Adjusting withdrawals upwards

[REWahoo]

Resetting upward requires resetting downward also, eliminating the year to year stability in withdrawals.

I don't think this is accurate. Once again, the best explanation I've seen is in this post from Dory36 (the guy behind FIRECalc), in the "Explain the 4% withdrawal rate" thread from Best of the Boards.

As has been stated a number of times in this discussion, once you start your SWR, if your portfolio increases you can recalculate a new (higher) SWR. This is because 1) you have a larger "stash" and 2) you will be withdrawing for fewer years...the Grim Reaper is catching up to you.

 

[ERD50]

I don't think this is accurate. Once again, the best explanation I've seen is in this post from Dory36

I have read that post from Dory, however I tend to agree with free4now:

But in some sense this is an artifact of the limited dataset that the studies are based on.

The success rate gets hit by just a few specific patterns of bad years in that data set. What if we experienced a pattern with just another bad year or two more than what we have from history? And what if it was encountered after a few good years? The Firecalc comparison of retiring in 73, 74, 75 was an eye-opener for me.

Sure, if you were going with a 3.5% SWR, and ten years later Firecalc is telling you 6% is 'safe' make some adjustments if you like.

As others have said, you can 'what if' yourself into *never* retiring, but I think one should be cautious and a bit conservative when looking at a readjustment up. Your options and ability to adjust are being reduced with time also.

As far as fewer years left, that is all considered in firecalc success rates.

-ERD50

 

[REWahoo]

I have read that post from Dory, however I tend to agree with free4now:

If you look at my posts in this thread, you will see that I am not arguing the wisdom of increasing withdrawals as I agree that the prudent thing to do is to err on the conservative side. My point was and is that the statement, "Resetting upward requires resetting downward also, eliminating the year to year stability in withdrawals" is not accurate.

It may be the safe, conservative, and wise approach, but it isn't "required".

 

[Rich_by_the_Bay]

I don't think this is accurate. Once again, the best explanation I've seen is in this post from Dory36 (the guy behind FIRECalc), in the "Explain the 4% withdrawal rate" thread from Best of the Boards.

But then how do you explain what happens in the example I gave? SWR increases from 4% to 4%+X after a runup and a reset; then there's a long bear market, and your cherry-picked new, improved higher SWR represents a WR of 6% or more on your newly shrunken nest egg. If that bear lasts a while, you could get in trouble.

I think resetting is something that should be done infrequently, and should be balanced by resetting downwards if market conditions warrant. I wouldn't rely on the "fewer years to finance" too much, especially in earlier FIRE, personally.

As long as there's some flexibility of expenses or willingess to belt-tighten it probably would work, but as a general rule, repeated upward-only resetting unbalanced by downward resetting seems require some caution. Fortunately, the ups usually outnumber the downs so we can get away with alot under customary markets.

 

[W2R]

Great post, free4now!

According to the studies one can maintain 100% success either with or without resetting withdrawals. But in some sense this is an artifact of the limited dataset that the studies are based on.

Yes! In my job, I work with probabilities based on even fewer years of data. We never state that model results indicate a 0% or 100% probability in our publications. While such probabilities may be technically correct, and we may refer to them as such casually in house, in a sense they would be misleading to the public because of limitations inherent in the subset of data available for use in the model. In this case, a bear market so bad that it is without precedent and even beyond our imagination is always possible.

If the SWR studies had more relevant data to work with, they would show more clearly that success rates decrease by resetting withdrawals upward.
Also, be aware that when the historical studies show 100% that doesn't mean your chances are 100% going forward... the future could be worse than history, and if so resetting withdrawals could make the difference between having enough and going hungry.

I am leaning towards resetting myself, but I don't take it lightly.

Another thing to consider is that as you get older your ability to go back to work decreases, so it is natural to want to take fewer risks. Whereas someone retiring at 40 years old might take the risk of a 4% withdrawal because they could go back to work if needed, that same person might need to lower their withdrawal to 3.5% to feel safe once they have passed the age that they could go back to work.

Other factors that affect capability of returning to work (other than age) come into play here, too. Some occupations are more in demand than others, for example, and some are more easily available in certain locations. It would be extremely unlikely for a position in my occupation to open up in Missouri, where I plan to retire, so I might as well be 80 as far as capability of returning to work once I retire. Besides, I won't want to. So for me, the withdrawal rate isn't so likely to be affected by my age, except for possibly increasing due to a shorter time frame as I grow older.

