The Chinese Box

Research on Safe Withdrawal Rates

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unclemick
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The Chinese Box

Post by unclemick »

Long ago and far, far away - when I was 21 in Seattle - we had this old (35) engineer tell us about the Chinese box. His(old country) parents ran a resturant - put nightly proceeds into a box under their bed. The box had everything - Jade, savings bonds, a few stocks, cash, collectible coins, ordinary gold/silver - etc, etc. In good times - the box stuff built up, hard times some things got sold.

Strikes me as a version of both DCA (resturant income) and take out (portfolio).

I've often thought of this - since I can DCA pension and SS (when it comes) into my portfolio 'box' - is there a way to look at the numbers from a different mental perspective.

I've been viewing pension, SS, dividend stocks, and IRA in terms of separate income streams. Spreadsheets naturally drive the mind to stream, paycheck, type thinking.

How about reverse thinking - put pension/SS stream in and take out look back chunks(1-4 yrs worth) based on past performance.

BTY - Tuck was nationally ranked in ping/pong - beat us slide rule cats with his acabus - and knew every U of W football statistic since the dawn of time.
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mickeyd
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Post by mickeyd »

Hey unclemick,

I like the Chinese Box idea a lot. It got me to thinking (always a dangerous concept) that the simplest things seem to work the best in the long run. As we DCA $ into our investments in our yourger years and later (as we get grayer) we slowly make withdrawals to live on we are simply doing what your friend's Chinese parents had done.

I have not begun collecting on my pension plans or SS and am over 10 years away from RMD time, but I am beginning to believe that I will possibly have a retirement income at some time that is in excess of what we need to live on and that I will be investing the income into post-tax investments that will be growing yearly. I love having these kind of problems.
regards,
mickeyd

Badges? Badges? I don't have to show you no stingin' badges!!
JWR1945
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Post by JWR1945 »

unclemick wrote:How about reverse thinking - put pension/SS stream in and take out look back chunks(1-4 yrs worth) based on past performance.
Our calculators and Gummy's mathematics permit deposits. They are negative withdrawals.

Everything is OK until a balance becomes negative, at which point everything suddenly loses its meaning. For example, if you have a balance of $-100 and your investments double, what do you end up with?

We have a related issue with TIPS when we withdraw a percentage of the interest [instead of the normal process of reinvesting all interest]. During periods of deflation, the mathematics has us putting money back into TIPS to compensate for the loss of principal. [This makes our detailed printouts of withdrawals look weird during the 1930s.]

The closest that I can come to simulating your condition on our calculators is to take advantage of the Percentage Gains Removed feature in box B17. Nothing is removed unless the portfolio balance has increased compared to the previous year.

Using the Percentage Gains Removed feature, you may make deposits via negative withdrawals (box B9) and negative expenses (box B15). The Percentage Gains Removed would be positive. [You can even make the Dividends Reinvested B22 and Interest Reinvested B23 negative if it is meaningful in your situation].

You can mix things up in any combination that you choose. For example, you might make steady deposits as a percentage of the initial balance (as a negative number) in box B9 and withdraw a percentage of the current balance as expenses (as a positive number) in box B15 and withdraw a Percentage of Gains (but not losses) compared to the previous year (as a positive number) in box B17.

Have fun.

John R.
JWR1945
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Post by JWR1945 »

The FIRECalc and Retire Early Safe Withdrawal Calculators allow you to make negative withdrawals (i.e., deposits). FIRECalc allows you to make a couple of discrete withdrawals and/or deposits after a specified number of years.

All balances are in nominal dollars, which can cause problems. You need to convert them into real dollars.

[My modified versions of the Retire Early Safe Withdrawal Calculators have tables in real dollars as well as in nominal dollars. The Retire Early Safe Withdrawal Calculator (unmodified Version 1.61) includes real dollar amounts in its data summaries, which translates to 10-year increments.]

Professor Robert Shiller's database includes the CPI. You can use this to convert FIRECalc and Retire Early Safe Withdrawal Calculator balances into real dollars. [Both calculators use Professor Shiller's database as their inputs.] Download an HMTL or Excel file, as appropriate, from his site.
http://www.econ.yale.edu/~shiller/data.htm

With this information and FIRECalc's flexibility, you can run sophisticated what-if exercises.

Have fun.

