This continues my investigation into the effects of Misjudging Safety of one's retirement portfolio. This time, I look into the most common reaction to portfolio setbacks: reducing one's withdrawal amount. I exclude shifting portfolio allocations.
My general conclusion is that adjusting your withdrawal amount changes very little in terms of the how much time that you have to hunker down. You simply have to wait out the bad times.
Conditions
The Retire Early Safe Withdrawal Calculator (with and without my changes) does not include changes in withdrawal rates during retirement. The FIRECalc does. That is why I have posted 30-year Historical Database Rates for HDBR50 and HDBR80 using FIRECalc. They provide the starting point from which I have made this study.
HDBR50 consists of 50% stocks and 50% commercial paper. HDBR80 consists of 80% stocks and 20% paper. I all cases I have used an expense ratio of 0.20%. I have adjusted withdrawals to match inflation according to the CPI.
These are ranges of Historical Database Rates in terms of valuations (as measured by P/E10) from the FIRECalc tables.
For HDBR50:
At the lowest valuations, Historical Database Rates vary from 5.3% to 9.6%.
At middle valuations, Historical Database Rates vary from 4.6% to 7.1%.
At the highest valuations, Historical Database Rates vary from 3.9% to 5.7%.
For HDBR80:
At the lowest valuations, Historical Database Rates vary from 7.2% to 11.6%.
At middle valuations, Historical Database Rates vary from 5.0% to 9.4%.
At the highest valuations, Historical Database Rates vary from 4.0% to 5.9%.
As before (i.e., as in Misjudging Safety), I have examined what would have happened if someone had thought that he was at the highest level of safety but he was really in the middle level of safety. With a 50% stock portfolio (that is, with HDBR50), he believes that he has 100% safety when he withdraws 4.6% of his initial balance (plus inflation) annually. With an 80% stock portfolio (that is, with HDBR80), he believes that he has 100% safety when he withdraw 5.0% of his initial balance (plus inflation) annually.
This time, I have assumed that the retiree is cautious, possibly because he realizes that valuations are high. He has decided to reduce his withdrawals to 75% or 60% of the level that he thinks is safe until he is able to build up his confidence.
This leaves us with four possible conditions. Using HDBR50, the withdrawal amounts are 75% of 4.6% and 60% of 4.6%. If the initial amount is $100000, his initial withdrawal amount is 75% or $4600 or 60% of $4600. At 75%, the inputs to FIRECalc are initial Withdrawals of $3450 followed by a Withdrawal Change 1 of $1150. At 60%, the inputs to FIRECalc are initial Withdrawals of $2760 followed by a Withdrawal Change 1 of $1840.
Using HDBR80, the withdrawal amounts are 75% of 5.0% and 60% of 5.0%. If the initial amount is $100000, his initial withdrawal amount is 75% or $5000 or 60% of $5000. At 75%, the inputs to FIRECalc are initial Withdrawals of $3750 followed by a Withdrawal Change 1 of $1250. At 60%, the inputs to FIRECalc are initial Withdrawals of $3000 followed by a Withdrawal Change 1 of $2000.
I determined how many years the retiree would have had to wait before increasing his withdrawals to reach 100% survival in the entire 1921-1980 period.
In addition, I looked at all combinations. That is, I looked at HDBR80 withdrawal amounts for the 50% stock (HDBR50) portfolio and at HDBR50 amounts with the 80% stock (HDBR80) portfolio.
By looking at such a variety of conditions, we can see the nature of what happens if, in fact, we have misjudged our portfolio's safety.
Results
These are the number of failures versus the number of years before the increase in the amount withdrawn.
HDBR50 at 75% ($3450 followed by an increase of $1150).
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Year Failures
4 6
5 5
6 3
7 2
8 2
9 1
10 1
11 1
12 1
13 0
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Year Failures
4 3
5 2
6 1
7 1
8 1
9 0
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Year Failures
4 14
5 13
6 12
7 8
8 8
9 7
10 6
11 6
12 3
13 3
14 2
15 2
16 1
17 1
18 1
19 1
20 1
21 0
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Year Failures
4 12
5 8
6 7
7 6
8 3
9 3
10 2
11 1
12 0
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Year Failures
4 9
5 9
6 8
7 7
8 7
9 6
10 5
11 5
12 4
13 4
14 2
15 2
16 1
17 1
18 1
19 0
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Year Failures
4 9
5 7
6 6
7 4
8 4
9 4
10 2
11 1
12 1
13 0
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Year Failures
4 5
5 4
6 4
7 4
8 3
9 1
10 1
11 1
12 1
13 0
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Year Failures
4 4
5 4
6 1
7 1
8 1
9 0
Time Needed to Reach 100% Survival
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Condition HDBR50 HDBR80
75% of HDBR50 amounts 13 13
75% of HDBR80 amounts 21 19
60% of HDBR50 amounts 9 9
60% of HDBR80 amounts 12 13
Deeper cuts early on reduce the amount of time needed to gain safety.
It was always necessary to wait a long time before gaining safety. For these conditions, it was a minimum of 9 years.
It is difficult to reduce withdrawal amounts enough to shorten the amount of time to regain safety significantly. [The exception is when your reduction is very shallow compared to the bare minimum.] There are times to look for ways to adjust to harsh market realities. This reinforces the general idea behind shifting allocations.
Have fun.
John R.