 

[REWahoo]

But then how do you explain what happens in the example I gave? SWR increases from 4% to 4%+X after a runup and a reset; then there's a long bear market, and your cherry-picked new, improved higher SWR represents a WR of 6% or more on your newly shrunken nest egg. If that bear lasts a while, you could get in trouble.

That goes to the very heart of FIRECalc and the logic in how it determines what is a "Safe" withdrawal rate.

If you believe what history/FIRECalc tells us about the initial SWR you use in your example above, why do you not believe the SWR you get from the program after a few up years?

I think resetting is something that should be done infrequently...

Agreed.

I wouldn't rely on the "fewer years to finance" too much, especially in earlier FIRE, personally.

Knowing the business you are in I'm more than a little surprised by this statement.

 

[ERD50]

If you look at my posts in this thread, you will see that I am not arguing the wisdom of increasing withdrawals as I agree that the prudent thing to do is to err on the conservative side. My point was and is that the statement, "Resetting upward requires resetting downward also, eliminating the year to year stability in withdrawals" is not accurate.

It may be the safe, conservative, and wise approach, but it isn't "required".

Well, it just seems counterintuitive to me. Lets try two examples, Abe and Bill, 5 years into retirement, both started with the same profile in Firecalc:

Abe has seen his NW increase. He runs FireCalc again and it indicates he can increase his SWR for the same success %.

Bill has seen his NW decrease. He runs FireCalc, and despite 5 years less life expectancy, it indicates that he needs to lower his SWR.

So we are saying that it is OK for Abe to adjust (maybe partially) up, but Bill does not need to adjust down?

I'm pretty sure the argument is that Bill must have hit that bad streak in the market, and anything that bad is past history for him, so he will be OK with his initial SWR. After all, that is what Firecalc was for, to get you through the bad times (assume you used a very high success rate). Running Firecalc again just repeats that bad streak for him. Double Whammy!

And the argument for Abe is that, rerunning Firecalc again includes that bad streak in the market, so the higher number does represent a new SWR for him.

Seems reasonable, but as free4now states, it all is dependent on that dataset. I guess some middle ground position makes sense.

-ERD50

PS - The real 'problem' as I see it is that as FIRED people, we probably are a group that were 'in control'. And we cannot control future markets , inflation, etc. It just makes us crazy

 

[ERD50]

That goes to the very heart of FIRECalc and the logic in how it determines what is a "Safe" withdrawal rate.

If you believe what history/FIRECalc tells us about the initial SWR you use in your example above, why do you not believe the SWR you get from the program after a few up years?

Good point! - ERD50

 

[jerryo]

My understanding is that AT ANY POINT IN TIME, you can take 4% adujusted upwarsds for inflation for 30 years with a 95% probability of success.

Once the first year's market performance has ocurred, however, you're in new circumstances.

If the market went down, your prospects of collecting an inflation adjusted 4% of the original balance for another 29 years IS NO LONGER 95%. And, if the market has gone up more than average, your chances of collecting an inflation adjusted 4% of the original balance for 29 years are greater than 95%.

Similarly, after the first year you can expect to withdraw 4% of the new balance for 30 years (which could be higher or lower than the previous year, depending on market performance.

In other words, once the market events have ocurred, they've ocurred and are no longer "probablilities."

 

[REWahoo]

PS - The real 'problem' as I see it is that as FIRED people, we probably are a group that were 'in control'. And we cannot control future markets , inflation, etc. It just makes us crazy

... ...

 

[Rich_by_the_Bay]

That goes to the very heart of FIRECalc and the logic in how it determines what is a "Safe" withdrawal rate.

If you believe what history/FIRECalc tells us about the initial SWR you use in your example above, why do you not believe the SWR you get from the program after a few up years?

Oh -- do you believe it a few years down the road if the market is up? Or if it's down? Or both? You can't just believe it when it's up, it seems to me. You're all in or all out, probability wise.

My logic (or lack thereof) goes like this: if you set it once and forget it, as per FIRECalc, you are letting the random chips fall where they have fallen in the past and the ups and downs (over the specified number of years) are built into FC's results - they are the historic ups and downs which even out to some extent over a long period of time. However, if you systematically game the historic results by bumping it up beyond 4% + inflation during good years, yet fail to do the same when the nest egg value goes down, you are disturbing the historically valid conclusions on which the FC conclusion is built.

