Poll: Retirees, do you keep your Excess Withdrawal? Or Spend it?

[2017ish]

... Americans in Canada, or Canadians in the US, should beware, as the IRS does not recognize the TFSA as a tax free account.

https://en.m.wikipedia.org/wiki/Tax-Free_Savings_Account

Thanks for that info! (DS1 and his Canadian bride are considering migration from SanFran to Toronto ....)

 

[Koolau]

I don't track expenses (I only watch the check book balance.) I don't have a standard WDR or expected spending. It typically comes out +/- 25% of an average, I suppose (though, honestly, I haven't even calculated that either - it's sort of an "impression."). I typically withdraw from the "port" no more than once a year and if the WDR is less than about 3.5% (in the old days) or now, maybe(?) 4% or more, I don't worry about it. IF my port took a big drop, I might be more concerned, but I've structured it to be a bit more market-resistant than many here (at an up-side cost, I admit.) At age 70, I've kind of abandoned the 30 year time-frame. Now with SS, it may be time to open the purse strings a bit (First class instead of cattle-car?). I guess we'll see if an old dog can learn new tricks. If not, I'm still happy with my spending. YMMV

 

[Meadbh]

Thanks for that info! (DS1 and his Canadian bride are considering migration from SanFran to Toronto ....)

They should check out the Canadian Money Forum.

http://canadianmoneyforum.com/index.php

 

[Lsbcal]

I selected keep the excess outside the portfolio but that isn't precisely what I do. I have an SWR but spend less that that. I leave the excess in the portfolio but track that amount as a pseudo account while reducing the SWR portion of the portfolio accordingly. The excess amount is reserved for special needs like a huge splurge or spending during a downturn.

This is somewhat my thinking nowadays. I credit Audrey (audreyh1) for this line of thought.

Our spending money is thus composed of:
1) WR % for this year. Based on the VPW tool and the parameters I use like portfolio depletion at age 110.
2) Unspent money (as per #1) from previous years 2015 and 2016.

This is a nice mental crutch as we thus have a fairly sizeable pot of unspent money that can be used in a downturn. All these funds are still in the portfolio but in a short term investment grade bond fund (VFSUX).

I have to constantly remind myself to have fun and not to be afraid of the big bad market bears. Besides the VPW simulations take into account markets like the 1930's and 1970's.

Here is our spending graph. The projections for 2017 and beyond are from VPW.

This year we have 3 trips fully planned and booked. Have to keep up that exercise too as going out a lot can add to the waist line. It's a full time job spending money. But I'm up to the task, I think.

 

[ERD50]

I don't understand the question in the OP.

What does it mean to "withdraw it", but not "spend it" ("keep it"?)? If you don't spend it, it is still in your portfolio, you didn't withdraw it.

Regarding increased spending:

This produces some uncertainty and anxiety, as I can see myself getting used to a higher standard of living. When the next recession hits, ouch.

Why not re-run FIRECalc with your current situation? If you were confident enough with the FIRECalc output to retire originally , then you should be confident now with more experience, and a shorter time to cover, and a better handle on expenses (not to be morbid, that is just the way it goes for all of us!). If FIRECalc looks good with current spending, it seems you are OK, no? If not, seems like some adjustment is in order to get comfortable again.

FIRECalc, with the defaults, doesn't lower spending in recessions, so we should not need to either. Depending of course, on how much margin we want to allow for a future that might be worse than the worst of the past, and how much margin we've added elsewhere. And I think almost everyone would agree that a 2% WR is very conservative, probably a 'forever' portfolio.

-ERD50

 

[Refresher]

The market has been booming ever since the 2008-2009 recession. Some of us have kept more or less the same WR, but that provides us with more and more spending money each year.

I attached graphs of my spending, and the corresponding percentages of my 12/31 portfolio, for each of my first 7 retirement years. As you can see, I'm spending more or less the same percentage, around 2%, but after the first year the dollars spent have been going up, up, up. Last year I spent 135.8% of what I spent in 2010, in dollars. Yet, the percent of my portfolio spent was down 0.39%.

This produces some uncertainty and anxiety, as I can see myself getting used to a higher standard of living. When the next recession hits, ouch.

How are you handling this situation? I'm going to attach a poll so wait a minute and it will appear.

Shouldn't annual spending be reduced by any incomes such as social security or pensions? If so later ER years should have less spending than earlier ones assuming no extreme lifestyle changes.

If not is the social security income just added to the portfolio value?

 

[Lsbcal]

I don't understand the question in the OP.

What does it mean to "withdraw it", but not "spend it" ("keep it"?)? If you don't spend it, it is still in your portfolio, you didn't withdraw it.

