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calculating wr question
Old 12-29-2014, 03:24 PM   #1
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calculating wr question

Regarding one's WR, when you say 2.5-4% of the portfolio, is that including the dividends, interest, ST and LT capital gains produced annually?

I looked at income produced in my portfolio for 2014. It generates 1/2 income (pre-tax of course) I will need per year in ER. Without these I need an initial 3% WR to meet my top end of spending. So if 1/2 is generated as above, would one say my WR is 1.5%?? I know this may seem obvious but just wanted to clarify.

Thanks!
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Old 12-29-2014, 03:32 PM   #2
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You want to be able to eat and pay the bills in years the market goes down, don't you?
That 4% is based on the total value of your portfolio at the prior end of year balance. Firecalc takes your spending amount and increases it for inflation each year.
Don't plan on taking out all your gains plus 4%
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Old 12-29-2014, 03:38 PM   #3
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It is 2.5 to 4% of the total portfolio. It doesn't matter if it comes from gains, dividends or interest.

So, in theory, the way it works is as follows. Say you have a $1M retirement portfolio on 1/1/15, and it is your first year of retirement. Using 4% for easy math, you can withdraw $40K from the account for the year.

In year two, you have two options:

1) In the standard form of the SWR, and the way most of the simulators work, you would take $40K + rate of inflation, and that would be your withdrawal amount (regardless of what the market did, or what your portfolio is now worth). If inflation was 5%, you'd withdraw $42K the second year.

2) Using a variable method, you would take 4% of the new portfolio balance on 1/1/16 and take out that. So, if your portfolio was worth $1.1M, you'd take out $44K, but if it was only $900K, you'd take out $36K.

Either way, the WR is the amount taken out divided by portfolio value.
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Old 12-29-2014, 03:44 PM   #4
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It is 2.5 to 4% of the total portfolio. It doesn't matter if it comes from gains, dividends or interest.
Thanks. That was the what I was trying to ask.
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Old 12-29-2014, 03:49 PM   #5
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Originally Posted by Travelwanted View Post
Regarding one's WR, when you say 2.5-4% of the portfolio, is that including the dividends, interest, ST and LT capital gains produced annually?

I looked at income produced in my portfolio for 2014. It generates 1/2 income (pre-tax of course) I will need per year in ER. Without these I need an initial 3% WR to meet my top end of spending. So if 1/2 is generated as above, would one say my WR is 1.5%?? I know this may seem obvious but just wanted to clarify.

Thanks!
How much you take out (2%, 1.5%, 3%) is the number you arrive at by multiplying the per centage by the year-end value - which includes cash being held in your investment accounts because of dividends, or declared capital gains.

Now you have a NUMBER. The value you withdraw can come from any combination of cash in your accounts plus sales of investments to make up the total Number you need to withdraw.

When people talk about their withdrawal rate, they are speaking of the total value in their accounts, not just the amount taken by selling investments.


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Old 12-29-2014, 03:50 PM   #6
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Originally Posted by lemming View Post
You want to be able to eat and pay the bills in years the market goes down, don't you?
That 4% is based on the total value of your portfolio at the prior end of year balance. Firecalc takes your spending amount and increases it for inflation each year.
Don't plan on taking out all your gains plus 4%
It's usually the initial portfolio balance, adjusted for inflation. This is the more common WR used, and the one most of the studies model.

Some of us use the "% of remaining portfolio" method with no inflation adjustment, and that does use portfolio value at end of prior year.

It's impotant to be clear which method is being used.
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Old 12-29-2014, 04:01 PM   #7
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Originally Posted by audreyh1 View Post
It's usually the initial portfolio balance, adjusted for inflation. This is the more common WR used, and the one most of the studies model.

Some of us use the "% of remaining portfolio" method with no inflation adjustment, and that does use portfolio value at end of prior year.

It's impotant to be clear which method is being used.
+1

I've seen a lot of misunderstanding of the definition of "WR" on the forum when measured against the SWR concept initially brought forward in the Trinity Study.
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Old 12-29-2014, 04:09 PM   #8
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Thanks all. My main question was whether or not to include the income generated from the portfolio as part of the WR.

As far as method, I would aim to use the actual portfolio value that year, not the initial year as forward guidance. Seems safer.
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Old 12-29-2014, 04:11 PM   #9
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Thanks all. My main question was whether or not to include the income generated from the portfolio as part of the WR.

As far as method, I would aim to use the actual portfolio value that year, not the initial year as forward guidance. Seems safer.
That's fine as long as you don't adjust for inflation, but rather accept whatever you portfolio performance is each year - up or down from prior year.
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Old 12-29-2014, 04:57 PM   #10
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+1

I've seen a lot of misunderstanding of the definition of "WR" on the forum when measured against the SWR concept initially brought forward in the Trinity Study.
That is so true!

I have computed my withdrawal rate every year since my 2009 retirement, using three methods just for fun.

1. First I use the exact amount withdrawn to calculate the withdrawal percentage of my portfolio balance on January 1st of that year. I like this method a lot because it is easy and very straightforward, and because I like the idea of a variable withdrawal depending on market conditions. Of course, this method includes dividends and capital gains in the portfolio balance. Travelwanted, this sounds like your method too.

2. Then out of curiousity I also compute the corresponding SWR according to the Trinity Study method. This method does not deal with dividends and capital gains, and assumes a constant inflation-adjusted withdrawal no matter what the market conditions.

