Poll on initial withdrawal rates

[RockMiner]

I'm planning to start with about 4%, which should drop slightly after SS kicks in at 65 or so. The bigger question in my mind is whether to go with automatic inflation adjustments, or a straight percentage as ESR Bob seems to advocate in his book.

As others have mentioned, I can't imagine ignoring a bear market and continuing to inflate withdrawals like nothing has happened So, the reality based system seems more sane to me. Granted, a little cheating might be needed to soften the dips. FireCalc is great but I'm pretty sure the stock market doesn't use it to decide how it is going to behave!

[audreyh1]

One of the advantages (disadvantages?) of going with a straight % approach is that if you have a run of "good" market years, your draw amount might be increasing very fast (say you had an up 20% year).

I view this as a good thing and a bad thing. I can pull more money out and enjoy it now, and leave less behind when I expire. Also - I'll take the most out at market peaks, thus harvesting those "overvalued" assets and turning them into safe cash. But eventually, I'll run into the string of bad years that mean I have to take a "pay cut".

So, it's wise to take this into account in your spending, and perhaps pile up a little extra spending money during the good years to tide you over during the bad years. Don't just let your yearly spending habits automatically increase with the amount you withdraw. People who are naturally LYBMers can probably manage this easily.

The person doing initial % + inflation will be drawing a dwindling % during that run of "good" market years so that when a string of bad years show up, there will be excess in the portfolio do cover the needed draw. But on average there will be a large amount left over at the end of the period, and that seems like a pity unless you have heirs you wish to reward.

Audrey

[RockMiner]

Quote:

Originally Posted by audreyh1 One of the advantages (disadvantages?) of going with a straight % approach is that if you have a run of "good" market years, your draw amount might be increasing very fast (say you had an up 20% year).

A simple way to smooth out large fluctuations is also mentioned in the book (Work Less, Live More), you can cap year to year changes at 10%... for example in a down year you still get to take 90% of the previous years draw. This method ignores whatever inflation might be doing but it is easy to use.

[MasterBlaster]

well I am a number of years away from retiring. My plans fluctuate about how to structure the withdrawals as I go along. I bounce from being perhaps way too conservative (just in case) to thinking about how large I could live under some rosy scenarios.

Lately my thinking is along the lines of a kind of hybrid - SWR with retirement optimazation spending plan

1) take the annuity pension rather than as a lump sum.
2) between the pension, the rental income and eventually perhaps some social security I could live at least as well as I do now.
3) for the nestegg which is now and should be pretty substantial by the time I retire take a 6 percent rolling withdrawal. If the portfolio does better than that I'll take 6 percent of the larger sum. If the portfolio tanks I'll take 6 percent of the smaller sum. That 6 percent by the way is kind of an average (50 percent success) SWR looking back historically.

This spending plan insures that I won't have to eat dog food and that I'll enjoy the fruits of all of my savings. If the larger withdrawal rate doesn't keep up with inflation then so be it. I can always live, if needed, off of the pension and other income.

My plan, of course, is to spend it, not to die with a huge nest-egg.

What are you saving it for ?

[audreyh1]

Quote:

Originally Posted by Rock A simple way to smooth out large fluctuations is also mentioned in the book (Work Less, Live More), you can cap year to year changes at 10%... for example in a down year you still get to take 90% of the previous years draw. This method ignores whatever inflation might be doing but it is easy to use.

Right.

Actually, I prefer to take the full amount even after a banner year, and sock away the excess as cash. The gut instinct rationale being that after a major up year or two you are more likely to get a major correction in the next year, so I'd rather take the most at market peaks and pad my cash living expenses account for leaner years ahead. This is just the way I think - take profits when the markets are running hot, take less out after a major correction. Use a cash account for living expenses and let it accumulate well more than a year's worth of needs.

I'm sure the fact that I retired in 1999 colors my outlook......

Audrey

[donheff]

Quote:

Originally Posted by audreyh1 One of the advantages (disadvantages?) of going with a straight % approach is that if you have a run of "good" market years, your draw amount might be increasing very fast (say you had an up 20% year).

But almost no one talks about, or recommends, a "straight % approach" and the poll didn't anticipate it. The concept is to take a percentage (e.g. 4%) of the starting portfolio and then continue taking that actual dollar amount adjusted for inflation. If you had a $1M portfolio and 3% inflation, you would take out $40K in year 1 and $40K + (40k*.03) = $41.2K the second year. It wouldn't (theoretically) matter if your portfolio went up or down 20% in year two.