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Getting close, question on SWR
Old 12-16-2012, 02:48 PM   #1
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Getting close, question on SWR

Hello all. I've been lurking and reading and learning. This seems to be a great forum with intelligent, sometimes humorous, and always respectful dialog. Thank you for having me.

My Basics: I'm 51, DW is 45. We both have jobs in megacorps and are getting tired of it all. We currently have $1M+ mixed in pre-tax and post-tax accounts. We also currently have a large house from which we will downsize and add some incremental funds into the allocation mix. Our retirement home will still be in the $700-800K range - e.g. potential for a further downsize later. We each have non-COLA'd pensions which we're planning to start drawing on at 55. Likewise, current plans are to start SS at 62, but we'll make that decision later. Since the value of the pensions will decay with inflation, I typically think about SS as "covering" the inflation loss of the pensions and not adding any real incremental income. The pensions (with SS inflation support) will cover about 40% of needed retirement income. The remainder to come from drawing against our portfolio - which is a typical Boglehead, 65/35 kind of mix.

We've played with FIREcalc, Fido RIP, etc. and I've been building my own spreadsheets for years.

I have a question regarding SWR. I understand 4% is "traditionally" accepted as a valid number to use - certainly many prefer 3% or less.

If I punch a $1M portfolio and $40K/annual spending for 30 years into FIREcalc, I get a 95% success rate. Increasing to 40 years drops success rate to 86%. This then seems to be "justification" for the 4% SWR number.

When I change the annual spending to $50K (or 5%), the success rates drop to 71% (30 years) and 57% (40 years).

(Note - the above FIREcalc numbers assume "spending power is preserved". When I use Bernicke's spending models, the success rates are, of course, significantly higher.)

My current thinking is to proceed with a 5% SWR. Under the following understanding:
- it is likely to be successful (57-71% range),
- "only" 60% of needed income comes from the portfolio,
- if needed we can downsize our home in the future,
- if needed we can opt for the Bernicke spending model (my assumed spending plan has a a few "luxury" items included which could be reduced/eliminated)

Is the 5% SWR approach just too aggressive? am I overlooking something/anything?

All feedback is much appreciated.

PS - I just finished "The Joy of NOT Working" and highly recommend it. (I found it from other posts on this forum - thanks again!)
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Old 12-16-2012, 03:33 PM   #2
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There was a recent thread here on similar subject. There were links to info that discuss whether the "safe" is too safe. Basically the 4% is for the worst case scenario and you could in theory withdraw more and still survive.

Article on safe withdrawal rates
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Old 12-16-2012, 03:49 PM   #3
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A lot depends on your personal risk tolerance. Take mine as an example. Reading your post made my hair stand on end! I would be a nervous wreck if I was spending 5%, especially at your relatively young ages. I'd rather spend half as much and feel more secure. But then, others do spend 5% and aren't bothered by that at all.
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Old 12-16-2012, 04:21 PM   #4
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It depends. If your willing to take a 30-40% chance that you'll run out of assets and live solely on pensions and SS in your old age then 5% would be fine. I think 4% would be the most I would be comfortable with for a 40+ year time horizon and I think 3.5% or less would be more comfortable.

That said, did you include SS in your Firecalc analysis? Also, since the risk is running out of money late in life, would your success rate improve if you delayed pension start and/or delayed SS until age 70?
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Old 12-16-2012, 08:35 PM   #5
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Make sure your Plan B is good! If you can be very flexible, you can certainly start at 5%. Merriman used to have a white paper showing that withdrawing 4%/year from a diversified portfolio (not adjusted for inflation, just 4% of the portfolio value each year) resulted in higher withdrawals after a few (6?) years than withdrawing 5% a year. 4% let things grow nicely, 5% kind of stunted portfolio growth. So 5% may not really be a good as it seems unless you want more just at the start.

