How did you adjust to making regular withdrawals and watching your balance decline?

[youbet]

Two years into RE, I struggled to not feel guilty over withdrawals. Lately, however, inspried by an ERD50 thread concerning portfolio value fluctuations and after much studying of FireCalc outputs, I've become more comfortable with the fact that there will likely be significant vairation in my portfolio value over time. And that my portfolio will shrink over time. Gimmicks such as buckets, holding large cash balances or extreme diversity don't solve the problem.

I downloaded a number of sample years in spreadsheet format from FireCalc and put middle and ending values into histograms. It's an eye opener! Few "average" outcomes. Many outcomes significantly above or below average and the distributions skewed to the right. Even with a WR that FireCalc indicates would have had a zero failure rate historically, there were lots of close calls and early dips.

In the end, I concluded that variation is something you just have to live with unless you want to buy an annuity or go to something like CD ladders and probably die a slow death to inflation.

After years of accumulating, I try to have money not be an end in itself but rather to live and enjoy my RE while prudently managing my investments.

 

[retire@40]

One approach you could take is creating a 3 to 5 year withdrawal spreadsheet based on your investment balances and your annual budget.

Column 1 is the current actual balance in all your investment accounts.
Column 2 is the current year withdrawals you plan on taking from each of those accounts.
Column 3 in the balance in your accounts (less withdrawals from prior year plus estimated increase or decrease in value)
Column 4 is withdrawals in year 2
Etc.

All columns may be adjusted on an ongoing basis as facts change. For example, if you had an unexpected large expense in the current year, it may cause you to decrease some of the fluff in your budgets over the next 3 to 5 years in order to absorb that extra cost. Conversely, if you inherit some money from a long-lost relative, you can adjust your entertainment line item over the next few years.

If you see that in year 5 your withdrawals are exceeding your budget, it tells you that your plan may not work unless you do something now to avoid the shortfall.

This will give you some short-term and mid-term confidence that your plan is working.

 

[blessed]

I have been retired 18 months; DH has pension and health from Fed. However, we are withdrawing more than 4% from savings (taking from taxable account). We rebalanced and had to pay big Cap Gains for 2007. So the taxes paid to Fed. and St. came to $24,000; it will be about $2,000 for 2008.

 

[Lsbcal]

If your an analytical like me then you will be doing a lot of number crunching to project some worse case historical data onto your situation. My wife likes to have a good time and so she's a counterbalance to my conservative views. I figured we could spend up to 5.2% of portfolio for the first years until SS kicks in and brings this down. This is based on several FireCalc runs.

So far we're about 16% above the inflation adjusted starting portfolio value after about 5 years retirement. Has been a good market though with 55/45 allocation. This buffer could disappear with a very bad stock market -- so no unnecessary increases in spending. That is, aside from that new flashy red hybrid Camry we will be buying in the next week . Could not convince DW to give up the leather and heated seats.

 

[socca]

I think my Mom did it by having all of her money in fixed income assets. She spent all the interest, so she had a declining real wealth. But, since the dollar amount never went down, she was okay psychologically. I expect a lot of people in her generation did that. Sounds corny, but remember that we're talking feelings not logic here.

Is the expectation that you can get something (after-tax inflation-adjusted rate of return above zero) for nothing by strategic investing 'logical'? This is certainly the conventional wisdom, and this 'wisdom' certainly brings great emotional comfort to the folks who subscribe to it. The only fly in the ointment is that this 'wisdom' is based on past returns, and the past is gone forever and may never be repeated. If we lived in a sustainable society, then past returns might be more indicative of future returns.

Every month I produce a spreadsheet showing what my laddered bond portfolio paid me the previous month. I compare this against my budgeted monthly expenses (I don't care about actual expenses as long as they're within budget). The ability to tell my megacorp war-mongering war-profiteering employers to take a hike back in Jan 2007 was based on my prediction that my monthly cash flow would be strongly positive. It was, and is. I now have the luxury of trying to develop an entrepreneurial career in line with my values rather than serve the American war machine.

