Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 12-23-2015, 03:22 PM   #41
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,428
JP, the withdrawals increase with inflation because it is presumed that living expenses increase with inflation. As an example, let's say someone had $1 million and a 4% WR so in the first year they are withdrawing $40k. If we assume inflation is 2.5%, they would withdraw $41k the second year, $42k the third year, etc.

The percentage is only really measured at inception (retirement) and could be more or less depending on how the portfolio does.... in most cases the % will actually decline if the return on the portfolio is more than the initial WR. For example, if in year 1 the portfolio returns 5%, then the second year withdrawal will be less than 4% of the portfolio balance.

I think many of us just withdraw what we need to live on. I haven't needed to increase my withdrawals for inflation since I retired, but we have dipped into our nestegg for some big items like a new garage.
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-23-2015, 03:47 PM   #42
Recycles dryer sheets
 
Join Date: Mar 2011
Posts: 64
Pb4uski. So the typical 4% rule everyone talks about assumes an annual increase in the withdrawal percentage based on the inflation rate. I didn't know this. Like you, we will try to live on the withdrawal rate we start with, and increase it if necessary. Take care. JP
__________________

__________________
JP.mpls is offline   Reply With Quote
Old 12-23-2015, 03:55 PM   #43
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,428
The increase is to the withdrawal percentage but the withdrawal percentage is applied to the initial $1 million balance (not the current balance).

So if the first withdrawal was 4% and inflation was 2.5%, then the second year's withdrawal is 4.1% (4% * (1+2.5%)^1) of $1 million and the third year withdrawal is 4.2% (4% * (1+2.5%)^2) of $1 million.

Mind you, very few people follow it this rigidly... it is more a rule of thumb. If experience was adverse most of us would tighten our belts and reduce our withdrawals and conversely, if experience is good, then we might splurge a little more which would increase withdrawals.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 12-23-2015, 07:33 PM   #44
Recycles dryer sheets
 
Join Date: Nov 2014
Posts: 381
Even if you do the inflation increase per year, it's probably better to use your own personal inflation rate based on your own spending. Another thing to remember is that most studies assume that you withdraw the entire year's spending all at once, adjusted for the previous year's inflation. But inflation happens all throughout the year - meaning you need to also have a buffer for that.


Sent from my iPad using Early Retirement Forum
__________________
big-papa is offline   Reply With Quote
Old 12-23-2015, 10:43 PM   #45
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
Quote:
Originally Posted by JP.mpls View Post
Pb4uski. So the typical 4% rule everyone talks about assumes an annual increase in the withdrawal percentage based on the inflation rate. I didn't know this. Like you, we will try to live on the withdrawal rate we start with, and increase it if necessary. Take care. JP
As Pb4uski mentions, very few people stick with a hard 4% and just adjust it for inflation. There's a lot to be said for using a withdrawal calculation method that uses the year-end balance of your accounts, or some smoothed average of that. This helps your portfolio survive dips in value and it also can significantly increase the amount you can spend. For more on this, see this post.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Old 12-24-2015, 02:38 AM   #46
Full time employment: Posting here.
old woman's Avatar
 
Join Date: Dec 2005
Posts: 551
I do it all wrong. I retired 2 years ago and just take money when I want it. I am taking my dividend this month because I ran out of money so will fill up checking, then live on that until it runs out then sell an investment if I want more money.
I live pretty cheap mostly and get SS so might spend down a few hundred a month and a few thousand for property taxes but this year drew out enough for a new roof and some cash gifts so about 5% total, next year maybe 2-3% withdrawal and the next year maybe 1-2% since I will finish up the cash gifts in 3 years I can live on just SS so my investments are only for extras after that I think I will end up taking 2% plus inflation and might still double my money before I die, that is why I am doing the cash gifts to set up the younger generations.
__________________
old woman is offline   Reply With Quote
Old 12-24-2015, 07:28 AM   #47
Recycles dryer sheets
 
Join Date: Nov 2014
Posts: 381
There are so many systematic withdrawal methods out there, but they do fall into two major categories.
Fixed amount each year (adjusted for inflation)
Variable amount (% withdrawn may be fixed or increasing over time like VPW, but whether the withdrawals keep up with inflation is totally dependent on your portfolio's returns)
And of course you can create a hybrid between the two major categories.

