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Pondering a portfolio spend strategy
Old 02-19-2018, 01:21 PM   #1
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Pondering a portfolio spend strategy

I wonder what others think about the following as a way to FIRE with a fairly high withdrawal rate while attempting to manage Sequence of Returns risk, and Inflation risk. Full credit to Michael Kitches’ “increasing equities glide path” concept to get me thinking about adjusting it to my own situation.

Assumptions:
- FIRE at 58 with 12 years to go before maximum SS;
- Max SS projections at 70 currently show $70K/year combined for DW and me;
- $2M portfolio or > at FIRE with a 60/40 AA.
- No kids and no interest in dying with a lot of $ left.

Proposed Spend Strategy: Fixed Income allocation is $800,000 and 100% in TIPS.
1). Spend 1/12th of fixed income assets per year ($67,000) as a bridge to maximum SS.
2) Basically, at 70 we trade the dependability of bonds, which are mostly depleted, for the dependability of SS.
3). Biggest risk is probably that current SS projections won’t be messed with by Congress just as we start it, though it’s a risk that is a matter of opinion and I can’t calculate whether AARP will have a stronger lobby than the Military contractors when SS finally goes wobbly in about 2030. If it all goes to heck, Hello Central America?
4). Sequence of Returns Risk management: Safely spending down a fixed % of bonds to get to a safe maximum SS check.
5). Inflation Risk management: 100% TIPS, although Total Bond Market seems a good choice, too. I could see allocating 50% to each.

Proposed Spend Strategy: Equities = $1.2M in 100% Total Stock Market Index:
1). Spend a FIXED 4%/year with no inflation adjustment. Year One spend is $48,000.
2). Assuming 8% growth in equities over those 12 years and a 4% spend rate, the stock index would compound at 4%/year (right?) to become $1.9M in 12 years at age 70.
3). During years with a >$48,000 spend possible: Park the excess cash in treasuries
4). Years with < $48,000 spend possible: make up the loss from the parked cash.
5). Sequence Risk management: The risk is still there but hopefully not catastrophic because, theoretically, one could not deplete a stock portfolio with a fixed 4% spend rate. I checked this on FIREcalc, which showed 100% success.
6). Inflation Risk management: Growth in stock valuations over time. Year One spend @ 4% is $48,000 but Year 12 spend is $76,000.

I Realize:
1). $115,000 year spending off a $2M portfolio in Year One is a high 5.75% withdrawal rate and not considered a “safe withdrawal rate.” But aren’t the usual risks managed pretty well above?
2). I’ve proposed a 12 year portfolio survival vs. the usual 30 year. But isn’t reaching SS securely with a dependable $70K/year for life that is inflation indexed, plus $1.9M in stocks “pretty good”? At that point, I could put the $1.9M in TIPS and spend 1/17th per year going forward ($111,764/year) plus max SS of $70K to get to a 30 year portfolio.

This is not traditional thinking, so tell me why it is whacked. Go on, I assume it has flaws I can’t see yet and I know you won’t be shy pointing them out, so please do
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Old 02-19-2018, 01:47 PM   #2
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Originally Posted by Markola View Post
1). $115,000 year spending off a $2M portfolio in Year One is a high 5.75% withdrawal rate and not considered a “safe withdrawal rate.” But aren’t the usual risks managed pretty well above?
It seems completely reasonable to me to spend at this rate for the 12 years prior to starting Social Security benefits.

Besides, if something completely unexpected happens, you have a good sized source of funds you could tap into.

Quote:
2). I’ve proposed a 12 year portfolio survival vs. the usual 30 year. But isn’t reaching SS securely with a dependable $70K/year for life that is inflation indexed, plus $1.9M in stocks “pretty good”? At that point, I could put the $1.9M in TIPS and spend 1/17th per year going forward ($111,764/year) plus max SS of $70K to get to a 30 year portfolio.
It looks at least "pretty good" to me. Probably more than "pretty good".

Quote:
I assume it has flaws I can’t see yet and I know you won’t be shy pointing them out, so please do
One (potential) flaw is what happens if one of you dies early. I'm assuming you have thought that through and either survivor will be okay with less Social Security income and the consequent less spending power.

I wouldn't be comfortable with "100% Total Stock Market Index" for too many years, unless I was also comfortable adjusting my spending goals downward should the economy take a bit hit. But that's me - you may have other ideas.

