
How do you calculate swr?
09192010, 05:49 PM

#1

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How do you calculate swr?
What I mean is, is swr calculated on your nest egg by including the interest, dividends & capital gains you make on your money annually or before taking that into account?
For example: if I have 2 million in my nest egg, and I'm retiring next year, what is my swr based on? Say I want a 3% swr, and I retire at the after 12 mos more of work. During that 12 mos my 2 million kicked off a 4% return, adding 80k to my total.
So, do I take 3% of 2mil? Or 3% of 2,080,000?
Hope this question makes sense. For example, if I just lived off the dividends, interest and capital gains from my portfolio, does that mean my swr is 0% since I'm only taking what the portfolio is kicking off and never taking from the principal?
I'm confused on this issue. Thanks
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09192010, 05:53 PM

#2

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The sort answer is the $2,080,000. You have to remember that this is a rough rule of thumb.
Measure it with a micrometer, mark it with chalk and cut it with an axe.
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09192010, 05:54 PM

#3

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Lol! Love your analogy!
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09192010, 05:54 PM

#4

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From my standpoint, you calculate your withdrawal rate (whether or not it is "safe" is up for discussion) based on the value of your portfolio when you begin withdrawals. In your example you would take 3% of whatever the portfolio amount is at the time you retire and begin withdrawing.
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09192010, 06:03 PM

#5

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So is it fair to say:
2 mil port for example. End of year 1 it kicks of 3% return of 60,000. I only need to take 40k of that to live. So my swr for that year is 2%, correct? Just trying to get a handle on this.
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09192010, 06:16 PM

#6

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I calculate my SWR on Jan.1 . I add all my investments together including dividends and Capital gains then I take 4% of that number . I write down that number and as the year goes on I just subtract what I have spent . Any excess gets rolled into next year and on and on. I've been retired almost four years and it is working fine . I usually end spending a lot less than 4% but I enjoy trying .
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09192010, 06:29 PM

#7

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Quote:
Originally Posted by Hiredgun
So is it fair to say:
2 mil port for example. End of year 1 it kicks of 3% return of 60,000. I only need to take 40k of that to live. So my swr for that year is 2%, correct? Just trying to get a handle on this.

Yes  I think you are getting hung up in the "micrometer" part of the formula.
 If your portfolio is $2M and you withdraw $40,000, then you've withdrawn 2% of your portfolio.
 If your portfolio grew by $60,000 during the first year (from dividends or cap gains, or interest, or whatever) then your portfolio is now valued at $2M plus $60k less $40k = $2,020,000.
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09192010, 06:39 PM

#8

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On the day I retired, 8/29/08, I added up everything in my portfolio plus cash and amount in checking accounts, took 4% of that as annual paycheck, and adjust for inflation each year. Now if I look at the total amount at the end of two years, 8/31/10, and take 4% I come to exactly the same number I withdrew for 2010. Such is math.
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09192010, 10:15 PM

#9

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Does anyone include Social Security in SWR calculation? For example, if we start taking SS at the age of 62, in the end of the 30 year cycle, the amount that we received would be about 60% value of our current portfolio. So, do you add that 60% into your portfolio for SWR calculation?
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09192010, 11:56 PM

#10

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Quote:
Originally Posted by fh2000
Does anyone include Social Security in SWR calculation? For example, if we start taking SS at the age of 62, in the end of the 30 year cycle, the amount that we received would be about 60% value of our current portfolio. So, do you add that 60% into your portfolio for SWR calculation?

See my response here:
What's the highest SWR you're comfortable with?
So I do, in a way, to get a fuller picture of the landscape and what pieces of the jigsaw puzzle fit where...
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09202010, 07:30 AM

#11

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Wait a second. If you are adding in the earnings for the year and then withdrawing a fixed percentage, you are not dealing with the standard SWR approach. The standard approach sets the SWR at year one and then increases by some inflation factor thereafter. So earnings during the year are irrelevant  you just take last year's withdrawal plus your inflation factor. If, on the other hand, you are taking a fixed percentage of the portfolio each year you would, of course, include the earnings as discussed above. But with that approach the term SWR seems irrelevant since you can never wipe out a portfolio by withdrawing a fixed percentage of the remainder.
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09202010, 07:43 AM

#12

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SWR is, surely, only a term in the equation of whether or not one can FIRE. To blindly maintain an X% portfolio withdrawal in the face of substantial evidence that it will result in the money running out seems like not something many of the rational people here would do.
With the availability of tools like FireCalc, I'm not sure how useful SWR is, other than as a shorthand for the number which you obtained when you last ran your retirement calculator program with the % risk of failure which you deemed acceptable at the time.
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09202010, 10:34 AM

#13

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You may also want to look at this thread I initiated in February. Notice post #10 by Independent, particularly  it lays out a list of potential strategies in addition to those in the poll.
At the moment (I'm not retired), I'm leaning toward this more conservative version of the 95% rule:
In bad years, take the greater of 4% of current portfolio or 95% of the previous year's spending. In good years, take the lesser of 4% of current portfolio or 4% of original portfolio at retirement (adjusted for inflation).
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09202010, 12:44 PM

#14

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Quote:
Originally Posted by fh2000
Does anyone include Social Security in SWR calculation? For example, if we start taking SS at the age of 62, in the end of the 30 year cycle, the amount that we received would be about 60% value of our current portfolio. So, do you add that 60% into your portfolio for SWR calculation?

