YO from her job at Tim's for a year or 3.
> 
> ...


You are right. We just have to determine exactly how long each of us will live and the calculation will be easy


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## Karlhungus (Oct 4, 2013)

hboy54 said:


> Hi:
> 
> Meh, I like the 4% and adapt method: If you get unlucky with sequence of returns, then adapt by bumping a 16 YO from her job at Tim's for a year or 3.
> 
> ...


I agree with this. 4% and adapt. I think people are overthinking this. No one will ever get it right because the future is unknown. But what we know is 4% would survive almost every single year of starting retirement in the past. Good enough. The biggest factor ive seen is the first 10 years of retirement. If you can survive that, you should be good forever. The 4% rule also doesnt count for government programs like OAS and CPP which are huge factors. With that in mind, 4% seems very safe.


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## olivaw (Nov 21, 2010)

^Are you saying that you should reduce withdrawals below 4% by the amount of CPP and OAS - or that you should withdraw the full 4% because CPP/OAS will act as a safety net if and when your savings run out. 

FWIW I do not yet collect CPP/OAS. I withdraw 3.8%. When CPP and OSS kick in I will reduce withdrawals by A corresponding amount.

I don't think it matters whether your income is from interest, capital gains, dividends or annuities - so long as your income is sufficient to keep you from outlying your nestegg.


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## GreatLaker (Mar 23, 2014)

olivaw said:


> ^Are you saying that you should reduce withdrawals below 4% by the amount of CPP and OAS - or that you should withdraw the full 4% because CPP/OAS will act as a safety net if and when your savings run out.
> 
> FWIW I do not yet collect CPP/OAS. I withdraw 3.8%. When CPP and OSS kick in I will reduce withdrawals by A corresponding amount.
> 
> I don't think it matters whether your income is from interest, capital gains, dividends or annuities - so long as your income is sufficient to keep you from outlying your nestegg.


Initially withdrawing 4% then adjusting that amount by inflation each year (regardless of market fluctuations) is what studies of historical data concluded is a withdrawal rate that has a low probability of depleting a low-cost balanced portfolio (stock allocation between 50% and 75%) within a 30 year retirement. The retiree's spending money will consist of that withdrawal plus other income such as CPP, OAS, other pensions, annuities etc.

And yes, if other income sources like CPP/OAS begin after retirement then the retiree will either have an increase in available spending money at that time, or they can lower the portfolio withdrawal rate to keep spending money the same. That's one of the difficulties of following constant real dollar withdrawal rate rules such as the 4% rule, as explained in post #39.


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## kcowan (Jul 1, 2010)

When I retired in 2002, I withdrew what I needed from my portfolio above the non-COLAd DB Pension. After CPP/OAS kicked in, my WD dropped to what was needed then. In 2016, WD was 1.8% and 68/32 portfolio grew by over 11% (adjusted down for USD FX gains).

So going forward, I can survive a 55% portfolio meltdown and maintain 4% WD. Personally, I believe that 4% is too optimistic and that portfolio performance over the next 20 years will most likely support a 3% WD rate.

That means that I could only sustain a 40% meltdown.

What I believe will happen is that the market will bump along in a slow decline like the real estate market has done in the past in both Toronto and Vancouver during down markets. Toronto took 7 years to decline by 50% and Vancouver quite a bit less time but more often. So hopefully the markets will be more like Toronto RE.

So you might ask: Why don't you liquidate? and I will respond that I am not sure about this prognosis, and I will gradually cut back when the evidence indicates I should do so. Because my portfolio is primarily dividend paying stocks, I will unload the non-payers first and then any company that cuts their dividend. This should keep me busy for the next couple of years!


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## olivaw (Nov 21, 2010)

kcowan said:


> When I retired in 2002, I withdrew what I needed from my portfolio above the non-COLAd DB Pension. After CPP/OAS kicked in, my WD dropped to what was needed then. In 2016, WD was 1.8% and 68/32 portfolio grew by over 11% (adjusted down for USD FX gains).


You've acheived an ideal retirement. Good health, excellent finances, the flexibility to winter in Mexico. Were you always in a position to withdraw less than 2% or was it achieved with portfolio growth since your retirement?


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## agent99 (Sep 11, 2013)

olivaw said:


> You've acheived an ideal retirement. Good health, excellent finances, the flexibility to winter in Mexico. Were you always in a position to withdraw less than 2% or was it achieved with portfolio growth since your retirement?