I'm also not comfortable "Assuming 8% growth in equities over those 12 years". While that might be reasonable average growth, there's no rule that says those 12 years will be average. And you only get one shot at those 12 years.
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Old 02-19-2018, 01:58 PM   #3
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Roger that. Thanks for taking the time to comment, joeea.
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Old 02-19-2018, 02:12 PM   #4
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Spending idea sounds fine with equities increasing as %. Which equities? Ask someone else.
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Pondering a portfolio spend strategy
Old 02-19-2018, 02:26 PM   #5
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Pondering a portfolio spend strategy

For sure, no one knows, but we do have a lot of evidence for the best tool available, which is the Total Stock Market Index. I realize I haven’t necessarily hedged against inflation because I can’t assume stock prices will keep up. See, The 1970s. On the other hand, the 1980s stock market made up for the 70s’ Stagflation. If those unique-in-history conditions repeat then, See (me in) Central America or with dimmed lights and under some serious blankets and sweaters being thankful for my paid off house.
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Old 02-19-2018, 03:40 PM   #6
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I think that sounds fine. Another approach that is similar would be to put aside a SS equivalent from now to 70 of $840k ($70k*12 years) in TIPS, leaving $1,160k to be invested in a 60/40 portfolio with inflation adjusted withdrawals of $46k a year at 4%.

Your spending would be $70k from the TIPS set-aside portfolio and $46k from the long-term portfolio for an inflation adjusted total of $116k in current spending power.

The initial total AA would be 34/66 and would grade towards 60/40 after 12 years. The overall WR would be 5.8% initally, but your real initial WR is 4%.

+1 on thinking through if you have enough if one or the other of you were to die prematurely... like tomorrow... but it sounds like you would be ok financially.
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Old 02-19-2018, 04:18 PM   #7
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Your twist to the non-TIPS portion really does bring the plane in for a smoother and more predictable landing at 70, doesn’t it? I’m guessing the remaining 60/40 portfolio at 70 would be smaller than what I proposed but predictability would be a lot higher. I guess if one equates SS with a form of TIPS, the AA at 70 and beyond would be less than 60% equities, which might be fine and certainly safer.

I admit that I have not fully factored the death of one of us before 70 regarding SS. It is certainly possible, of course, for any of us. Daily living expenses for 1 person vs. 2 would go down, too, wouldn’t they, until the one of us who survives can re-marry to Mr. or Mrs. Thurston Howell III?
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Old 02-19-2018, 06:36 PM   #8
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Daily living expenses for 1 person vs. 2 would go down, too, wouldn’t they, until the one of us who survives can re-marry to Mr. or Mrs. Thurston Howell III?
Yes, a singleton's daily expenses would be somewhat less than those for two people -- but not 50%. I've read anywhere from 1.3x (where it used to be 2x) and higher. Additionally, the taxes for a singleton with assets can get quite "interesting", not in a good way.

There seem to be many seeking Mr. or Mrs. T. Howell III. Good luck with that.

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Old 02-19-2018, 07:28 PM   #9
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What I think you're missing - in a good way - is the 5.75% ignores the present value of your SS benefit. As a super simple way of looking at it, your $70K represents a 4% withdrawal on $1.75M. Add the $1.75M - you should really discount it some to reflect that it's 12 years from now - to your $2M and you're around $3.75M. $115K on that $3.75M is a hair over 3%. So that's reasonable.

(I do a similar thing but my SS is a smaller percentage of my stash.)

One quick thing: "4). Years with < $48,000 spend possible: make up the loss from the parked cash." This only works if you have a prior ">$48K" year to create the parked cash. What do you do if the first year is a down year? If it's huddle under blankets or move to Central America, fine. But I think you should explicitly put that in the plan as it makes things more real, which is when the rubber hits the road and you decide if you're really willing to do that or not...either way, it's good information to know.

Good luck!
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Old 02-19-2018, 08:11 PM   #10
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Originally Posted by pb4uski View Post
I think that sounds fine. Another approach that is similar would be to put aside a SS equivalent from now to 70 of $840k ($70k*12 years) in TIPS, leaving $1,160k to be invested in a 60/40 portfolio with inflation adjusted withdrawals of $46k a year at 4%.