Well one could think of "withdraw it" as marking it for the near term spending pool. That pool could be for the next year or for the next year plus the next few years. Takes care of things like new cars or a big downturn. There are so many ways to account for longer term needs and unknowns.

Some actually take it out of their idea of a portfolio i.e. there is the portfolio and there is the spending pool.

Regarding increased spending:

Why not re-run FIRECalc with your current situation? If you were confident enough with the FIRECalc output to retire originally , then you should be confident now with more experience, and a shorter time to cover, and a better handle on expenses (not to be morbid, that is just the way it goes for all of us!). If FIRECalc looks good with current spending, it seems you are OK, no? If not, seems like some adjustment is in order to get comfortable again.
...
-ERD50

Some of us are never quite comfortable with spending down the nest egg. Those lines that go down and to the right in FireCalc are one thing to take note of but quite another to live through.

So far many of us have never ridden one of those many year downhill lines. If we have a stretch like the 1970's for instance, I can only imagine the angst that will be expressed here. And I'll probably be among them.

 

[Walt34]

I checked "I don't fit into any of these categories". Almost all of our income is pension and starting last spring, SS, and a few hundred in dividends. I haven't touched my IRA yet because that's DW's safety net if I exit before she's 66 and can take the full SS benefit w/o penalty. She has a TSP account and a small IRA CD that we haven't touched either. DW needs the safety net because the pension drops 30% when I exit. She'd probably be okay with just what's in savings until then, but I like her to have lots of options.

 

[ERD50]

Shouldn't annual spending be reduced by any incomes such as social security or pensions? If so later ER years should have less spending than earlier ones assuming no extreme lifestyle changes.

If not is the social security income just added to the portfolio value?

I think you are confusing the terms here.

I wouldn't reduce my spending by SS/pension - that makes no sense at all. I think that what you mean is, to the extent that SS/Pension covers a portion (or all) of your spending, that is money you don't need to withdraw from your portfolio.

Income is not 'added to the portfolio value', it offsets your spending. Alternately, you could calculate the value of that income stream, add it to the portfolio, then ignore it as income, but that seems like the long way around, and I probably just confused myself .

FIRECalc handles this. Entries for SS/Pension offsets your spending, so less is required for withdrawals.

-ERD50

 

[TrvlBug]

I'll have to wait a bit. I just calculated DH's RMD and our SS for next year. Assuming all else the same (except for cap gains/divs), we should be able to cover our expenses. The big unknown is that we will exhaust our losses this year and for the first time since 2008, have a positive number. This year is not bad due to some add'l tax loss harvesting, but have no idea what next year will look like. Surprisingly, our income will be higher in retirement than with DH working...what a problem to have. We may be able to cover expenses, but if not, won't have to pull out a lot of add'l $ from savings.

 

[Chuckanut]

I keep the excess withdrawal stashed away since I figure at some point the Bear will come out of its cave and take a big swipe out of my assets. That's when I'll spend the excess.

If you've ever experienced a relentless nasty bear market as an investor you know what I mean.

 

[Meadbh]

I don't understand the question in the OP.

What does it mean to "withdraw it", but not "spend it" ("keep it"?)? If you don't spend it, it is still in your portfolio, you didn't withdraw it.

I agree. But I think W2R is doing some mental accounting. She is thinking of the money she withdrew from her "investment portfolio" to cash as being in a different compartment. In reality, since money is fungible, and cash is a legitimate component of an investment portfolio, she has just reallocated it to cash.

 

[Refresher]

I think you are confusing the terms here.

I wouldn't reduce my spending by SS/pension - that makes no sense at all. I think that what you mean is, to the extent that SS/Pension covers a portion (or all) of your spending, that is money you don't need to withdraw from your portfolio.

Income is not 'added to the portfolio value', it offsets your spending. Alternately, you could calculate the value of that income stream, add it to the portfolio, then ignore it as income, but that seems like the long way around, and I probably just confused myself .

FIRECalc handles this. Entries for SS/Pension offsets your spending, so less is required for withdrawals.

-ERD50

Correct if my WR of 4% on a million allows me 40K and I have SS for 20K I can spend 60K and be in compliance. Or if I spend 40K and have 20K SS the dent in my portfolio is only 2%.

I did not understand why OPs spending would not be reduced in the last year from the first year assuming SS was available in year 7 and not in year 1. As stated income is not added to portfolio value it is subtracted from spending with the goal of not exceeding allowed WR.

 

[Bestwifeever]

I don't know, W2R, at that 2% WD rate, you might run out of money when you are 120 or so. Better get plan B ready.

You probably won't be buying another dream home that requires landscaping etc., so I think you can sleep at night.

