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Old 12-24-2015, 09:25 PM   #61
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Old 12-25-2015, 08:20 AM   #62
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Originally Posted by tmm99 View Post
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.
There are many ways to approach this. If you like targets, then perhaps systematic withdrawal methods might be better for you. In those cases, the only inflation that matters is the inflation that applies to you, personally. Now, you might want to separate your expenses between basic expenses (like utilities, mortgage, insurance, food) and discretion (travel, gifts, etc) and think of the inflation adjusted part as applying only to the basic expenses, for example. That's not to say that you shouldn't shop around for the best deals in those areas (where you can) or move your thermostat setting, etc. But there is a limit even there and you're basically changing the baseline - those items will still be subject to inflation but the point is, each of those expenses have their own price changes over the years. That is, the official CPI is an aggregate of many things, so if you don't purchase those things in the same proportions used by the reported CPI, you're not getting an accurate reading of how your own cost of living is changing. Tracking is the key here.

As noted by many others, however, non-systematic methods work just as well if you're willing (and able) to dynamically adjust your spending during down markets. That becomes tolerable for many if the fixed portion of their income (SS and/or a pension) can supply much of the funds needed for life. Or if your nestegg is big enough that even a small percentage withdrawn per year can still support your basic spending needs.
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Old 12-25-2015, 09:11 AM   #63
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There are many ways to approach this. If you like targets, then perhaps systematic withdrawal methods might be better for you. In those cases, the only inflation that matters is the inflation that applies to you, personally. Now, you might want to separate your expenses between basic expenses (like utilities, mortgage, insurance, food) and discretion (travel, gifts, etc) and think of the inflation adjusted part as applying only to the basic expenses, for example. That's not to say that you shouldn't shop around for the best deals in those areas (where you can) or move your thermostat setting, etc. But there is a limit even there and you're basically changing the baseline - those items will still be subject to inflation but the point is, each of those expenses have their own price changes over the years. That is, the official CPI is an aggregate of many things, so if you don't purchase those things in the same proportions used by the reported CPI, you're not getting an accurate reading of how your own cost of living is changing. Tracking is the key here.

As noted by many others, however, non-systematic methods work just as well if you're willing (and able) to dynamically adjust your spending during down markets. That becomes tolerable for many if the fixed portion of their income (SS and/or a pension) can supply much of the funds needed for life. Or if your nestegg is big enough that even a small percentage withdrawn per year can still support your basic spending needs.
Thank you very much for your thoughtful comments. I would like to adjust my spending according to the health of the market especially during the down markets. And what you say about CPI makes sense that only portions of it applies ot each individual (in our case, the low gas prices do not affect us as much since we only drive a few thousand miles per year.)

I am in the process of deciding the WR strategy. I recently moved to Canada and I currently have 6% CAD and the rest in USD. (3% CAD stocks and 3% cash) The expense level I set up in the US is what I am using here (with the assumption USD:CAD is 1:1) and it has been working OK so far without having to raise the numbers (although most things are more expensive here if you looked it as if USD:CAD were 1:1). For example, I would be able to get boneless chicken breast for $1.99/lb in the US on sale, but over here, the cheapest I could ever get chicken breast is $2.99/lb Lots of things are imported from the US and they are all more expensive. Sales tax being 13% doesn't help either.) My WR with my set budget is now looking like 2.6% WR instead of 3.5% due to the strong USD and I am very happy about that. (This could change to the other way around in a few years though although and that's why I am sticking with the USD level budget instead of spending the CAD equivalent...)

Anyway, my plan is to move some of my USD asset to CAD very very slowly (70% of my asset is in tax deferred so even if the exchange rate is favorable, I don't want to take a lot out at once.) How do you think I should look at inflation? Inflation rates are different between two countries, but most of my money is in the US so I imagine I should follow the inflation rate in the US?
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Old 12-25-2015, 10:41 AM   #64
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I wouldn't use personal inflation because all of the models like the Bengan are based on the CPI. So how can one choose a safe withdrawal rate based on personal inflation?

I chose to avoid the whole inflation adjusted withdrawals because I would rather track portfolio performance. That's why I do a fixed percent of portfolio on Dec 31 each year. Currently I am using 3.5%.

