Detailed Distribution-Decumulation-Withdrawal Plan

[Midpack]

This topic seems to be under-represented vs accumulation --- and distribution seems to be quite a bit more difficult to plan. I have found a few good articles (and discussions here) that explain methods conceptually, and I've built a spreadsheet (that I don't fully trust), but have any of you seen a published detailed distribution plan showing everything over the projected life of the distribution? And by no means am I asking anyone here to share their personal plan/details. I would pay a professional to develop a plan as a 'second opinion,' but I haven't found anyone I'd trust to do it yet. And yes, I realize the plan is only a roadmap, that I will have to adjust for along the way. [Edit: without a roadmap, how can I know if I'm on track or need to make an adjustment? I'd want to know ASAP, not when it becomes obvious and might be too late to correct. Otar, Fulmer and Evensky/Katz do provide good discussions on this.] FWIW my spreadsheet has assumptions inputs for:

• Retirement Age,
• Assumed Inflation Rate,
• Taxable Dividends & Cap Gains,
• Projected Investment Return,
• Pension Starting Withdrawal Age,
• Pension Monthly,
• Soc Security Starting Age ME,
• Soc Security Starting Age DW,
• Soc Security Reduction,
• Bonus Contribution while working,
• Deferred while working 401k (Cont+Catch Up+Seed+Match) + 2xTIRA+ HSA,
• Current Taxable Nest Egg,
• Current Tax Deferred Nest Egg,
• Current Total Nest Egg,
• Property (Home, Boat, etc.)

The output includes annual:

• Year,
• Age (to 95),
• Gross Budget Expenses,
• Gross Special Expenses,
• Gross Annual Expenses,
• Taxable Income,
• Estimated Taxes,
• After Tax Cash Income,
• After Tax Monthly Income less Spcl Exp,
• Pension,
• Soc Sec ME,
• Soc Sec DW,
• Total Pension & Soc Sec,
• Net Withdrawal,
• Taxable,
• Deferred (with RMD),
• Taxable Nest Egg Balance,
• Deferred Nest Egg Balance,
• Total Nest Egg Balance,
• Property (Home, Boat, etc.),
• Withdrawal Rate,
• Tax Rate

 

[LOL!]

Does Optimal Retirement Calculator and Retirement Decision Support System qualify?

What about ESPlanner?

 

[W2R]

I like Chapter 20 of the Boglehead's Guide to Investing, "Making your Money Last Longer Than You Do".

First, they make a list of factors such as those you have listed and suggest that you can run through any one of a number of online financial programs (that we have discussed many times on this forum). But then they admit that there are really too many unknowns, "even if you have an ironclad date with Dr. Kevorkian". They discuss many of the issues we discuss here, such as spending flexibility, delaying SS, buying an annuity, and delaying retirement. Finally the chapter discusses "A Prudent Plan for Tapping Your Portfolio (but this section is only about two pages long). They point out that if your portfolio is really large, you might be able to maintain or even increase your stock allocation as you age. They discuss AA and conclude by saying that "the most important key to making your money last is to be financially flexible, particularly in the early years" (of retirement).

Although they don't have the kind of detailed financial plan that you are asking for, I think there is a lot of wisdom here. What I got out of it is that although you can run your info through programs like Firecalc and others and get some idea, life after retirement will hopefully last for a long, long time and situations change. (For example, I am thinking that SS could disappear, or whatever, or your spouse might die, heaven forbid, or so many other things could happen that would affect your income or expenditures). So my interpretation is that they are suggesting that instead of trying to actually control your entire financial plan for many decades in the future, that you do your best to set yourself up well and then approach things with an attitude of awareness and flexibility.

Another interesting book that I noticed while writing the above, is the Bogleheads' Guide to Retirement Planning. I haven't read this one but having read the reviews on Amazon, it sounds like a terrific book as well and I plan to order it.

 

[W2R]

In the Four Pillars of Investing, Bernstein adds more wisdom. He, too, doesn't discuss details but he says that if you are set up well enough, you can assume that you will live forever. He says to estimate expenses, including taxes, adjust for SS, and divide by your expected real rate of return. Then you don't have to die on schedule, so that removes one of the unknowns.

One sentence on p.236 stands out, however: "But at the end of the day, you also have to realize that it is impossible to completely eliminate risk."

Again, what I take away from this is to prepare well, and then remain aware, flexible, and knowledgable in handling your portfolio in retirement.

