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March 28, 2012


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Is Joe married? Is this a joint portfolio? Average Joes whom I know live in a less expensive area with houses paid off and a bit of pension. . I'd love to see a 500,000 chart. Do you just cut the chart in half?
Thanks Syd. This is the type of hard numbers I need to see. Not an accountant, but totally in charge of the withdrawal rate.
Off to find 5% ...somewhere.


Syd, it is good that you make special mention of the rise-and-fall of the total portfolio due to earnings initially exceeding expenses for a few years, then that pattern reversing.

When I was planning my ER budget (using only taxable account investments), I saw a similar pattern, especially when I plugged in some higher inflation figures into my spreadsheet. However, in my ER budget, those deficits in the out-years would not last long because of the presence of my three "reinforcements" which were (1) unfettered access to my IRA, (2) collecting my frozen company pension, and (3) Social Security. These 3 new income sources would more than offset projected deficits in the longer term. Then there is Medicare which would lower my health insurance costs.

Does your chart not take into account those things or have you already worked them into the withdrawal rate?

New at this

You're Right! The rest of us non-accountants hate it. It's a nice tidy and neat spread sheet, but have you looked at trend chart to see how the real market performs?

In real life, a balanced portfolio returns about 10% CAGR over the long term. This means if you are pulling out 3% to spend, and losing 3.5% to inflation, you should actually "grow" your nest egg over the long run. But the problem is that along the way you will likely suffer through several 30, 40, 50% drops. And your (and my) job is to avoid hitting the skids when this happens.

In fact I suspect it's these types of tidy looking spread sheets that cause people to panic when the real world disrupts the accountants view of reality.

The beauty of Bengens research is that it is in no way tied to the view that your portfolio will follow this orderly process of growing at 5% each and every year.

It's now very clear to me why we kept talking past each other on your earlier post.

My advice, throw away the spread sheet as it must have been a very painful lens in which to view what actually happened to your nest egg over the last 3 volatile years.

Retired Syd

@Jan: Yes, Joe has got a lot of money for being Average, I admit. But not-so-average Syd is best with nice clean numbers for examples, so that's why I gave Joe a raise.

You are exactly right, the numbers would be exactly in half, although the actual percentages withdrawn (actually all the %'s) remain the same as above.

@deegee: Yes, my own plan has lots of variables for Plan B, just like yours. But for the purposes of this example, I just wanted to keep it clean and assume Joe has nothing else. Poor Joe.

@New: I already wrote the post that you asked me to, now I'm allowed to write posts about whatever I want, even if they are not what you asked me to write.

It's funny to me that your criticism would be based on an AVERAGE CAGR when you are criticizing me for using an average example. As you know, up to now, I haven't been dealing in averages, or probabilities, but instead worst-case scenarios based on history.

I'm glad it's clear to you now why we've been talking past one another. That's been clear to me for quite awhile now.

Thanks so much for your advice.

New at this

If u want to talk worst case scenarios (and arguably more likely), lay in a couple double-digit negative returns in the first couple years and sprinkle in a few more along the way. This would give your readers a much more realistic version of what to expect.

And if u really want to represent reality, just lay in the actual market returns over any 30 year period. And then if u really want to get fancy, vary the 30 years of history used by 1 year, and repeat.

What u will find is that some look pretty good, and some get very scary, but none will look like your spread sheet version.

And back to our guy1/guy2 example, what does your spread sheet look like if you set the year 2000 (peak of tech boom) as your first year.

I fear that u will see that Joe winds up destitute.

Retired Syd

@New: Oh my gosh, what a great idea! Wow, that would be a lot of work, but . . . Oh my gosh, I just thought of something; BENGEN ALREADY DID EXACTLY THAT!

Wow, that just saved me a lot of work.

New at this

You do understand!!!! So why misrepresent it to your readers?

Now, how did that work out again for guy1, who retired in the year 2000?

I sure hope he normalized his assets in year1 before calculating 3%.

History suggests he "might" sneak by, but r u really suggesting he should try?

Retired Syd

@New: I am not suggesting anything to guy #1. He has to make his own decisions. That's part of being an adult.

I was only describing how one of the tools work. He can decide for himself whether that tool suits him. He may not be comfortable with it so then HE SHOULD NOT USE IT.

