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Challenging the 4% Rule

Including Financial Independence and Retiring Early (FIRE)
GeoffF100
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Re: Challenging the 4% Rule

#461349

Postby GeoffF100 » November 27th, 2021, 8:24 am

Hariseldon58 wrote:I thinks that’s the essence of the problem, the search for an “answer” to the retirement drawdown question, it’s different for everyone, there is no single answer.

Personally I am eternally optimistic,I believe that things always pan out and I had no sleepless nights, from a rational outside perspective, I am almost certainly deluded ! Personally I would find 60% bonds excessively cautious, however it would actually work for me.

IE 35 years income required would be a reasonable guess as a maximum lifespan from here, 100/35 =2.85% per year drawdown, a 60% bond/ 40% equity portfolio would likely keep up with inflation and since my expenditure is in a range of 1.5% to 3% for a comfortable / luxury lifestyle, throw-in future state pensions for myself and Mrs Hari it would clearly be a sensible choice.

Equally my present 80%+ equity portfolio has sufficient margin of safety and will probably work out better, there is a chance that will not work out as well. However the last 14 years have given me a higher standard of living than I anticipated and inflation adjusted capital is over double the starting value, if I was to suffer a 50% permanent loss from here I would be no worse off than if I had taken the lower risk approach initially.

"Sequence of returns risk" is the issue here. If you have a 50% permanent loss now you will be fine. If a newcomer has a 50% loss now, with recovery just before he dies, the income he can draw down will be severely reduced.

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Re: Challenging the 4% Rule

#461352

Postby TahiPanasDua » November 27th, 2021, 8:43 am

Hariseldon58 wrote:
xxd09 wrote:We post on the same boards?
Your retirement with 90% equities is a tough allocation for me to have handled-unless I was Mrs Warren Buffett with a huge portfolio !
Glad you made it through-there must have been some sleepless nights!
I was the other way -over 60% bonds at retirement
Different horses for same courses!
xxd09


I thinks that’s the essence of the problem, the search for an “answer” to the retirement drawdown question, it’s different for everyone, there is no single answer.

Personally I am eternally optimistic,I believe that things always pan out and I had no sleepless nights, from a rational outside perspective, I am almost certainly deluded ! Personally I would find 60% bonds excessively cautious, however it would actually work for me.

IE 35 years income required would be a reasonable guess as a maximum lifespan from here, 100/35 =2.85% per year drawdown, a 60% bond/ 40% equity portfolio would likely keep up with inflation and since my expenditure is in a range of 1.5% to 3% for a comfortable / luxury lifestyle, throw-in future state pensions for myself and Mrs Hari it would clearly be a sensible choice.

Equally my present 80%+ equity portfolio has sufficient margin of safety and will probably work out better, there is a chance that will not work out as well. However the last 14 years have given me a higher standard of living than I anticipated and inflation adjusted capital is over double the starting value, if I was to suffer a 50% permanent loss from here I would be no worse off than if I had taken the lower risk approach initially.


Hari,
your comment that the answer is different for everybody is spot on. We all have different needs based on personality, when it comes to safety. There is really no correct solution. Few of the comments I read here on SWR take this into account and, indeed, some of the frequent commenters write on a seeming assumption that there is a correct/ideal approach backed by extensive historical events and data. Such an approach is good for them but I feel I come from a different planet.

I am definitely an outlier in the spectrum. I invest only in internationally diversified shares, ITs and ETFs, have no bonds and live off the natural yield plus a pathetic £5k pa pension. We have about 2 years expenses in cash but have not had to use it in more than 20 years. We pay ourselves a monthly living allowance based on 90% of fluctuating income. In practise, we usually spend only about 90% of that allowance. Indeed that includes about 15% spent on others. We adjust spending to suit income without any obvious hardship but that is also personality driven.

The above would seem to suggest we must be loaded. Absolutely not! We live very modestly and are not obsessed with cash or buying stuff. Our big indulgence is travel.

