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Basic question about WRs.
Old 08-22-2012, 06:40 AM   #1
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Basic question about WRs.

Hello. I have a question about withdrawal rates. Does the amount you withdrawal each year depend on the amount you took out the year before or does it depend on what your portfolio is worth at the beginning of that year.
For example, to make the math simple, let say someone has $1m to live off and is going to withdrawal 3% ($30 k) per year. Suppose that after the first year, the $1m shrinks to $900k. Is the withdrawal for the next year 3% of 900k OR is it $30 k plus whatever the inflation rate is for the year? Iím pretty sure it is the latter. If you have the right investment mix, over the long haul, you will make money.
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Old 08-22-2012, 06:53 AM   #2
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I think it depends on what you want to spend each year without going into more debt.
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Old 08-22-2012, 07:29 AM   #3
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It's supposed to be $30,000, plus whatever inflation is for the year. The theory is that, in the long run, your portfolio should recover, and the times of prosperity should more than outweigh the down years.

However, in a big enough downturn, I think I'd be leery of still spending that $30K plus inflation number. For instance, in November of 2008, I lost about half of my portfolio's value, compared to the peak it hit in October 2007. If I was retired and depending on that portfolio, I think I would be cutting back on expenses as much as possible during that downturn.

I'd imagine that, in the overall scheme of things, there aren't going to be too many years where you lose half of your portfolio. But, that drop is still fresh enough in my memory that I'm still a bit leery.

To be fair though, that 50% loss isn't year-to-year, but peak-to-trough, which probably isn't totally fair. If I measure 12/31/07 to 12/31/08, I was "only" down about 36%

Also, in theory you would have a balanced portfolio with several years of cash, CD's, or whatever that you could live off of, so you could keep your riskier stocks and mutual funds, not sell them at a loss, and hopefully they'd be back up in value by the time you had to replenish the cash reserves.
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Old 08-22-2012, 08:31 AM   #4
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Originally Posted by Fiseeker View Post
....Is the withdrawal for the next year 3% of 900k OR is it $30 k plus whatever the inflation rate is for the year? I’m pretty sure it is the latter. ....
You have it right, the withdrawal the second year would be $30k plus inflation.

The important think is being able to have some flexibility in the withdrawals. For example, in a situation where out of the box the portfolio declines by 10%, you might decide to tighten your belt and forgo the inflation increase in the second year and only withdraw $30k.
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Old 08-22-2012, 09:07 AM   #5
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Hello. I have a question about withdrawal rates. Does the amount you withdrawal each year depend on the amount you took out the year before or does it depend on what your portfolio is worth at the beginning of that year.
I'll just add another artifact to consider, regardless of the withdrawal target rate is 4%, 8%, or beyond.

This is an ER forum, and as such must consider scenarios a bit different than those who w*rk till whatever their "normal retirement age" is, and start on "day one" with all their income sources on line - be it from a pension, SS, or whatever else income stream is available.

For many of us who retire before what is considered normal (yes, we're all abnormal on this board - I'll be the first to admit it!) "Normal" rates may not apply in all instances.

I'll just talk about DW/myself on this subject, as an example.

We both (for many years) thought about retiring at the same age as our parents - that is between the ages of early SS (62), or our original full SS age (at the time of our lives - our 20/30's, age 65).

What happened along the way? The SS FRA age was changed to 66 (for both of us), our long term retirement savings/investment "plan" did better than expected, over three decades, and we both were ready to leave our respective employers ASAP.

By our mid-50's, we knew that it might be possible to leave the w*rkforce earlier than we had planned many years ago. By our late 50's, we were sure of it.

Unlike a lot of folks on this forum who retired many years before us, we planned on making our "breakout" at age 59 (we're the same age). Not necessarily early, but certainly earlier than we had planned for, many years in the past.

The "problem" as it was retiring early that the "4% rule" really didn't apply to us.

Why? Simply because our lifestyle required us to take withdrawals above that magic number. Were we willing to cut back on our spending/lifestyle just to escape "the man"? No. If we considered that, we could have just stayed employed to support our lifestyle.

However, as in all cases of ER (whatever the age), one must look at not only current assets/income, but also future assets/income.

Using a forecast product to determine future income (be it a spreadsheet or any other planning tool - I won't say what you should use), it showed our ER spending rate greatly above that 4% guidance.