This seems overly complicated to me.
There are only two numbers that determine the withdrawl rate  the portfolio value and the amount you are taking from the portfolio.
A more straightforward approach might be to take the total $ requirement, subtract any entitlements you may receive like SS, pensions, etc. and boil that number down to what you need the portfolio to produce, then calculate a WR from that. After you know the WR you can decide whether to add the S in front of it or not. This is easier with COLA'd SS and pensions than with things that do not have a COLA.
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09202010, 01:03 PM

#15

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Quote:
Originally Posted by fh2000
Does anyone include Social Security in SWR calculation? For example, if we start taking SS at the age of 62, in the end of the 30 year cycle, the amount that we received would be about 60% value of our current portfolio. So, do you add that 60% into your portfolio for SWR calculation?

You just take what you still need for annual income AFTER SS, and then divide that into your portfolio. That gives you your portfolio withdrawal rate.
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09202010, 03:54 PM

#16

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In the context of 4% "rule" or studies, your withdrawal rate for a given year is your withdrawals from your portfolio, including interest and dividends that have been paid out and spent as opposed to reinvested or saved as cash in the portfolio, divided by the portfolio value at the beginning of retirement.
That above number is a withdrawal rate, WR, and not "your" SWR. SWR means Safe Withdrawal Rate, which is the same for everybody with the same portfolio and expected length of withdrawal. In this context the SWR is 4% indexed for inflation between the beginning point and now.
Whether or not you have a pension or SS or whatever has no effect on either WR or SWR. Pension and SS have a great effect on the degree to which your withdrawal covers your expenses as you can subtract the pension and SS from your expenses to find what remains that needs to be covered by the withdrawal.
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09202010, 04:54 PM

#17

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I would really recommend Kotlikoff and Burns Spend 'til the End. It doesn't tell you what to do, but it does point out that this topic is probably a lot more complex than the oversimplified picture that we often get. Not to mention the many, many different misunderstandings of even this oversimplified version. I would also make one more comment. One will never know his "SWR". Only the executor of the estate can say whether a WR was in fact an SWR, unless it fails earlier in which it can definitely be termed a NSWRNot Safe Withdrawal Rate
Ha
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09202010, 11:57 PM

#18

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Quote:
Originally Posted by Hiredgun
What I mean is, is swr calculated on your nest egg by including the interest, dividends & capital gains you make on your money annually or before taking that into account?
For example: if I have 2 million in my nest egg, and I'm retiring next year, what is my swr based on? Say I want a 3% swr, and I retire at the after 12 mos more of work. During that 12 mos my 2 million kicked off a 4% return, adding 80k to my total.
So, do I take 3% of 2mil? Or 3% of 2,080,000?
Hope this question makes sense. For example, if I just lived off the dividends, interest and capital gains from my portfolio, does that mean my swr is 0% since I'm only taking what the portfolio is kicking off and never taking from the principal?
I'm confused on this issue. Thanks

"Safe Withdrawal Rate" is just a bunch of words  anybody can define them however they like. The Trinity Study, and FIRECalc, use this definition:
The maximum percent of your inititial portfolio that you can withdraw, as an annual amount increased with inflation, and have at least an P% chance of your portfolio surviving for at least Y years. (Lots of people choose P=95 and Y=30.)
The SWR is determined by taking a lot of random walks down various invesment/inflation scenarios, or by looking at a bunch of prior years, and by trial and error finding the highest withdrawal percent that satisfies X and Y.
If you use FIRECalc, maybe 50/50 stocks/bonds, 95 and 30, it will give you something around 4%.
If you actually withdraw 2%, when the FIRECalc calculation gave you 4%, then you are withdrawing half of your SWR. So 2% is way less than your SWR. (You can go back to FIRECalc and get a P for 2%, it will be higher than 95%.)
The calculations I've seen always use total return. It doesn't matter if you are taking out dividends, interest, capital gains, or principal.
The 4% SWR assumes that your question is "How much can I safely withdraw, on a level basis, from my investments?", not "How much total income will I have?". FIRECalc will let you bring in the other things and calculate a total "Safe Income Rate" (I'm making up that term) but the SIR is not the same as the SWR.
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