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Managing RE spending based on market performance
Old 05-20-2018, 06:47 AM   #1
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Managing RE spending based on market performance

Planning to RE at the end of 2019 (age 55) and will be totally dependent on investments for RE income (no pension, no working spouse). Plan on using total return/rebalance approach once a year effectively funding a full year's (coming year's) expenses at the time of rebalance. While working under the basic 4% SWR, I have underwritten effectively 3 budgets which will give me flexibility to ratchet down my SWR should the market not cooperate. For those of you who may be in a similar situation where you are 100% dependent upon your investments for your RE income, I would be curious to know how you weave and bob with market fluctuations? Some specific questions...

- Are you blindly taking your set SWR % every year despite market performance to fill your annual expense budget and ignoring previous years returns or current portfolio balance, or do these variables change what you withdrawal from year to year?

- Say like 2017 you had a strong market performance and you fill your 2018 annual budget to cover expenses, but then 2018 begins to tank say 10%+... are you pulling back on 2018 expenses based on the current market movements, or do you figure you will just cross that bridge at the end of 2018 and access the final market returns/portfolio balance at that time to plan for 2019 expenses? I suppose asked another way, what factors/sensitivities/frequency drive you to get more conservative with your withdrawals/expenses?

While I am sure the more margin you have in your RE budget, the less concern you may have for making any reductions from year to year, it would seem logical that many in RE have some "if this happens, then I do this" formulas they implement to steady the ship during the storms. Conversely, I suppose many of you have formulas that say spend more during the good times. Much of this gets back to what helps you sleep at night, but I suspect many of you 10 yr plus RE veterans out there have lived this and can share their wisdom.
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Old 05-20-2018, 07:02 AM   #2
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Sort of in the same boat. 2 ish years out from FIRE at 57 at the end of 2020. No pension other than SS which we’ll take in our full retirement years. I have a muni bond ladder I am building that will fund approximately the first six years of our retirement. That gets us past some of the sequence of returns risk and represents about a 2% withdrawal rate in those years. Being muni bonds it also frees up lots of space to do our Roth rollovers up to the 12% tax level. If ACA is still around, it could also give us a shot at a subsidy, but I am NOT counting on that. It’s a conservative plan and one that I hope takes some worry out of what I hope will still be some of our most active years in retirement. We’d much rather be hiking and biking and traveling rather than worrying about our investments. Good luck to you. I look forward to hearing about your progress.
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Old 05-20-2018, 07:26 AM   #3
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I use VPW as a guide for my budget. It handles market fluctuations over time. If the previous year did really well, I get a small boost every year from it, unless a later correction takes it away. I base my year's target on start of the year balance, but if we get a major market downturn earlier in the year I'm going to be a bit more cautious rather than blindly allow myself to spend the full amount. Most years I've come in under budget so I don't worry much, and wouldn't sweat over a downturn, though we'll see what happens if one comes.
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Old 05-20-2018, 07:29 AM   #4
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While we are not totally dependent on the portfolio, we also quit early, and use a variable withdrawal strategy which is working well for us. We set ours at 5% max increase and 2.5% decrease floor. We have however seen good markets since retirement, so would re-evaluate if a big drop came and stayed. We keep about 2 years essential expenses in a money market account within the IRA's, and do not count that as assets when we calculate the take each year. If a market were down quite a bit at the beginning of a year then we would take from that for the year.
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Old 05-20-2018, 07:40 AM   #5
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The first full year of RE (2018), we are using a set % of the beginning RE portfolio.
Starting next year, we are switching to a % of remaining portfolio set at the beginning of each year. However, we will apply the Clyatt rule which adds the floor of no less than 95% of the previous year's WR when the market goes down.
The rule was developed with a 4% WR, but we will start with 3% and if there is a 2008 style drop, it would move our "effective" WR to around or just above 4% and allow us to not take big hits to our discretionary spending hopefully.
This is a variation of the VPW and the Guyton methodologies.
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Old 05-20-2018, 07:51 AM   #6
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We have no income other than portfolio. I paid very little into SS so when we start later this year that will not be a significant source of income.

