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Old 07-14-2016, 06:23 PM   #41
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I count everything as "net worth"

If I spend a hundred grand a year and my net worth never changes what is my "withdrawal rate"?
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Old 07-14-2016, 06:27 PM   #42
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Originally Posted by RobbieB View Post
I count everything as "net worth"

If I spend a hundred grand a year and my net worth never changes what is my "withdrawal rate"?
Your withdrawal rate is $100,000 divided by whatever your net worth was at the beginning of the year.

So if NW at the beginning of Year 1 was $5 million, withdrawal rate was $100,000/$5,000,000 = 0.02, or 2%.

You say NW at the end of the year was unchanged. Therefore, for Year 2, if you again withdraw $100,000, your withdrawal rate will once again be 2%.
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Old 07-14-2016, 06:36 PM   #43
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OK, I get it, but that number really doesn't mean anything.

If I make 4% and have more dough the next year than I had before I still had a withdrawal rate of 2% even though I now have more dough than I started with?

Yup semantics as I thought. The only thing that really matters is how much dough you have and how fast it's going down.
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Old 07-14-2016, 06:41 PM   #44
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Firecalc assumes you go to war with the army you have. If you keep moving the goal post each year you are gambling each year that you will not "start out" with a big down year like '72 and lose the race.
Dividends won't keep up with inflation-or maybe will. Things change.
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Old 07-14-2016, 06:42 PM   #45
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If dividends and interest are part of the portfolio (not disagreeing), what is rental income?

This is why to me it is difficult to accept the total return approach. If I spend only dividends, interest, and rental income, my ownership of these assets remains. Next year, they are still in the portfolio, producing income for me. If I sell shares, cash in CD's or bonds, or sell a rental, the sources of the income are gone.
In terms of the term withdraw rate, investments are assumed to be reinvested in some investment unless they are withdrawn. Rental income I would take the same way. Withdrawing does not mean you have to sell something. You may just not reinvest it. Things like SS are income streams that are hard to put a value on as you can't sell them. Retirement calculators treat these as income streams with no intrinsic value... thus not used in the withdraw rate calculation. These reduce the WR that your portfolio needs to generate for a given amount of spending.

I tend to put real estate (rentals) as investments as they are more similar to investments than to SS or a pension. I'm not sure how well retirement planners handle real estate. If you think it is more like an income stream... look at the people who owned real estate in military towns when defense spending was cut in the early 90's and bases were closed.

Including spent rental income in WR does not mean they are good or bad investments. But we have some people who are counting dividends, rents, capital gains and interest distributions that are not reinvested (spent) as withdraws and others who don't.

Some don't count anything as a withdraw if the portfolio value when up. In this case, if the portfolio went down 10% due to the market and he spent 4% on living... then was his withdraw rate for the year 14% (both % base on beginning of the year value).

I was really trying to understand how people live on 0% WR. It is hard to make sense of the posts when there are so many different ways of interpreting WR or what a withdraw is.

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Originally Posted by RobbieB View Post
This must be a "semantic" thing. I hear people talking about a 4% withdrawal rate as being "safe", ie your dough should last ~30 years.

If you are making 4% then there is no question, your dough will last forever.

What am I missing?
One part you are missing it that the 4% rule usually assumes that your withdraw increases by inflation each year. Thus if you just make 4%, but are taking x1=4% *PV the first year, and x2 =(x1+inflation1*PV) the second year, and x3 =(x2+inflation2 *PV).. and so on. Your portfolio will eventually become zero. But this is really an overly simplified concept.
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Old 07-14-2016, 06:48 PM   #46
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OK, I get it, but that number really doesn't mean anything.

If I make 4% and have more dough the next year than I had before I still had a withdrawal rate of 2% even though I now have more dough than I started with?

Yup semantics as I thought. The only thing that really matters is how much dough you have and how fast it's going down.
OK, let's try another scenario. You retire with a portfolio of $5 million, as before. You withdraw $100,000, or 2%, on January 1, leaving your portfolio with a balance (for now) of $4,900,000. During Year 1, the market crashes. Your portfolio ends Year 1 at $2.5 million.

On January 1 of Year 2, you withdraw $100,000, as in the previous scenario. Your withdrawal rate based on your original portfolio ($5m) is 2%. However, based on the balance at the beginning of Year 2, it is 4%. After your withdrawal, your portfolio balance is $2.4 million.