SWR can certainly be lower for those who have a pension! Some of us not so lucky


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## kcowan (Jul 1, 2010)

olivaw said:


> You've acheived an ideal retirement. Good health, excellent finances, the flexibility to winter in Mexico. Were you always in a position to withdraw less than 2% or was it achieved with portfolio growth since your retirement?


No a lot of our financial flexibility comes from living in Mexico for 6 months, where the cost of living is less than 50% of living in Vancouver! Now that our connections to Vancouver have declined through deaths, we are considering making Mexico our home base and spending 2 months in Vancouver, 2 months in Ontario and another 2 months somewhere else. This would require a favourable ruling on healthcare that time in Ontario/elsewhere counts towards our 212 days.


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## Eclectic12 (Oct 20, 2010)

^^^^

How often is the plan to do the temporary absence?

Even if you get a favourable ruling, unless the program has changed from the link below - it reads that one is only allowed this temporary extra time away, once every five years. 

There is the qualification requirements that say:


> ... not have been granted an extended absence in the previous 60 months (five years)


as well as:


> ... not have taken advantage of the seven month absence in a calendar year, available to vacationers, during the year the extended absence begins or during the calendar year prior to the start of the extended absence; ...


http://www2.gov.bc.ca/gov/content/h...aging-your-msp-account/leaving-bc-temporarily


Interesting to know BC has a way of doing this once every five years but the "make Mexico our home base" suggests the time frame is for more time than the program allows.


Cheers


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## james4beach (Nov 15, 2012)

GreatLaker said:


> Initially withdrawing 4% then adjusting that amount by inflation each year (regardless of market fluctuations) is what studies of historical data concluded is a withdrawal rate that has a low probability of depleting a low-cost balanced portfolio (stock allocation between 50% and 75%) within a 30 year retirement. The retiree's spending money will consist of that withdrawal plus other income such as CPP, OAS, other pensions, annuities etc.


Yes, this was my understanding as well. The best results are obtained with a stock allocation in that 50-75% zone



> And yes, if other income sources like CPP/OAS begin after retirement then the retiree will either have an increase in available spending money at that time, or they can lower the portfolio withdrawal rate to keep spending money the same. That's one of the difficulties of following constant real dollar withdrawal rate rules such as the 4% rule, as explained in post #39.


I agree that the real life calculations get much more complex due to the various factors outlined in that post #39. This is not easy to figure out.

I think the fixed rate guidelines are a good starting point. Like anything else that's difficult to calculate exactly, it's good to start with a simplified starting point.


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## james4beach (Nov 15, 2012)

I've been helping some family members figure out their retirement finances. This couple has a work pension + CPP + OAS. The remainder of their retirement income will come from a withdrawal plan out of a balanced 60/40 mutual fund.

The current idea is to withdraw 3.0% of their portfolio and continue withdrawing that initial amount + inflation adjustment.

Our initial projection is that the resulting net after tax income will be just a bit higher than their anticipating living expenses. It will probably take a couple years for the tax situation and their new retirement spending pattern to stabilize.

My guess is that in 2-3 years, we'll have a better sense of what their portfolio withdrawal regime should be. Seeing what happens with taxes and their spending pattern, we can then adjust the withdrawal amount to what's necessary to cover their expenses. All the while remembering that the withdrawal amount can be adjusted as needed in the future.

^ does this sound like the right approach?


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## My Own Advisor (Sep 24, 2012)

"My guess is that in 2-3 years, we'll have a better sense of what their portfolio withdrawal regime should be. Seeing what happens with taxes and their spending pattern, we can then adjust the withdrawal amount to what's necessary to cover their expenses. All the while remembering that the withdrawal amount can be adjusted as needed in the future."

That seems absolutely reasonable, likely after 2 years, you'll know very well how nest egg is holding up or not - markets depending of course. I personally believe starting with 3% is rather safe but very smart, since as they say, better to be safe than....

FWIW, I'm aiming for 3% SWR myself in year one; stopping all DRIPs - basically living off dividends + RRSP withdrawals and see where that takes me after that tax year. I will adjust accordingly. 

