Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Correctly calculating WR with other varying income sources?
Old 04-24-2012, 10:37 AM   #1
Thinks s/he gets paid by the post
gauss's Avatar
 
Join Date: Aug 2011
Posts: 1,709
Correctly calculating WR with other varying income sources?

I am unclear how folks typically calculate WR unless they are starting retirement when SS and any COLA pensions are already started.

For my case, SS will not begin until 17 years after ER, and we have various non-COLA pensions that will come online at various points.

The attached picture (in real 2011 $) illustrates my situation with the following legend:
  • Lt Brown - Social Security of DW & DH
  • Blue/Red - Pensions of DW & DH
  • Lt Blue - Portion to be made up from Investments

The naive calculation would be to just look at the ratio of Investment income to total income for the first year and then multiply this ratio by first year investment income divided by Nest Egg balance in first year.

Given that this ratio varies greatly over the time period, this is likely incorrect.

This would seem to be a similar issue for anyone with a non-COLA pension.

Thanks for any pointers to discussions or references that discuss this.

gauss



FWIW - My attempt at correctly doing this was to calculate the (NPV), in first year, of all the income streams of the 50 year time period. I would then calculate the ratio of NPV (Investment Income) / NPV (Total Income) in first year and then multiply this by Investment Income(first year)/Nest Egg Value (in first year).









Attached Images
File Type: bmp RetirementIncomeBreakdown.bmp (1.11 MB, 272 views)
__________________

__________________
gauss is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-24-2012, 10:51 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,428
I think WR is a lot more simple that what you are trying to do. The WR is simply the expected withdrawal for a particular projection year in relation to the nestegg balance.

In my case my projected WR is initially higher than it is ultimately once my pension and SS kick in.

Putting WR aside, one way I look at my situation is the PV of the projected withdrawals (the pv of the light blue bars in your picture) discounted at a conservative real rate of return compared to the amount of my nestegg. You may have the data to calculate your projected WR for each projection year.
__________________

__________________
pb4uski is offline   Reply With Quote
Old 04-24-2012, 11:48 AM   #3
Full time employment: Posting here.
kaudrey's Avatar
 
Join Date: Feb 2006
Location: Alexandria, Va
Posts: 943
I do it exactly as pb4uski does it; with a pension at 57 and then SS at 65 or later, my WR goes down over time.
__________________
Two roads diverged in a wood, and I - I took the one less travelled by...
kaudrey is offline   Reply With Quote
Old 04-24-2012, 11:48 AM   #4
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
My WR varies as various income sources com online and costs drop off. You can run FIRECalc with all the income streams coming on at different times, so it is possible to model this and get a safe spending amount. Hardly anyone has the simplest case.
__________________
Animorph is offline   Reply With Quote
Old 04-24-2012, 01:22 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Nov 2009
Posts: 3,867
For me, calculating a WR is a bit strange because I am accessing only my non-retirement accounts for now while my IRA continues to grow and won't be touched until at least age 59.5 (which is in about 10 years from now). Should the denominator include the IRA or should it not?

Furthermore, my frozen company pension and SS will kick in when I am in 60s and those two new income streams will reduce my dependence on my current investment income sources as well as my IRA.

I often refer to these three future income sources as my "reinforcements" so as long as I can make it to age 59.5 intact I know things will improve for me. I ran my scenario through Fidelity's Retirement Income Planner (and met with their reps a few times over the last 4 years) and it showed the same thing.

Even now, I have a surplus of income from taxable investment accounts versus my expenses so even if that erodes in the next 10 years I will still be okay.
__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

"I want my money working for me instead of me working for my money!"
scrabbler1 is offline   Reply With Quote
Old 04-24-2012, 02:50 PM   #6
Thinks s/he gets paid by the post
Brett_Cameron's Avatar
 
Join Date: May 2011
Location: South Eastern USA
Posts: 1,010
My model has discretely varying expenses and varying income and income taxes. Calculation of safe withdrawal rates gives me warm fuzzies or cold shivers that are useful as one of several benchmarks to gain a level of non-confidence.
__________________
Brett_Cameron is offline   Reply With Quote
Old 04-24-2012, 02:53 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,428
Quote:
Originally Posted by scrabbler1 View Post
... Should the denominator include the IRA or should it not?
Yes. At least the way I do it I include all my nestegg (taxable investments, tIRAs, and Roths)
__________________
pb4uski is offline   Reply With Quote
Old 04-27-2012, 04:02 AM   #8
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
This is the way I look at WR too. My WR is not perfectly constant (between 3 and 4%, depending on the years - between 47 when I FIRE and 95).
Quote:
Originally Posted by pb4uski View Post
I think WR is a lot more simple that what you are trying to do. The WR is simply the expected withdrawal for a particular projection year in relation to the nestegg balance.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 04-27-2012, 10:28 AM   #9
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,820
Withdraw the light blue every year, don't worry about converting that into a level percentage. The 4% SWR is just a crude rule-of-thumb and you're already past that.

Use FireCalc, and your own worksheet (I'm thinking it's more than this one graph), and any other source that makes sense to you, to determine the total of all sources.

If you want a formula that fits your worksheet so far,
(NPV of all income) / (NPV of $1 per year) = annual spending
(annual spending) - (first year's pensions) = first year withdrawal (in dollars)
Recalculate every year. That's what I do.

We put some money into short term assets just to protect ourselves against sudden drops in the first few years when we were selling assets pretty fast. Some people do that, some don't.
__________________
Independent is offline   Reply With Quote
Old 04-27-2012, 11:28 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,686
What I would add to above, investigate some of your situation using ORP link here: Optimal Retirement Calculator and Retirement Decision Support System

It might give you some ideas about things like Roth conversions before SS kicks in and best method to take some income streams with the emphasis on tax efficiency.

BTW, nice graph and colors . Your estimate of 4% inflation for the entire period is too much in my opinion. Suggest using the market rate for the next 10 years = 10yr Treasury yield - 10yr TIPS.
__________________

__________________
Lsbcal is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 04:23 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.