ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
A common problem here is that discussing your personal WR% isn't as simple as it sounds. Often, an ER will have a high WR% in their early years, which declines when pensions/SS kick in, and then may increase again if that pension is non-COLA. So what number should we use when trying to convey the relative safety/risk of our overall or average WR?
Here is my suggestion:
A) First, you must disclose your time period and success rate assumptions, as these are key variables (I'll think about this later, but maybe everything could be referenced to the default 30yr/95% success...).
B) In FIRECalc, enter your time period, and $1,000,000 portfolio without any pensions or SS entries. Ignore spending amount.
C) Use the investigate tab, set:
and SUBMIT.
D) Take the resulting spending level, and shift the decimal place to get the WR%.
Example:
45 years, 100% success results in a $32,393 spend level, so that is 3.24% WR. So any combination of pension and portfolio and spending that provides 100% success for 45 years could be expressed as a 3.24% effective WR%. So that WR% should represent an equalized value for comparison.
As a simple validation of this, compare:
If your plan shows money left over at the end of your time period (>100% success), you could either simply say 'lower than x.xx% WR', or adjust spending in FIRECalc to get a similar ratio of end/begin portfolio, and report that WR%.
Make sense?
-ERD50
Here is my suggestion:
A) First, you must disclose your time period and success rate assumptions, as these are key variables (I'll think about this later, but maybe everything could be referenced to the default 30yr/95% success...).
B) In FIRECalc, enter your time period, and $1,000,000 portfolio without any pensions or SS entries. Ignore spending amount.
C) Use the investigate tab, set:
Given a success rate, determine spending level for a set portfolio, or portfolio for a set spending level
Search for settings that will get a success rate of as close to __XXX___ % as possible (usually within 1%) by changing... _check__ Spending Level
Search for settings that will get a success rate of as close to __XXX___ % as possible (usually within 1%) by changing... _check__ Spending Level
and SUBMIT.
D) Take the resulting spending level, and shift the decimal place to get the WR%.
Example:
45 years, 100% success results in a $32,393 spend level, so that is 3.24% WR. So any combination of pension and portfolio and spending that provides 100% success for 45 years could be expressed as a 3.24% effective WR%. So that WR% should represent an equalized value for comparison.
As a simple validation of this, compare:
A) A retiree with a $50,000 spend level who can take $25,000 SS from the start. The other $25,000 (50%) comes from a 4% withdraw from a $625,000 portfolio.
B) A retiree with a $50,000 spend level with no pension/SS. The $50,000 comes from a 4% withdraw from a $1,250,000 portfolio (2x the size of retiree A).
So they both are drawing 4% from the portfolio, and the portfolios will have the same success rate. Of course, if they fail, retiree A still has half their spending sourced by SS, but that is separate from the portfolio success itself.
B) A retiree with a $50,000 spend level with no pension/SS. The $50,000 comes from a 4% withdraw from a $1,250,000 portfolio (2x the size of retiree A).
So they both are drawing 4% from the portfolio, and the portfolios will have the same success rate. Of course, if they fail, retiree A still has half their spending sourced by SS, but that is separate from the portfolio success itself.
If your plan shows money left over at the end of your time period (>100% success), you could either simply say 'lower than x.xx% WR', or adjust spending in FIRECalc to get a similar ratio of end/begin portfolio, and report that WR%.
Make sense?
-ERD50