At the end of the day I believe the key is having enough to start with 3% or 4% and adjust accordingly. If some Canadians are not even close to knowing how to build a portfolio to yield/draw down their 3% or 4% - or worse still, they don't have enough saved to cover most expenses with a portfolio draw down at that rate that includes pensions, government benefits, etc. then I believe they have two scary choices:

1) work longer, or 2) spend much less. Maybe they actually have a third choice - 3) a combination of both. The latter is the worst of all if you're forced into it in your 60s. I suspect most of Gen X could be in that position unless they own a home in Toronto or Vancouver with run-up prices.


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## GreatLaker (Mar 23, 2014)

james4beach said:


> I've been helping some family members figure out their retirement finances. This couple has a work pension + CPP + OAS. The remainder of their retirement income will come from a withdrawal plan out of a balanced 60/40 mutual fund.
> 
> The current idea is to withdraw 3.0% of their portfolio and continue withdrawing that initial amount + inflation adjustment.
> 
> ...


It sounds like a good approach James. I plan on a similar method with a conservative income plan and carefully monitoring my income, expenses and portfolio value in early retirement to see if I need to fine tune things.

Some items you have probably thought of, but bear repeating:

Taxes may be lower in retirement depending on their income and portfolio makeup. In fact taxes on dividends can be negative. Capital gains taxes on non-registered withdrawals will be much lower than on RRSP withdrawals that are taxed at full marginal rate. The tax tables at taxtips.ca are useful for evaluating this issue
Evaluate the budget and living expenses carefully. It's easy to miss things unless the retiree has a good record of actual expenses. Health care costs may go up if as an employee they had employee health care that ends when employment ends. Major infrequent expenses that were not an issue when employed can put a big dent in a retiree's budget like replacing appliances, HVAC, new shingles, replacement car etc. I estimated lifespan and replacement cost for those things and will put aside a set $ value in a separate fund each year.
Be wary of increasing expenditures above initial withdrawal + inflation just because of a few years of good investment returns, which have a bad habit of mean reversion.
Retirees with a large RRSP (assuming they are Canadian) may get hit with OS clawback when mandatory RRIF withdrawals begin. Consider withdrawing some RRSP funds post-retirement before age 72 to minimize or eliminate this if possible
Consider putting excess cashflow into the TFSA to protect it from taxes.


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## canew90 (Jul 13, 2016)

SWR are a necessary study for those who have not saved as much as they might need for retirement and will likely need to withdraw capital. But many of the SWR studies are really theory, as many have mentioned.

However, for those who have many years before retiring, say 20 years, don't waste your time worrying about SWR. Concentrate on living within your means, saving as much as you can and investing in a strategy you feel good about.

Why I like the Income Strategy (basically Dividend Growth strategy) is as your investment grows, so will your income. In fact each month, quarter and year you will see your income grow and can project fairly accurately how much it continue to grow. If one follows the strategy for a number of years, during market ups and downs, and if your income has grown through those periods, your confidence will grow and you'll know how much income you might expect from your investments and if you might need to draw from capital or not. An added benefit is that if your income does grow each year, than likely your capital will have grown at roughly the same rate.

Avoid High Yielding stocks, cyclical, energy, tech and new issues or rising stars. Stick with large, solid companies that have a long history of paying and growing their dividend. Slow and steady growers. We've followed this strategy and for us its working.


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## james4beach (Nov 15, 2012)

I still think that a danger of getting too wrapped up in dividend investing / dividend growth strategies is that you can fool yourself into thinking that you're immune to market declines or bear markets.

The sequence of return risk that I illustrated in post #38 remains a danger, even if you're using dividend strategies. But people who focus on dividends seem to think that they are immune to that.

I don't mean that anyone should take the 3% or 4% SWR literally, but I think it's important to understand sequence of return risk. Here's one source with a nice illustration:
http://www.ariadnewa.com/sequence-of-return-risk/

I worry about this topic and I worry about retirees misplacing their faith in dividends. This leads retirees to the following outcomes, popular today:
- high stock exposures in retirement
- a belief that dividends will provide all cashflow needs
- a belief that capital is never depleted when you live off dividends

As opposed to these, which seem to be neglected by many retirees:
- the importance of low volatility because of sequence of return risk
- the need for fixed income
- the fact that high returns don't solve your retirement needs

The consequence of misunderstanding these problems is that you can make decisions (like going 100% into stocks) that risk depleting your capital faster. Another consequence of misunderstanding this problem is an unnecessarily high level of vulnerability to bear markets.

e.g. for a retiree who is in the early years of retirement, 60/40 allocation is a better idea than 100% stocks, even if it means lower average annual returns.