 

[W2R]

Following up on the idea of there being too many unknowns to trust a financial program completely and forever, here is a quote from "The Only Investment Guide You'll Ever Need" by Andrew Tobias:

"The long and short of it is that - - whatever it may be called by the time you retire - - there is almost sure to be some sort of Social Security safety net. But the benefits it pays, especially to those who don't need them, are likely to be even less rich than today." (p.256)

Sorry if I am bombarding you with general information that is not really a specific financial plan. I just find your question to be intriguing.


For example, look at the lack of certainty in your inputs:

• Retirement Age, - - you can probably control this unless your employer changes your options
• Assumed Inflation Rate, - - we have had threads on impending hyper-inflation or deflation. Assumptions are pretty tenuous.
• Taxable Dividends & Cap Gains, - - look what has happened with our dividends in the past year! Ick.
• Projected Investment Return, - - ditto
• Pension Starting Withdrawal Age, - - again, this is probably ok but your employer could change the rules, I suppose.
• Pension Monthly, - - seems certain. Relying on a pension for necessities seems pretty scary to me these days, even with PBGC.
• Soc Security Starting Age ME, - - - ok, since I believe you are in your 50's (?) Not certain if you were in your 20's.
• Soc Security Starting Age DW, - - - ok, ditto
• Soc Security Reduction, - - SS in general seems like something we can't fully depend on, but *probably* this will remain the same for you
• Bonus Contribution while working, - - - if you can continue to do this, but who knows what life will bring?
• Deferred while working 401k (Cont+Catch Up+Seed+Match) + 2xTIRA+ HSA, - - - this is probably pretty certain, unless your employer eliminates it
• Current Taxable Nest Egg, - - - excellent, but look at 2008
• Current Tax Deferred Nest Egg, - - - ditto
• Current Total Nest Egg, - - - ditto
• Property (Home, Boat, etc.) - - - we just saw a housing crash. Who knows? Housing could skyrocket or go lower.

I'm not trying to be discouraging, but just to point out that there are SO many unknowns and assumptions that the Bogleheads' point about remaining flexible is really more important than any financial plan you could come up with. But for the latter, Firecalc or the link that "LOL!" gave you would be a good starting point.

 

[Midpack]

Sorry if I am bombarding you with general information that is not really a specific financial plan. I just find your question to be intriguing.

No danger of that, no such thing as too much information on this subject. I should add that while I know I can't 'die broke,' I have no interest in leaving an estate.

 

[Amethyst]

Midpack,

Very important issue. Thanks for posting your requirements. I'm using yours to develop a personalized set, because no on-line calculators (including the formidable Firecalc) model my situation closely enough. (And none of them dare venture too close to taxes!)

Note: Firecalc's underlying methodology is impressive; it's the data input fields that don't quite work for me.

Once I have my requirements right, I'll post in hopes of adding to the discussion.

Amethyst

 

[Rich_by_the_Bay]

Otar clarified quite a bit for me.

 

[W2R]

No danger of that, no such thing as too much information on this subject. I should add that while I know I can't 'die broke,' I have no interest in leaving an estate.

To me, the requirement of remaining flexible, aware, and knowledgable is fine but what if a person ends up alone with Alzheimers or otherwise incompetent? With SS apparently gasping its dying breath, there is going to be a lot of misery for such folks.

All of these authors seem to agree that you can't really make a plan that controls all factors and gives you a certain guaranteed standard of living forever. You are dealing with probabilities, only, not certainty. As I recall even inflation adjusted annuities are not guaranteed by the states for over $100K, usually, in the event that the annuity company craters.

 

[Animorph]

I wrote my own computer program to cover exactly those issues. I can even plug in historical returns to see how market volatility affects it. However, you never know what will actually happen, so it's still a rough guess at best.

Although I haven't set a goal of leaving an inheritance, I do target a final portfolio net worth in order to provide added longevity insurance and make sure I'm withdrawing less than 4% per year or less. If you really don't care, an immediate annuity and late SS benefits probably works best.

You will find it is easy to fudge the numbers if you just add a little more investment gain in particular, so stick with something conservative that gives similar numbers to FIRECalc.

 

[Midpack]

Added to original post FWIW. [Edit: without a roadmap, how can I know if I'm on track or need to make an adjustment? I'd want to know ASAP, not when it becomes obvious and might be too late to correct.]

And thanks for the responses so far.