So far our budget and spending has been steady with a steady growth each year. I don’t withdraw a % of portfolio, I withdraw 100%-105% of the previous year budget and put it in the bank.
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Old 05-20-2018, 09:09 AM   #7
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Our spending is now somewhat decoupled from market events now since the portfolio has grown so much over the past we are underspending our withdrawal. We take a full year % of remaining portfolio each Jan and bank the unspent funds at the end of the year, so even if we had a severe income drop due to portfolio shrinkage, we wouldn’t have to curb spending immediately.

Our 3% withdrawal rate is too low at our ages of 58 and 63, but I don’t think I’d be comfortable with 4% until I was 65. Although technically my %remaining portfolio method at 50/50 AA should support 4.3%. It’s just psychological getting up to the 4% area for me.

I’ll have to be more aggressive with withdrawals in the not too distant future.
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Old 05-20-2018, 09:26 AM   #8
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I’ll have to be more aggressive with withdrawals in the not too distant future.
Hey, if you need some help with this I'm happy to lend a hand.
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Old 05-20-2018, 09:30 AM   #9
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Hey, if you need some help with this I'm happy to lend a hand.
Me too, plus I'm a lot closer to your location and can pick up your excess funds in person if you prefer.
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Old 05-20-2018, 09:38 AM   #10
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Our spending is now somewhat decoupled from market events now since the portfolio has grown so much over the past we are underspending our withdrawal. We take a full year % of remaining portfolio each Jan and bank the unspent funds at the end of the year, so even if we had a severe income drop due to portfolio shrinkage, we wouldn’t have to curb spending immediately.

Our 3% withdrawal rate is too low at our ages of 58 and 63, but I don’t think I’d be comfortable with 4% until I was 65. Although technically my %remaining portfolio method at 50/50 AA should support 4.3%. It’s just psychological getting up to the 4% area for me.

I’ll have to be more aggressive with withdrawals in the not too distant future.
This is where we hope to get to someday, as not much $ in the safety account yet. I chose not to segregate a larger cash portion at the beginning of retirement and instead let it work for my portfolio. I understand that money is fungible in the end. Thus the Clyatt methodology will hopefully smooth the downturns in the beginning of retirement if needed.
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Old 05-20-2018, 10:13 AM   #11
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I play it by ear. Because I am the type of person who worries a lot, this works for me. I tend to spend more in a bull market than when the market is tanking. Sure, I still spend about the same on bare bones expenses, but during tough times I generally delay buying expensive discretionary items.

Times have not been tough lately, and from 2009-2017 I was trying to "Blow that Dough" although my annual withdrawals averaged less than 2%. I am only used to a lower middle class lifestyle and have been trying to figure out how to spend money in ways that I value, rather than throwing it away. Even though I dutifully spent more, my portfolio would still grow due to the market so my WR remained low.

But earlier this year I was a little worried because the market seemed to be faltering. Because of that, honestly I haven't had as much desire to spend a lot on discretionary stuff and I stopped trying so hard to spend more. So far this year, my projections tell me that I am on track to be spending 65% of what I spent last year. This lower amount would be more than covered by my mini-pension and the higher SS income that I am going to start receiving when I turn 70 next month. * During the first few years of retirement, most of us do not have SS and it is harder to cut back. But being older now, I have it and it is a big help.

Since the market really did not fail, I should probably start thinking of spending a little more in the second half of 2018. It would be so much easier to adjust to market conditions, if we actually knew exactly when the next bear market would start or if the financial gurus predicting a market crash actually knew what they were talking about. So, in a sense it's a little bit "by guess and by golly" when we aren't in the middle of a raging bull or a bottomless, plummeting bear market.


* (I have been on divorced spousal SS for almost 4 years, and next month when I turn 70 I am switching to SS based on my own employment record. So, my SS income will increase by $555/month at that time.)
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Old 05-20-2018, 10:16 AM   #12
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We don’t have a set WR. We’ve been retired for 18 months and so far we have been spending about what we estimated we would, which is slightly more than when we were working. We have this far been able to live on deferred comp payouts. Between additional employee benefit payouts, dividends and interest, and SS whenever we choose to start it in the future, we have some flexibility. The Fidelity Retirement Income Planner tool projects our WR at 2.5-3.5% going forward.