(So far the former (January 1st) method has produced a lower/preferable withdrawal rate than that obtained using the Trinity study method, probably because of the booming market. With my conservative AA the difference has been less than 0.25% for any given year. But method 3 yields quite different results: )

3. For my own information I also compute a third rate - - my withdrawal as a percentage of my portfolio balance on March 9th, 2009. That was the date when my portfolio was at its lowest during the 2008-2009 crash. The purpose of computing this is to help harden myself in advance for the next crash.
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Old 12-29-2014, 05:38 PM   #11
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i like bob clyatts method and intend to use that as my own method.

just taking each years balance and multiplying it by 4% can leave you pretty short to pay bills in big down years. bob's method says take 4% of the years balance or less 5% than you did if markets are down. you take which ever is higher. no seperate inflation adjusting needed each year
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Old 12-29-2014, 05:48 PM   #12
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This is a timely question for us.

I realize that many/most people, living exclusively on withdrawals, are flying under the tax radar, so my question does not apply to them.

For us, withdrawals consist of fund CG/dividends, over and above pension income. May I assume that the WR includes the taxes on the withdrawals?

Thanks,

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Old 12-29-2014, 06:11 PM   #13
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yep , taxes are an expense.
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Old 12-29-2014, 06:13 PM   #14
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This is a timely question for us.

I realize that many/most people, living exclusively on withdrawals, are flying under the tax radar, so my question does not apply to them.

For us, withdrawals consist of fund CG/dividends, over and above pension income. May I assume that the WR includes the taxes on the withdrawals?

Thanks,

Amethyst
Withdrawals are whatever you withdraw (remove) from your portfolio. How you spend the money once it is withdrawn (pay the grocery bill or pay taxes with it) makes no difference, it is still gone (withdrawn).
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Old 12-31-2014, 10:35 AM   #15
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Our 60/40 portfolio costs us 0.7% per year. ER=0.3%.Taxes=0.4%.

Our gross AWR=3.2%. We live on our net AWR=2.5%.
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Old 12-31-2014, 11:12 AM   #16
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Originally Posted by mathjak107 View Post
i like bob clyatts method and intend to use that as my own method.

just taking each years balance and multiplying it by 4% can leave you pretty short to pay bills in big down years. bob's method says take 4% of the years balance or less 5% than you did if markets are down. you take which ever is higher. no seperate inflation adjusting needed each year
You'll be short only if you spend absolutely everything you withdraw in the up years.
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Old 12-31-2014, 12:12 PM   #17
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Can't income tax, especially tax on investments skew the number a bit? I may be way off here, but as an example. If I had $10 million dollars making 15% before tax return, that would be $1.5 million income, lets say taxed at 40% that would $600k in taxes or 6% of the $10 million. Forget that the setup isn't real but if it took $200k (2% of the portfolio) for me to live that would be 2% plus the 6% taxes or 8%. Now, at 3% inflation, my $10 million needs to go up $300k each year to keep the buying power in place. In this example, then, I have cleared $900k after tax, spent $200k and have $700k left to cover inflation of my primary investment.

I know this seems like a random analysis but what am I missing other than finding a 15% return on one's entire portfolio. But it does make the WR look really high. Maybe I am answering my own question but is seems the return on your portfolio is critical to assessing if 2,4, 6% or whatever, is a "SWR".



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Old 12-31-2014, 12:21 PM   #18
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Can't income tax, especially tax on investments skew the number a bit? I may be way off here, but as an example. If I had $10 million dollars making 15% before tax return, that would be $1.5 million income, lets say taxed at 40% that would $600k in taxes or 6% of the $10 million...
For most people, that hypothetical $1.5M "income" will not be totally taxed. Much of it will be unrealized capital gains and will not be taxed until the shares are sold. And then, whatever is in tax-deferred accounts like 401k or IRA is not taxed until it is withdrawn.

Our I-bonds in Treasury Direct also accumulate tax-deferred interests that will not be taxed until we redeem.
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Old 12-31-2014, 04:33 PM   #19
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I calculate my SWR as the quotient of my total expenses divided by the end-of-year portfolio value, both of which I am in the process of calculating now. The portfolio's value includes unrealized cap gains and reinvested dividends and cap gain distributions. Total expenses includes all income taxes but I do adjust those taxes based on what is due for the year, not what I actually paid that year because what I paid during the year may be for taxes due in other years (i.e. estimated taxes may be paid the following January; April payments may be for the prior year).


I have had my SWR spike upward due to a large, unexpected short-term cap gains distribution whose income was fully taxable as ordinary income. But a spike due to that doesn't trouble me a whole lot because the added taxes came about due to added income, so I always had the money to pay for it. I know......that kind of distribution often has a corresponding drop in that fund's value (i.e. total portfolio) so I didn't really see a growth in wealth.
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Old 01-02-2015, 04:36 AM   #20
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Since some people actually withdraw funds quarterly or monthly, one can conceivably select a monthly or quarterly SWR based on very latest/current market environment.

I plan to just use an annual SWR percentage based on portfolio value in September/October, - typical market low.

I like the idea of stress testing portfolio SWR with Fibonacci percentages just to see what a worst case might look/ feel like. Others have suggested using a portfolio balance in March 2009, which was very near one of the Fibonacci percentages (-66 pct).
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