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## canew90 (Jul 13, 2016)

james4beach said:


> I still think that a danger of getting too wrapped up in dividend investing / dividend growth strategies is that you can fool yourself into thinking that you're immune to market declines or bear markets.
> 
> The sequence of return risk that I illustrated in post #38 remains a danger, even if you're using dividend strategies. But people who focus on dividends seem to think that they are immune to that.
> 
> ...


We been around this before, and I agree that All Strategies have risk. But IMO if one follows the Income/Dividend Growth strategy over an extended period than their risk should become much lower, because:
- ones income would have likely risen gradually and steadily over the period
- one would likely have seen their income grow even during down markets as with the Financial Crisis (though at a slower rate)
- ones portfolio value would probably have grown as ones income grew
- the longer one follows the strategy the safer it becomes
- at some point its possible that the income will have grown to the point where it meets ones needs without selling capital

If one was invested in a 60/40 during the financial crisis and needed to sell capital to support their income, would their income have continued to grow, not likely. It would have taken several years before they were back to the period before the crisis. My income grew each year though the paper value of my holdings was down about 30%.
Each person has to access their own strategy and decide if the risk suits their temperament.


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## canew90 (Jul 13, 2016)

My Own Advisor said:


> If some Canadians are not even close to knowing how to build a portfolio to yield/draw down their 3% or 4% - or worse still, they don't have enough saved to cover most expenses with a portfolio draw down at that rate that includes pensions, government benefits, etc. then I believe they have two scary choices:
> 
> 1) work longer, or 2) spend much less. Maybe they actually have a third choice - 3) a combination of both. The latter is the worst of all if you're forced into it in your 60s. I suspect most of Gen X could be in that position unless they own a home in Toronto or Vancouver with run-up prices.


Mark: you forgot to mention "Save More"


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## OnlyMyOpinion (Sep 1, 2013)

James, to say that you have concerns about retirees misplacing their faith in dividends, etc., could be interpreted as a bit gratuitous and judgmental. 

Give us seniors some credit for having been around a while, We've seen huge changes in what and how people invest. Interventionist governments have come and gone. The subprime crisis is only the most recent of many market corrections we've survived. 
We may have lost more money to date than you have earned. 

ISTM that the larger risk may be the gun-shy senior who still has all their money parked in GIC's. Or the senior whose adult whiz kid has convinced them to invest imprudently (they aren't all like your parents who have a son with a good understanding of investing).

BTW, I agree with the prudence of having diversity in your portfolio, across both equity and fixed income investments, and particularly as that portfolio becomes a potentially key part of your retirement income. 
Come to think, it may be the only thing I've learned over all those years.

Oh, and that if you're lucky to have saved enough, part of your portfolio can provide sufficient dividend income to top up your cash flow needs while leaving the underlying portfolio intact and growing over time. :friendly_wink:


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## Eder (Feb 16, 2011)

Nice post...its not intuitive how dangerous gic's and bonds are today.


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## agent99 (Sep 11, 2013)

I too liked OMO's post  especially : "Give us seniors some credit for having been around a while"  and
"ISTM that the larger risk may be the gun-shy senior who still has all their money parked in GIC's." (Or low yield funds of various stripes?)

I would advise those in midlife with concerns about how to fund their retirement, to embark on a learning process. Don't believe all you read on forums or what your bank or brokerage suggests. Learn as much as you can and make your own investment decisions.


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## james4beach (Nov 15, 2012)

Part of the problem with our debate are these terms "risk" and "dangerous". They mean different things to different people.

As for the fear that people are talking retirees into being fully in GICs... when I read articles, I see very few instances where the author is trying to convince anyone to go heavily into fixed income. What I keep seeing are arguments for why seniors should reduce their bond exposure and go more heavily into stocks.

Is there _really_ a danger that seniors across Canada are being talked into parking money in fixed income? How about all the CMF threads where people have shifted from fixed income into dividend stocks.