John R.
unclemick
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Post by unclemick »

Thanks JWR

On webtv so can't download files - but even with Fircalc $, I can putz a little.
JWR1945
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Post by JWR1945 »

I have made a very brief survey to supply a few examples of what can be done with our calculators. My main focus in this survey was the MINIMUM PORTFOLIO BALANCE during 1921-1975. [I excluded 1976-1980 because of distortions caused by dummy data after 2002.]

First, I established a baseline using my full up Deluxe Calculator V1.1A02 of 8-01-04. I removed 50% of all portfolio gains from the previous year but none of the losses. [I wrote 50% into cell B17, the Portfolio Gains Removed.] I set the initial balance at $100000. I selected commercial paper for the fixed income series. I adjusted withdrawals to match inflation as measured by the CPI. This affects only the withdrawals based upon a percentage of the initial balance (B9, the Initial Withdrawal Rate). I rebalanced my allocations annually.

All of the dollar amounts that follow are in terms of real dollars (i.e., after adjusting for inflation). All of the time periods are 30 years or less.

Here are the results with 50% of all portfolio gains from the previous year withdrawn but none of the losses.

These results are for an annual deposit of $2000 and for annual withdrawals of 4.2%. [The Initial Withdrawal Rate B9 was set to -2%.] This corresponds to a net withdrawal of $2000 in the first year plus expenses of 0.20% or $200 before counting any gains or losses. I kept the 0.20% for expenses because my main focus was on MINIMUM PORTFOLIO BALANCES. If I had been more interested in the TOTAL AMOUNT WITHDRAWN, I would have left this 0.2% out and withdrawn 4.0% (because it is a round number).

With 50% stocks and 50% commercial paper, the MINIMUM PORTFOLIO BALANCE between 1921 and 1975 was above $49700 but below $49800. The minimum TOTAL AMOUNT WITHDRAWN was between $1100 and $1300, occurring first in the 1929 and 1930 sequences.

The extremes of the TOTAL AMOUNT WITHDRAWN in year 10 were $1434 for the 1939 sequence and $17525 for the 1925 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 20 were $1279 for the 1929 sequence and $9320 for the 1940 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 30 were $2116 for the 1964 sequence and $11233 for the 1926 sequence.

With 80% stocks and 20% commercial paper, the MINIMUM PORTFOLIO BALANCE between 1921 and 1975 was above $40300 but below $40400. The minimum TOTAL AMOUNT WITHDRAWN was below $900, occurring first in the 1928-1931 sequences.

The extremes of the TOTAL AMOUNT WITHDRAWN in year 10 were $864 for the 1929 sequence and $26532 for the 1950 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 20 were $1140 for the 1928 sequence and $18035 for the 1940 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 30 were $2014 for the 1959 sequence and $19231 for the 1926 sequence.

These results are for an annual deposit of $3000 and for annual withdrawals of 5.2%. [The Initial Withdrawal Rate B9 was set to -3%.] This corresponds to a net withdrawal of $2000 in the first year plus expenses of 0.20% or $200 before counting any gains or losses. I kept the 0.20% for expenses because my main focus was on MINIMUM PORTFOLIO BALANCES. If I had been more interested in the TOTAL AMOUNT WITHDRAWN, I would have left this 0.2% out and withdrawn 5.0% (because it is a round number).

With 50% stocks and 50% commercial paper, the MINIMUM PORTFOLIO BALANCE between 1921 and 1975 was above $48900 but below $49000. The minimum TOTAL AMOUNT WITHDRAWN was below $1000, occurring first in the 1929 and 1930 sequences.

The extremes of the TOTAL AMOUNT WITHDRAWN in year 10 were $1387 for the 1929 sequence and $17444 for the 1925 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 20 were $1300 for the 1928 sequence and $9324 for the 1940 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 30 were $2295 for the 1953 sequence and $11357 for the 1926 sequence.

With 80% stocks and 20% commercial paper, the MINIMUM PORTFOLIO BALANCE between 1921 and 1975 was above $40000 but below $40100. The minimum TOTAL AMOUNT WITHDRAWN was below $600, occurring first in the 1928-1931 sequences.

The extremes of the TOTAL AMOUNT WITHDRAWN in year 10 were $570 for the 1929 sequence and $26483 for the 1950 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 20 were $1143 for the 1928 sequence and $17803 for the 1940 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 30 were $2197 for the 1959 sequence and $19556 for the 1926 sequence.

