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Can your SWR be above 4% if you have more than you need?
Old 07-19-2007, 09:22 PM   #1
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Can your SWR be above 4% if you have more than you need?

Can you safely withdraw more than 4% per year if you start with a principal balance which provides more than you need? Consider a hypothetical retiree, let's call him Mr. Gotrocks.....

Mr. Gotrocks needs $80,000 per year to live a comfortable life in retirement. To sustain that at 4%, he would need a starting balance of $2 million. He has $4 million. Therefore, Mr. Gotrocks could safely withdraw $160,000 per year (inflation adjusted) which is twice what he needs to live comfortably in retirement.

In this hypothetical, doesn't Mr. Gotrocks have the option of withdrawing as much as he wants, so long as he doesn't allow the principal balance to fall below $2 million? (I understand the $2 million has to adjust with inflation) For example, couldn't Mr. Gotrocks live it up early in his retirement, and spend hundreds of thousands of dollars per year, so long as he stops his spending spree when his portfolio drops to $2 million, inflation adjusted?

Of course, he runs the risk that he may get so accustomed to his high living that he won't be able to cut back after several years of profligacy. But let's assume that he has tremendous self control, and he can cut back when needed. What is the flaw in this plan?
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Old 07-19-2007, 09:38 PM   #2
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sure he can. That's what some of the calculators from hell attempt to demonstrate.
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Old 07-20-2007, 12:59 AM   #3
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Sure- rather than think of him 'withdrawing at a higher rate' it is probably better to think of him as having an extra 2 million sitting around which he can blow, spend slowly, buy a second home with, whatever--- while he lives of a safe withdrawal rate on his remaining 2 million.

It's all just about being prudent with the core amount you need to support a basic living standard in a long retirement. If he has a couple million extra lying around, he can be imprudent with it if he wants to.
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Old 07-20-2007, 02:39 AM   #4
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Yup! Like Bob says... You might consider that $2MM can safely generate a floor (i.e., base) income of $80k at 4%. He has an extra $2MM.


What ever it takes to safely build that base income (conservative), must be dealt with is a less risky manner.

There are several ways to accomplish that goal. And the $4MM (double the money) helps .
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Old 07-20-2007, 10:01 AM   #5
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Of course, he runs the risk that he may get so accustomed to his high living that he won't be able to cut back after several years of profligacy. But let's assume that he has tremendous self control, and he can cut back when needed.
Actually the amount of self-control may be less than you think. It is typical for personal consumption to decline as one ages: older people tend not to do as much travelling, and trend towards cheaper hobbies such as reading, crafts, etc.

I am aware that health costs increase for older people; but generally speaking this is a gradual trend and there is not a sharp spike until the last six months of life.
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Old 07-20-2007, 10:22 AM   #6
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In this hypothetical, doesn't Mr. Gotrocks have the option of withdrawing as much as he wants, so long as he doesn't allow the principal balance to fall below $2 million? (I understand the $2 million has to adjust with inflation)
Yes, exactly.

In fact, it is perfectly reasonable to "raid" one's retirement portfolio for the occasional large one-off purchase such as upgrading to a more expensive home/property or (god forbid) buying an RV.

You just need to look at the remaining amount and determine that you can live within 4% of the remainder.

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Old 07-20-2007, 10:59 AM   #7
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We plan to buy a place in PV. When we first retired, we could not afford it so we rented there. Now, even though the prices have gone up there like everywhere else, we can afford it. We are planning a special shopping trip in November, before our regular time Jan-Mar. When we own, we will go from Nov-Apr.

Of course, we consider it to be a lifestyle expense and have not counted any appreciation or income. Our heirs will benefit from any residual value. Similarly, our 12 and 14 year-old cars will be upgraded sometime in the next 10 years. We plugged in 2010 for both just to account for them.
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Old 07-20-2007, 11:07 AM   #8
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Hmmm - so the cheap bastard in me figures out how to 'live' on my pension/early SS. Substitute 'evil annuity' if you like.

The 'party animal' part can skip SWR and spend my portfolio down at a 'hog'er' rate as I age?

Eh! Not ready to go there yet. In practice have varied spending widely the last 13 years due to circumstances.

heh heh heh - boy am I bad - retired without an SWR or spending spreadsheet. Better get a grip - huh
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Old 07-20-2007, 11:16 AM   #9
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Originally Posted by JustCurious View Post
Can you safely withdraw more than 4% per year if you start with a principal balance which provides more than you need? Consider a hypothetical retiree, let's call him Mr. Gotrocks.....


This is a very misleading title to a post. I thought it would lead to a review of Bernicke and/or Guyton where Mr. Gotrocks had $2MM but wanted to withdraw $120,000 every year.

In the case you described, he only wants a 2% SWR which by FIRECalc would last forever with a 100% certainty. However, he also wanted to know if he could "splurge" all the way up to 4%. DUH?

Mr. Gotrocks can blow or give away $160,000 inflation adjusted for probably the rest of his and Mrs. Gotrocks lifetimes. Very simple. Spend less and all the little Gotracks will really smile someday.
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Old 07-20-2007, 12:12 PM   #10
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Perhaps the more interesting analysis would be to divide the nest egg into the safe half and a "wild" half.

A 4% SWR would generate the needed $80k income from the safe pot.

Then he could withdraw a larger percentage from the "wild" part of the nest egg - maybe 6% or even slightly more. And if the economy is good to him then that pot will possibly not go broke. And over many retirement duration periods that approach would do just fine.

That would generate an income of around $200k ($80k safe + $120k wild).

The downside risk is that during a period like the 70's malaise the "wild" pot might go broke. In that case he would have to limit himself to the basic $80k or scale back his spending from the wild pot.