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## AltaRed (Jun 8, 2009)

I doubt it James since the bulk of folks likely stuck in GICs are unlikely to be forum members to begin with. If anything, they are being talked into dividend paying equities (including REITs) by their financial advisors. Almost no one I talk to that is reasonably intelligent on finances has heard of CMF, FWF, or similar sites... .no matter how much I mention such sites.. let alone actually make the effort to find out. CMFers should be intelligent enough not to be 'sold' everything (most of what?) they read on internet forums.


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## james4beach (Nov 15, 2012)

Interesting, thanks AltaRed.

By the way, I agree that people should not be fully in bonds or fixed income. Retirement money won't last as long if it's all in bonds. I posted an illustration in this other thread (link).

That shows an example of living off capital. The pure bond allocation fares substantially worse than both pure stock and 60/40 allocations.


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## agent99 (Sep 11, 2013)

james4beach said:


> Interesting, thanks AltaRed.
> 
> By the way, I agree that people should not be fully in bonds or fixed income. Retirement money won't last as long if it's all in bonds. I posted an illustration in this other thread (link).
> 
> That shows an example of living off capital. The pure bond allocation fares substantially worse than both pure stock and 60/40 allocations.


I posted our own actual withdrawal experience over same 10 years in that other thread


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## My Own Advisor (Sep 24, 2012)

canew90 said:


> Mark: you forgot to mention "Save More"


You are correct!


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## My Own Advisor (Sep 24, 2012)

Agreed James. 100% bonds is bad for long-term prospective returns. 

@AR "CMFers should be intelligent enough not to be 'sold' everything (most of what?) they read on internet forums." 

I would hope. We're here to learn. Most people not on CMF, FWF, other sites/forums I can only assume couldn't care less otherwise they would be here/read here.

It's likely I have a bias, well, I know I do - to dividend paying stocks. I've talked to and listened to a number of 50- and 60-somethings who have their own bias with 10, 20 or more dividend paying stocks and they seem to have (and continue....) to do VERY well when it comes to total returns and avoiding depleting their portfolios at the same time. This is regardless of what the market does or does not do. 

During and after The Great Recession, these investors with an income-focused approach came out fine. In recent years they've been thrilled since the market is on a tear. They continue to spend their dividends and/or distributions and withdraw capital as they please. They don't worry about SWR (like cannew mentioned). They have little reason to. A close friend's father has been a dividend investor for about 50 years. Sure, he has sold a few companies here and there, and purchased new ones, but for the most part - he doesn't change. The portfolio of banks, telcos, Canada and US utilities and a few more - has made him very wealthy. He makes 6-figures from his portfolio on dividends. My friend likely has a huge inheritance coming his way. When I started getting more interested in investing, some 10 years ago now, I asked him about the stocks he owns, how he intends to invest in case of a market crash and he basically just smiled and said - "I never worry about it."

My point being...I suspect the people that worry about SWR the most are the folks that didn't save enough money. They are unsure what the appropriate amount of capital is to fund their expenses. They are worried about drawing down their portfolio at the wrong time, what bonds will do to protect them, etc.

The investors that did save enough don't care too much about SWR because they have constructed their portfolios in such a way to make income and they focus on that. They know even in the darkest prolonged years, all they would need to do is spend a bit less money that the capital generates. Just in case.

My other point is, you don't need to do this just with individual dividend paying stocks. You could easily have a portfolio of XIU with VYM and IDV - that would churn at least $30k per year, cash for life, with $1 M invested. This way you own hundreds of dividend stocks from around the world and you don't need to select any on your own. 

Anyhow, this debate will never end. SWR, total return vs. income focused approach, etc. That's fine. I enjoy hearing and reading about other perspectives.


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## AltaRed (Jun 8, 2009)

Indeed. I don't disagree with you one bit. The abiliity to choose one methodology over another depends greatly on portfolio size. I am lucky enough to be in the small group of retirees that don't have to worry about SWR either, but that is not a valid reason to not have a SWR discussion.The people that need the most help from internet forums are the ones who have to work with SWR or VPM, not the ones who can live comfortably on dividend cash flow only. 

My response was primarily to James - in terms of how participants here are likely more intelligent than blindly following a philosophy espoused by any member. I have learned much myself over about 20 years of participation in financial discussion forums (like VPM for example).


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## olivaw (Nov 21, 2010)

I've been following this discussion with a great deal of interest. SWR is very important to us and many of our friends. 