If I were heavily into equities (the conventional wisdom), I would use the same basic management strategy but modify my spreadsheet so that I'm making virtual monthly payments to myself rather than actual payments. I would then track whether my long-term portfolio investment return is in line with my estimates. A short-term market correction (to equity enthusiasts, all downturns are 'short-term') would not be a concern at all. I would simply note that my portfolio is temporarily below its expected long-term trend (up, up, up, always up!!), and go about living my life.

 

[Nords]

How did you adjust to making regular withdrawals and watching your balance decline?

The good news is that you're asking this question before you start making the withdrawals.

Now, 2000-2002 while I was still working - Then it shrunk!

Like EJ says, the better news is that you already know how to adjust. Remember during 2000-2002 when you used to make regular contributions and watch your balance decline? ER's not much different, except that you have more time to [-]obsess[/-] focus on your finances because you're not [-]wasting[/-] spending all that time in the office.

Yep. But when I consider the alternative (working), it ain't too bad...

One factor that has been of great assistance in my transition from growing to spending our nest egg is the death of friends and siblings. Nothing like the ultimate reminder of the fleeting and temporary nature of life to make you ask yourself "What am I saving it for?".

I used to read the obits in the back of our alumni magazine and think "Man, what a bunch of old guys. I hope I make it that long." Now, however, our class is starting to make a more consistent appearance in that section.

So far, the market ups and downs are far more visible than any withdrawals.

Until we wrote that check for the car purchase...

 

[Lsbcal]

I used to read the obits in the back of our alumni magazine and think "Man, what a bunch of old guys. I hope I make it that long." Now, however, our class is starting to make a more consistent appearance in that section.

Have you noticed how many people in their 50's and 60's are kicking the bucket? Just crossed the 60's line.

 

[SkisALot]

I've been ER'd 3 years now and living entirely off my portfolio. There are still days when seeing a stock take a dive is very gut wrenching; I go over my options again. Still, I was getting used to living with the uncertainty until inflation became a BIG issue. I didn't count on the real inflation rate that I believe we are experiencing (and that everyone is denying) getting as high as it is. While I have been living below my means, I am always on the look-out for ways to cut back further. This perception has become a way of life now. Living entirely off my money has drastically changed my thinking from what it was when I had a pay check coming in. It's like living in a different world.

 

[megacorp-firee]

There is a third alternative...spend less than your portfolio earns, so that the balance continues to grow even without working. But I would hate to deprive myself so that my heirs can live it up when I'm gone.

Another alternative is to live off the dividends and interest. The balance does not grow, but it doesn't get much smaller (not counting the crazy market actions lately) due to withdrawals.

 

[Mysto]

I've handled the problem by using the "bucket" (I know-I know) theory. At then end of the day it's all just AA but by having a spending bucket of 10 years I just watch my long term bucket grow w/o a drawdown. It's all just psychology but it works for me.

 

[W2R]

Have you noticed how many people in their 50's and 60's are kicking the bucket? Just crossed the 60's line.

In 23 days I will hit the big six-oh too, and the idea is pretty horrifying. Where did the time go? Where do our lives go? How could this possibly be true?

I'd better quit before someone starts singing "Cat's in the Cradle".

 

[Lsbcal]

Want2Retire, you mentioned it was really nice to sit out in the backyard in the morning with a cup of coffee (in a previous thread). Haven't forgotten that, so I tried it this morning since it was very warm ... and you were right!

 

[walkinwood]

Its human nature that losses hurt more than gains feel good. Its the reason why people sell winning investments too soon and hold on to losers too long.

