Actual Withdraw Rates

[audreyh1]

For me, dividends & interest, SS and capitol gains.

Dividends, interest, and capital gains harvested all count as money withdrawn from a portfolio.

 

[RobbieB]

I'm not withdrawing anything from the bag, just living off cash in the bank paying milli-percent. The dividends are all being re-invested. When I've done the net worth calculation it doesn't change.

Therefor I find that I've lived the last 2 years with zero impact on my net worth. The way the market is going this year me thinks I'll find I made dough.

IE, the cash in the bank is getting smaller but the investments are getting bigger with a net zero.

 

[W2R]

My planned withdrawal rate has always been 3.5%. It still is.

Method: I do not use the SWR method (where you take 3.5%, then increase for inflation each year). Instead, my withdrawal is 3.5% of the actual value of my portfolio on 12/31 of the prior year.

(To clarify after reading the next few pages of this thread, my portfolio consists of mutual funds at Vanguard and the TSP, as well as cash in a money market fund, and nothing else. Withdrawal rate percentages only refer to the percentage of my portfolio that I withdraw from it and spend each year. They have nothing whatsoever to do with other income sources such as SS and my tiny pension, or possessions such as my paid off home.)

So far, here is the reality of what I have withdrawn from my portfolio each year and spent:

2010: 2.61%
2011: 1.98%
2012: 2.12%
2013: 2.40%
2014: 1.70%
2015: 8.64% (1.72%, +6.92% Dream House)

The 6.92% for the Dream House covers the difference in what I paid in cash for my Dream House less what I received in cash for my prior house. It also covers repairs of my old house that the buyers required, the cost of movers, the cost of fixing up my new house, the extra cost of maintaining two houses vs one house for a couple of months, and closing costs. It also covers extensive landscaping work done on my new house that was done in January-February 2016.

 

[bingybear]

I'm not withdrawing anything from the bag, just living off cash in the bank paying milli-percent. The dividends are all being re-invested. When I've done the net worth calculation it doesn't change.

Therefor I find that I've lived the last 2 years with zero impact on my net worth. The way the market is going this year me thinks I'll find I made dough.

I guess my question may not have been well defined. I think the topic was "actual withdraw rates". I assumed this to be withdraw rates that FIRECALC or Fido RIP might calculate or be derived from these calculations. In my narrow view money from income streams like SS or a pension would not count as withdraw from assets (thus withdraw rate). However, rents, interest, dividends and capital gains that are used for living expenses (not reinvested) would be considered in the withdraw rate.

I think the above follows the concepts in the retirement planners and retirement planning in terms of withdraw rates.

 

[Another Reader]

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.

 

[rodi]

Year 1 - 2014 (only 6 months retired): 4.1%
Year 2 - 2015: 2.9%
Year 3 - 2016(planned): 2.7%

Year 3 is the current year. I withdraw money each quarter - and plan to withdraw the same amount for the 4th quarter that I withdrew for the previous 3.

Year 1, I was only retired for 6 months of it - but pulled out extra money to cover the trip-of-a-lifetime planned for year 2. I wanted the money set aside and ready to guarantee I'd be able to keep my income low in year 2 for ACA insurance. Some of the money was pulled from an inherited IRA - so it counted as income/taxable.

We might pop the WR up to 3-4% next year since we're pondering a trip to Asia with the kids... But DH goes on medicare next year - so those savings may allow us to keep the WR under 3%.

 

[RobbieB]

Maybe I'm wrong in thinking the way I do, but to me at least if my net worth does not change then I haven't spent anything "down".

I only do this calculation once a year (at tax time) when I see what the whole cash flow situation is also.

 

[Meadbh]

Maybe I'm wrong in thinking the way I do, but to me at least if my net worth does not change then I haven't spent anything "down".

I'm afraid you are indeed wrong. Or, more tactfully, you are mixing two different concepts.

 

[pjigar]

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.

It is all about inflation adjusting the assets. So
rental income = spend it all since your asset is already inflation protected.
interest income = only spend (interest - inflation*principle)
dividends = tricky since some CEOs can be devaluing the company while some company can be preserving the value. I would only spend 50% of the dividends and re-invest other 50%.

 

[lemming]

Just spend divs. Current yield is about 3.95%

I think dividends count in the percentage so your rate is 3.95%
I also think that firecalc assumptions are based on your beginning balance not current year. So my 2009 first year balance was pretty low and the first 5 years my not so safe withdrawals were over 6% but the balances still went up. Once social security gave me a cushion I am taking taxable dividends and other income for a 2.8% withdrawal rate. Happy until I go through a 20/30% market drop. ( I do have 2 years in cd's)

 

[RobbieB]

I'm afraid you are indeed wrong. Or, more tactfully, you are mixing two different concepts.

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?

 

[Free]

several people noting they are withdrawing very little or 0. Just curious what you are living on.
Is this cash on the side that you don't see as part of your investments?
Is this rental income?
Is this SS or pension? (some noted this)
Is this dividend or interest?
Is this an annuity purchased with your investments/retirement $?

Just curious how 0 is obtained.

Six months in, so I may not be a good representation of others. But, I've been spending down the "float" in our accounts or the amount of cushion in checking/savings, etc., before we get to a month to month situation. Additionally for us DW still works part time, retiree health care is taken care of an I have a small "temporary" pension of about $30,000 for 5 years. I anticipate we'll be drawing about 2% annually out of our true retirement funds beginning next year, but we may make it on a bit less. I think it will change over time. We'll wait until 66+ to draw SS and probably be hit by pretty high RMW at 71. We'll need to do some serious calculations before then to determine the best way to minimize the tax hit on the RMW's.

Thank you for the question. I find it very interesting to see how others are doing in this area.

 

[REWahoo]

...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?

That sounds like a good question for your financial advisor. Make him earn his money!

 

[GravitySucks]

several people noting they are withdrawing very little or 0. Just curious what you are living on.

Is this cash on the side that you don't see as part of your investments?

Is this rental income?

Is this SS or pension? (some noted this)

Is this dividend or interest?

Is this an annuity purchased with your investments/retirement $?



Just curious how 0 is obtained.

Mine was cash outside retirement savings.

 

[audreyh1]

I'm not withdrawing anything from the bag, just living off cash in the bank paying milli-percent. The dividends are all being re-invested. When I've done the net worth calculation it doesn't change.

Therefor I find that I've lived the last 2 years with zero impact on my net worth. The way the market is going this year me thinks I'll find I made dough.

IE, the cash in the bank is getting smaller but the investments are getting bigger with a net zero.

It depends on whether or not you count that cash as part of your portfolio. If not, then I agree 0 withdrawal.

But a retirement portfolio should grow, hopefully (especially in the first half of retirement), to counter inflation and have enough built up to smooth out the down years. Just because a portfolio increases enough to cover the withdrawal in a given year doesn't mean your withdrawal rate was zero.

 

[RobbieB]

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"?

 

[Meadbh]

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%.

 

[RobbieB]

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.

 

[lemming]

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.

 

[bingybear]

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.

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.

 

[Meadbh]

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?

 

[RobbieB]

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.

 

[audreyh1]

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.

 

[audreyh1]

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.

 

[RobbieB]

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.