My personal withdrawal scheme will be something alomg those lines.
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Old 07-20-2007, 12:23 PM   #11
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Perhaps the more interesting analysis would be to divide the nest egg into the safe half and a "wild" half.

Using the 4% SWR (and only the 4% SWR) would generate the needed $80k income.

Then he could withdraw a larger percentage from the "wild" part of the nest egg - maybe 6% or so. And if the economy is good to him then that pot will possibly not go broke. And over many retirement duration periods that approach would do just fine.

That would generate an income of around $200k ($80k safe + $120k wild).

The downside risk is that during a period like the 70's malaise the "wild" pot might go broke. In that case he would have to limit himself to the basic $80k.

My personal withdrawal scheme will be something alomg those lines.
I heartily agree with the approach and intend to use it myself. I'm planning on a decent minimumal subsistance to be covered by SS and a portion of my assets. The travel, donations and extras will all be out of another portion that I intend to treat more along the lines of Bernicke. If all goes well, DW and I should still have a reasonable amount of "extra" money at age 75 but we won't be begging on the street corner (or applying at Wal Mart) if it doesn't.

If everything is "normalized," my actual withdrawl rate will be over 4%. I think people that intentionally wait to retire from a job they hate until they are under a 4% SWR are needlessly prolonging their agony. Bernicke and Guyton are not being taken seriously by enough people.

My question to people that say they are going to live on significantly less than a 4% SWR is "Why did you wait so long?"
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Old 07-20-2007, 01:51 PM   #12
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To answer the what took so long question, the sole proprietor had to find a buyer for the business.
I would be suprised if a couple with $4 million wanted to live an $80K (pretax) retirement lifestyle. Yes, spending the first $2 million is just an example, but "living on $80K" could go on for a long time after the round-the-world cruises end.
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Old 07-20-2007, 02:35 PM   #13
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To answer the what took so long question, the sole proprietor had to find a buyer for the business.
I would be suprised if a couple with $4 million wanted to live an $80K (pretax) retirement lifestyle. Yes, spending the first $2 million is just an example, but "living on $80K" could go on for a long time after the round-the-world cruises end.
Heyyou, I didn't say that Mr. Gotrocks was a "couple."
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Old 07-20-2007, 04:40 PM   #14
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In practice have varied spending widely the last 13 years due to circumstances.
This may be true for a lot of folks, I wonder how many retirees have a slow, steady & safe withdrawal rate and how many have widely varying withdrawals?

I expect my actual expenditures will vary widely. DW & I expect all our basic retirement to be covered by our pensions. The rest of our funds can be spent, conserved or passed on. So the difference of taking 1%, 10% or 0% is based on things we plan to do and how the market is going.
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Old 07-20-2007, 05:59 PM   #15
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I suspect most retirees have steady expenses since they, I think, do not have pensions, unlike retirees of the government or mega-corporations that still can afford to pay for the pension obligations.
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Old 07-20-2007, 06:51 PM   #16
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I think alot of public companies can still afford to fund pensions for their employees but they would rather save the money to pay their outgoing CEO $29 million severances packages after they screw things up and need to be replaced.
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Old 07-21-2007, 10:52 PM   #17
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I think I will be scared to withdraw 4% so will plan to have a home paid off, a roommate I already have had the last 21 years and a decent car that has several years left in it. My SS check and roommate income will cover property taxes, insurances, food, and utilities. I will probably only draw on retirement savings in January when I have a bunch of dividends and capital gains from mutual funds and just spend that the first few years for fun stuff. I will buy one replacement vehicle in retirement maybe at around 75 if I get a new one at 60 something. If I start with 600K invested and don't really need any of it but take out about 5K to have fun for a couple of years and it grows to 700K I might start taking 10K for fun. Then when it gets to 800K start taking 16K. If I run pretty lean my boyfriend/roommate will buy me stuff. Today he fixed the trap on a sink, mowed my yard, trimmed and put moss killer on the roof. I just ask if he wanted me to give him money for the hardware store stuff and he didn't. Maybe tomorrow I will have him change my oil in my truck and put a new thermostat in. I know most people don't want to have roommates but I like it. He also cleans all the fish I catch and pays me to live with me and pets the cats and feeds them so I think I will keep him for retirement.
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Old 07-23-2007, 10:19 AM   #18
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Old_woman:

Well, here's something to think about. If you don't take out 4% (as your SWR) then you almost certainly will die without spending your nestegg. As it is even a 4% SWR will almost always leave a substantial nestegg. So to take less than that just limits your lifestyle.

As Cutthroat posted many times - What are you saving it for ?
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Old 07-23-2007, 01:11 PM   #19
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...My question to people that say they are going to live on significantly less than a 4% SWR is "Why did you wait so long?"
My current number comes out to about 3.7% but Iím seriously debating myself about using a higher number than current expenses. OTOH, Iím looking at 4/08 instead of a planned 4/09 exit date.

Other factors are that I have no children and do not own a house or car. I do not hate my job but it has become awfully stale; more importantly, I have no doubt my health would improve without the job. So here I am, about to fall off of the fence.

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Old 07-23-2007, 05:07 PM   #20
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My current number comes out to about 3.7% but Iím seriously debating myself about using a higher number than current expenses. OTOH, Iím looking at 4/08 instead of a planned 4/09 exit date.
My "number" is higher than my current expenses because I want to do a lot more traveling than I do now. However, I don't expect that travel surge to continue for that many years so I have a conservative living fund covered by SS and a portion of my nest egg (4% SWR). The travel/extra fund is expected to be depleted so it's done on a Bernicke formula. At 75 I'll still have a decent amount of "extra" money available but not as much as I had when I first retire.
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