Poll:Enjoyment vs Conservatism

[aim-high]

You and DW are almost 50 with no pension, but are use to great cash flow from a high salary. Your annual SS when taken at 70 will only cover 20% of your annual expenses. You have no debts and two kids who are both in college and is paid for.

You have hit your number during the recent market run-up and are ready to retire.

Your assets allow you to enjoy a very comfortable lifestyle at a 3.5% WR, or live fairly well at a 2.5% WR. If austerity was required you could shrink down to a 2% WR.

Based on life expectancy charts, it's fairly likely one of you will live into the mid 90's and possibly even to 100.

How do you start out your (hopefully) long 45 to 50 year retirement?

 

[brewer12345]

3% WR to start and if things go well in the first 5 years you give yourself a raise. If you are really, really conservative, start shopping longevity insurance.

 

[robnplunder]

I didn't vote b/c my heart says vote for the first bullet, most likely I will end up doing the 2nd bullet, and may end up doing the 3rd if stock/bond market stalls. The 4th bullet for me is to do OMY until I feel I have enough to do the 1st bullet.

 

[SoReady]

I didn't vote b/c my WR starts out at 6.5% and doesn't get below 3.5% until I'm 67. I'll be 58 this year.

 

[martyb]

I'll be starting at 4%, but I'll have a couple of pensions. Not really any SS to speak of though.

 

[rodi]

In the situation described - I'd go the middle road - 3%.

That said - I'll probably retire with a higher than 4% withdrawal rate for the first few years - as I continue to set aside kids college funds. They launch (and go off my spending/expenses) about the same time my SS comes online and the withdrawal rate goes to about 2.5%....

As has been mentioned - staying adaptive and flexible is a good thing... start at 3% and see how it goes... if your nest egg grows, consider giving yourself a raise. If the market is less wonderful, stay the course, or drop it down a little.

 

[W2R]

The 50 year length of your retirement plans is quite formidable. Given this very lengthy retirement, I voted for 2.5%.

Since, as you mention, you can "live fairly well" on 2.5%, this should not be a hardship.

 

[NW-Bound]

Hey, how do I vote? I thought 3.5% would be frugal. What with SS still coming?

 

[Birchwood]

I belong to the better safe than sorry group.
I'll even do 2%, since my life style is pretty frugal. At any time, if I need big ticket items, I can always spend more. I just don't want to make it a habit of spending a lot. It is better to be conservative with occ. liberalism.

 

[aim-high]

Hey, how do I vote? I thought 3.5% would be frugal. What with SS still coming?

So you're for taking the risk and only adjusting in case of a significant market drop.

 

[Louis2]

I voted conservative too. All the models in the world won't help my psyche if my portfolio loses 15% the first year! After a few years of 2.5% with a growing FIRECALC probability, I hope to be able to loosen up.

 

[JacqJolie]

I wouldn't trust that recent market run-up to stick around... I had a 62% gain in 2009 and about 40% in 2008 but I didn't expect that to be the norm and it certainly wasn't in 2010-11 for me. What goes up, did come down (or stay flat anyway).

Maybe I'd discount my 2013 end # by about 20% or more and work out the withdrawal from there (~3-3.2%?) But I don't really get the whole SWR method anyway because I don't - and won't - invest in indices (although I have thought of shorting SPY lately).

 

[FIREd]

I would start out at 2.5% because this is a long retirement and most assets are currently expensive (IMO).

 

[TallTim]

Sounds like us.

I voted for 2 b/c that's what I'd like to do … my personal reality is closer to 4 (OMY or 2 or 3) until DD and DS have a year of college and we know what it will actually cost vs. plan …. plus the extra interim income and savings might make #1 a possibility,

 

[Aiming_4_55]

My goal is B, but SWR will probably be lower. Not factoring in SS or small pension at 62.

 

[NW-Bound]

So you're for taking the risk and only adjusting in case of a significant market drop.

OK, I did not read the scenario in the OP, and was thinking of my own situation, which is quite different.