Here's a link to Pfau's blog describing Guyton's approach to taking 5%:

Retirement Researcher Blog: Jonathan Guyton on Combining Dynamic Withdrawals and Dynamic Asset Allocation
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Old 12-17-2012, 06:34 AM   #6
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I would answer 'yes'.

My planned SWR is about 3.5%

Quote:
Originally Posted by Brian99 View Post
Is the 5% SWR approach just too aggressive? am I overlooking something/anything?

All feedback is much appreciated.
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Old 12-17-2012, 06:51 AM   #7
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Only you can answer if 5% is too aggressive. If you both live a very long time you might find yourselves with little income during your final years. Will you see that coming in time to make adjustments to your lifestyle and be able to avoid the really bad outcomes?

"Sell the house" was the plan for a generation and might have worked for some, but if you don't need that much house you are much better off downsizing and converting part of it into portfolio now.
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Old 12-17-2012, 07:08 AM   #8
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Only you can answer if 5% is too aggressive. If you both live a very long time you might find yourselves with little income during your final years. Will you see that coming in time to make adjustments to your lifestyle and be able to avoid the really bad outcomes?

"Sell the house" was the plan for a generation and might have worked for some, but if you don't need that much house you are much better off downsizing and converting part of it into portfolio now.
+1 on the house. I haven't fired yet but I plan on at least cutting my housing expense by moving to a lower cost area or downsizing. All that goes with a high value home is a drag on funds.....taxes, upkeep, utilities, etc. For me it's a no brainer....I expect to only have about 10% - 15% max of my net worth in my home longer term.
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Old 12-17-2012, 07:52 AM   #9
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I would answer 'yes'.

My planned SWR is about 3.5%
Obgyn: I believe you are basically all in CDs and deferred annuities and when you FIRE then will be in annuities. If that is accurate, how do you plan your 3.5 % ??
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Old 12-17-2012, 07:57 AM   #10
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One more vote for being a bit overly agressive at 5%. I would hang in there for a year or two in megacorp and sock away every penny I could (this would also be good pratice for retirement).
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Old 12-17-2012, 08:32 AM   #11
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I've answered this question before, but I'll save you the trouble of doing a search on my previous responses.

I retired in early 2007, DW in March of this year.

Our only "income" comes from a joint SPIA (purchased with qualified funds from my rollover IRA) and our retirement portfolio withdrawls. We will have additional income streams in the future (two small pensions for DW, along with our respective SS income - including my 50% spousal claim in just over a year when DW starts SS, at FRA).

You mentiond that you use FIDO's RIP program. As you know, it contains a year by year forecast of taxes, expenses, income, RMD's, etc. It also shows (in the last column) your forecast withdrawl rate.

Our joint withdrawl rate for the last 5+ years has been above that magic 4%. Are we concerned? Not at all.

Going down the report to age 70 (we're the same age, within a few months), our WD rate drops to 3% - at the time I claim my SS.

I would say for a lot of folks who retire earlier than "normal" (whatever that is) fall into the same situation. Is 4% valid? I don't know, but it's certainly easier to use that as a beginning goal if on day one of your retirement, all income sources start and not be delayed into the future.

The second reason we're above that 4% is our desire to "burn" a good deal of our joint retirement accounts to minimize "excessive RMD's" at age 70.5. What are excessive RMD's? Those are the withdrawls you are required to take by law, but don't need to take to satisfy your retirement income needs at that age.

Sure, you can just take the remainder (after paying taxes) and reinvest, but I look at it as just another thing I have to consider as I (and DW) age. I want financial management to become easier, not harder as I age.

Should we (as a couple, in our personal situation) adhere to that 4% WR come h*ll or high water at our age (mid-60's)? Heck no. We enjoy retirement and spend a lot at this age. Assuming I/we live till our 90's (financial plan is to age 100 - but that's another story), we don't want to have regrets that "we should have, at an earlier age" (even if that earlier age is in our 6th decade ).

Just our way of looking at the question the OP asked...
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Old 12-17-2012, 10:00 AM   #12
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Thanks to EVERYONE for your comments.