Your spending would be $70k from the TIPS set-aside portfolio and $46k from the long-term portfolio for an inflation adjusted total of $116k in current spending power.

The initial total AA would be 34/66 and would grade towards 60/40 after 12 years. The overall WR would be 5.8% initally, but your real initial WR is 4%.

+1 on thinking through if you have enough if one or the other of you were to die prematurely... like tomorrow... but it sounds like you would be ok financially.
The above strategy in bold is where I'm at in my thinking at the moment. My situation is similar to the OP. I think I may just go to FRA instead of 70, but the general framework is about what I am thinking. FWIW, the TIPS idea/strategy came up in my discussion with Fidelity as I discussed what I liked and did not like about their annuity ideas. The TIPS seemed to cover the base of secured income without the permanence of an annuity. Then, similar to OP, once me and DW get SS, we hardly need to withdraw from what's left from our remaining portfolio.
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Old 02-19-2018, 08:20 PM   #11
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What I think you're missing - in a good way - is the 5.75% ignores the present value of your SS benefit.
Your strategy is very reasonable.

I was going to make a similar comment as SecondCor521 from a slightly different angle. It is what I call the "SWR two-step." From ER to SS you have a withdrawal rate strictly from your portfolio, but for most folks SS represents maybe 1-2% of their portfolio draw. So their portfolio WR drops by that much when SS kicks in.

If you ER at 55 and plan a 40 year retirement with SS at 70, you are looking at 15 years off the portfolio and 25 years off the portfolio plus SS. If you choose a SWR of 4%, and if SS equals 2% of your portfolio/year, your Pre-SS SWR would be 5.25% and post-SS SWR would be 3.25%.

Your case, with only 8 years at 5.75% followed by a post-SS WR of ~2.5% is certainly within bounds of historical SWRs.
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Old 02-19-2018, 09:47 PM   #12
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The above strategy in bold is where I'm at in my thinking at the moment. My situation is similar to the OP. I think I may just go to FRA instead of 70, but the general framework is about what I am thinking. FWIW, the TIPS idea/strategy came up in my discussion with Fidelity as I discussed what I liked and did not like about their annuity ideas. The TIPS seemed to cover the base of secured income without the permanence of an annuity. Then, similar to OP, once me and DW get SS, we hardly need to withdraw from what's left from our remaining portfolio.
I have to admit that I was curious so I ran our numbers through FIRECalc under 2 scenarios... 1) just a plain Jane 60/40 portfolio but no carveout for SS and 2) carving out a side fund to substitute for SS from now to FRA and having the rest invested 60/40.

I used Firecalc to compute the annual spending at 95% success rate over 38 years (to age 100)... the side fund approach spending was 100.7% of the plain Jane spending with all other assumptions held constant. In our case we only have 4 years to FRA so that might be why it doesn't seem to make much of a difference.

I then ran it with OP's numbers and the side fund approach increased spending at 95% success by ~4%... but if I set spending level the side fund increase the success rate from 89.5% to 98.1%. So it seems that having 12 years to SS vs 4 years makes a significant difference.
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Old 02-20-2018, 05:38 AM   #13
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That’s encouraging, pb4uski. Thanks. Do you recall what the actual set spending levels were that succeeded at 98.1%? My back of envelope in the initial post above was a 5.75% swr.
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Pondering a portfolio spend strategy
Old 02-20-2018, 05:43 AM   #14
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Pondering a portfolio spend strategy

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Originally Posted by SecondCor521 View Post
What I think you're missing - in a good way - is the 5.75% ignores the present value of your SS benefit. As a super simple way of looking at it, your $70K represents a 4% withdrawal on $1.75M. Add the $1.75M - you should really discount it some to reflect that it's 12 years from now - to your $2M and you're around $3.75M. $115K on that $3.75M is a hair over 3%. So that's reasonable.

(I do a similar thing but my SS is a smaller percentage of my stash.)

One quick thing: "4). Years with < $48,000 spend possible: make up the loss from the parked cash." This only works if you have a prior ">$48K" year to create the parked cash. What do you do if the first year is a down year? If it's huddle under blankets or move to Central America, fine. But I think you should explicitly put that in the plan as it makes things more real, which is when the rubber hits the road and you decide if you're really willing to do that or not...either way, it's good information to know.