My crystal ball doesn't go as far as 2030, but all the Bengen Rule says (and remember, YOU did ask me to explain the rule, so please don't tell me to shut up about it now), is that if the 30 year period from 2000 to 2030 happens to look no worse than the worst 30 year period in the 80 year historical period that he modeled, (for example the 30 years following the market's high before the Great Depression), he's ok.

If it's worse, you are right, he's hosed. But you didn't ask me to predict the future. You asked me to explain the 3% rule.

If I were in the actual business of making recommendations, I would recommend that you not use the rule because it doesn't work for you. But I'm not in that business.

New at this

So Joe's future all comes down to your assumption of 5% earnings. Where did the 5% come from? Did Bengen use 5%?

For grins, I just looked up on Fidelity's web-site. They say average CAGR for last 100 years for a "Balanced" Portfolio ((50%, 40%, 10%) is 7.96%.

And also for grins, I replicated your spreadsheet and plugged in 7.96% for our hero. Turns out Poor ol Joe doesn't wind up so poor, dying with ~$3.4M in the bank if you hold all the rest of your assumptions constant.

This seems to draw your statement below into question:

"No matter what facts you assume, this will always happen, i.e. that when using a flat starting rate, say 3% or 4%, that you adjust for inflation each year, your nest egg will grow for some period in the early years and shrink after that, down to nothing depending on how long you live."


For some reason the phrase "No good deed goes unpunished" keeps flashing through my mind as I read through your past three posts and the avalanche of subsequent comments.

Thank you for taking the time to share both your thoughts and today's spreadsheet. I never understood at what point, or why, our portfolio would stop growing and instead begin to deplete. I do now!


@New: So your premise is that Joe will now have a retirement of 100 years???? Is there any period in time (of 30 consecutive years) that the CAGR was 7.96%?

Syd - Discovered your blog after the post in Yahoo Finance and very much enjoy your writing style!

Retired Syd

@Tamara: Thanks for making me smile!

@Sue: Welcome and thank you. (Consider yourself warned, though, about joining the fray. Based on my historical modeling of the last week of blog comments, I'm pretty sure New will want the last word here.)


It's a pretty sad commentary for Average Joe to have saved $1mill, only to try and live on $40K a year. That's almost poverty level around here. And I am sure Average Joe, who was able to sock away $1mill probably lived a lot better on more than $40K a year?

Anyway, thank you Syd for this analogy. It's more understandable. I get it now.

New at this

Sniff. It appears the females are ganging up on the lone male.

Sue - You can answer your own question if you just replicate Syd's spreadsheet for 30 years. But if you just keep everything identical; except change "earnings" to 7.96%; Answer = $3.4M. Not arguing, its just math. But its inconvenient math because it does not support her assertion that we're all going to end up with 2 cents in the bank when we die, right on schedule (How depressing; and thankfully not accurate unless there is some rationale for using 5% - Syd is still keeping us in suspense about this...)

Tamara - Is it my good deeds that you are referring to as being punished?

Syd - You seem so defensive, but you cannot argue with the many deficiencies our discussion exposed along the way. So are you going to answer the question of where the assumption of 5% returns came from...? Your entire spreadsheet rests on this critical assumption. Change it by 1 point in either direction and you get a very different answer.

P.S. If you'd prefer a forum where you just post fluff statements and everyone opines on how wonderful you are, just let me know and I'll take my bag of marbles to another blog....

New at this

P.P.S. And just to make one more insightful contribution to this discussion, I signed up for Fidelity's Monte-Carlo simulation program for modeling retirement. Playing around with it, its comforting to find that it tends to confirm Bengen's research on 3% and 4%.

And interestingly, if you could figure out how to live on 2.4%, the inflation adjusted amount of your nest egg winds up about where you started after 50 years of living off of it....And that is under what they classify as a 90% confidence level....Seems to imply you could live in perpetuity at 2.4%....


@New, No need to be condescending to Syd, I've been reading her posts for a number of years and she has a very good handle on early retirement. Her explanation of the 3% rule was perfectly clear to me (a male who retired at age 45, thirteen years ago) and some others here. I admire her patience in trying to explain how the "rule" works despite your unsuccessful attempts to trip her up. If you don't like the "worst 30" or "worst 50" year scenarios you certainly don't have use the technique, as Syd said repeatedly.