Here are the results with no gains removed.

These results are for an annual deposit of $2000. [The Initial Withdrawal Rate B9 was set to -2%.] I varied expenses until the MINIMUM PORTFOLIO BALANCES were comparable to the previous conditions.

With 50% stocks and 50% commercial paper, the MINIMUM PORTFOLIO BALANCE between 1921 and 1975 was above $49700 but below $49800 when the expenses were 6.4%. This corresponds to a net withdrawal of $4200 in the first year plus $200 in expenses. The minimum TOTAL AMOUNT WITHDRAWN was between $2100 and $2200 in the 1937 sequence.

The extremes of the TOTAL AMOUNT WITHDRAWN in year 10 were $2594 for the 1939 sequence and $9028 for the 1921 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 20 were $2466 for the 1929 sequence and $7365 for the 1921 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 30 were $3383 for the 1956 sequence and $6065 for the 1970 sequence.

With 80% stocks and 20% commercial paper, the MINIMUM PORTFOLIO BALANCE between 1921 and 1975 was above $40000 but below [$40100 and] $40400 when the expenses were 7.0%. This corresponds to a net withdrawal of $4800 in the first year plus $200 in expenses. The minimum TOTAL AMOUNT WITHDRAWN was below $2000 in the 1929 sequence.

The extremes of the TOTAL AMOUNT WITHDRAWN in year 10 were $2479 for the 1966 sequence and $12975 for the 1921 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 20 were $2532 for the 1962 sequence and $12761 for the 1947 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 30 were $3522 for the 1956 sequence and $10586 for the 1933 sequence.

These results are for an annual deposit of $3000. [The Initial Withdrawal Rate B9 was set to -3%.] I varied expenses until the MINIMUM PORTFOLIO BALANCES were comparable to the previous conditions.

With 50% stocks and 50% commercial paper, the MINIMUM PORTFOLIO BALANCE between 1921 and 1975 was above $48900 but below $49000 when the expenses were 7.4%. This corresponds to a net withdrawal of $4200 in the first year plus $200 in expenses. The minimum TOTAL AMOUNT WITHDRAWN was between $2100 and $2200 in the 1937 sequence.

The extremes of the TOTAL AMOUNT WITHDRAWN in year 10 were $2613 for the 1939 sequence and $9435 for the 1921 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 20 were $2528 for the 1929 sequence and $7469 for the 1947 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 30 were $3429 for the 1952 sequence and $6076 for the 1970 sequence.

With 80% stocks and 20% commercial paper, the MINIMUM PORTFOLIO BALANCE between 1921 and 1975 was above $39900 but below [$40000 and] $40400 when the expenses were 8.0%. This corresponds to a net withdrawal of $4800 in the first year plus $200 in expenses. The minimum TOTAL AMOUNT WITHDRAWN was below $2000 in the 1929 and 1930 sequences.

The extremes of the TOTAL AMOUNT WITHDRAWN in year 10 were $2420 for the 1966 sequence and $13577 for the 1921 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 20 were $2600 for the 1962 sequence and $12865 for the 1947 sequence. The extremes of the TOTAL AMOUNT WITHDRAWN in year 30 were $3557 for the 1956 sequence and $10345 for the 1933 sequence.

Comparisons

In the first set of data, half of all portfolio gains were removed, but none of the losses.

From the first set of data, we held the difference between deposits and withdrawals in the first year constant at $2200 (of which, $200 corresponds to portfolio expenses). Increasing the stock allocation from 50% to 80% caused the MINIMUM PORTFOLIO BALANCE during the first 30 years to drop from $49700-$49800 to $40300-$40400 when $2000 (plus inflation) was deposited every year. When $3000 (plus inflation) was deposited every year, the MINIMUM PORTFOLIO BALANCES were $48900-$49000 with 50% stocks and $40000-$40100 with 80% stocks.

The larger guaranteed deposits caused the MINIMUM PORTFOLIO BALANCES to fall slightly because the corresponding withdrawal was a greater percentage of the portfolio's current balance.

The primary effect was the stock allocation. The higher stock allocation had caused greater volatility and lowered the MINIMUM PORTFOLIO BALANCE.

The second set of data is more traditional. None of the portfolio gains were removed as such. A percentage of the portfolio's current balance was removed. It was set up so that the MINIMUM PORTFOLIO BALANCES were similar to those of the previous conditions.