During Year 2, the market dips again. Your $2.4 million becomes $2 million. On January 1 of Year 3, you withdraw $100,000. That's still 2% of your original portfolio, but 5% of your portfolio at the start of Year 3. After the withdrawal, your remaining portfolio balance is $1.9 million. How are you feeling now?
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Old 07-14-2016, 06:58 PM   #47
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Now we're talking. That would ring my bell, make me sit up and take notice. Adjust my lifestyle. Do something different.

That's real money -

That's really what it's all about eh? What is the use of data that doesn't mean anything?

The number that's important is how big your stack is and how fast it's going down. If I spend 2% of my bag and the market goes down 10% then yup, I'm down 12%. That's a real number. Just like zero is right now for me.
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Old 07-14-2016, 07:04 PM   #48
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Originally Posted by RobbieB View Post
OK, I get it, but that number really doesn't mean anything.

If I make 4% and have more dough the next year than I had before I still had a withdrawal rate of 2% even though I now have more dough than I started with?

Yup semantics as I thought. The only thing that really matters is how much dough you have and how fast it's going down.
Yes it means something. We have studies on portfolio survival and withdrawal rates. These take into account market fluctuations as well as inflation over the long run. There are rules about how one can expect a portfolio to survive for a given withdrawal rate, time period, and portfolio allocation.

Your net worth will not always stay the same or increase at some fixed rate. Volatility happens. You might get a 30 to 50% haircut one year. It happened to many of us in 2008. All of a sudden you are behind. These studies model how well portfolios recover from nasty markets AND keep up with inflation so that you don't run out of money over a certain long time period.
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Old 07-14-2016, 07:13 PM   #49
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Originally Posted by lemming View Post
Firecalc assumes you go to war with the army you have. If you keep moving the goal post each year you are gambling each year that you will not "start out" with a big down year like '72 and lose the race.
Dividends won't keep up with inflation-or maybe will. Things change.
Not exactly, because you change the goal posts again the next year - in particular by taking a big a pay cut.

Changing the goal posts every year is just a different technique. You aren't stuck in the worst case scenario because you aren't increasing your withdrawals by inflation and you take pay cuts after market drops.

Firecalc does model this scenario - although it has the rather stringent requirement that the ending portfolio match what you started out to be considered successful with rather than allow you to draw down to some small number. This scenario never actually goes to zero.
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Old 07-14-2016, 07:34 PM   #50
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Yes, volatility happens. If my bag takes a big hit, I'll reduce my spending. This seems an easy concept.

I really only care about how much dough I have and how fast I'm spending it.
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Old 07-14-2016, 08:00 PM   #51
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Yes, volatility happens. If my bag takes a big hit, I'll reduce my spending. This seems an easy concept.

I really only care about how much dough I have and how fast I'm spending it.
Firecalc uses historic market performance and RIP uses monte carlo analysis to estimate (predict) how likely a given withdraw rate is to succeed during retirement. These tool assume a withdraw rate that is indexed to an assumed inflation rate. A SWR is one that provides a good chance for success. This may be 95% to 100% for many people.

Some people do not have the flexibility to cut their spending by 50% or 75% if the market is really bad. Thus instead of spending lots more in good market, they build assets to buffer the next down turn.

This calculation of SWR is based on understanding how market volatility can screw with your ability to withdraw needed spending money. You seem to focus on the present snapshot. Retirement planning involves estimating the likely variation over long time spans.

In the end you are right... it is the size of the stash you have to pull from. SWR provides an estimation of a sustainable income stream. This is typically a pessimistic value as it tries to eliminate most or any failure. Thus over time one could increase WR. There are also variable WR that allows more adjustment over time, but still look at longer term effects than just what this year looks like.
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Old 07-14-2016, 08:11 PM   #52
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The models are designed for paper asset portfolios. The models increase your confidence in having less invested than you would have to own to live solely off dividends and interest. Decumulation is assumed (you sell some of the assets).

The bulk of my net worth is in real estate. The cash on cash return is higher than the dividend yield of the market, current bond yields, or bank interest. There are tax advantages that do not apply to paper portfolios. The value of the rental properties on any given January 1 is irrelevant, as long as the rent checks arrive. That was an interesting lesson driven home in 2008-2013.

The risk to the income is different than for paper asset portfolios. I played with a lot of the retirement income planners but they did not work for my situation. The pensions and Social Security are similar in dollar amounts to the RMD's and their capital value is not part of any withdrawal calculation or my net worth. I don't really think in terms of withdrawal rate because I'm not withdrawing from a closed portfolio.
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Old 07-14-2016, 08:11 PM   #53
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As I have "aged" here I'm sort of getting the concept. The whole "planning for retirement early" concept at the soonest possible date. I didn't do that, I just figured I had enough dough (from other internet calculators) and just retired.