In our case, we have enough saved that we could create a dividend portfolio that yields enough to spend at our current rate but our risk tolerance is such that we would not be comfortable seeing 40% of our nestegg disappear during a bear market. We therefore maintain a blend of stocks, bonds and cash. According to my conservative estimate, we have enough to last until beyond 2055 but I am always interested to learn about new ways to look at the numbers.


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## james4beach (Nov 15, 2012)

I think after reading all these SWR papers, looking at my family's numbers, and running my own monte carlo simulations, one thing I've learned is that you'll be OK as long as you can be flexible with your expenses. Being flexible means being able to reduce your spending in case of a serious bear market.

The other thing I've learned is that diversifying between assets is a good thing and that a diversified portfolio (like a balanced fund) is greater than the sum of its parts.

We haven't had a serious bear market in a long time! 2008 barely qualifies, since the rebound was so fast.


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## AltaRed (Jun 8, 2009)

Or better yet, use the Variable Percentage Method (VPW). SWR is too inflexible and misguided.


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## james4beach (Nov 15, 2012)

Although I'm in my 30s, I've been working a long time and have saved up some capital. Because of my consulting-like work pattern, I sometimes have to live off my savings. And sometimes I just want to go on extended vacations and not work.

My lifestyle does not fit the traditional pattern of steady accumulation for many decades followed by a sudden shift to retirement/living off capital. So I am trying to stay very flexible and follow investment strategies that are compatible with my lifestyle, e.g. the permanent portfolio, which is resilient to drawing money out of a portfolio as shown here:
View attachment 14402


I'd love to hear any suggestions on what an appropriate investment style might be for someone with my pattern. In phases where I dip into capital, it might last 0.5 - 2 years at most so the problem for me isn't portfolio depletion, but preserving capital in case I need to do this during a bear market. My withdrawal might be as high as 6%.

I avoid high stock exposure due to sequence of return risk. Perfect example: when the income from my small business crashed (due to economic contraction), I was living off my capital in 2008 & 2009. Luckily I was heavily in fixed income. If I had to live off my stocks, I would have done huge damage to my capital.

Then I ask questions like, what about when I want to buy a house? It's unrealistic to think that my investment portfolio will be left untouched for the next 30 years. At some unpredictable point in time I will extract a huge amount of the capital for a home purchase.

Because I need to occasionally live off capital, and will buy a home at some point, I feel like my best approach is to invest in portfolios with low volatility and reasonably low maximum drawdown (like a balanced fund or permanent portfolio).


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## leoc2 (Dec 28, 2010)

I have a friend who lived a similar consultant lifestyle as you James. He was contracted to projects throughout the world for his expertise in robotic welding. He gave up his consulting practice (IIRC in his late 40's early 50's) for a community college position and is now accumulating a DB pension in the home stretch of his career. His retirement savings accumulated as a consultant will now be supported by a smallish DB pension when he retires. Perhaps you can find your way to a teaching position with the knowledge you accumulate?


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## GreatLaker (Mar 23, 2014)

I still regularly hear people talk about how badly they were hurt in 2008, some working longer than they planned, others already retired had to cut back. My portfolio dropped around 20% in the great recession and more than recovered by the end of 2009. That was with a balanced total-return approach to investing, neither concentrating on dividends/income or focusing on capital growth or safety. The key was having a good investment strategy and sticking to it.

I don't understand the drive some investors have to never spend their capital. I could live on only investment income (dividends and interest) plus CPP & OAS. But if I did that I would leave a very large estate. It's my money, I worked hard for it and I want to enjoy the benefits of it, with a reasonable margin of safety. My parents really enjoyed their retirement. Nice home, lots of travel, recreational property, timeshare (back when they were an OK deal). I like to joke that they were spending their kids' inheritance. Some people want to leave a legacy to their kids, but really, seeing how much they enjoyed retirement means more to me than any inheritance ever will.

People that have been retired now for a decade or two were fortunate to be working and saving during the go-go years of the 60s, 80s and 90s. The 70s were awful for savers and investors but anyone that could stick with it through those 4 decades probably did really well. With the current gig-economy, corporate downsizings, pressures of globalization, and bad or non-existent pensions, today's workers may not be so fortunate. For them, spending investment capital could mean the difference between having to live a very frugal lifestyle and being able to really enjoy retirement. SWR techniques, especially variable percentage withdrawal (VPW) are one tool to enable that.