I figure over long periods of time my portfolio should keep up with or beat inflation since I have >50% in equities. But in the short term it may fall behind for several years, and so will my income. But when the portfolio zooms ahead, I get to increase my withdrawal.
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Old 12-25-2015, 10:44 AM   #65
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tracking the cpi is worthless . none of our lives track that hypotetical basket of things .

one of the reasons counting on tips is a poor idea is you may come up way short using a cpi index vs reality . the cpi is only a price index it is not a true cost of living index .

like audry i prefer a dynamic withdrawal rate based on an inflation adjusted balance each year in real time .
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Old 12-25-2015, 11:28 AM   #66
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So how can one choose a safe withdrawal rate based on personal inflation?
And personal inflation for many/most people would be so noisy/erratic as to be very hard to use. One year you have big medical bills, the next year you take a big vacation, then the following year the house needs a new roof.

I will take my withdrawal amounts based on the year-end balance of my portfolio. I'm dependent on our investments and their growth to support my spending long term, and those investments don't "know" or care what inflation has been. But tracking the value of our portfolio against general inflation over the long term provides a good check on whether we are slowly losing (or gaining) altitude and therefore need to adjust our spending.
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Old 12-25-2015, 11:55 AM   #67
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I want to again thank everyone for their comments.


Samclem:
I planned on rebalancing my allocation, but the Kitces article really emphasized the importance of doing this. Thanks for posting it.
Fritz:
You are giving me confidence that our similar withdrawal strategies have been working out well for you over the last 6 years
. Thanks.
LOL:
I suspect using bonds instead of 2 years of cash is a logical approach. I psychologically like the idea of having a cash supply to withdraw from. Your idea makes putting everything into a 60/40 balance index fund at Vanguard and letting it ride very tempting.


I have two more comments/questions:
- I'm going to show my ignorance here. My retirement budget takes into account medical costs, and taxes to cover the money that will be withdrawn from IRA/401K accounts. While reading everyone's comments I started to realize that I'm not taking inflation into account. Am I supposed to consider increasing the withdrawal percentage as we go along? I certainly haven't planned for that, and it has me very concerned.


- I crunched our numbers a few more times, and came to the following conclusion: A 4% withdrawal rate gives us a very generous monthly amount to live on. In reality we can easily live on something closer to 3%, in fact we are living on something close to the 3% rate. If we plan on this lower 3% withdrawal rate, that leaves us with a nice big slush fund for extra expenditures (car replacement, home repairs, vacations). I realize that I'm just playing mind games with the numbers, but I like the lower withdrawal rate plan better. Any comments on this idea?

Thanks. JP
Our current withdrawals are only from our taxable accounts, and Roth accounts - a source of tax-free income not subject to ACA income criteria. We take dividends from Taxable and Roth accounts, and capital gains from Taxable (when needed). IRAs will hopefully be converted (as much as possible) to Roth accounts between 65 and 70.5 B4 RMDs start.

From 58 to 62 - we pulled from a savings account set aside specifically for that time frame, along with taxable account Divs. As mentioned, at 62 we both started Social Security (special set aside savings was depleted). Wife's SS is not considered as used to cover base living expenses, as it goes away when one of us does (we consider it a source of discretionary spending funds). Starting my SS @ 62 allows us to pull just 1.25% withdrawal rate from investments off Taxable and Roth accounts (divs only) to cover our base living expenses. Keep two years of that amount in a 1% APR savings account to eliminate using Divs/CGs if the market should slump. Also gives us a spending account for large purchases (car, home improvements, unusual medical expenses, and gifts to family). All of those uses have happened over our 6 yrs of retirement (and some of them have their own time frame demands). We take taxable account year end capital gains to replenished 1% APR savings account (added Roth CGs one year with unusually high medical expenses).

Above is to give you a better understanding of our withdrawal strategy - given my earlier posting comparing how similar our retirement strategies were.

I would suggest that you consider setting a budget of base living expenses w/o any discretionary spending (extras like new cars, travel, home improvements, etc). We track base living expenses on a single page excel spreadsheet - divided into those we can't control and those we can. Keep this simple or you might not be inclined to keep it up properly. If you learn to live within this base living expenses budget for everyday retirement, you'll accomplish a couple of positive things. You'll find that you'll always have a source of extra funds that have accumulated for desired discretionary spending. Your retirement savings will not be significantly dented for base living expenses in your early years of retirement (only if you decide on discretionary spending). I would say your thoughts about lowering withdrawal rate for your base retirement expenses, and holding it for future discretionary spending is "right on the money" (has worked well for us).
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Old 12-25-2015, 01:40 PM   #68
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I don't think it's possible to calculate a "personal inflation rate".