In the variable category, there are many methods out there to smooth year-to-year withdrawals. For example: Scott Burns and others have mentioned taking some fixed percentage of your portfolio out each year OR 90% of the previous year's withdrawal, whichever is largest. The 90% (or whatever % you're comfortable with) limits how far your annual withdrawals can drop relative to the previous year's withdrawal during a down market.

Back to the 4% "rule", the studies show that over history most of the time you could have withdrawn more than 4% - meaning that most of the time in history, you'll croak leaving a large sum behind. Fine if you want to leave some behind. Not so fine if you wished you could have used that during retirement.

Enter several methods that help you take advantage if you didn't happen to retire at the worst time in history.
1. Kitces Ratcheting described here: https://www.kitces.com/blog/the-ratc...of-the-4-rule/
Shows you a method to increase your withdrawals over time (beyond inflation) if your portfolio is still continuing to grow after several years of withdrawals.
2. And oldy but goody and one of my favorites: Gummy's sensible withdrawals described here: sensible withdrawals
If you can live on less than the amount described in the 4% rule, this is a method that allows you to withdraw some percentage of the extra returns during years when your portfolio has grown even after taking your withdrawal and inflation into account. I tend to like it because it's sort of like a bonus at work. You (your portfolio) does well, you get a bonus, otherwise, no bonus. I also like it because, statistically, when a bonus happens, it tends to happen earlier in retirement instead of later - meaning that you might have bonuses earlier in retirement when you still want to travel, etc.

As mentioned, the systematic withdrawal methods are endless and one-size definitely does not fit all.
__________________
big-papa is offline   Reply With Quote
Old 12-24-2015, 08:14 AM   #48
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,428
Quote:
Originally Posted by old woman View Post
I do it all wrong. I retired 2 years ago and just take money when I want it. ...
We are sort of that way... I have my monthly "paycheck" withdrawal from the cash part of our retirement nestegg and we take more if we need to. I focus more on our spending being within a WR range based on our spending needs and our portfolio as if I retired today, which effectively ratchets up allowable withdrawal amounts if there is a sustained period of favorable investment performance and increases allowable withdrawals only for inflation if there is a sustained period of unfavorable investment performance.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 12-24-2015, 10:13 AM   #49
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
No matter which withdrawal. Method one chooses, I think after retirement it would be very useful to keep a historic track of one's real portfolio value (or its value in present-year dollars and another line for the value at retirement adjusted each year for inflation). That lets you know if you are gaining ground or losing ground.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Old 12-24-2015, 12:14 PM   #50
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Quote:
Originally Posted by samclem View Post
No matter which withdrawal. Method one chooses, I think after retirement it would be very useful to keep a historic track of one's real portfolio value (or its value in present-year dollars and another line for the value at retirement adjusted each year for inflation). That lets you know if you are gaining ground or losing ground.
We sort of do a rough test by seeing tracking our inflation adjusted net worth. If it stays above the initial value adjusted for inflation, we're doing great. But things can easily be knocked down hard by a market sell off. After 2008 it took 5 years to get back to even when taking into account inflation.

Now we're running about 16% ahead of inflation which is a nice cushion. I take comfort from that when I am withdrawing from a portfolio that is smaller than it was a year ago. In 2015 (at least so far) the portfolio didn't grow enough to recover from my last withdrawal. It's flat to slightly negative this year, which means we're taking a small pay cut compared to last year, and a second withdrawal from a portfolio that didn't grow.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 12-24-2015, 12:45 PM   #51
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,412
this is our first year in retirement with a portfolio that really didn't grow . basically flat return wise .

we are about 100k less then last year in value after spending down but in the scheme of things that does not spell much of a cut for 2016 . we use bob clyatts dynamic method .
__________________
mathjak107 is offline   Reply With Quote
Old 12-24-2015, 01:15 PM   #52
Recycles dryer sheets
 
Join Date: Nov 2014
Posts: 381
Quote:
Originally Posted by mathjak107 View Post
this is our first year in retirement with a portfolio that really didn't grow . basically flat return wise .

we are about 100k less then last year in value after spending down but in the scheme of things that does not spell much of a cut for 2016 . we use bob clyatts dynamic method .
Yup, Clyatt's dynamic method and the method Scott Burns published a couple of years ago are essentially the same algorithm. I think Burns suggested 6%/90% whereas Clyatt suggested 4%/95%.