We are older, have worked longer hence will have higher SS, and I also do not think I have that good a chance to last till 90. So, 3.5% WR which I am drawing now is already conservative.

Regarding the situation as outlined, I would agree with other posters that a lower WR would be prudent, whether that's 3% or 2.5%.

 

[Major Tom]

I voted to start out at 2.5% (which is what I did) for several reasons -

1) SS won't be significant for you so you won't have much else to save you if things get hairy,
2) This will be a long retirement period and
3) You stated that you can live "fairly well" at 2.5%. You won't exactly be hurting at that level, so why not play it safe to begin with?

PS - having my portfolio merely "survive" a particular retirement period was not my only requirement. I am trying to minimize the chances that it will dip to a scary low level so that I can sleep at night, and a conservative WR at the beginning of retirement can help with this. This was one of the reasons for my conservative WR.

PPS - Social Security will account for a larger portion of my income than yours which, IMHO, is even more reason for you to begin retirement with a conservative WR.

PPPS - Don't necessarily listen to what I'm saying. Feel free to do what works for you

 

[Lsbcal]

I think the comments here will be the most valuable thing for the OP. I did not vote because I'm not the OP and his is the only vote that counts.

Seriously, as many find in severe bear markets we don't know our risk tolerance until it is tested. But the test may never come or it may come and be something that is worse then history suggests. Life is complicated.

 

[MichaelB]

I think the starting withdrawal rate needs perspective, and what matters is 1) what is the desired lifestyle and 2) do they have a plan B? If they want to continue their current lifestyle, that puts them at 3.5%, and they really have nothing to fall back on, it's risky. If their desired lifestyle is less than that and they have some assets they can sell (like a second home or a boat) the plan looks much more realistic, an pd feasible.

 

[aim-high]

Thanks. The comments have been very helpful.

Here is a fuller picture. I'm a technology consultant (now working at a mega-corp for the last 5 months.) I've never done index investing but LBYM, while working and investing in a couple of startups and throwing excess cash flow back into those as well as a couple of concentrated positions.

We're not quite there yet, but are almost at the point where 2.5% of assets will cover our current LBYM lifestyle in a high expense area. It's a comfortable lifestyle, but it is LBYM so we're not regularly taking fancy trips, leasing new cars, eating out at real restaurants, or doing many of the other things that high earners in affluent areas do.

However a couple of years ago we indulged in a 2 week trip to Europe and loved it. We also want to get more actively involved in philanthropic activities and do some adventure travel (hiking, kayaking, white water rafting, etc.)

After reading the thread about travel and ER, I decided to spend the travel money now while I'm "young" and in good enough shape to actually enjoy adventure travel. My thinking is to start with 2.5% to fund regular living expenses. Instead of fully stopping all sources of income, setup an LLC and do about 500 hours per year of consulting to fund philanthropic and adventure travel activities for the first few years of ER.

I don't know what its like to have a broadly diversified low beta portfolio. I think I need to get used to the idea of living from our investments instead of my ability to perform. My startup mindset has always recognized that what I have today could be wiped out tomorrow and I have always drawn comfort in from being able to earn a good living consulting. But once I turn that off, I want it to be off for good.

 

[Spanky]

more ranges are needed:
<1.0% (super rich, super frugal, fat pension, etc)
1.0%
1.5%
2.0%
4.0%
4.5%
5.0%
>5.0%

 

[MooreBonds]

3% WR to start and if things go well in the first 5 years you give yourself a raise. If you are really, really conservative, start shopping longevity insurance.

At first, I was going to join the 3% crowd, but then I saw your second post:

I've never done index investing but LBYM, while working and investing in a couple of startups and throwing excess cash flow back into those as well as a couple of concentrated positions.
...
I don't know what its like to have a broadly diversified low beta portfolio. I think I need to get used to the idea of living from our investments instead of my ability to perform. My startup mindset has always recognized that what I have today could be wiped out tomorrow and I have always drawn comfort in from being able to earn a good living consulting. But once I turn that off, I want it to be off for good.