However (and this is the main point), once our future income sources came "on-line" - such as DW's two small pensions, our respective SS income (she at 66 - me at 70), my 50% claim against her SS at age 66 our forecast portfolio withdrawal rate would be well under 4% at age 70 (when my SS started) after all our income sources were on-line.

BTW, that 4% is not expected to be exceeded for the rest of our joint lifespan.

The main point is that if we would have adhered to that 4% (or whatever you choose), we would have been greatly "cutting back" in our early retirement years - the years that we would be most vigorous and active to pursue our desires.

The result would be that we would have left many $M on the table after we passed while at the same time depriving ourselves the "fruits of our labors".

It's been a bit over five years for me, in retirement. DW joined me this year; her plan to retire at age 59 worked financially, but not emotionally. She chose to w*rk until she was ready to retire (one of the joys of being FI).

Our plan (as measured against the base plan I took a snapshot of on the day I retired in early 2007) has turned out better than expected. Sure, DW's continued employment helped, but our joint retirement assets are well above (discounting her income) what could have been expected at this time.

Just a (long) story to let you think about WD rates in a more expansive manner....

BTW, welcome to the forum (tell us a bit about yourself )...
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Old 08-22-2012, 09:11 AM   #6
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You can of course withdraw in any fashion whatsoever. But I suspect you were asking what the Safe Withdrawal Rate assumptions are (Trinity Study, Bengen, etc.), and you've been given the right answer to that question. It is one of the most popular withdrawal theoretical methodologies, but there are many others...
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Old 08-22-2012, 10:33 AM   #7
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It seems to me that rescue has it figured out. It is not one size fits all. I'm planning on retiring 18 months before I turn 65, because of Cobra and to make sure we can keep insurance no matter what. From 63 & 1/2 to age 69, we have a very well secured income stream that will pay 75-85% of our expected "retirement" expenses. We don't expect to take anything out of our retirement accounts for at least a year or two, because of cash reserves, and then we might have to withdraw about 1.5% annually until the income stream runs out. SS will then make up more than half the lost income stream, and our WR might go up to 5%, but what the heck, I'll be almost 70.

And, assuming we continue to grow the retirement savings at 4% to 5%, we may never actually withdraw principal.

You can't run this on any of the standard FireCalc or other planners, but you can spread sheet it. We think that our retirement expenses will be lower than budgeted and that we will be able to spend more money on fun things after we get settled in. But looking at the worse case scenario, unless the cash stream defaults early and the collateral isn't enough to make it up, we are unlikely to run out of money.

My hope is that I'm being very conservative on the income side of retirement finances and very liberal on the expense side, so that there is a pretty good margin for error. I guess we'll find out, starting next year.
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Old 08-22-2012, 10:35 AM   #8
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And PS, if the cash stream does default, it will just mean we won't leave our kids as much money. Yes, we'll have to lower the lifestyle a little, but not too much.
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Old 08-22-2012, 03:45 PM   #9
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Per rescume's comments above, one size does not fit all in terms of WRs, and the appropriate WR for any given person/couple may change during retirement for various reasons. For an interesting (although sometimes tedious) read on the subject, check out Spend to the End by financial columnist Scott Burns and economist Lawrence Kotlikoff
Amazon.com: Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire (9781416548904): Laurence J. Kotlikoff, Scott Burns: Books
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Old 08-22-2012, 09:27 PM   #10
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Cooley, Hubbard, and Walz (1999), also known as the Trinity Study, noted that in the past a retiree holding a roughly average 60% US stock/40%US bond portfolio could have started with an initial 4% withdrawal from their portfolio and increased it annually by the inflation rate and only run out of money twice over rolling 30 year periods.

http://www.afcpe.org/assets/pdf/vol1014.pdf

other studies using similar data sets arrived at similar conclusions, with portfolios from 40/60 to 80/20 being similarly successful.

Some retirees are uncomfortable with increased spending based on inflation, instead doing an annual withdrawal based on some % of current portfolio value.

Each method has pros and cons, personally I think a combination of the two to set a range of possible spending amy be the best.
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Old 08-23-2012, 06:00 AM   #11
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Originally Posted by rescueme View Post
I'll just add another artifact to consider, regardless of the withdrawal target rate is 4%, 8%, or beyond.

This is an ER forum, and as such must consider scenarios a bit different than those who w*rk till whatever their "normal retirement age" is, and start on "day one" with all their income sources on line - be it from a pension, SS, or whatever else income stream is available.

For many of us who retire before what is considered normal (yes, we're all abnormal on this board - I'll be the first to admit it!) "Normal" rates may not apply in all instances.