The idea is the same: withdraw a fixed % of your portfolio without regard for inflation. Mathematically, that can never run out of money (though it could theoretically become infinitely small). Then add the 90 or 95% of the previous year's withdrawal portion of the algorithm so you don't have to take a huge cut in spending in a bad market. In other words spending can increase by whatever % your portfolio increases, but it can never decrease by more than 90% (Burns) or 95% (Clyatt's) of the previous year's withdrawal.

I backtested this a couple of years ago and it does work. However, for a retirement that started in the late 1960's, because of the combination of a bear market and high inflation, it took quite a number of years before the spending power of your withdrawals caught back up to the first year's withdrawal. The lowest single year's withdrawal (measured against inflation) was also pretty low. That's the price to pay for a method that can almost literally last forever.

You can mitigate that somewhat Instead of using 95% of the previous year's withdrawal, use 95% of the previous year's withdrawal, adjusted for inflation. So the 95% becomes variable.

My recollection is that it's somewhat whack-a-mole in that there's a tradeoff between the lowest withdrawal (measured against inflation) and the amount of time it takes for your withdrawals to get back to where they were the first year.
__________________
big-papa is offline   Reply With Quote
Old 12-24-2015, 01:32 PM   #53
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,428
I'm 17.5% ahead of when I retired 4 years ago... even after 4 years of living expenses and spending on almost $50k on a new garage so not much calculating for me to do.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 12-24-2015, 01:59 PM   #54
Thinks s/he gets paid by the post
 
Join Date: May 2008
Posts: 2,259
Quote:
Originally Posted by audreyh1 View Post

Now we're running about 16% ahead of inflation which is a nice cushion. I take comfort from that when I am withdrawing from a portfolio that is smaller than it was a year ago. In 2015 (at least so far) the portfolio didn't grow enough to recover from my last withdrawal. It's flat to slightly negative this year, which means we're taking a small pay cut compared to last year, and a second withdrawal from a portfolio that didn't grow.
Which month do you look at when you do this if you withdrew money on January 1st? I look at my Network on Mint, and the amount varies by almost 5% in one area although if I pick Dec 14 to Dec 15, there is not much change (before I add in the inflation). And how do you calculate the inflation? Do you just look at the average CPI for the year? Thank you!
__________________
tmm99 is offline   Reply With Quote
Old 12-24-2015, 03:18 PM   #55
Recycles dryer sheets
 
Join Date: Nov 2014
Posts: 381
Quote:
Originally Posted by tmm99 View Post
Which month do you look at when you do this if you withdrew money on January 1st? I look at my Network on Mint, and the amount varies by almost 5% in one area although if I pick Dec 14 to Dec 15, there is not much change (before I add in the inflation). And how do you calculate the inflation? Do you just look at the average CPI for the year? Thank you!
For backtesting most use CPI because it's available. However, if you're actually in retirement, why not use your own personal rate of inflation? How much did baseline expenses increase for you, personally, over the previous year?
__________________
big-papa is offline   Reply With Quote
Old 12-24-2015, 04:39 PM   #56
Thinks s/he gets paid by the post
 