Of course, not everyone has the funds to live off natural yield and some are constitutionally incapable of leaving assets to others, etc. We are all different.

TP2

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Re: Challenging the 4% Rule

#461366

Postby xxd09 » November 27th, 2021, 10:04 am

Good reply but your remark as feeling like an outlier rings bells
Conservative types like me are outliers too but in a different format
Shows that “There are many roads to Dublin!”
If these boards are supposed to help other investors then pointing out the “extremes” is surely helpful
Most investors in the middle with stomach acid determining % of equities in portfolio
60/40 is hard to beat as a guideline for most of us
xxd09

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Re: Challenging the 4% Rule

#461383

Postby TahiPanasDua » November 27th, 2021, 10:58 am

xxd09 wrote:Good reply but your remark as feeling like an outlier rings bells
Conservative types like me are outliers too but in a different format
Shows that “There are many roads to Dublin!”
If these boards are supposed to help other investors then pointing out the “extremes” is surely helpful
Most investors in the middle with stomach acid determining % of equities in portfolio
60/40 is hard to beat as a guideline for most of us
xxd09


xxd0g,

I totally agree of course. People near the opposite ends of the spectrum help to set the picture of what is possible. Of course, that doesn't make decisions necessarily any easier for people in the mainstream which is what you are saying.
The difficulty of recommending 50/50, 60/40 or 70/30, etc, seems to me to be dependent to an extent on the risk adversity of both parties complicated by the precariousness of the financial resources, time span, etc. This is not easy.


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Re: Challenging the 4% Rule

#461452

Postby 1nvest » November 27th, 2021, 7:19 pm

TahiPanasDua wrote:The difficulty of recommending 50/50, 60/40 or 70/30, etc, seems to me to be dependent to an extent on the risk adversity of both parties complicated by the precariousness of the financial resources, time span, etc. This is not easy.

The differences in rewards between 50/50, 60/70, 70/30 can be very marginal. US data 1972 to March 2009 for instance and they were all near identical

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Re: Challenging the 4% Rule

#461496

Postby xxd09 » November 27th, 2021, 11:17 pm

Even down to 30/70!
An Asset Allocation I have used for many years
Very surprising
Bonds too have their day in the sun but with less obvious results than equities-as it should be
xxd09

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Re: Challenging the 4% Rule

#461909

Postby hiriskpaul » November 29th, 2021, 6:52 pm

As I think other have said, calling 4% a Rule is stretching the definition of the word "Rule" past breaking point. The very best thing to do is be very lucky when you retire, as the chart on this page shows:

https://earlyretirementnow.com/2017/05/ ... isk-part2/

Maximum sustainable withdrawal rates vary from under 4% to over 13%. Of course, the amount accumulated at the point of retirement can also depend a great deal on how lucky you have been up to that point.

To state the bleeding obvious, the lower the amount you withdraw from your portfolio, the lower the risk of running out of money. Get down below 4% and there is usually not a great deal of difference in risk of running out between various asset allocations. Warren Buffett's wife with a portfolio consisting of 90% in a S&P 500 tracker and 10% in treasury bills, would doubtless get on just fine with 10% S&P/90% bills, or any other ratio in between. However, if you need 4% and are unlucky enough to retire at a point when the maximum SWR ends up being at or below 4%, you are going to have a very uncomfortable ride being in 100% equities. OTOH, if you retire when the maximum SWR turns out to have been over say 7%, then 100% equities should give you a fantastic ride.

Introducing some kind of dynamic spending, cutting back during periods of poor investment returns, spending more during the good times (as in Geoff100's Vanguard link) can take a surprising amount of risk off the table.

