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A quick, basic question ... definition of WR
Old 02-22-2017, 01:06 PM   #1
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A quick, basic question ... definition of WR

The "safe withdrawal rate" is a key parameter in retirement. 3 or 4 percent is often cited as OK. A couple definition questions:

Is the WR a constant dollar value based on X% of the initial balance?

If so, should one inflation adjust the dollar number, so that in Y years, assuming inflation, you will be withdrawing more dollars than at the beginning?

Or is it a straight percentage of whatever the current balance happens to be?

Or is it something else?

Thanks in advance, Jeff
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Old 02-22-2017, 01:14 PM   #2
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While how people commonly define it here differs, technically it is a % of the initial balance, with the withdrawal adjusted each year for inflation.

So if the initial balance is $1 million, the WR is 3.5% and inflation is 2% the first year withdrawal would $35,000, the second year withdrawal would be $35,700, the third year would be $36,414, etc.

The formula for a given year's withdrawal is IB*WR*(1+i)^(n-1) where IB is initial balance, WR is withdrawal rate, i is inflation rate and n is withdrawal year.

First year.... $1,000,000 * 3.5% * (1+2%)^(1-1) = $35,000
Second year.$1,000,000 * 3.5% * (1+2%)^(2-1) = $35,700
Third year....$1,000,000 * 3.5% * (1+2%)^(3-1) = $36,414

Above assumes that inflation is constant
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Old 02-22-2017, 01:24 PM   #3
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Thanks, that's a clear and useful answer. I wonder if anyone adopts the strategy of limiting withdrawals to, say 4% of the current balance, whatever that is? That of course requires 'trimming the sails' in a market downturn, but maybe that's not a bad idea. Even more conservative would be to do the above, but cap the max withdrawal to 4% of original balance if the market happens to skyrocket one year.

Quote:
Originally Posted by pb4uski View Post
While how people commonly define it here differs, technically it is a % of the initial balance, with the withdrawal adjusted each year for inflation.

So if the initial balance is $1 million, the WR is 3.5% and inflation is 2% the first year withdrawal would $35,000, the second year withdrawal would be $35,700, the third year would be $36,414, etc.

The formula for a given year's withdrawal is IB*WR*(1+i)^(n-1) where IB is initial balance, WR is withdrawal rate, i is inflation rate and n is withdrawal year.

First year.... $1,000,000 * 3.5% * (1+2%)^(1-1) = $35,000
Second year.$1,000,000 * 3.5% * (1+2%)^(2-1) = $35,700
Third year....$1,000,000 * 3.5% * (1+2%)^(3-1) = $36,414

Above assumes that inflation is constant
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Old 02-22-2017, 01:24 PM   #4
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The way I plan to calculate withdrawal rate for future years is to use either the current balance as if you're just starting withdrawals OR the initial balance adjusted for inflation, whichever is larger using the same % drawdown (i.e. whatever you originally decided was a SWR for you). The latter is more conservative but swapping for the former when applicable is "just as conservative as you were when you started out" so should provide adequate comfort with the withdrawal rate while maximizing your spending ability.
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Old 02-22-2017, 01:33 PM   #5
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Originally Posted by JeffInSeattle View Post
Thanks, that's a clear and useful answer. I wonder if anyone adopts the strategy of limiting withdrawals to, say 4% of the current balance, whatever that is?
Yes, they do - it is called a Variable Withdrawal Rate, which you can search for here or Google to get lots of information on it.
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Old 02-22-2017, 03:07 PM   #6
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The WR as defined above, a set % of portfolio adjusted upwards by an assumed inflation, is helpful in PLANNING your retirement- running analysis to determine what are your odds you can achieve that particular WR.

As a practical matter, I don't tie myself to a budget defined by the successful WR I achieved 4 years ago when I retired. I do however, re-run analysis to open up new options, such as spending more or investing less aggressively given the up markets of the last four years, while still achieving a successful WR analysis.
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Old 02-22-2017, 03:09 PM   #7
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+1... I withdraw what we need to live on and periodically evaluate whether we continue to "have enough" based on current conditions.
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Old 02-22-2017, 04:51 PM   #8
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The "safe withdrawal rate" is a key parameter in retirement.
Not necessarily. My 'means' is my annual income; portfolio value is irrelevant to me (but is of concern to the people & charities that will inherit my assets - not my problem).

I'm still waiting to be excommunicated from this board for failing to worship FIREcalc.
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Old 02-22-2017, 05:01 PM   #9
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Old 02-22-2017, 05:21 PM   #10
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+1... I withdraw what we need to live on and periodically evaluate whether we continue to "have enough" based on current conditions.
Yup! That's how I do it too. I only used the so-called "4% rule" (or whatever it has now morphed into) to calculate how much I would NEED in my nest egg. Withdrawing from the nest egg has been much less precise and at most, I look back and determine what my withdrawal rate WAS for the previous year. YMMV
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Old 02-22-2017, 05:23 PM   #11
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+1
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Old 02-22-2017, 05:44 PM   #12
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Not necessarily. My 'means' is my annual income; portfolio value is irrelevant to me (but is of concern to the people & charities that will inherit my assets - not my problem).

I'm still waiting to be excommunicated from this board for failing to worship FIREcalc.
It seems to me that, barring a guaranteed income stream (pension etc) that completely covers spending, a person's available income in retirement is directly related to their portfolio value. If your portfolio value was $0, then the "means" it supplies would be $0 also.
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