Join Date: May 2008
Posts: 2,259
Quote:
Originally Posted by big-papa View Post
For backtesting most use CPI because it's available. However, if you're actually in retirement, why not use your own personal rate of inflation? How much did baseline expenses increase for you, personally, over the previous year?
Thank you. I have only been FIREd for half a year, so I cannot say how it will increase yet, but what you suggest sounds like a good idea - to use it as a main method or as a supplemental method to CPI or some other methods. I am not sure if that should be my main method since I have a tendency to try to meet self-imposed targets, so I might end up reducing my spending to meet my forecasted expense target even if it's painful.
__________________
tmm99 is offline   Reply With Quote
Old 12-24-2015, 05:06 PM   #57
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Quote:
Originally Posted by tmm99 View Post
Which month do you look at when you do this if you withdrew money on January 1st? I look at my Network on Mint, and the amount varies by almost 5% in one area although if I pick Dec 14 to Dec 15, there is not much change (before I add in the inflation). And how do you calculate the inflation? Do you just look at the average CPI for the year? Thank you!
I look at it monthly if I care to, although I usually only check a few times a year, or if things seem to have hit a new high .

Inflationdata.com lets you calculate the inflation over several months and years - that's what I use. They have updated info soon after the CPI for the prior month is released - usually later that afternoon.

So granularity is monthly.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 12-24-2015, 07:39 PM   #58
Thinks s/he gets paid by the post
 
Join Date: May 2008
Posts: 2,259
Quote:
Originally Posted by audreyh1 View Post
I look at it monthly if I care to, although I usually only check a few times a year, or if things seem to have hit a new high .

Inflationdata.com lets you calculate the inflation over several months and years - that's what I use. They have updated info soon after the CPI for the prior year is released - usually later that afternoon.

So granularity is monthly.
Thank you, Audreyh1 for your comment and the link.

So, are you saying (if "you look at it monthly"), you check your real return each month (from the month before) and adjust your monthly withdrawal accordingly? And do you take the money out of cash or from shares that have gained? I am just trying to make sure I understand. (I have just recently started the withdrawal phase and I haven't come up with any good ways yet so I am currently spending money out of my cash reserves.) Thanks.
__________________
tmm99 is offline   Reply With Quote
Old 12-24-2015, 07:49 PM   #59
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
No, I don't make any withdrawal adjustments based on inflation. My withdrawal is annually, in Jan, and it is a fixed percent of the portfolio value on Dec 31 of the prior year. I ignore inflation in my withdrawal calc.

My withdrawal is usually all in cash, although occasionally I may take some in securities. After I take the withdrawal I rebalance the remaining portfolio.

My inflation adjusted net worth is measured from Jan 1, 2000, a few months after I retired. So I am looking back almost 16 years now. Jan 1 2000 is a tough compare because everything was at a multi year peak.

I just use it as a rough "how a I doing" measure, and as of yet haven't taken any measures based on the results.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 12-24-2015, 09:04 PM   #60
Thinks s/he gets paid by the post
 
Join Date: May 2008
Posts: 2,259
Quote:
Originally Posted by audreyh1 View Post
No, I don't make any withdrawal adjustments based on inflation. My withdrawal is annually, in Jan, and it is a fixed percent of the portfolio value on Dec 31 of the prior year. I ignore inflation in my withdrawal calc.

My withdrawal is usually all in cash, although occasionally I may take some in securities. After I take the withdrawal I rebalance the remaining portfolio.

My inflation adjusted net worth is measured from Jan 1, 2000, a few months after I retired. So I am looking back almost 16 years now. Jan 1 2000 is a tough compare because everything was at a multi year peak.

I just use it as a rough "how a I doing" measure, and as of yet haven't taken any measures based on the results.
Got you. Thanks. I cannot remember if I read it on this thread or somewhere else, but I read that some people were doing withdrawals based on real return rate, and for some unknown reason, I thought you were doing that too; hence the questions. My bad.
__________________

__________________
tmm99 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Basic 401(a) withdrawal question BigNick FIRE and Money 12 03-05-2015 06:41 AM
Basic numbers for a successful retirement. nun FIRE and Money 12 11-04-2011 06:31 PM
Poll: What is your basic income need (floor) in retirement? chinaco FIRE and Money 226 01-31-2011 07:06 AM
Review: Society of Actuaries' retirement publications Htown Harry FIRE and Money 6 10-10-2010 07:07 AM
Effective withdrawal stratagies kbst FIRE and Money 6 03-17-2006 12:54 PM

 

 
All times are GMT -6. The time now is 02:33 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.