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## agent99 (Sep 11, 2013)

AltaRed said:


> Or better yet, use the Variable Percentage Method (VPW). SWR is too inflexible and misguided.


As you know Alta, SWR is not really a "method". It is a guide that is useful in determining how much you need to save before retirement. 

Choosing a constant withdrawal percentage (like 4%) is no worse than guessing at a constant rate of return or inflation rate when planning for retirement. Most retirement calculators do that. VPW is, I guess aimed at those who have or are about to reach retirement. Has some merit, but may be too complex for many. 

I use CSWR (Common Sense Withdrawal Rate). Just spend what you can afford  If you overspend one year, spend less the next year. Keeping average at somewhere in 3.5-4% range seems to work and is simple enough, It is what I use to "control" household spending  (no new kitchen this year if we put new roof on last year  )


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## Koogie (Dec 15, 2014)

agent99 said:


> I use CSWR (Common Sense Withdrawal Rate). Just spend what you can afford  If you overspend one year, spend less the next year. Keeping average at somewhere in 3.5-4% range seems to work and is simple enough, It is what I use to "control" household spending  (no new kitchen this year if we put new roof on last year  )


The problem with common sense, as the joke goes, is that it is not very common....
:rapture:


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## AltaRed (Jun 8, 2009)

Koogie said:


> The problem with common sense, as the joke goes, is that it is not very common....
> :rapture:


I think, to agent99's point, most people would have the intuition to cut back 'intuitively' in a year where their portfolio dropped in value due to financial market malaise BUT most likely don't have a framework to understand how much, especially if their SWR includes a capital withdrawal. IOW, does that person cut back so much that s/he doesn't bite into capital at all? That would be the safest approach in 'bad' years but would not really be necessary with a balanced portfolio. 

That is really what VPW is about if people took the time to understand that indeed, it is merely a process that resets the clock each year, based on an asset allocation, to determine what percentage is safe to withdraw. It intuitively makes sense but alas, most will not take the time to understand it...even though it will likely result in a higher spending retirement without risking premature depletion. 

P.S. I am with GreatLaker. It seems perverse not to fully enjoy the fruit of one's labour. It may take people some years of retirement to fully understand what they can really do with their portfolio. I started off with a conservative approach immediately pre, and post, retirement. My spending has more than doubled, and is heading even higher, 11 years into retirement. I have a good understanding of what my portfolio can do for me and I don't plan on leaving much of it behind. Capital depletion is (will be) part of it.


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## Koogie (Dec 15, 2014)

I was being facetious. 

However, lets not forget the VAST majority of people in this country are in significant debt at any given time and saving poorly for retirement. If they can't see the lack of common sense inherent in either of those failures, they will probably never acquire the sense (or interest) to understand the fine differences between SWR and VPW.

I happen to agree with spending down the capital and it is a significant part of my future plans. I like the VPW approach as well but don't place to much stock in its results, nor in the results of any SWR calculations. I am in my forties. For me at this point in time there are to many moving parts, assumptions and future unknowns for those type of calculations to produce any result that can be relied on. They can be widely useful guidelines but not much else.


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## AltaRed (Jun 8, 2009)

Koogie said:


> I am in my forties. For me at this point in time there are to many moving parts, assumptions and future unknowns for those type of calculations to produce any result that can be relied on. They can be widely useful guidelines but not much else.


Indeed, clarity improves considerably when retirement is looming in front of you, and even more after some years of retirement. 

FWIW, I provide financial guidance to a few retirees. It goes from the extreme of someone with a small DB pension and a low 6 digit RRSP (to convert soon to an RRIF) and someone with a pretty nice DB pension with a 7 figure portfolio. As you can imagine, my guidance to those individuals is radically different. The first is based on a balanced 50/50 portfolio and a necessary SWR/VPW type discipline and the latter is based on an 80/20 equity/FI portfolio where the individual lives happily on the cash flow only and with whom I am trying to encourage a step up in lifestyle and to start thinking about estate planning options.


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## TomB19 (Sep 24, 2015)

Hmmm... how to create cash flow so we can either buy more stocks when they are cheap or live on the cash flow when we have to?

Explain to me again how lousy distributing stocks are? lol!

I'm an R-E guy. That's why I'm able to retire. Still, distributing stocks make up a significant portion of my monthly cash flow. Without distributing stocks, I would need to buy more properties and property ownership doesn't scale easily.