Quote:
Originally Posted by rbmrtn View Post
There was a recent thread here on similar subject. There were links to info that discuss whether the "safe" is too safe. Basically the 4% is for the worst case scenario and you could in theory withdraw more and still survive.

Article on safe withdrawal rates

Sorry I had not seen this thread before. VERY interesting. thx.

The dialog/analysis regarding inflation as perhaps more dangerous than stock market fluctuations made me think - how best to hedge against that? Precious metals are the popular play (not in my portfolio presently - should they be?). Real estate also historically tracks very closely to inflation over time -- so maybe keeping a larger home for potential Plan B downsizing is a good approach?


Quote:
Originally Posted by rescueme View Post

Should we (as a couple, in our personal situation) adhere to that 4% WR come h*ll or high water at our age (mid-60's)? Heck no. We enjoy retirement and spend a lot at this age. Assuming I/we live till our 90's (financial plan is to age 100 - but that's another story), we don't want to have regrets that "we should have, at an earlier age" (even if that earlier age is in our 6th decade ).

Just our way of looking at the question the OP asked...

That's somewhat how I feel about it. While much of my career has been very fulfilling - I want to be able to have time and energy to do things while still young enough to really dive in completely. An extra year of freedom in my 50's seems much more valuable than some extra cash in my 80's.

I should also point out that included in my projected 5% SWR are "reserve" accounts -- i.e. money to pay for a new roof, new driveway, bath and kitchen remodels, etc. etc. I ammortized these costs into a monthly/annual number in my budget. These reserves amount to roughly 0.75%. So my actual "current expenses" budget would only consume roughly 4.25% SWR or less. (I don't know how others handle budgeting "reserves").

As someone pointed out, a real key is recognizing quickly if there is going to be a problem and then adjusting promptly. It seems unlikely that a FIREcalc "failure" would happen all at once - evidence should become clear in advance. If there's a catastrophic stock market in the early years of FIRE, then I would clearly have to adjust spending to avoid "failure".

DW has also indicated she would gladly work part-time if necessary to maintain the freedom of spending on small luxury incidentals. So there's that option.

Regarding using the house as a potential Plan B down the road, my initial thinking was that this was NOT a great approach, mostly because even if the value kept pace with inflation, it would not "exceed" inflation and therefore the assets would better placed somewhere where real returns could be earned. But given the inflation potential and the damage it can do, maybe having diversification in real estate makes sense. It would, no doubt, drive maintenance costs higher.

Thanks again!!
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Old 12-17-2012, 11:02 AM   #13
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Obgyn: I believe you are basically all in CDs and deferred annuities and when you FIRE then will be in annuities. If that is accurate, how do you plan your 3.5 % ??
Good question. When I do a fixed income, 40 year run in FIRECALC, I'm coming up with SWRs of 2.2% or less.

-ERD50
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Old 12-17-2012, 12:37 PM   #14
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Hello Richard - you are correct. I am mostly in CDs and this year i have begun to buy deferred annuities.

My planned initial withdrawal is about $85k after tax, which is about SWR = 3 to 3.5% in my case. My spreadsheet shows that I can start with a higher withdrawal, I.e. $100k the first year, if I factor annuities in.

How do you plan your SWR?

Edit 1- I have planned my annual withdrawals in such a way that my monthly checking account balance does not go below zero.

edit 2- I have found that using deferred annuities at an early age (e.g. 45 years) and SPIAs at a much later age (e.g. 80) really increases my annual maximum withdrawal. Again, not everyone will agree.

Quote:
Originally Posted by Richard4444

Obgyn: I believe you are basically all in CDs and deferred annuities and when you FIRE then will be in annuities. If that is accurate, how do you plan your 3.5 % ??
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Old 12-17-2012, 02:36 PM   #15
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Quote:
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Hello Richard - you are correct. I am mostly in CDs and this year i have begun to buy deferred annuities.

