Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Expense Ratio as WR
Old 02-16-2015, 08:56 AM   #1
Thinks s/he gets paid by the post
 
Join Date: Jun 2014
Posts: 1,035
Expense Ratio as WR

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.
__________________

__________________
dallas27 is offline   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 02-16-2015, 09:23 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: 16,501
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.
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is online now   Reply With Quote
Old 02-16-2015, 09:29 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,538
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.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 02-16-2015, 09:30 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,617
Quote:
Originally Posted by dallas27 View Post
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.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 02-16-2015, 11:09 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Amethyst's Avatar
 
Join Date: Dec 2008
Posts: 5,900
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
__________________
If you understood everything I say, you'd be me ~ Miles Davis
'There is only one success to be able to spend your life in your own way. Christopher Morley.
Amethyst is offline   Reply With Quote
Old 02-16-2015, 11:09 AM   #6
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,951
Quote:
Originally Posted by dallas27 View Post
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.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is online now   Reply With Quote
Old 02-16-2015, 12:59 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,409
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.
__________________
unclemick is offline   Reply With Quote
Old 02-16-2015, 01:28 PM   #8
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,153
Quote:
Originally Posted by samclem View Post
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.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is online now   Reply With Quote
Old 02-16-2015, 01:58 PM   #9
Full time employment: Posting here.
GalaxyBoy's Avatar
 
Join Date: Jul 2009
Location: The Beautiful Blue Ridge Mountains
Posts: 862
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?
__________________
GalaxyBoy is online now   Reply With Quote
Old 02-16-2015, 02:44 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,617
Quote:
Originally Posted by GalaxyBoy View Post
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.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 02-16-2015, 04:33 PM   #11
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: 16,501
Quote:
Originally Posted by W2R View Post
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?
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is online now   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


Similar Threads
Thread Thread Starter Forum Replies Last Post
401k (high expense ratio) vs. Non-Tax deferred account (low expense ratio) Mike54 FIRE and Money 15 11-11-2012 11:31 PM
Expense Ratio and Price/Earnings Forward mickeyd FIRE and Money 5 01-28-2007 05:59 PM
Whats your overall expense ratio? cute fuzzy bunny FIRE and Money 58 03-18-2006 12:42 PM
Expense ratio smooch FIRE and Money 4 12-28-2005 09:14 PM
Expense Ratio Reporting TromboneAl FIRE and Money 8 12-01-2005 11:04 AM

 

 
All times are GMT -6. The time now is 04:00 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.