To do that, I'd have to buy exactly the same items over time - same brand, same size.
Then, I'd have to track every expenditure at that level.
Even if I always buy 10-packs of Quaker Instant Oatmeal, I still find that the price varies. Sometimes $2.50, sometimes $2.00, sometimes 3 for $7.00.
And, I'd have to normalize my market basket so I "buy" exactly the same quantities of exactly the same items year-over-year.

But, there are items that I don't buy frequently enough to make that work. A new computer, a winter jacket, running shoes, house paint. How do I adjust for different brands and probably different qualities.

Sure, I could probably estimate my personal inflation rate accurate within -15% to +15%, but the CPI is probably a better estimator.
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Old 12-25-2015, 01:49 PM   #69
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You could always break down your yearly expenses into categories and then match them to BLS numbers to get your personal rate.

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Old 12-25-2015, 02:00 PM   #70
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Originally Posted by audreyh1 View Post
I wouldn't use personal inflation because all of the models like the Bengan are based on the CPI. So how can one choose a safe withdrawal rate based on personal inflation?

I chose to avoid the whole inflation adjusted withdrawals because I would rather track portfolio performance. That's why I do a fixed percent of portfolio on Dec 31 each year. Currently I am using 3.5%.

I figure over long periods of time my portfolio should keep up with or beat inflation since I have >50% in equities. But in the short term it may fall behind for several years, and so will my income. But when the portfolio zooms ahead, I get to increase my withdrawal.
This is exactly my plan 3.5% fixed percent of portfolio. I am only 20 months in, so am very interested in your experience, as 2000 was not the best time to retire, your success is an inspiration. Have you been using this withdrawal method since you first retired 15 years ago, or have you modified it along the way?
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Old 12-25-2015, 06:40 PM   #71
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You could always break down your yearly expenses into categories and then match them to BLS numbers to get your personal rate.

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Yes, that's a more practical approach. I wonder how much difference it would make.
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Old 12-25-2015, 07:40 PM   #72
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This is exactly my plan 3.5% fixed percent of portfolio. I am only 20 months in, so am very interested in your experience, as 2000 was not the best time to retire, your success is an inspiration. Have you been using this withdrawal method since you first retired 15 years ago, or have you modified it along the way?
No, actually, I had other investments that I managed to live off of and didn't start withdrawing from the retirement portfolio until 2013. Also, the first two years I used 3.3%, then when I reached 55 I decided to go up to 3.5%. But those rates aren't including our IRAs yet. If I include those the rate is like 3%.

I retired really early, 39, so I set aside what I considered to be "enough" for a long term retirement portfolio, but I didn't want to tap into it right away, preferring to let it grow for at least 10 years. Managed to last 13.

That's why I use inflation adjusted total net worth over all those years to track how I did, since the retirement portfolio is a subset of all our investments, and we've only been drawing from it for a few years.

So, I'm not sure if I am a good model, although the other investments were actually riskier. Most of those years I was drawing down company stock. If it had ever gone to zero, or dropped really low, I would have switched to the retirement portfolio. Fortunately that didn't happen.

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Old 12-26-2015, 09:55 AM   #73
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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.
But those 4 years were pretty good ones.
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Old 12-26-2015, 11:10 AM   #74
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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.
I agree, the numbers currently look great but adjusting for inflation is critical. Otherwise we are just fooling ourselves.

Retired partially in 2003 and fully in 2005. SS taken in 2012. This year the bar will be slightly down, about where it was in 2013. You can see my bar chart below which is updated yearly (Y-axis clipped off intentionally).

I think of VPW as the upper spending limit. This year we are allowed 4.5% from the portfolio but will come in at about 3.5%. We did spend a lot but SS helps.

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Old 12-26-2015, 11:14 AM   #75
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But those 4 years were pretty good ones.
I agree... I definitely retired at the right time.
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Old 12-26-2015, 11:26 AM   #76
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I agree, the numbers currently look great but adjusting for inflation is critical. Otherwise we are just fooling ourselves.