I'll just talk about DW/myself on this subject, as an example.

We both (for many years) thought about retiring at the same age as our parents - that is between the ages of early SS (62), or our original full SS age (at the time of our lives - our 20/30's, age 65).

What happened along the way? The SS FRA age was changed to 66 (for both of us), our long term retirement savings/investment "plan" did better than expected, over three decades, and we both were ready to leave our respective employers ASAP.

By our mid-50's, we knew that it might be possible to leave the w*rkforce earlier than we had planned many years ago. By our late 50's, we were sure of it.

Unlike a lot of folks on this forum who retired many years before us, we planned on making our "breakout" at age 59 (we're the same age). Not necessarily early, but certainly earlier than we had planned for, many years in the past.

The "problem" as it was retiring early that the "4% rule" really didn't apply to us.

Why? Simply because our lifestyle required us to take withdrawals above that magic number. Were we willing to cut back on our spending/lifestyle just to escape "the man"? No. If we considered that, we could have just stayed employed to support our lifestyle.

However, as in all cases of ER (whatever the age), one must look at not only current assets/income, but also future assets/income.

Using a forecast product to determine future income (be it a spreadsheet or any other planning tool - I won't say what you should use), it showed our ER spending rate greatly above that 4% guidance.

However (and this is the main point), once our future income sources came "on-line" - such as DW's two small pensions, our respective SS income (she at 66 - me at 70), my 50% claim against her SS at age 66 our forecast portfolio withdrawal rate would be well under 4% at age 70 (when my SS started) after all our income sources were on-line.

BTW, that 4% is not expected to be exceeded for the rest of our joint lifespan.

The main point is that if we would have adhered to that 4% (or whatever you choose), we would have been greatly "cutting back" in our early retirement years - the years that we would be most vigorous and active to pursue our desires.

The result would be that we would have left many $M on the table after we passed while at the same time depriving ourselves the "fruits of our labors".

It's been a bit over five years for me, in retirement. DW joined me this year; her plan to retire at age 59 worked financially, but not emotionally. She chose to w*rk until she was ready to retire (one of the joys of being FI).

Our plan (as measured against the base plan I took a snapshot of on the day I retired in early 2007) has turned out better than expected. Sure, DW's continued employment helped, but our joint retirement assets are well above (discounting her income) what could have been expected at this time.

Just a (long) story to let you think about WD rates in a more expansive manner....

BTW, welcome to the forum (tell us a bit about yourself )...
I think this is a great example of how to use the "rules of thumb" as guidance and tailor them for your particular situation; especially on the subject of "what does an early retiree do for income before SS, pension, etc.".


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You can't run this on any of the standard FireCalc or other planners, but you can spread sheet it.
Actually, Fidelity Retirement Income Planner should be able to model this for you, if you have access.
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Old 08-23-2012, 06:44 AM   #12
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I plan to retire at age 60 - not so early for those on this forum, but works for me. I've been doing a lot of thinking and tinkering lately about WR and income sources. My situation is like rescueme above in that we have pension income and once SS kicks in, the pension and SS will more than cover our current expenses. Using fido tools we will only need to make token withdrawls from our retirement savings once I start SS at 70. We will also pay off mortgate at like 78 so if we last that long our incomes will be almost double our expenses.

So my situation is that I can use 3-4% draw for the first 10 years and cover expenses and then have a pile of $$ left that won't needd to touch. 2nd option is to increase our draw in the first 10 years when we have energy and desire to be more active and coast into the 70's with a smaller pile left but still our pension and SS incomes and a pile of smaller size. Since the concern about WR is all about not outliving your pile and our expenses will be covered if we live through 70's, 80's and perhaps more what am I saving the pile for?

I guess my comment is that for my entire life we have LBYM (mostly ) and put off today for the future. Is this one time when we should adjust and live just a little more for the day? What is the risk? One more note, I'll wait for SS till 70 so DW will have the largest check from them if I don't make the 90's.
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Old 08-23-2012, 08:35 PM   #13
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Originally Posted by RetireBy90 View Post
I plan to retire at age 60 - not so early for those on this forum, but works for me. I've been doing a lot of thinking and tinkering lately about WR and income sources. My situation is like rescueme above in that we have pension income and once SS kicks in, the pension and SS will more than cover our current expenses. Using fido tools we will only need to make token withdrawls from our retirement savings once I start SS at 70. We will also pay off mortgate at like 78 so if we last that long our incomes will be almost double our expenses.