So what exactly does your portfolio look like currently? Almost entirely of private company start-ups? While owning partial stakes in private businesses can be lucrative, I would have a hard time knowing how to value your different positions in terms of a SWR.

Are your taxes on distributions considered part of profits, or are they qualified dividends? If the former, your taxes will likely be considerably higher in retirement, rather than having a good chunk be qualified dividends and long-term capital gains at lower tax rates.

The issue of 3% also depends on your final portfolio, in terms of what % to bonds, what kind of bond holdings, what kind of stock holdings, etc. Perhaps you could try figuring out a target AA, and seeing what that would spin off in estimated income each year.

It's good that you have SS covering 20% of your budget, which would help give a little bit of a cushion and let you splurge a little bit more now while you're young, but a 50 year retirement is something you want to have a strong financing for.

Then there's the age-old question of how much you'll spend from years 80-90. While you might encounter high expenses in 90+ with assisted living, there's a good chance your current projected ER budget at age 50 will be considerably higher than when you're 80-90 (minus healthcare issues), so perhaps a 3.5% WR for the first few years could work out. Hopefully you'll have more free time to be able to time your purchases better and you'll enjoy an upgraded lifestyle for the same 3% WR cost (think: specials on airfare/trip costs, last-minute cruises, early bird dinners, etc.)

 

[kcowan]

We have spent 12 years doing whatever we want. Trips, snowbirding, restaurant meals. The first 5 years were a little high based on our long range plan (running out of money before 90) but they have come into line since we bought our southern home. Now we can live forever!

 

[aim-high]

At first, I was going to join the 3% crowd, but then I saw your second post:



So what exactly does your portfolio look like currently? Almost entirely of private company start-ups? While owning partial stakes in private businesses can be lucrative, I would have a hard time knowing how to value your different positions in terms of a SWR.

Are your taxes on distributions considered part of profits, or are they qualified dividends? If the former, your taxes will likely be considerably higher in retirement, rather than having a good chunk be qualified dividends and long-term capital gains at lower tax rates.

The issue of 3% also depends on your final portfolio, in terms of what % to bonds, what kind of bond holdings, what kind of stock holdings, etc. Perhaps you could try figuring out a target AA, and seeing what that would spin off in estimated income each year.

...

Then there's the age-old question of how much you'll spend from years 80-90. While you might encounter high expenses in 90+ with assisted living, there's a good chance your current projected ER budget at age 50 will be considerably higher than when you're 80-90 (minus healthcare issues), so perhaps a 3.5% WR for the first few years could work out. Hopefully you'll have more free time to be able to time your purchases better and you'll enjoy an upgraded lifestyle for the same 3% WR cost (think: specials on airfare/trip costs, last-minute cruises, early bird dinners, etc.)

We are still in our concentrated positions awaiting an exiting event and expiration of lockup period. The percentages I'm estimating are net of taxes. Tax planning going forward should be easy. Two-thirds of the nest egg is in Roth accounts. We moved most of our under appreciated assets to a Roth in 2010 and took the tax hit over two years with a fair, but low valuation.

I never thought about being able to better manage the lifestyle costs by being able to have flexibility, so maybe I can save a good bit there.

I think I will consult for a couple of years to offset the increased travel and philanthropic activities, but I'll be extremely picky about the projects I work on. I can easily imagine the expenses increasing once we are fully retired depending on how our kids land.

 

[ERhoosier]

......
I never thought about being able to better manage the lifestyle costs by being able to have flexibility, so maybe I can save a good bit there.

I think I will consult for a couple of years to offset the increased travel and philanthropic activities, but I'll be extremely picky about the projects I work on. I can easily imagine the expenses increasing once we are fully retired depending on how our kids land.

Very wise plan to keep up a flexible income stream. At just 50 yrs old & with 2 kids your financial cone-of-uncertainty remains rather wide.