Some have said in the past that since FC doesn't "know" what has happened in the past, resetting at any point is just fine -- FC just looks ahead and, after all, 4% is 4%. This is true on the face of it. However, you could make the same argument during down years-- FC applied during a down year using the amount derived from 4% of a prior UP year would give you less favorable results. You either believe FC or you don't -- can't just believe it when the market's good and ignore it when the market's bad without assuming some additional failure risk.

At some point, the ever-shrinking retirement duration likely offsets this effect, but you just have to factor that in. Clearly, resetting at leisurely intervals doesn't scare me at all. But for ERs who get in to a pattern of resetting frequently but only when the market is up, I feel they are gaming the system at their own peril. A 5-7 year bear or zero-return market probably doesn't feel good in retirement, and that goosed up SWR from prior run-ups would make me nervous as heck.

Not that there's anything wrong with that .

 

[REWahoo]

At some point, the ever-shrinking retirement duration likely offsets this effect...

Yep. When I retired two years ago at age 58, I set "how long should it last" in FIRECalc to 34 years (age 92). If I run FIRECalc today, I set it to 32 years. Although Mr Market has been very good to me and I'm up 10+% even after living entirely off withdrawals for the past two years, if I put in my initial portfolio amount naturally, I get a larger SWR than I did when I ran it two years ago.

A 5-7 year bear or zero-return market probably doesn't feel good in retirement, and that goosed up SWR from prior run-ups would make me nervous as heck.

It would make me feel nervous as heck regardless of the presence of geese.

I'm not advocating that anyone should increase their withdrawal amount annually during a market run-up. I certainly don't have the sleeping proficiency to do so. I saw what I believed to be incorrect information about the logic behind the 4% SWR and what FIRECalc tells us, and was attempting to point that out.

 

[Rich_by_the_Bay]

If I run FIRECalc today, I set it to 32 years. Although Mr Market has been very good to me and I'm up 10+% even after living entirely off withdrawals for the past two years

Yikes! You're my hero.

And I think that's the ideal scenario to adjust your SWR upward - no one's taking back your gains (at least the greenbacks you were able to take off the equity table) so why not enjoy them.

 

[Jarhead*]

Yep. When I retired two years ago at age 58, I set "how long should it last" in FIRECalc to 34 years (age 92). If I run FIRECalc today, I set it to 32 years. Although Mr Market has been very good to me and I'm up 10+% even after living entirely off withdrawals for the past two years, if I put in my initial portfolio amount naturally, I get a larger SWR than I did when I ran it two years ago.

ReWahoo: Slightly off topic, but for me, not bad.

RMD requirements have been expanded a whole bunch in the last few years. (Must be contemplating you prosperous and healthy "Baby-Boomers" in the pipeline).

Prior to change, first years requirement was about 6.7, and exhausted in 16 years.

Currently first year is 3.7 and according to Firecalk, and RMD requirements,
following their program, I should live well past 100.

 

[rmark]

http://www.afcpe.org/doc/Vol1014.pdf

 

[REWahoo]

Currently first year is 3.7 and according to Firecalk, and RMD requirements,
following their program, I should live well past 100.

Yep, you can take it to the bank. The US govt. would never lie to you.

 

[Nords]

But then how do you explain what happens in the example I gave? SWR increases from 4% to 4%+X after a runup and a reset; then there's a long bear market, and your cherry-picked new, improved higher SWR represents a WR of 6% or more on your newly shrunken nest egg. If that bear lasts a while, you could get in trouble.

I'd explain that as an ER who started withdrawals in the 1960s. But FIRECalc's data would claim that 90% of the time there wouldn't be any problem with an extended 6% "S"WR. Of course that guy only has one chance to find out which side of the 90% he's on, and he still has to die on FIRECalc's schedule. Other than that, no worries!

I think resetting is something that should be done infrequently, and should be balanced by resetting downwards if market conditions warrant. I wouldn't rely on the "fewer years to finance" too much, especially in earlier FIRE, personally.

I think that if I ramped up my spending I'd shorten my lifespan by "virtue" of the activities in which I'd be ramping up my spending.

And again I don't want to ever have one of those spouse conversations that starts with "Honey, FIRECalc says we need to reduce our spending."

As long as there's some flexibility of expenses or willingess to belt-tighten it probably would work, but as a general rule, repeated upward-only resetting unbalanced by downward resetting seems require some caution. Fortunately, the ups usually outnumber the downs so we can get away with alot under customary markets.