So my situation is that I can use 3-4% draw for the first 10 years and cover expenses and then have a pile of $$ left that won't needd to touch. 2nd option is to increase our draw in the first 10 years when we have energy and desire to be more active and coast into the 70's with a smaller pile left but still our pension and SS incomes and a pile of smaller size. Since the concern about WR is all about not outliving your pile and our expenses will be covered if we live through 70's, 80's and perhaps more what am I saving the pile for?

I guess my comment is that for my entire life we have LBYM (mostly ) and put off today for the future. Is this one time when we should adjust and live just a little more for the day? What is the risk? One more note, I'll wait for SS till 70 so DW will have the largest check from them if I don't make the 90's.
RB90-

Here are some thoughts based on a series of assumptions. I've gleaned info from your post and profile so, these estimates may be way off. But, here goes.

Charlottesville, VA is not cheap but, you bought ~12 yrs ago, assume Mtge = $300k

Estimate PITI=$2200/mo

SS=$2500/mo (US avg=$1250/mo & max=$2550/mo, and there are 2 of you; I assume a following military spouse with lower earnings history)

Retired Military Pay=$1900/mo (a self described "working stiff" is likely a retired enlisted man; we all know officers do very little work )

"income almost double expenses" after you start SS and have no more Mtge
($2500 + $1900)/$2200=50%
So, I'm close there

I also calculate your "pile" as being what you'd have to withdraw while awaiting SS = ($2500/mo*12mos)/3.5%=$857k

Assuming an after inflation net zero return (conservative),
10 yrs withdrawal * $30k/yr = $300k
This leaves you $557k

If all this is a close approximation, then things to consider are:
- how much more would you need each year to "live more for the day"?
($10k more/yr means a $457k nest egg at age 70)
- would your home equity (mtge almost paid at age 70) give you comfort as a backup source of funds?
- if you're not sure, why not set a 5 yr plan to spend $XX/yr more (age 60-65) and then evaluate where you are?

Hope this is helpful.

Good luck, and thank you for your service!
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Old 08-24-2012, 06:07 AM   #14
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RB90-

Here are some thoughts based on a series of assumptions. I've gleaned info from your post and profile so, these estimates may be way off. But, here goes.

Charlottesville, VA is not cheap but, you bought ~12 yrs ago, assume Mtge = $300k

Estimate PITI=$2200/mo

SS=$2500/mo (US avg=$1250/mo & max=$2550/mo, and there are 2 of you; I assume a following military spouse with lower earnings history)

Retired Military Pay=$1900/mo (a self described "working stiff" is likely a retired enlisted man; we all know officers do very little work )

"income almost double expenses" after you start SS and have no more Mtge
($2500 + $1900)/$2200=50%
So, I'm close there

I also calculate your "pile" as being what you'd have to withdraw while awaiting SS = ($2500/mo*12mos)/3.5%=$857k

Assuming an after inflation net zero return (conservative),
10 yrs withdrawal * $30k/yr = $300k
This leaves you $557k

If all this is a close approximation, then things to consider are:
- how much more would you need each year to "live more for the day"?
($10k more/yr means a $457k nest egg at age 70)
- would your home equity (mtge almost paid at age 70) give you comfort as a backup source of funds?
- if you're not sure, why not set a 5 yr plan to spend $XX/yr more (age 60-65) and then evaluate where you are?

Hope this is helpful.

Good luck, and thank you for your service!
Wow - you really did some good assumptions. Centreville VA is home, guess Cville could mean more than one place Thanks for the time you spent running through the numbers. We have 2 Army checks so get takehome of $3500 and SS would be $4467 if DW takes it at 66 and I take it ast 70. So income at 70 would be almost $8K and expenses at $3500 today, plus house note.

I'm very conservative with the $$ so my idea is to use about $10K each year for unprogrammed expenses like travel and entertainment. Then DW will have a 2nd retirement check we plan to use for fun stuff. I really don't see our expenses going up much except for inflation and Army checks and SS are both cola protected. We would for sure start with a small extra draw and bypass it if we take a hit in the market.