+1

I found this calculator which gives the total inflation rate over a date range:

InflationData.com's Cumulative Inflation Calculator
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Old 12-26-2015, 11:46 AM   #77
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This is exactly my plan 3.5% fixed percent of portfolio. I am only 20 months in, so am very interested in your experience, as 2000 was not the best time to retire, your success is an inspiration.
I agree -- to me, Audreyh1's financial choices in retirement have been both sensible and inspirational, to me, anyway.

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Have you been using this withdrawal method since you first retired 15 years ago, or have you modified it along the way?
I retired in 2009, and this is my 7th year of retirement. My initial plan was to withdraw 3.5% fixed percent of my portfolio as of 12/31 each year. I have been spending a bit less because that is all that I want/need, and returning the excess to my portfolio.

Back in 2009, for all I knew the market would plummet further and if it had, I would have needed 3.5%. But it didn't crash.

All is good and when the next market crash happens, I plan to address it by any or all of the following:

(1) tightening my belt
(2) spending the entire 3.5%
(3) adding cash from my cash reserves if need be.

(edited to add: My cash heavy, 45% equity portfolio is 18% higher than it was when I retired, despite the expenses related to buying my dream house in cash, selling my paid off but less expensive old house, and moving, so that is what I mean by "All is good" above. I thank Mr. Market for that.)
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Old 12-26-2015, 12:22 PM   #78
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I wouldn't use personal inflation because all of the models like the Bengan are based on the CPI. So how can one choose a safe withdrawal rate based on personal inflation?

I chose to avoid the whole inflation adjusted withdrawals because I would rather track portfolio performance. That's why I do a fixed percent of portfolio on Dec 31 each year. Currently I am using 3.5%.

I figure over long periods of time my portfolio should keep up with or beat inflation since I have >50% in equities. But in the short term it may fall behind for several years, and so will my income. But when the portfolio zooms ahead, I get to increase my withdrawal.
I agree if you're withdrawing using a variable method based on portfolio performance. You're already ignoring inflation in the withdrawals, though you still might want to check on what the "effective" withdrawals are relative to inflation over the years. But if you're not participating in the entire breadbasket of items in the same proportions that go into the CPI, then the only thing that matters is what you're spending money you're money on and how much it has increased over the years. On the other hand, basing the calculation on the reported CPI pretty darned easy.
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Old 12-26-2015, 12:32 PM   #79
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I agree -- to me, Audreyh1's financial choices in retirement have been both sensible and inspirational, to me, anyway.
You ladies seem to have missed out on the testosterone fueled market planning. Helps me to hear your views and pull back from unnecessary risks.
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...Back in 2009, for all I knew the market would plummet further and if it had, I would have needed 3.5%. But it didn't crash.
Well, it felt like enough of a crash to me. But I have to agree, the path in the 1930's was similar to the 2008 to March 2009 path, but just kept going down ... and down ... and down.

Quote:
All is good and when the next market crash happens, I plan to address it by any or all of the following:

(1) tightening my belt
(2) spending the entire 3.5%
(3) adding cash from my cash reserves if need be.
...
Are (1) and (2) consistent?

I know we would spend less then 3.5% in a badly down market. But I'd try not to reduce too much. These years are precious now and I don't want to miss the fun. Plus bargains abound when times are rougher. We could reduce spending fairly easily to 2% of the portfolio and still live very nicely with a modest vacation or two. Even 1% is possible and still able to eat out and buy some stuff.

My plan in a really bad market is to spend from FI and let the stocks recover. I will not rebalance until a reasonable uptrend is established. I have my own way of measuring an uptrend so it's not just a "feeling".
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Old 12-26-2015, 12:39 PM   #80
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Yes this is easy for me to say because my withdrawal strategy is my monthly pension and what I don't spend gets invested. Completely the opposite strategy faced here. But I do enjoy reading these threads, and respect all who are facing this. My useless opinion is based on anecdotal evidence of a dozen or so friends and relatives who are in their 80s nearing the finish line.
None of them even know what a withdrawal strategy is. The closest they have is complaining about the government forcing them to liquidate a part of their IRA assets each year they don't want or need to spend.
Most of them have way less money than people here and a few have a small pension of $500-$700 a month non cola'd.
My point is they all have said they have more money now than they ever had (inflation adjusted I have no idea, and neither would they). They are simple conservative people and making it to the finish line just fine. I am willing to bet most here will do way better since they are more sophisticated investors. Plan yes, worry excessively...no. Anyone smart enough to work and save a nice nest egg, will be smart enough instinctively to adjust when necessary in spending and protecting it.


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