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Re: Challenging the 4% Rule

#461955

Postby 1nvest » November 29th, 2021, 11:56 pm

xxd09 wrote:Even down to 30/70!
An Asset Allocation I have used for many years
Very surprising
Bonds too have their day in the sun but with less obvious results than equities-as it should be
xxd09

34/66 stock/bonds is a nice SWAN (sleep well at night) portfolio for a 3% withdrawal rate. If bonds pace inflation and are spent first that covers 22 years and transitions to 100/0, averages 67/33. FT250 for the stocks (small and somewhat value in US scale). Whilst bonds are negative real yields at more recent levels, over 22 year that cycles (at other times will outpace inflation, broadly washes). And if the grim reaper comes knocking after 20 odd years younger heirs inherit a stock heavy portfolio that was in effect 'averaged into' over many years. Simple for non financial aware partners to inherit also, FT250 accumulation fund, draw income from bonds, otherwise no rebalancing/activity involved.

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Re: Challenging the 4% Rule

#461957

Postby 1nvest » November 30th, 2021, 12:03 am

hiriskpaul wrote:As I think other have said, calling 4% a Rule is stretching the definition of the word "Rule" past breaking point. The very best thing to do is be very lucky when you retire, as the chart on this page shows:

https://earlyretirementnow.com/2017/05/ ... isk-part2/

Maximum sustainable withdrawal rates vary from under 4% to over 13%. Of course, the amount accumulated at the point of retirement can also depend a great deal on how lucky you have been up to that point.

To state the bleeding obvious, the lower the amount you withdraw from your portfolio, the lower the risk of running out of money. Get down below 4% and there is usually not a great deal of difference in risk of running out between various asset allocations. Warren Buffett's wife with a portfolio consisting of 90% in a S&P 500 tracker and 10% in treasury bills, would doubtless get on just fine with 10% S&P/90% bills, or any other ratio in between. However, if you need 4% and are unlucky enough to retire at a point when the maximum SWR ends up being at or below 4%, you are going to have a very uncomfortable ride being in 100% equities. OTOH, if you retire when the maximum SWR turns out to have been over say 7%, then 100% equities should give you a fantastic ride.

Introducing some kind of dynamic spending, cutting back during periods of poor investment returns, spending more during the good times (as in Geoff100's Vanguard link) can take a surprising amount of risk off the table.

There is a element of correlation with start date valuation and SWR outcome. Sum the yearly PE and Dow/Gold ratio for instance, smooth over a number of years and compare that to best/worst SWR outcomes and there's a modest correlation. Basically if PE and Dow/Gold are both low then there's a good prospect of a significant SWR outcome. If both are high then even 4% might be pushing it. As per my prior post if your initial allocation is bond heavy then if valuations do improve significantly your losses in transitioning to those low valuations might be relatively low and you have the option of going-all-in to potentially lock into a high SWR.

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Re: Challenging the 4% Rule

#461959

Postby hiriskpaul » November 30th, 2021, 12:12 am

1nvest wrote:
hiriskpaul wrote:As I think other have said, calling 4% a Rule is stretching the definition of the word "Rule" past breaking point. The very best thing to do is be very lucky when you retire, as the chart on this page shows:

https://earlyretirementnow.com/2017/05/ ... isk-part2/

Maximum sustainable withdrawal rates vary from under 4% to over 13%. Of course, the amount accumulated at the point of retirement can also depend a great deal on how lucky you have been up to that point.

To state the bleeding obvious, the lower the amount you withdraw from your portfolio, the lower the risk of running out of money. Get down below 4% and there is usually not a great deal of difference in risk of running out between various asset allocations. Warren Buffett's wife with a portfolio consisting of 90% in a S&P 500 tracker and 10% in treasury bills, would doubtless get on just fine with 10% S&P/90% bills, or any other ratio in between. However, if you need 4% and are unlucky enough to retire at a point when the maximum SWR ends up being at or below 4%, you are going to have a very uncomfortable ride being in 100% equities. OTOH, if you retire when the maximum SWR turns out to have been over say 7%, then 100% equities should give you a fantastic ride.

Introducing some kind of dynamic spending, cutting back during periods of poor investment returns, spending more during the good times (as in Geoff100's Vanguard link) can take a surprising amount of risk off the table.