I've just ER'd and to try and prevent a panic, I've done the following
a) Read the original SWR papers by Bengen etc. I am very comfortable with the thinking behind the SWR strategies and the back-testing and MC testing that has gone on. btw, I've chosen to use the 4%/95% plan advocated by Bob Clyatt.

b) Stick to your plan.

c) I've put a spreadsheet that shows what my portfolio 'should' look like taking consumption and a modest investment performance into account. That will show you how you stand at any time in relation to your 'plan'.

d) Don't check your portfolio every day. I can't help myself on this one, but am working on it.


So far - 16 days into ER - I haven't really withdrawn any money so all this is theory so far.

 

[Lsbcal]

... So far - 16 days into ER - I haven't really withdrawn any money so all this is theory so far.

I got a kick out of this last sentence .

What's kind of hard to manage is all those unknown expenses. You can plan for them to some extent, but emotionally it still can be a little difficult to deal with especially in a down market. For us there were things like:

$16k, new roof
$5k, replace forced air ducting
$30k, son decided to really get serious about college so we gave him old car and are buying new one
$15k/yr -- college expense
$10k, replace house carpeting

 

[aenlighten]

I am used to fluctuations

Over half of my expenses are covered by dividends and I actually draw on cash as I need it. It only becomes a concern when I sell to replenish my cash. I try to avoid this in a down market but with my low withdrawal rate I am not overly concerned. I would avoid major expenses until it recovered and eventually I expect my portfolio will be so sizable it will not be a concern at all.

 

[Nords]

Have you noticed how many people in their 50's and 60's are kicking the bucket? Just crossed the 60's line.

What's grabbing my 47-year-old attention is the guys (and they seem to be all males) who haven't even made it that far... "died in his sleep", "died during routine surgery", "massive heart attack while mowing the lawn"-- let alone cancer or car accidents.

So I push a little harder at taekwondo when I read those obits. "Ouch, Nords, that's my head! What's with you tonight?"

 

[hogwild]

I've handled the problem by using the "bucket" (I know-I know) theory. At then end of the day it's all just AA but by having a spending bucket of 10 years I just watch my long term bucket grow w/o a drawdown. It's all just psychology but it works for me.

You are not alone on this board. I'm bucketized as well. So I don't lose sleep over the gyrations of the market.

 

[JDARNELL]

I am not there yet on the withdrawl issue but I plan on using a 2-3 yr living expense bucket to help smooth out market gyrations and try to keep my SWR in the 2.25 to 2.75 range. I would like to make it longer but think 2 yrs is ok. The issue with this may be the inefficiency of return as to what I "could" be making. But I guess it is worth it for me to sleep well at night. At least for now til I put it into practice.

Tomcat98

 

[blessed]

I have a "bucket" of extra cash in a CD. This was to be a fall back. The MM was there for day to day flow. Then the tax payments were so BIG that I just about depleted the MM. I told DH no big purchases until the CD comes due in July (Ok you can order that one $700 lens... this is like women with shoes.....) I will breath a little easier after July 5th. The CD is @ 5.75% I can kiss that rate goodbye!

 

[OAG]

I have a "bucket" of extra cash in a CD. This was to be a fall back. The MM was there for day to day flow. Then the tax payments were so BIG that I just about depleted the MM. I told DH no big purchases until the CD comes due in July (Ok you can order that one $700 lens... this is like women with shoes.....) I will breath a little easier after July 5th. The CD is @ 5.75% I can kiss that rate goodbye!

Keep an eye on Credit Unions - Navy Federal just posted a 5% APY CD - long term and $20K Minimum, but the rates seem to be coming up SLOWLY.

 

[youbet]

Have you noticed how many people in their 50's and 60's are kicking the bucket? Just crossed the 60's line.

At 55 yo, I didn't have a single contemporary close friend, relative or work associate who had died. At 60, I have nine! That crosses my mind everyday.

Also, at 60 I find myself much less open to cutting spending due to down markets. Putting off vacations, a new kayak or spinning reel doesn't seem as optional as it might have a few years ago.