There are a lot of things I would do differently, were I to start again. ... like start with distributing stocks from day one and leave the growth stocks until the core of distributing stocks are stable. We did almost that, though. The only mis-step was buying FCR. I sold that at the end of 2015 when business was booming, they were hardly paying a distribution, and the books didn't look that great. Thats when I knew there was a leak so we bought even more DRG-UN in Feb 2016 when it was distributing over 10%. I have to admit, we were very lucky with DRG-UN.

The formula is so simple, it's really difficult to follow.

- simple stocks that are understandable
- debt that isn't too off the hook
- I look at bonuses paid during bad years. If they set bonus records during periods of loss, I black ball the stock. For that reason, my short list has only about 45 stocks on it. lol!
- they either need to distribute a good amount of their profit, buy back their stock, or be in a significant expansionary phase without trying to maximize market capitalization with every merger... some of the money needs to be returned to investors in a direct way such as described
- from there, I buy and hold
- distributions, new contributions, and other investment income is used to expand the investments based on the best value of the moment, and only when there is a decent value available. I don't get too caught up in balancing. Our portfolio has become more balanced over time but I just look to buy good businesses and then I hang in there through thick and thin.


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## agent99 (Sep 11, 2013)

Koogie said:


> I happen to agree with spending down the capital and it is a significant part of my future plans.


Our portfolio value is about 50% higher that it was when we retired about 14 yrs ago. We don't know what it will be over the coming 20-25 yrs, but we could no doubt double our spending by drawing down capital and likely still not deplete our savings very much. However, markets could drop back as they did in 2008/9. We have a comfortable enough lifestyle and don't see changing it. Our grown up kids do not look to be on track to have enough saved by the time they retire. So, in a way, we are doing it for them. We will be there to help if they need it.


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## Koogie (Dec 15, 2014)

agent99 said:


> Our portfolio value is about 50% higher that it was when we retired about 14 yrs ago. We don't know what it will be over the coming 20-25 yrs, but we could no doubt double our spending by drawing down capital and likely still not deplete our savings very much. However, markets could drop back as they did in 2008/9. We have a comfortable enough lifestyle and don't see changing it. Our grown up kids do not look to be on track to have enough saved by the time they retire. So, in a way, we are doing it for them. We will be there to help if they need it.


And it is your choice to help out your children in that way. We could probably debate the morals of that but why bother since it comes down to personal preference.

We will be drawing down the capital but at nowhere near a rate that would "double our spending". More like goosing it by a percent or two a year. 

And no, we have no kids and no real need to leave a "legacy" Not that we necessarily would anyway. I've seen to many poor examples of what that can do to the beneficiaries.


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## gaspr (Mar 24, 2014)

As regards to children, I think that we have a responsibility to minimize the chances of becoming a financial burden if it happens that we "fail to die in a timely manner". :wink-new: I think too few retirees think enough about longevity insurance... Or what a prolonged bout of higher inflation could do to a fixed income portfolio...


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## olivaw (Nov 21, 2010)

^Good point.

We can't plan our date of death. We will either have too little money and become a burden - or - too much money and leave a legacy. The later is the better choice.


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## agent99 (Sep 11, 2013)

olivaw said:


> ^Good point.
> 
> We can't plan our date of death. We will either have too little money and become a burden -* or - too much money and leave a legacy. The later is the better choice*.


We are not even trying to get it right. Ideally, if we don't run into medical or other unforeseen expenses, we will not draw down our portfolio by much, if at all. Our adult kids will likely have difficulty saving for their own retirements. We will be happy to help when the time comes.


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## Eder (Feb 16, 2011)

agent99 said:


> We will be happy to help when the time comes.


I like this....too many people are gifting kids that have no clue about the value of money. 

I prefer to hook up my kids when they are ready to retire as well (if I'm alive)...hopefully by then they'll have stopped buying lattes and begun driving used cars.


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## olivaw (Nov 21, 2010)

We too will be happy to help when the time comes. It seems like the right thing to do on so many levels.


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## steve41 (Apr 18, 2009)

I propose a new paradigm.... the CWR for Calculated Withdrawal Rate (which can be negative BTW) You specify the size and trajectory of your after tax income (living costs) and the CWR is calculated based on inflation, ROR estimates, salary profile, taxation rules, entitlements, cash windfalls, and estate goals. Easy-peasy.


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