Changing the amount of deposits and withdrawals had little effect so long as the differences in the first year were close. With 50% stocks and $2000 deposits, withdrawals were 6.4% of the portfolio's current balance. For 50% stocks and $3000 deposits, withdrawals were 7.4% of the portfolio's current balance. In both cases, the net amount withdrawn during the first year was $4400 (of which, $200 covers expenses).

With 80% stocks and $2000 deposits, withdrawals were 7.0% of the portfolio's current balance. For 80% and $3000 deposits, withdrawals were 8.0% of the portfolio's current deposits. In both cases, the amount withdrawn during the first year was $5000 (of which, $200 covers expenses).

From the second set of data, we see that the minimum TOTAL AMOUNT WITHDRAWN was higher with 50% stocks than with 80% stocks. For a specified stock allocation, the deposit amount did not matter too much so long as the difference between the deposit and withdrawal was the same in the first year.

Interpreting the TOTAL AMOUNT WITHDRAWN data in the first set of data will require averaging over several years. That capability is not yet in the calculator. The data presented give an idea of how much withdrawals fluctuate from year to year. The amount withdrawn after a portfolio's balance has risen would not be consumed immediately. It would be spread out over several years.

Have fun.

John R.
JWR1945
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Post by JWR1945 »

Initial Balance: $100000.
Inflation Adjustment: CPI.
Annual rebalancing between stocks and commercial paper.
Time period: 30-year sequences starting in 1921-1975.
Set up: Set the stock allocation, the deposit amount (which equals minus 1 times the withdrawal amount, which is determine from the percentage of the initial balance) and the percentage of gains removed.
Determine the expense percentage (with an increment of 0.1%) that brings the MINIMUM PORTFOLIO BALANCE just below $50000.
Record the number of sequences (out of 55) with portfolio balances below $52000.

Condition Set A
Annual Deposits: $2000 plus inflation (i.e., the Initial Withdrawal Rate equals -2%).
Stock allocation: 50%.
Percentage of gains removed: 0%.
Expense percentage: 6.4%.
Number of sequences with minimum balances below $52000: 5 out of 55.

Annual Deposits: $3000 plus inflation (i.e., the Initial Withdrawal Rate equals -3%).
Stock allocation: 50%.
Percentage of gains removed: 0%.
Expense percentage: 7.3%.
Number of sequences with minimum balances below $52000: 8 out of 55.

Annual Deposits: $2000 plus inflation (i.e., the Initial Withdrawal Rate equals -2%).
Stock allocation: 50%.
Percentage of gains removed: 50%.
Expense percentage: 4.2%.
Number of sequences with minimum balances below $52000: 5 out of 55.

Annual Deposits: $3000 plus inflation (i.e., the Initial Withdrawal Rate equals -3%).
Stock allocation: 50%.
Percentage of gains removed: 0%.
Expense percentage: 5.1%.
Number of sequences with minimum balances below $52000: 8 out of 55.

Condition Set B
Annual Deposits: $2000 plus inflation (i.e., the Initial Withdrawal Rate equals -2%).
Stock allocation: 80%.
Percentage of gains removed: 0%.
Expense percentage: 5.5%.
Number of sequences with minimum balances below $52000: 2 out of 55.

Annual Deposits: $3000 plus inflation (i.e., the Initial Withdrawal Rate equals -3%).
Stock allocation: 80%.
Percentage of gains removed: 0%.
Expense percentage: 6.4%.
Number of sequences with minimum balances below $52000: 2 out of 55.

Annual Deposits: $2000 plus inflation (i.e., the Initial Withdrawal Rate equals -2%).
Stock allocation: 80%.
Percentage of gains removed: 50%.
Expense percentage: 2.4%.
Number of sequences with minimum balances below $52000: 4 out of 55.

Annual Deposits: $3000 plus inflation (i.e., the Initial Withdrawal Rate equals -3%).
Stock allocation: 80%.
Percentage of gains removed: 50%.
Expense percentage: 3.3%.
Number of sequences with minimum balances below $52000: 4 out of 55.

The effect of withdrawing 50% of a portfolio's gains is dramatic. When the stock allocation is 80%, it makes the initial deposits and withdrawals almost equal. The remaining income is erratic. It consists almost entirely of the gains that are removed.

Have fun.