 

[W2R]

Added to original post FWIW. [Edit: without a roadmap, how can I know if I'm on track or need to make an adjustment? I'd want to know ASAP, not when it becomes obvious and might be too late to correct.]

And thanks for the responses so far.

Well, last October I was re-running FIRECalc a lot to see how my diminished nestegg size would affect my ER budget.... Re-running whatever financial program you use, and/or studying your spreadsheet could be one way to get an idea of how you're doing.

For example after ten years of ER, I would re-run FIRECalc using my nestegg size at the time and shortening the anticipated retirement period since I would be older. Another factor to consider is that the older one gets, the more likely one is to live to an older age. So, if you are assuming that you would live to 85, then you would want to adjust that to an older age when you are in your 70's or 80's. I have been assuming that I will die at no younger than 93, but I doubt I will spend that much so my nestegg will probably last indefinitely. Either way, if I live to my 80's I will move my anticipated expiration date back to over 100. The oldest person alive is 113, I believe, but that is so unlikely as to be ridiculous for me, anyway.

 

[Moemg]

Before I retired I really worried about how I would handle the distribution phase but now that I'm retired two years I really see how easy it is . Every January I check my portfolio and make a determination how much money I can spend ( 4% of portfolio + pension + SS ) . Then as I spend it I mark it down . Any money left over goes into next years pot . I don't go over the spending amount . If I need a car that just means less travel for the year . Last year when my portfolio took a hit I just spent less . As Rich pointed out Otar really does give some good points on this . I especially liked his point on not re balancing so often.

 

[Ed_The_Gypsy]

For withdrawal, I like Galeno's basic approach:
http://www.early-retirement.org/forums/f26/hi-im-galeno-13957.html

Stepping back a bit, it seems like you are trying to do two things at the same time--managing your portfolio and managing your expenses.

Having no option myself, I have to look at managing my portfolio first (a la Galeno, more or less) then deciding how to live off the distribution (managing my expenses to fit). This requires a Draconian approach to retired lifestyle that my DW is sure not to like. (Maybe that is why she keeps sending me back to work.)

Surely you have to do the same thing today with your paycheck and monthly expenses. We all have to live on our after-tax income. I am very negative on using credit anymore but I still have to. I am trying to eliminate all debt by the time I have to stop working and swear off it thereafter.

As far as planning ahead, how will it be different in retirement?

 

[walkinwood]

Try ESPlanner. It may give you most of what you need.

 

[Midpack]

Before I retired I really worried about how I would handle the distribution phase but now that I'm retired two years I really see how easy it is . Every January I check my portfolio and make a determination how much money I can spend ( 4% of portfolio + pension + SS ) . Then as I spend it I mark it down . Any money left over goes into next years pot . I don't go over the spending amount . If I need a car that just means less travel for the year . Last year when my portfolio took a hit I just spent less . As Rich pointed out Otar really does give some good points on this . I especially liked his point on not re balancing so often.

Unless I misunderstand, this approach will a) ensure you never fully deplete your nest egg but b) if your real return (actual return minus inflation) is less than 4%, your expenses will have to decline throughout your retirement.

I would like to at least maintain my standard of living, and I am afraid health care and diminishing SS/Medicare benefits will require more from my personal holdings over the years ahead. And my goal will be to deplete my nest egg, but at some age beyond what I can realistically expect, I am using 95 in my model.

 

[youbet]

Any methodology or tool that uses projected rates of return or inflation without time phasing them is worthless. For example, assuming a 6% rate of return average over 30 years is meaningless. If you average 6% by having fabulous returns at the beginning followed by low or negative returns at the end you will be much better off than if you average 6% by having staggering losses at the beginning followed by nice returns at the end.

40 months into RE, I try to do these things:

1. Try to understand and place a value (personal and subjective but key) on the risk of not spending and wishing you had vs. spending and wishing you hadn't for DW and myself.

2. Try to understand our tolerance for investment volatility and risk to establish limits for AA schemes.

3. Periodically review the almost four year old FireCalc run that was an important factor in my decision to FIRE. In particular, I remind myself that even though my run back-tested with zero failures (100% success rate), there were a number of starting years that were near failures and produced 30 yr periods that would be "scary" even though they survived.

4. Understand that there are variables over which you have little or no control and that widely varying outcomes from individual to individual and from time to time are the norm. Even when you make your decisions based on historical probabilities or a model built on prudent assumptions, you will still have a significant chance of being an abnormality. Learn to live with that.

