Expense Ratio as WR

[dallas27]

This will be a short thread -

For those targeting a SWR of, say, 4%, do you reduce your ACTUAL withdrawal by your expense ratio?

For example, if my target SWR is 4%, and I know my portfolio has an expense ratio of 0.1%, I then withdrawal only 3.9%. Seems like the right way to do it, but wanted to ask the question and not assume.

 

[pb4uski]

I would think not, because the ER is already built into the WR as an explicit assumptions or as a reduction to the rate of return.

For example, in firecalc is it an explicit assumption, so if you solved for living expenses (aka withdrawals) to achieve a certain level of success, then to reduce those living expenses for investment expenses would be redundant.

I'm not all that scientific. Our withdrawals are what we need to live on and I focus on portfolio survivability rather than a target WR.

 

[audreyh1]

It also turns out it's not a simple % subtraction. So use Firecalc to model your expense ratio when you calculate your various WR scenarios.

 

[samclem]

For those targeting a SWR of, say, 4%, do you reduce your ACTUAL withdrawal by your expense ratio?

For example, if my target SWR is 4%, and I know my portfolio has an expense ratio of 0.1%, I then withdrawal only 3.9%. Seems like the right way to do it, but wanted to ask the question and not assume.

The expense ratio does have to be accounted for. In FIRECalc, under the "Your portfolio" tab and "Options", there's a place to enter your ER. That function accounts for the ER drag on returns when showing results. Otherwise, the results are based on indices which don't have expenses, and the results will be overstated.
So, in a nutshell, it depends how you calculated that 4% was safe for you. If there was no ER baked into that calculation (or advisor's fees, etc), then you need to account for that. You'd need to reduce your actual withdrawals by that amount.

 

[Amethyst]

Rather than say 3.9% is your WR, I would say "My expenses are (x,y,z....), and my WR is whatever it takes to meet those expenses."

Expenses are expenses. The "cost" of owning your investments (the fees, etc.) is an expense. Similarly, taxes are a huge expense for some people. Myself, I include replenishing the emergency fund (which got drawn down a lot last year) as an expense.

Amethyst

 

[W2R]

This will be a short thread -

For those targeting a SWR of, say, 4%, do you reduce your ACTUAL withdrawal by your expense ratio?

For example, if my target SWR is 4%, and I know my portfolio has an expense ratio of 0.1%, I then withdrawal only 3.9%. Seems like the right way to do it, but wanted to ask the question and not assume.

To be honest, I just don't try to cut things that closely. I would never use a 4% SWR because I am fairly conservative about such things. The highest I have actually spent in my first five years of retirement, has been equivalent to a 2.64% SWR without including expense ratio. I would withdraw up to 3.5% without worrying about it, though.

 

[unclemick]

For the last 20 years of ER about 2% to 6% WR ballpark speaking hand grenade wise depending on what life and Mr Market has dealt us. Try to keep expense ratio low (Vanguard) but overall yearly budget gets aggressively managed depending on portfolio value at prior year end. A 'bad year' means tighen budget going forward until things look rosier.

heh heh heh - that's my grand unified theory of chickenheartedness. And I'm sticking to it.

 

[Alan]

The expense ratio does have to be accounted for. In FIRECalc, under the "Your portfolio" tab and "Options", there's a place to enter your ER. That function accounts for the ER drag on returns when showing results. Otherwise, the results are based on indices which don't have expenses, and the results will be overstated.
So, in a nutshell, it depends how you calculated that 4% was safe for you. If there was no ER baked into that calculation (or advisor's fees, etc), then you need to account for that. You'd need to reduce your actual withdrawals by that amount.

Exactly.

 

[GalaxyBoy]

This sounds to me like the OP is "measuring with a micrometer and cutting with a hatchet." Is the theory behind this stuff really that precise?

 

[samclem]

This sounds to me like the OP is "measuring with a micrometer and cutting with a hatchet." Is the theory behind this stuff really that precise?

No, it's not very precise and IMO it's pretty much lost in the noise if we are talking about .10% ERs like many low-cost funds have. But it's definitely not something to disregard with funds that have 1+ % ERs, plus maybe a helpful advisor taking 1%. (The industry-average MF ER was 1.08% in 2013, this isn't just a theoretical issue). So, to be consistent, ER's and other costs of investing should be considered as either "expenses" or decrements to expected performance. They all reduce the probability of success (or the available withdrawals at a given success rate) to a greater or lesser degree.

 

[pb4uski]

To be honest, I just don't try to cut things that closely. I would never use a 4% SWR because I am fairly conservative about such things. The highest I have actually spent in my first five years of retirement, has been equivalent to a 2.64% SWR without including expense ratio. I would withdraw up to 3.5% without worrying about it, though.

Are you accepting applications for heirs?