Yes, because FIRECalc has a hard time with flexible spending so we can claim that we're smarter than the historical data.

One advantage to an ER budget category of gifting & charitable donations is that those can be the first cuts when the finances go south. So maybe the primary reason for adjusting withdrawals upward would be to make additional charitable donations (of course for tax deductions too).

 

[donheff]

Some have said in the past that since FC doesn't "know" what has happened in the past, resetting at any point is just fine -- FC just looks ahead and, after all, 4% is 4%. This is true on the face of it. However, you could make the same argument during down years-- FC applied during a down year using the amount derived from 4% of a prior UP year would give you less favorable results.

Jerryo said it right, "once the market events have ocurred, they've ocurred and are no longer "probablilities." If you start out with a 4% SWR at a 95% probability of success and the market goes down for 3 years, you are no longer at 95% probability of success. At this point you have additional knowledge - among the possible futures that were modeled you now know that you are not following any of the possible futures with good early years. So, as of today, if you keep up the spending you originally planned you are less than 95% likely to succeed. All you have to do is run the new numbers through Firecalc to figure out what the odds are.

You either believe FC or you don't -- can't just believe it when the market's good and ignore it when the market's bad without assuming some additional failure risk.

Actually, you can choose to go with just the up side. It is just more likely that you will eventually end up on the down side. You will still probably be pretty safe - just not as safe as you think.

 

[Jarhead*]

Everybody talks about raising their SWR, but for what purpose?

If we're happy on our current SWR, then what more do we need?

Nords: Finally, a pony showed up.

If you are living where you want to be. (Hawaii aint bad) You're experienced enough in your own skin to know what is required money-wise to live the way you want to live, and your spouse (Or partner) agrees, you're "Golden".

I've tried to live by that philosophy since I "pulled the pin", and if my kids get lucky, more power to them. (Haven't missed much, and along the way I haven't contributed a whole helluva lot to "Madison Ave."

As far as I am concerned you can take your approach to the bank.

 

[unclemick]

Nords: Finally, a pony showed up.

As far as I am concerned you can take your approach to the bank.

Holy Sugarbeets Batman!! I feel a big time relapse into:

"cheap bastardhood"

Now that I don't have any women to enourage my spending.

Gotta keep a grip - not getting any younger.

heh heh heh - mumble mumble :

 

[Nords]

If you are living where you want to be. (Hawaii aint bad)

Thanks, Jarhead. Are you just saying that because you've seen the golf courses?

Eight-foot-plus surf coming to the south shore tomorrow, right on schedule to open the season. Life is good!

Holy Sugarbeets Batman!! I feel a big time relapse into:
"cheap bastardhood"

Well, the Broadway version of "Lion King" is coming to Hawaii in Sep-Oct and we were required to purchase tickets. For this amount of money I believe that Timon & Pumba should be driving our stretch limo. But since it's my first visit to a theater in 20 years that didn't include Barney the Purple Dinosaur, I think we can splurge.

Now that I don't have any women to enourage my spending.
Gotta keep a grip - not getting any younger.

You never know. Put on your best Dickies, sign up for another cruise with maybe a side trip to Branson, let 'em feast their eyes on your pickup-- anything could happen!

Or at least it could if you weren't 14 years old and stuck in Missoula...

 

[OKLibrarian]

Well, the Broadway version of "Lion King" is coming to Hawaii in Sep-Oct and we were required to purchase tickets. For this amount of money I believe that Timon & Pumba should be driving our stretch limo. But since it's my first visit to a theater in 20 years that didn't include Barney the Purple Dinosaur, I think we can splurge.

We saw it last summer. It's worth every single cent. Get seats near the aisle on the floor if you can (you'll understand when you get there).

 

[Mwsinron]

Just seen the shortened show at Disney World of the Lion King. Damned if it wasn't near the best thing about the place. Really well done.

 

[Nords]

We saw it last summer. It's worth every single cent. Get seats near the aisle on the floor if you can (you'll understand when you get there).

Ruh-roh, I've been on the floor/aisle at Gallagher shows and that's not a good thing!

We're way in the back of the orchestra (ground floor) a few seats away from the aisle, and those are the "cheap seats" ($100/person). More importantly, six hours after the box office opened for a six-week run, they were the available seats.

 

[HFWR]

Ruh-roh, I've been on the floor/aisle at Gallagher shows and that's not a good thing!

We were ok until he smacked that f-ing jello...