Having said that, I think we will likely throttle back a bit on travel & entertainment when the market tanks. We may not do fewer trips, but less expensive ones in the leaner years. Even if we don’t “need” to cut back, I think it will be harder for me to “blow that dough” if our portfolio is down 20%+.
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Old 05-20-2018, 10:32 AM   #13
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I'm going to spend more this year that any so far. Getting married, home improvements and a new car.
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Old 05-20-2018, 10:40 AM   #14
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I'm going to spend more this year that any so far. Getting married, home improvements and a new car.
Congrats, plus you have an ER Forum rep to keep up.
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Old 05-20-2018, 12:07 PM   #15
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A couple observations... it seems like many are spending less than they had initially planned for which has them now trying to find ways to “ blow the dough”. I suppose this is due to a combination of very conservative planning/withdrawal %, a cautious nature, and long run of the bull. Rich man problems! It also appears many are adding a safety bucket outside of their AA rebalance approach just in case. Whether it’s keeping a set $ amount covering X years in a separate acct or storing up unused cash from unspent years, this seems to give many an extra layer of comfort (understandable). I suppose it begs the question are you playing games with your AA? Eg: if you say you are a 60/40 AA, but keep 2 yrs of cash, are you not really something more conservative than 60/40? Not a judgment, just some observations. I get erroring on the side of caution helps many psychologically feel more safe with their potential for long term success of their $. I am sure I will adopt some of these strategies,
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Old 05-20-2018, 12:10 PM   #16
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I always report my AA as equities/fixed/cash. After my meeting next week I'll be 75/20/5
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Old 05-20-2018, 12:47 PM   #17
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A couple observations... it seems like many are spending less than they had initially planned for which has them now trying to find ways to “ blow the dough”. I suppose this is due to a combination of very conservative planning/withdrawal %, a cautious nature, and long run of the bull. Rich man problems! It also appears many are adding a safety bucket outside of their AA rebalance approach just in case. Whether it’s keeping a set $ amount covering X years in a separate acct or storing up unused cash from unspent years, this seems to give many an extra layer of comfort (understandable). I suppose it begs the question are you playing games with your AA? Eg: if you say you are a 60/40 AA, but keep 2 yrs of cash, are you not really something more conservative than 60/40? Not a judgment, just some observations. I get erroring on the side of caution helps many psychologically feel more safe with their potential for long term success of their $. I am sure I will adopt some of these strategies,
This concept was discussed in a recent blog.
Some of us including me don't count monies separate from the portfolio as being included in their AA. Others do include it.
For me once it is segregated elsewhere and will not be invested back into the portfolio, then it is not included even though it might be invested for example in CD's no different than the cash portion of a 60/35/5 portfolio invested in CD's.
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Old 05-20-2018, 12:52 PM   #18
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Only 2 years in so we've not experienced a post paycheck downturn. However as simple minded plodders we use what I've heard is a floor approach in that we divide our expenses into absolutely necessary and discretionary. It all starts with your AA. Cover the necessary with safe return investments for the foreseeable future. (Personally we're 43/57 Equity/Fixed ALL funds and accounts are included). CD ladders now make up about 70% of our fixed income. These give us a floor which my DW describes as a boardwalk 30 years long.

The rest is the variable component. My IRA's are dividend and income oriented and DW's smaller IRA's are Total Return oriented (3 Fund Boglehead). We take my divies and interest and eventually will tap my DW's at 3-4% of prior year end value if required. Meanwhile we'll let her 80/20 portfolio ride.( Inflation wildcard along with building up the Series I each year from taxable)

While it may look a little too complicated it is easy for us to manage considering the number accounts we have. Taxable, (2) TIRA's and (2) Roths.

So far so good. At this point the variable aspect will only have impact on our travel budget and choosing better accommodations or travel class. I guess that could be considered blowing dough in some circles.
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Old 05-20-2018, 01:02 PM   #19
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..,. And don't forget taxes.
On the subject matter of taxes, do many of you use iorp on an annual basis to do any strategic planning with your various accounts and withdrawal accordingly? Any other good tax planning tools other than running mock tax returns? Particularly if you are planning on more significant annual withdrawals?
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Old 05-20-2018, 01:07 PM   #20
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My non-equities part of my AA includes the short-term cash I keep on hand. It's all money to me. I know the short term cash gets drained over the year, but all of my investments are subject to change of the year, so I worry about that whenever I go to rebalance. I mainly rebalance after end of the year mutual fund distributions, and I take a look any time I have to sell any investments to shore up my cash, to decide which asset class to sell from.
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