I guess my comment was that you need to lbym but there comes a point where what are you saving for? if you have taken care of expenses, covered for those risks in the future, just adding to the pile for extra 110% or 150% covered is perhaps not the best use of the extra $$. Don't know about anyone else on the forum but it seems like a big adjustment to me to ease up a bit on the savings. Just goes against my grain but I need to come to grips with this situation.
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Old 08-24-2012, 06:21 AM   #15
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Wow - you really did some good assumptions. Centreville VA is home, guess Cville could mean more than one place Thanks for the time you spent running through the numbers. We have 2 Army checks so get takehome of $3500 and SS would be $4467 if DW takes it at 66 and I take it ast 70. So income at 70 would be almost $8K and expenses at $3500 today, plus house note.

I'm very conservative with the $$ so my idea is to use about $10K each year for unprogrammed expenses like travel and entertainment. Then DW will have a 2nd retirement check we plan to use for fun stuff. I really don't see our expenses going up much except for inflation and Army checks and SS are both cola protected. We would for sure start with a small extra draw and bypass it if we take a hit in the market.

I guess my comment was that you need to lbym but there comes a point where what are you saving for? if you have taken care of expenses, covered for those risks in the future, just adding to the pile for extra 110% or 150% covered is perhaps not the best use of the extra $$. Don't know about anyone else on the forum but it seems like a big adjustment to me to ease up a bit on the savings. Just goes against my grain but I need to come to grips with this situation.
RB90-

Looks like my estimates were aft by a fair bit. But, I think the questions from the original email are still relevant.

1. How much more would you like to spend each year to feel like you're not missing out on something? (sounds like ~$10k is your target). My other thought on this is to calc what "extra" amount you feel is very safe versus assets, and set that as your upper limit.

2. Why not lay out a 5 year plan, monitor it, and go from there? Another thought here is to have 2+ years cash (a practice common by ERs here) to help lower the risk in the early years.

BTW, I used to live in Fairfax county so, I'm familiar with the area around your C'ville.
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Old 08-24-2012, 07:28 AM   #16
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RB90-

Looks like my estimates were aft by a fair bit. But, I think the questions from the original email are still relevant.

1. How much more would you like to spend each year to feel like you're not missing out on something? (sounds like ~$10k is your target). My other thought on this is to calc what "extra" amount you feel is very safe versus assets, and set that as your upper limit.

2. Why not lay out a 5 year plan, monitor it, and go from there? Another thought here is to have 2+ years cash (a practice common by ERs here) to help lower the risk in the early years.

BTW, I used to live in Fairfax county so, I'm familiar with the area around your C'ville.
So I guess answers are #1 around $10K would be a good target, #2 I will have cash for first 5 years set aside in CD savings, or close to the expenses. Once I cross the retirement line, I'll put in place a plan to replace one years cash each year, so I plan to have funds for the next 5 years always in a short term liquid place. Not sure I want <> 150K sitting in savings account or CDs right now
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Old 08-24-2012, 07:43 AM   #17
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(snip)...I will have cash for first 5 years set aside in CD savings, or close to the expenses. Once I cross the retirement line, I'll put in place a plan to replace one years cash each year, so I plan to have funds for the next 5 years always in a short term liquid place. Not sure I want <> 150K sitting in savings account or CDs right now
Just remember that your actual cash balance will be reduced over time, even if maintaining that 5 years of "safe income".

As your future income sources start, the actual cash held will be reduced. It's not a case (necessarily) that you will aways hold a great deal of cash.

BTW, our actual cash held in ER (DW/me) is much more than your forecast for your situation. Could we do better by an alternative place to put that liquid cash in another vehicle rather than MM accounts? Sure.

Do we need to chase performance for our "safety net" funds? No. That's what our remaining holdings are there for.

Being able to sit back and disregard the market for our income for more than several years is a "luxury", IMHO.
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Old 08-24-2012, 08:12 AM   #18
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Just remember that your actual cash balance will be reduced over time, even if maintaining that 5 years of "safe income".

As your future income sources start, the actual cash held will be reduced. It's not a case (necessarily) that you will aways hold a great deal of cash.
Maybe I'm just missing something, why would actual cash balance be reduced over time? If I move equity assets to cash with inflation wouldn't the cash balance increase? Or are you saying that once I start SS for DW (at $1,387/month) that the size of the 1 year bucket needed will be $16K less?
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Old 08-24-2012, 08:14 AM   #19
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Or are you saying that once I start SS for DW (at $1,387/month) that the size of the 1 year bucket needed will be $16K less?
Exactly .

Actually, multiply the projected annual income times your future 5-year target (assuming you hold 5 years worth of cash equivalent instruments). That means total cash held will be reduced by $83k.
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