5. Be informed. Read, read, read.

6. Be flexible.

7. If and when things go against you, don't obcess. Life is short and you're going to be dead a long time so have a little fun now. (Philosophy lesson from youbet's long dead mom.)

 

[youbet]

my goal will be to deplete my nest egg, but at some age beyond what I can realistically expect, I am using 95 in my model.

Unless you do something like buy an annuity with a payout period that ends when you're 95, there is no sure way to plan for exactly running out of money at some predetermined time. Chances are, if you go with a FireCalc 100% model, you'll wind up with somewhere between zero and several times the beginning value of your portfolio based on future factors we can't predict or control.

You're trying way, way too hard to predict and control the future. You can only walk a historically prudent path, hope for the best and enjoy life.

 

[tmm99]

LOL,

Very nice calculator. Thanks for sharing!

 

[Ed_The_Gypsy]

I saw this NYT article on Yahoo not long ago:
http://www.nytimes.com/2009/08/29/your-money/individual-retirement-account-iras/29money.html

It may be germane here.

 

[Meadbh]

Midpack, I sense your need for control (!) but there are so many unknowns in the future that whatever plan you come up with now will most certainly not represent what actually happens over the next several decades. Think back to your early career. Did you plan the whole thing out till ER date? I'm willing to bet, NOT!

The Russians tried to run the economy of the Soviet Union on centralized 10 year plans, and it just didn't work. It's essential to have a plan, but it's also essential to be flexible. Why not do what most Megacorps do: strategic planning every 3-5 years, with operational planning annually?

I agree with what others have said and the resources they have pointed to. Perhaps the most important issue in the first five years of retirement is the sequence of returns. This will have a disproportionate effect on the longevity of your assets. It seems to me it's important to have a "strategic plan" aimed at preserving capital in the first five years of retirement. After that, the strategic goals can change.

 

[Rich_by_the_Bay]

Unless I misunderstand, this approach will a) ensure you never fully deplete your nest egg but b) if your real return (actual return minus inflation) is less than 4%, your expenses will have to decline throughout your retirement.

I would like to at least maintain my standard of living..

Clyatt back-tested using a 95%-of-prior-year floor on your annual withdrawal and it stood up well when using the percent of total portfolio approach.

I am among those who feel that a little belt tightening in bad years is less uncomfortable than forging ahead with a fixed damn-the-torpedos 4%+inflation amount.

It's a personal issue, of course. My plan is 4.5% of total, never under 95% of prior year withdrawal, accept a little fluctuation and have a healthy emergency fund for the really bad times. You can play a little catch up when gains exceed 4.5% by a substantial margin.

 

[Moemg]

Unless I misunderstand, this approach will a) ensure you never fully deplete your nest egg but b) if your real return (actual return minus inflation) is less than 4%, your expenses will have to decline throughout your retirement.

.

I use this approach for two reasons .
1- It is simple to figure out
2- Peace of mind
I retired in Jan. 2008 and no way did I have the guts in Jan.2009 to take 4% of my intial portfolio and an increace after my portfolio had taken a beating so the 4% had me tighten my spending slightly and allowed my portfolio time to recover .

 

[youbet]

I use this approach for two reasons .
1- It is simple to figure out
2- Peace of mind
I retired in Jan. 2008 and no way did I have the guts in Jan.2009 to take 4% of my intial portfolio and an increace after my portfolio had taken a beating so the 4% had me tighten my spending slightly and allowed my portfolio time to recover .

My portfolio dropped 25% - 30% (don't want to go look, too painful! ). If your's dropped a similar amount, did you actually cut spending by a corresponding amount?

We didn't. As you may recall from earlier threads, I was concerned about continuing to spend at planned rates but also worried about postponing activities that were "now or never" due to our age and other factors. So, while we did postpone some remodeling (that we're doing right now! ) we didn't postpone some travelling and other activities and this resulted in us not cutting spending by the amount our portfolio dropped.

We're really glad we made the decision that way. Had we blindly followed the "percent of current portfolio value" rule, we'd have had to cancel some activities that would have been very painful to cancel. Instead we went ahead and did those things and today, even though our total overall net worth is roughly $8k less than it would have been had we done the full cutback, it seems inconsequential.

YMMV.

 

[Moemg]

My portfolio dropped 25% - 30% (don't want to go look, too painful! ). If your's dropped a similar amount, did you actually cut spending by a corresponding amount?

No, I only had to cut spending by $4,000 because I have a pension which has a COLA plus I had $5000 left over from the previous year .