My planned initial withdrawal is about $85k after tax, which is about SWR = 3 to 3.5% in my case. My spreadsheet shows that I can start with a higher withdrawal, I.e. $100k the first year, if I factor annuities in.
So, if I understand you correctly ... you will begin with your annuities yielding 3 to 3.5 % and then add annually an inflation amount ? I ask as I am considering SPIAs at 65 or so. My thinking is to have a 'base' from annuities and then add an inflation or similar amount annually from a fund for such purpose as well as any emergencies.
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Old 12-17-2012, 02:57 PM   #16
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My first deferred annuity pays out when I reach 62, in 15 years' time. Payout= 12%, as mentioned in other threads.

My plan includes laddered SPIAs from mid 60 to 90 years, in the unlikely event I reach that age.

The inflation rate I use is low. Again, I am not a financial planner so my plan may be a bit off whack :-)

I like the idea of having a 'base' from annuities.


Quote:
Originally Posted by Richard4444

So, if I understand you correctly ... you will begin with your annuities yielding 3 to 3.5 % and then add annually an inflation amount ? I ask as I am considering SPIAs at 65 or so. My thinking is to have a 'base' from annuities and then add an inflation or similar amount annually from a fund for such purpose as well as any emergencies.
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Old 12-17-2012, 03:25 PM   #17
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Originally Posted by obgyn65 View Post
My first deferred annuity pays out when I reach 62, in 15 years' time. Payout= 12%, as mentioned in other threads.

My plan includes laddered SPIAs from mid 60 to 90 years, in the unlikely event I reach that age.

The inflation rate I use is low. Again, I am not a financial planner so my plan may be a bit off whack :-)

I like the idea of having a 'base' from annuities.
Using a low estimate of future inflation rates is quite risky. Given how conservative you seem to be on the investment side, I'm surprised you'd take the risky route on the budget side.

If your annuities are not COLA'd and you're assuming a low inflation rate, that's a fairly daring position to put yourself into.
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Old 12-17-2012, 03:34 PM   #18
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I agree the approach is risky, but please remember that I will continue to do part time hours at a couple of clinics during my semi-retirement.

I am also ok with reducing my annual expenditures if inflation is too high.

Quote:
Originally Posted by youbet

Using a low estimate of future inflation rates is quite risky. Given how conservative you seem to be on the investment side, I'm surprised you'd take the risky route on the budget side.

If your annuities are not COLA'd and you're assuming a low inflation rate, that's a fairly daring position to put yourself into.
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Old 12-17-2012, 06:35 PM   #19
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...I should also point out that included in my projected 5% SWR are "reserve" accounts -- i.e. money to pay for a new roof, new driveway, bath and kitchen remodels, etc. etc. I ammortized these costs into a monthly/annual number in my budget. These reserves amount to roughly 0.75%. So my actual "current expenses" budget would only consume roughly 4.25% SWR or less. (I don't know how others handle budgeting "reserves")......
I think the more relevant WR is the projected WR once one's pension and SS are on-line. I know my WR from ER to 60 is higher than when I start drawing on my pension and it falls again once I start SS. As long as the projected WR once I start SS is less than 4%, I'm comfortable.

For cars, boats, etc. I simply include depreciation in my projected living expense recognizing that the actual expense will be lumpy compared to what I have provided for.

For more non-routine withdrawals that I expect to occur over the next couple years (DS college, DD's wedding if either of those happen) I just reduce my retirement assets as if I pay for them now and those assets are now gone.
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Old 12-17-2012, 06:44 PM   #20
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I think the more relevant WR is the projected WR once one's pension and SS are on-line. I know my WR from ER to 60 is higher than when I start drawing on my pension and it falls again once I start SS. As long as the projected WR once I start SS is less than 4%, I'm comfortable.
+1

In the four years of retirement prior to SS kicking in our WR averaged 7+%. Now that both DW and I are drawing SS it has dropped to under 4%.
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