I was out almost 2 years before I signed up here and no idea of the concept of "drawing the line" as close as you can. You guys are real artisans of the concept and I wish I had done it sooner.
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Old 07-14-2016, 08:46 PM   #54
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My planned withdrawal rate has always been 3.5%. It still is.
I hope to follow this regimen myself. To be determined.


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Old 07-14-2016, 09:16 PM   #55
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Yes, volatility happens. If my bag takes a big hit, I'll reduce my spending. This seems an easy concept.

I really only care about how much dough I have and how fast I'm spending it.
Actually, I think you make a good point. A lot of us here, myself included, tend to overthink things that are really quite simple.
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Actual Withdraw Rates
Old 07-14-2016, 10:04 PM   #56
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Actual Withdraw Rates

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Originally Posted by RobbieB View Post
Yes, volatility happens. If my bag takes a big hit, I'll reduce my spending. This seems an easy concept.

I really only care about how much dough I have and how fast I'm spending it.

I think you nailed it.

Also, if that really bad downside happens you have that nice shelf (with lots of bottles).
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Old 07-14-2016, 10:06 PM   #57
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Good question.

2014: 2.75% - $33,000 spent on ~$1,200,000*
2015: 1.92% - $24,000 spent on $1,250,000*
2016: 2.69% - $35,000 estimated spend on $1,300,000*

That's without my side hustle income from the blog and the couple hours per month of consulting. After those are included, the 2015 withdrawal rate roughly zero. 2016 withdrawal rate will probably be between zero and one percent.

I've got a problem. Even with zero side hustle income, I'm barely spending enough to deplete my portfolio before my kids inherit millions in another 5-6 decades. I'd hate for that to happen.

edit: My withdrawal rate target is around 3.25% (using the initial+inflation method) or around 4% of actual value each year. After realizing I'm not spending enough, I bumped up our target budget from $33k to $40k for 2016, but I still don't think we'll spend it this year. We have about 30 years till SS of $24k in today's dollars kicks in which would cover our anticipated core expenses (so portfolio shrinking to near zero wouldn't be the end of the world).

I don't know how to incorporate my side hustle income that comes close to covering our annual expenses. I don't want to rely on it continuing forever at this level, but I also acknowledge it's more than zero and will probably remain in the four or five digit per year range for the short to intermediate future even if I dump the hobby.

*portfolio values don't include separate funds to cover one off expenses like the mortgage repayment fund (since paid in full), college for kids, and other lump sum kid costs (wedding? car?).
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Old 07-14-2016, 10:52 PM   #58
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Old 07-14-2016, 11:17 PM   #59
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.....
I wonder if anyone 'banks' the difference for later use. For example, if your SWR is 4% and one year you only take 1%, does anyone view that additional 3% as banked so that one year you might withdraw 7% and still be 'safe'?
Depending upon where you withdraw it from, this choice could make a huge difference in taxes if all of it comes from IRA/401K each year.

I have decided to pull from IRA's as soon as possible, even when I don't need the money each year, simply to reduce the IRA's so that RMD's will be smaller, while I pay only up to the 15% rate.
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Rental income... in or out?
Old 07-15-2016, 03:57 AM   #60
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Rental income... in or out?

For purposes of calculating WR, I consider rental income same as SS, pensions, annuity, side hustle, etc. It reduces the amount I need to generate from the portfolio of stocks and bonds. Obviously, this also means I exclude the value of rental properties from the denominator of the WR calculation.

If I calculate WR with rental income as a withdrawal, and include rental value in the denominator, the resulting WR is significantly higher. This results from the simple fact that the rentals generate cash returns well in excess of what I need to generate from the stock/bond portfolio. I don't think this represents a higher risk retirement plan, quite the contrary. The higher number reflects the increased WR I would need to generate *IF* I sold the rentals and put the proceeds into the stock/bond portfolio. But that's a what-if, not reality.

I have trouble with the concept that rental income is a "withdrawal" from my rental "investment." I agree it's not the same as SS or pensions, which have no tangible, underlying asset value. But it's also clearly different than dividends and capital gains, which reduce the value of the underlying stock/bond.

For those that have actually read the academic studies on SWR (I haven't), what is the official stance on rentals? ...Or for that matter, any small business or side hustle that generates income but requires an investment? Are these in or out of the WR calculation?
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