There is a element of correlation with start date valuation and SWR outcome. Sum the yearly PE and Dow/Gold ratio for instance, smooth over a number of years and compare that to best/worst SWR outcomes and there's a modest correlation. Basically if PE and Dow/Gold are both low then there's a good prospect of a significant SWR outcome. If both are high then even 4% might be pushing it. As per my prior post if your initial allocation is bond heavy then if valuations do improve significantly your losses in transitioning to those low valuations might be relatively low and you have the option of going-all-in to potentially lock into a high SWR.

There is a correlation, but it is weak. The page I linked to demonstrated that the link between max SWR and market returns over the investment period is also weak. Compare for example 1970 (5% SWR, 8% average return) and 1980 (10% SWR, 7% average return) on the chart.

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Re: Challenging the 4% Rule

#462020

Postby TUK020 » November 30th, 2021, 10:17 am

1nvest wrote:Whilst bonds are negative real yields at more recent levels, over 22 year that cycles (at other times will outpace inflation, broadly washes).

This is a conclusion from looking at bond performance over a century.
Since the invention of QE, does this still hold?

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Re: Challenging the 4% Rule

#462025

Postby xxd09 » November 30th, 2021, 10:36 am

There still seems no other places for investors to run to at the moment except bonds as an alternative to equities
All other options are expensive and/or riskier
A historical look at bond performance is some reassurance -they have performed well in many ways-reducing the volatility of portfolios with some gains also due to interest accruals
Life is not a settled scenario however(covid) any more than the stockmarket
Investors have to be constantly on their toes
Bonds it is for just now as the alternative to equities
Things may change but not yet
xxd09

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Re: Challenging the 4% Rule

#462038

Postby Hariseldon58 » November 30th, 2021, 11:15 am

GeoffF100 wrote:
Hariseldon58 wrote:I thinks that’s the essence of the problem, the search for an “answer” to the retirement drawdown question, it’s different for everyone, there is no single answer.

Personally I am eternally optimistic,I believe that things always pan out and I had no sleepless nights, from a rational outside perspective, I am almost certainly deluded ! Personally I would find 60% bonds excessively cautious, however it would actually work for me.

IE 35 years income required would be a reasonable guess as a maximum lifespan from here, 100/35 =2.85% per year drawdown, a 60% bond/ 40% equity portfolio would likely keep up with inflation and since my expenditure is in a range of 1.5% to 3% for a comfortable / luxury lifestyle, throw-in future state pensions for myself and Mrs Hari it would clearly be a sensible choice.

Equally my present 80%+ equity portfolio has sufficient margin of safety and will probably work out better, there is a chance that will not work out as well. However the last 14 years have given me a higher standard of living than I anticipated and inflation adjusted capital is over double the starting value, if I was to suffer a 50% permanent loss from here I would be no worse off than if I had taken the lower risk approach initially.

"Sequence of returns risk" is the issue here. If you have a 50% permanent loss now you will be fine. If a newcomer has a 50% loss now, with recovery just before he dies, the income he can draw down will be severely reduced.


I take the point that a 50% loss now would not be catastrophic, it is worth pointing out that I retired in November 2007 and within 14 months I had suffered a 50% loss, in real terms I had returned to the start point by the spring of 2011 ( despite my error of not having a decent cash cushion or any bonds..)

The subsequent 10 years have returned a real 7.5+% pa return after living costs ( 3% being a sensible guess).

I like to say it was down to skill but it was not, markets returns are variable , uncertain and we really don’t know what comes next.

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Re: Challenging the 4% Rule

#462039

Postby hiriskpaul » November 30th, 2021, 11:19 am

xxd09 wrote:There still seems no other places for investors to run to at the moment except bonds as an alternative to equities
All other options are expensive and/or riskier
A historical look at bond performance is some reassurance -they have performed well in many ways-reducing the volatility of portfolios with some gains also due to interest accruals
Life is not a settled scenario however(covid) any more than the stockmarket
Investors have to be constantly on their toes
Bonds it is for just now as the alternative to equities
Things may change but not yet
xxd09

There is cash, which at present if you shop around, offers better returns than short dated gilts and probably intermediate dated as well. The main problem with cash is that returns on cash in SIPPs and ISAs is much lower than on best buy deposit accounts.