@Syd, For me the "rule" is too conservative, I planned my draw in the hope that my meager portfolio would last me to at least age 70, when I could get the maximum Social Security payments, on which I could live very comfortably. Two bear markets later I'm still right on track (thanks, in part, to not panic selling when my investments head south and then missing out on the rebound). The 3% rule is intended for those who are very fearful about running out of money and unwilling to consider the "Plan B" options that you mentioned previously. But most people with the motivation to retire early have a number of Plan B ideas in case something unexpected happens. Just like you do.

fred doe

i see a repetition in your resent posts. no not three percent. hammocks! dose pawleys island hammocks have one of those ipo's. i'm going to look into it. thanks for the idea ms syd. no i'm not a accountant and i don't hate this post. yesterday on BLOOMBERG i watched a miss o'brian from MF GLOBAL take the fifth with congress (fifty years ago the guys who did that all had nick names) I thought if they locked her in a room with a accountant for two days she'd tell them what they'd want to hear:)


As an accountant, I endorse this post. (And heaven help me, I'm even working in budgeting. Capital budgeting at that! Only $50B in assets though, so what do I know?...)

I like the "die broke" scenarios. I'd like to bounce the cheque to the undertaker if I could. I guess that's why many older people do a reverse mortgage.

Alicia - oddly enough my projections are to live on about $40k a year sans mortgage. In the last 5 years, I've made anywhere from $70k - $300k/year and I've never spent more than about $40k excluding the mortgage. Some of us are weird that way in not spending everything we make. It makes it easy to accumulate that million at least.

Retired Syd

@dpgcolorado: Thanks so much for your comment, I have actually tired of repeating myself (which is hard to do because I love to talk!), so I appreciate your saying what I would have said in a fresh new voice.

I agree, the worst case scenario is even too conservative for me--I am an optimist by nature, you are right, it's really for the nervous nellies. You are the perfect example of how to survive, don't panic. And you've accomplished that through two downturns (I only have one under my belt so far.) And yes, Plan B never hurts either.

@fred: Thanks again for always making me laugh!

@Jacq: Truth be told, a large number of accountants and ex-accountants read this blog (I get a lot of emails) Perhaps we are more comfortable with the computations, or more disciplined at saving for that goal, I don't know, but the fact is I get a lot of emails from early and wanna be early retirees that are accountants. So I knew you would not be alone.

@Alicia: Thank you for your comment, coming from you that's huge! (wink wink).


Quoting @New: "It appears the females are ganging up on the lone male." The gender of those posting is irrelevant to the validity (or lack thereof) of their comments (if you are wondering, I am a male).

New at this

Thanks Rick. I was wondering.


New: The "pack" seems to have turned on you, but I'd like to encourage you to keep pushing the envelope. I guess you realize by asking all those tough questions, you are stepping on a sacred cow for a bunch of people who desperately want to believe that the logic behind their retirment plans is sound. But as someone who is still contemplating making the leap, I found this discussion very enlightenging and educational.

Syd - Nice job keeping your cool.

New at this

Tracy - Thanks for the encouragement, and yes, I do "get it". Retirement is an emotional topic for most (myself included). And while I understand everyone is wired differently, I personlly don't like the philosophy of "Leap, and the net will appear..."



I think that if you use this link, which uses historical data since 1871 you will discover that 'new' is correct. There are many times that you would not even go negative on your original 1M. Theres no rule that I can see that says we have to ever go negative. Possible or probable, but not inevitable. All you have to do is be lucky to retire after a bear market and on the cusp of a bull.


Retired Syd

@New and Brian: You are correct, at the 7.96% 100-year return rate that New has quoted, you will indeed never run out of money. Lower it to to 7% and you run out of money at 62 years. You have to read "depending on how long you live" with the wink--unless you are really young when you retire, 62 years is not probable (but I suppose possible).

I've never done any research as to whether7.96% is a realistic expectation, I'm not counting on that myself. I'm an optimist, but not that optimistic. But indeed, if you think that's reasonable, your good to go!

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