How to calculate WR?

[scrabbler1]

I calculate my overall SWR as total spending divided by end-of-year portfolio balance. Only about 2/3 of my portfolio is available right now in after-tax accounts, so a SWR using that lower denominator will be somewhat higher.


I use monthly and quarterly dividends from a stock fund and my main bond fund to supply me with the income to cover my expenses. so any change in the portfolio's value is secondary. The dividends are a function of the number of shares in each fund times a cents-per-share dividend. What those shares are worth at any given time is less important.

 

[Cobra9777]

Here's another issue with WR that I wonder about sometimes... I frequently say my WR is 2%, which seems very conservative (I've even been accused of "irrational" conservatism). But 60% of our spend is covered by pensions and rental income. So the 2% is really just taxable dividends and small withdrawals that cover the remaining 40%, divided by our investable portfolio of stock and bonds.

But if I count our TOTAL spending in the numerator and include the FMV of rentals and the NPV of pensions in the denominator, the answer is 3.3%, which seems much less conservative and more in-line with general trends I've observed here. It's higher primarily because the payout ratio on the pensions is in the 6-7% range.

And BTW, this is not a pie-in-the-sky what-if. We could have easily elected the lump sum option on both pensions and we can sell the rentals at any time.

I think most of you would probably say that 2% is the correct answer. But IMHO, when comparing to an early retiree who is completely dependent on portfolio withdrawals, 3.3% is the more meaningful figure. SS complicates this even further.

Regarding deferred taxes on IRA balances, I see no issue using gross balances so long as the numerator includes federal tax expense.

I also agree with those who question the usefulness of WR in general. It seems to me that FIRECalc success rates, including the total retirement plan, are more indicative of whether one is ready to pull the trigger as compared to WRs, which will change dramatically as different income streams come online as various times and with various tax consequences.

 

[CardsFan]

IMHO, WR is only useful as an indicator to the individual(s) involved. With the 4% rule as a general target, it helps us see if we are on track for a "safe" future.

Right now, with no other income, it is easy to calculate: spend/balance. And spend includes EVERYTHING! No adjustment for future taxes, we are cutting with an ax, why measure with a micrometer?

If spend grows at inflation, then WR will reduce significantly when SS kicks in. OR, we can keep the WR the same, and spend more!

In any event, way too personal to even put numbers to it. Only you can decide what is right for you.

 

[Scuba]

Balances are as dependent upon the market as they are your spending, maybe more. What are you all going to do if the market is flat for a couple of years? Not spend anything at all, because that's the only way to keep from having less dough?

IMO you should have some idea of your WR, and a rough target of your spending, because the good times aren't going to last forever, and some of you may not find it so easy to back off the spending you've gotten used to. Others may not find it so hard to switch from Wagyu to prime beef.

I do have a target spend amount that our retirement plan was based on, and I do track where we are vs that after the fact. I just don't calculate a WR and when I started thinking about the complexities of doing so and getting feedback on this forum, it doesn't sound like I need to worry about WR. As long as our spending is within expected range and our balances look healthy, we should be good. When the market inevitably declines, I'm sure we will reduce discretionary spending somewhat, as we did when DH was laid off for several months a number of years ago. Almost half of our target spending is fully discretionary.

 

[Ronstar]

I'll probably go down after all the home improvements go in. Sorta making my current place into my dream house.

I'm really not worried, my SS survivor benes cover all my fixed costs except food, drink, entertainment and travel. In 4 years I'll claim on my own account and double my SS income. In 3 years I'm on Medicare.

Wagyu and caviar are still treats, not everyday. I've never had a budget, never tracked my spending and never balanced a checkbook. I plan to keep it that way -

Mine will rise during the upcoming home improvement phase. But with me doing the improvements (taking a long time), the difference will barely be noticeable.

 

[kcowan]

I really like doing this. My spending is an aspect of my life that I feel I can, and should control and micromanage.

I hope you give us the courtesy of doing it in private! I hate to see people inputting data while settling their bill in a restaurant.

 

[kcowan]

DW had my shopping gene removed as partial requirement before marriage, so there is little need for micromanaging my spending. And for DW, she never had that gene.

DW has the gene but controls it pretty well. I never had it. She is my personal shopper. Seems to work for us.

(WR is an unfortunate standard, I think net spend into portfolio should be the measure but then reality messes it up too.)

 

[W2R]

I hope you give us the courtesy of doing it in private! I hate to see people inputting data while settling their bill in a restaurant.

We figure it out in our heads (separately), compare the results, and then pay. Nobody sees it, so don't worry. The fun part is that we use two different, equally valid orders of computation.

 

[audreyh1]

Since I use the % of remaining portfolio withdrawal method, I calculate what I can withdraw each Jan 2 based on a set % of my portfolio value on Dec 31.

The first thing I do after withdrawing is set aside funds to cover the income taxes I expect to pay during the new year. The rest is then available for spending.

The year's spending funds are put in a high yield savings account, and monthly amounts automatically deposited to checking.