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Re: Challenging the 4% Rule

#462041

Postby hiriskpaul » November 30th, 2021, 11:22 am

Hariseldon58 wrote:
GeoffF100 wrote:
Hariseldon58 wrote:I thinks that’s the essence of the problem, the search for an “answer” to the retirement drawdown question, it’s different for everyone, there is no single answer.

Personally I am eternally optimistic,I believe that things always pan out and I had no sleepless nights, from a rational outside perspective, I am almost certainly deluded ! Personally I would find 60% bonds excessively cautious, however it would actually work for me.

IE 35 years income required would be a reasonable guess as a maximum lifespan from here, 100/35 =2.85% per year drawdown, a 60% bond/ 40% equity portfolio would likely keep up with inflation and since my expenditure is in a range of 1.5% to 3% for a comfortable / luxury lifestyle, throw-in future state pensions for myself and Mrs Hari it would clearly be a sensible choice.

Equally my present 80%+ equity portfolio has sufficient margin of safety and will probably work out better, there is a chance that will not work out as well. However the last 14 years have given me a higher standard of living than I anticipated and inflation adjusted capital is over double the starting value, if I was to suffer a 50% permanent loss from here I would be no worse off than if I had taken the lower risk approach initially.

"Sequence of returns risk" is the issue here. If you have a 50% permanent loss now you will be fine. If a newcomer has a 50% loss now, with recovery just before he dies, the income he can draw down will be severely reduced.


I take the point that a 50% loss now would not be catastrophic, it is worth pointing out that I retired in November 2007 and within 14 months I had suffered a 50% loss, in real terms I had returned to the start point by the spring of 2011 ( despite my error of not having a decent cash cushion or any bonds..)

The subsequent 10 years have returned a real 7.5+% pa return after living costs ( 3% being a sensible guess).

I like to say it was down to skill but it was not, markets returns are variable , uncertain and we really don’t know what comes next.

Market returns are likely to be higher after falls (but not guaranteed ;)). Shiller and others work provides evidence for this.

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Re: Challenging the 4% Rule

#462172

Postby GeoffF100 » November 30th, 2021, 8:40 pm

hiriskpaul wrote:Market returns are likely to be higher after falls (but not guaranteed ;)). Shiller and others work provides evidence for this.

It is certainly true that, other things being equal, returns are likely to be better if the price is lower. Nonetheless, a fall from a crazily high price to a very high price does not bode well for the future. The CAPE ratio for most markets, particularly the US is sky high. It is said that is justified because interest rates are so low. Nonetheless, that could unwind.

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Re: Challenging the 4% Rule

#462238

Postby DrFfybes » December 1st, 2021, 8:34 am

1nvest wrote:
TahiPanasDua wrote:The difficulty of recommending 50/50, 60/40 or 70/30, etc, seems to me to be dependent to an extent on the risk adversity of both parties complicated by the precariousness of the financial resources, time span, etc. This is not easy.

The differences in rewards between 50/50, 60/70, 70/30 can be very marginal. US data 1972 to March 2009 for instance and they were all near identical


I spent a couple of hours playing with this yesterday, and wrote up a summary which never arrived, however...

The default dates end on a dip, this skews the apparent result. I set the portfolios at 50/50 65/35 and 80/20 Equities/bondsfor a wider spread.
You can play with all sorts of portfolio mixes and swap asset classes, but even swapping bonds for gold gives the same results, after a dip/crash the different ratio portfolios all return to similar value.

However this changes if you are taking an income.... and this is after all a board for Retirement investing :)

I selected a drawdown of $100 each quarter (4%) and inflation linked it, leave rebalancing on, and in pretty much every scenario I could find the higher equites portfolios won out, often quite considerably.