My RE portfolio is a diversified 60/35/5 (or so) allocation and I'd describe it as typical, dominated by low cost index funds. Despite not using any of the common gimicks such as "buckets" or heavy doses of cash, I haven't had any issues with needing to sell significant amounts of beaten down assets during this recent market downturn. Interest, dividends and skimming a little cash when trading or rebalancing seems to do it.

To those using so-called "buckets," as long as you realize it's primarily a mind game making you feel more comfortable, hey, go for it. I've taken my master spreadsheet and reorganized it into "buckets" several times and find my holdings do indeed reorganize fairly closely into a Lucia-like scheme. I just don't care to use the jargon. My only concern is for those who don't get it and think they're actually doing something different than you could do in a traditional AA scheme.

I'm a realist and understand that the years ahead may lead to me croaking with little $$$ left and there may be scary dips along the way depending on the markets. And there is little I can do in terms of avoidance schemes which wouldn't add other types of risk. Of course, I may croak with much more $$$ than I have now, again depending on the markets. So, you pay your money, you make your choice. Then you live with it.

 

[Poundkey]

I am not there yet on the withdrawl issue but I plan on using a 2-3 yr living expense bucket to help smooth out market gyrations and try to keep my SWR in the 2.25 to 2.75 range. I would like to make it longer but think 2 yrs is ok. The issue with this may be the inefficiency of return as to what I "could" be making. But I guess it is worth it for me to sleep well at night. At least for now til I put it into practice.

Tomcat98

I was unknowingly using a "bucket" method before I learned there was a book written about it. I doubt many here (including myself) actually bucketize per the book though. There is some inefficiency (as Tomcat mentions), but necessary for the "sleep at night" factor IMO. I try to reduce the inefficiency somewhat depending on MM and CD rates. Bucket one ranges from 3 to 5 years depending on short term rates. If rates are low (as they are now) I move cash into bucket 2 until I'm down to 3 years. Bucket 2 (taxable index funds) has roughly 8-10 years. Barring any huge disasters bucket 3 will most likely be split between the kids at some point. I realize this "bucket" stuff isn't for everyone......just adding to an interesting conversation.

As for the OP's questions.......yes, we were a bit anxious when we jumped out of the rat race (a little over 2 years now), but are now feeling better after seeing that our AA is behaving as we planned it. There have been some adjustments. We spend and conserve even more carefully now even though we may be over doing it. I just hope the kids enjoy bucket 3.

 

[Rich_by_the_Bay]

Despite not using any of the common gimicks such as "buckets" or heavy doses of cash...To those using so-called "buckets," as long as you realize it's primarily a mind game making you feel more comfortable, hey, go for it.

I agree with that.

Of course, as someone who finds the Buckets analogy to be useful, I'd have worded it differently, like, "To those NOT using so-called "buckets," as long as you realize that you actually ARE using buckets and denying it, this is primarily a mind game making you feel more comfortable, hey, go for it."

But in the end it's about diversifying, having enough cash on hand to meet personal comfort needs and weather typical market gyrations. Call it what you will.

And even at age 60, few of us can say that our post-retirement nest egg has really been tested severely, yet. It'll be interesting and scary to see our collective reaction to a 2002-like event or worse. Somehow I think we'll do better than most.

 

[youbet]

And even at age 60, few of us can say that our post-retirement nest egg has really been tested severely, yet. It'll be interesting and scary to see our collective reaction to a 2002-like event or worse. Somehow I think we'll do better than most.

Well, if Lucia is correct, the bucket terminology types will be doing fine.... totally confindent and assured of success. AA types will have been shown the error of their ways and will be standing in the soup lines staring blankly into space wondering why they didn't listen to Ray!

 

[W2R]

Buckets or no buckets - - it's all conceptual. I am working with hazy buckets too, I suppose, though they are only separate in a diffuse way in the back of my mind. I'm really happy with my investment plan, though.

I really need to read Ray Lucia's book!