 

[NW-Bound]

One's spending money should go up a bit with time to compensate for inflation. The inflation has been below the historical average. Still, from 2010 till now, the cumulative inflation is about 10%, so one should allow for at least that much (and to temper his giddiness by discounting his portfolio growth too).

Even after taking into consideration the inflation, if one still finds his WR fluctuating wildly from 2 to 3%, a 50% increase OMG, relax. A 4% overshooting to 6% is cause for alarm, but 2% increasing to 3% is still very golden.

Anything below 3.5% is quite OK, and one will run out of life before he runs out of money (unless Attita the Hun or Hiltler is reincarnated, to borrow from Bernstein, then both life and money will be at risk). I would spend more time worrying about my health than about my money.

 

[Lsbcal]

... I would spend more time worrying about my health than about my money.

Right, and let's not forget ... having fun.

 

[NW-Bound]

Right, and let's not forget ... having fun.

I am still working on that.

It's a good thing I do not crave expensive stuff and still have enough so that I do not need to spend 6% WR to get the "fun".

Else, even 6% is OK and not the end of the world, because only running out of life is really the end of, er, life.

I leave the worrying about money to youngsters who have 60 years left to live. Me, nah!

 

[jebmke]

My definition of withdrawal is what I spend, period. Once it is out of my control it is gone. So, I don't consider donations to my DAF as withdrawal but I do consider tax payments as withdrawal.

 

[RetiredGypsy]

I had to go with the last option. I don't fit in anywhere.

I'm getting VA disability, and what I don't spend each month goes into investments to someday get something more than a small fixed income for the next 40+ years.

 

[Rustic23]

RMD here, and it goes straight to taxable account.

 

[Winemaker]

I guess we have just dodged a bullet; from here on out I say spend.



https://www.cnet.com/news/asteroid-2017-ag13-passes-earth-moon-slooh/

 

[2017ish]

I guess we have just dodged a bullet; from here on out I say spend.



https://www.cnet.com/news/asteroid-2017-ag13-passes-earth-moon-slooh/

Bernstein forgot to include cataclysmic meteor/comet impact in his list of why not to go nuts in seeking 100% chance of success.

A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless.

Now, let’s return to the above table. The historically naïve investor (or academic) might consider reducing his monthly withdrawals to a very low level to maximize his chances of success. But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for political, economic, and military reasons relative to the failure of banal financial planning.

The Retirement Calculator from Hell, Part III

 

[kcowan]

In order to keep up with inflation I'd generally assume that a "constant spending" budget would increase over time. Have you accounted for inflation in your budget/spending changes?

Yes I have an assumed inflation of 2% per year. I also assume portfolio returns of 7%. Reset the plan to actual each year.

 

[Another Reader]

The only withdrawals from the paper portfolio are the RMD's from the inherited IRA's. I pay off more than that on the rental mortgages every year, so it's really a transfer from paper to real estate assets. Not looking forward to age 70.5 for a number of reasons, including much higher RMD's.

 

[kcowan]

Thanks for that info! (DS1 and his Canadian bride are considering migration from SanFran to Toronto ....)

They should probably find living expenses comparable once they get over the higher taxes on everything.

They should check out the Canadian Money Forum.Canadian Money Forum

Also the Canadian Financial Wisdom Forum:
Financial Wisdom Forum - Index page
it is a more mature forum and has a financial wiki:
finiki, the Canadian financial wiki

I don't understand the question in the OP. What does it mean to "withdraw it", but not "spend it" ("keep it"?)? If you don't spend it, it is still in your portfolio, you didn't withdraw it.

Yes it is compartimental thinking. We only withdraw what we need and it is usually from the cash that the dividend stream has generated. If our draw is below the dividend stream, we reinvest it in the portfolio.

Why not re-run FIRECalc with your current situation? If you were confident enough with the FIRECalc output to retire originally , then you should be confident now with more experience, and a shorter time to cover, and a better handle on expenses (not to be morbid, that is just the way it goes for all of us!).

I think Firecalc is useful for deciding whether to retire. Remember it assumes that you will spend your principal. No one here is actively planning to do that. You need a spreadsheet that has 4 lines:
1. Portfolio value, including capital gains, dividends, ROE
2. Income: Pensions, SS, net rental, annuities
3. Expenses
4. Extra-ordinary costs: New cars, new roof...
Grow line 1 by your average return assumption. Line 2 may grow through COLA or not. Line 3 should have an inflater. Line 4 are specific estimates of non-recurring costs.

The key assumption is life expectancy. Each year you live your expectancy increases by more than one year. My 90 yo Dad had an expectancy of 3.5 years and he died 5 years later so he was above the 50% median.

Some of us are never quite comfortable with spending down the nest egg. Those lines that go down and to the right in FireCalc are one thing to take note of but quite another to live through.

And that is why Firecalc loses its value.