Even setting the start (retirement) date to just before the big falls gave the same result after a few years, with the single exception of if you retired in 2000. In that case the falls were so big and you were so soon into retirement, that you would probably have been able to do something about it. Taking income in Jan 2000 would mean current values for P1/2/3 of $15.8, $14.5, and $12k so the high bonds one wins out.

However, if you take Lootman's (among others) approach and have a couple of years of cash, things change. Taking a Jan 2000 start date, the values at Jan 2002 for P1, P2, P3 are 10k, 9.4k, and 8.8k. If you use those as start figures for each portfolio mix and start to take the same $400/year income from Jan 2002, at end August 2021 values are P1 $20.4k, p2 $20K, and P3 (80% equities) $18.2k. Much closer figures, even though you are drawing higher initial percentages from the portfolios.

In the latter scenario delaying your drawdown until 2003 P1 goes from 9.6k to 22k, P2 from 8.8k to $23.8k and P3 from 7.6k to £21.5k.

At this point I considered re-running it with a pause in income withdrawal for the 2008 dip, but MrsF seemed to think I'd been playing enough.

Paul

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Re: Challenging the 4% Rule

#462246

Postby xxd09 » December 1st, 2021, 9:01 am

Conservative investor
Been running a 30/65/5 equities/bonds/cash(2 years living expenses) for many years -18 in fact-now aged 75 so probably won’t change
Approx 3.8% withdrawal rate
That relative performance record/graph of the performances of 70/30 portfolios through to 30/70 ones was known to me from American retirement financial websites from many years ago
xxd09
PS only use global index funds

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Re: Challenging the 4% Rule

#462296

Postby hiriskpaul » December 1st, 2021, 11:23 am

DrFfybes wrote:
1nvest wrote:
TahiPanasDua wrote:The difficulty of recommending 50/50, 60/40 or 70/30, etc, seems to me to be dependent to an extent on the risk adversity of both parties complicated by the precariousness of the financial resources, time span, etc. This is not easy.


I selected a drawdown of $100 each quarter (4%) and inflation linked it, leave rebalancing on, and in pretty much every scenario I could find the higher equites portfolios won out, often quite considerably.


I would agree with that assessment. In over 90% of cases you are better off 100% in equities adding bonds results in worse outcomes. But having bonds/cash, probably gold as well gets you a higher SWR in those 10% of cases where market and/or sequence of returns are really bad.

Is it more important to avoid really bad outcomes, or to maximise income/legacy?

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Re: Challenging the 4% Rule

#462311

Postby Hariseldon58 » December 1st, 2021, 12:20 pm

hiriskpaul wrote:
DrFfybes wrote:
1nvest wrote:
I selected a drawdown of $100 each quarter (4%) and inflation linked it, leave rebalancing on, and in pretty much every scenario I could find the higher equites portfolios won out, often quite considerably.


I would agree with that assessment. In over 90% of cases you are better off 100% in equities adding bonds results in worse outcomes. But having bonds/cash, probably gold as well gets you a higher SWR in those 10% of cases where market and/or sequence of returns are really bad.

Is it more important to avoid really bad outcomes, or to maximise income/legacy?


McClungs "Living off your money" book delves very deeply into these areas and high equity allocations can work well, it's largely my approach and can lead to a significant increase in living standards over the retirement lifetime. I'm 14 years in and hopefully years more to go ( now early 60's) but I could see that XXD's approach of 30% Equity 70% bonds/cash would probably keep pace with inflation and that could work well for me.

Ultimately the objects are a comfortable lifestyle, free of financial worries, if you can obtain the first with a low level of risk and thus achieve the second objective then this has to be a win.

I have lowered my 90+% equity allocation to 80+%, the gain from the higher equity allocation is marginal and will not change my lifestyle, going into Coronavirus in March 2020 with a 10 year plus supply of cash bonds was comfortable. ( The naughty active side of me, dramatically cut the cash /bond allocation for some healthy gains, the cash bond allocation is now almost back to pre crisis levels)

Each to their own level of comfort.


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