John R.
unclemick
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Post by unclemick »

I think the 'thrills and chills' aspect put this it the 'interesting to look at' catagory for a while.
JWR1945
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Post by JWR1945 »

Here is more information about the thrills and chills.

These are 4-year average amounts withdrawn and 5-year average amounts withdrawn for selected conditions. A 4-year average covers a complete presidential election cycle. A 5-year average corresponds to the maturity of some short-term fixed income securities.

Initial Balance: $100000.
Inflation Adjustment: CPI.
Annual rebalancing between stocks and commercial paper.
Time period: 30-year sequences starting in 1921-1975.
Set up: Set the stock allocation, the deposit amount (which equals minus 1 times the withdrawal amount, which is determine from the percentage of the initial balance) and the percentage of gains removed.
Determine the expense percentage (with an increment of 0.1%) that brings the MINIMUM PORTFOLIO BALANCE just below $50000.
Record the number of sequences (out of 55) with portfolio balances below $52000.

Condition Set A
Annual Deposits: $2000 plus inflation (i.e., the Initial Withdrawal Rate equals -2%).
Stock allocation: 50%.
Percentage of gains removed: 0%.
Expense percentage: 6.4%.
Number of sequences with minimum balances below $52000: 5 out of 55.
FOUR YEAR AVERAGE WITHDRAWALS:
Ending at year 10, from $2753 in 1937 to $8774 in 1921.
Ending at year 20, from $2631 in 1930 to $8098 in 1921.
Ending at year 30, from $3206 in 1956 to $5879 in 1974.
FIVE YEAR AVERAGE WITHDRAWALS:
Ending at year 10, from $2669 in 1937 to $8348 in 1922.
Ending at year 20, from $2727 in 1931 to $8390 in 1921.
Ending at year 30, from $3139 in 1956 to $6340 in 1975.

Annual Deposits: $2000 plus inflation (i.e., the Initial Withdrawal Rate equals -2%).
Stock allocation: 50%.
Percentage of gains removed: 50%.
Expense percentage: 4.2%.
Number of sequences with minimum balances below $52000: 5 out of 55.
FOUR YEAR AVERAGE WITHDRAWALS:
Ending at year 10, from $2456 in 1934 to $10476 in 1921.
Ending at year 20, from $1902 in 1931 to $7114 in 1948.
Ending at year 30, from $3149 in 1975 to $6562 in 1970.
FIVE YEAR AVERAGE WITHDRAWALS:
Ending at year 10, from $2797 in 1936 to $9799 in 1921.
Ending at year 20, from $2717 in 1931 to $8349 in 1921.
Ending at year 30, from $3079 in 1966 to $6163 in 1971.

Condition Set B
Annual Deposits: $2000 plus inflation (i.e., the Initial Withdrawal Rate equals -2%).
Stock allocation: 80%.
Percentage of gains removed: 0%.
Expense percentage: 5.5%.
Number of sequences with minimum balances below $52000: 2 out of 55.
FOUR YEAR AVERAGE WITHDRAWALS:
Ending at year 10, from $2302 in 1969 to $11206 in 1921.
Ending at year 20, from $2537 in 1962 to $13594 in 1948.
Ending at year 30, from $3746 in 1956 to $12322 in 1933.
FIVE YEAR AVERAGE WITHDRAWALS:
Ending at year 10, from $2279 in 1969 to $10420 in 1921.
Ending at year 20, from $2537 in 1965 to $13360 in 1948.
Ending at year 30, from $3635 in 1956 to $12382 in 1942.

Annual Deposits: $2000 plus inflation (i.e., the Initial Withdrawal Rate equals -2%).
Stock allocation: 80%.
Percentage of gains removed: 50%.
Expense percentage: 2.4%.
Number of sequences with minimum balances below $52000: 4 out of 55.
FOUR YEAR AVERAGE WITHDRAWALS:
Ending at year 10, from $1235 in 1924 to $15278 in 1921.
Ending at year 20, from $2221 in 1931 to $13338 in 1943.
Ending at year 30, from $3007 in 1975 to $12703 in 1975.
FIVE YEAR AVERAGE WITHDRAWALS:
Ending at year 10, from $2079 in 1969 to $14020 in 1921.
Ending at year 20, from $2845 in 1959 to $12678 in 1947.
Ending at year 30, from $3711 in 1966 to $10840 in 1933.

Have fun.

John R.
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