Good luck!


Good point! SS is something like a two life deferred annuity component in a portfolio. As for a down year early on regarding my 4), yes, I need some kind of insurance. For us that is part time w*rk and some other levers to pull to bridge that gap.
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Old 02-20-2018, 10:51 AM   #15
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Am I the only one that thinks that the probability of SS being "means tested" in a non-trivial way is fairly high (e.g. one in three, one in two)? I know that is discussed in item 3) , but I would be reluctant to have a plan that doesn't take at least a bit of that risk factor into account.

What that would me (for me), is to assume a lower (at least after tax) value of those age 70 SS payments, thus resulting in a somewhat lower front end loading of my spend. This doesn't need to be all or none. For instance, I might assume SS is capped (based on the means testing) at a value from an earlier age and not inflation adjusted...and then see what that means to my spend plan.
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Old 02-20-2018, 11:05 AM   #16
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Am I the only one that thinks that the probability of SS being "means tested" in a non-trivial way is fairly high (e.g. one in three, one in two)?
You probably aren't the only one no matter what you think. That said, I don't personally know anyone who feels confident that they know exactly how social security benefits will in the future. I know that I don't.

But I'm currently 63. I'm guessing (and perhaps hoping) that when I reach 70 the rules will be fundamentally the same, or at least grandfathered in for my wife and I.

And I'm guessing (and perhaps hoping) that social security funding will be fixed before cutbacks are mandated. I honestly don't believe that would be difficult to achieve.

So, my assumptions are unchanged until I hear something concrete that changes my mind. Perhaps younger folks should have different assumptions.
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Old 02-20-2018, 12:35 PM   #17
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Pondering a portfolio spend strategy

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Yes, a singleton's daily expenses would be somewhat less than those for two people -- but not 50%. I've read anywhere from 1.3x (where it used to be 2x) and higher. Additionally, the taxes for a singleton with assets can get quite "interesting", not in a good way.

There seem to be many seeking Mr. or Mrs. T. Howell III. Good luck with that.

omni


+1 Taxes were a huge surprise when DW passed. And expenses didn't drop to half even getting rid of the medical costs.

And tough enough to find a good girlfriend let alone a Lovey Howell. Even harder for me as I'm still looking for a MaryAnn.
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Old 02-20-2018, 02:31 PM   #18
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But isn’t reaching SS securely with a dependable $70K/year for life that is inflation indexed, plus $1.9M in stocks “pretty good”? At that point, I could put the $1.9M in TIPS and spend 1/17th per year going forward ($111,764/year) plus max SS of $70K to get to a 30 year portfolio.

This is not traditional thinking, so tell me why it is whacked. Go on, I assume it has flaws I can’t see yet and I know you won’t be shy pointing them out, so please do
Nice job Markola. You might consider lowering your expected SS benefit at least 20%... 12 years is a long time, and there may be reductions in SS benefits between when you reach age 70 and today. I reduce our expected SS benefit by 50%, and we don't really count on it. This is a conservative approach, and it may not suit you.
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Old 02-20-2018, 03:15 PM   #19
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Am I the only one that thinks that the probability of SS being "means tested" in a non-trivial way is fairly high (e.g. one in three, one in two)? I know that is discussed in item 3) , but I would be reluctant to have a plan that doesn't take at least a bit of that risk factor into account.

What that would me (for me), is to assume a lower (at least after tax) value of those age 70 SS payments, thus resulting in a somewhat lower front end loading of my spend. This doesn't need to be all or none. For instance, I might assume SS is capped (based on the means testing) at a value from an earlier age and not inflation adjusted...and then see what that means to my spend plan.
I don't think that SS is extremely likely to be means tested or crater, but I think there is too much probability of that happening for me to be comfortable with Markola's plan. That is, unless he has written down exactly what he plans to do if he discovers, upon reaching age 70, that there is no SS money to be had.

If he can cut back enough to manage without it, then fine. That's how I planned my retirement; if SS ended up being non-existent, I could still live on Raman noodles in a cheap studio apartment. For me, SS is mostly for lifestyle upgrades from what I need, to what I want.
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Old 02-20-2018, 03:20 PM   #20
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For me, SS is mostly for lifestyle upgrades from what I need, to what I want.
This is essentially how I am 'figuring' SS. My FIRE ready assessment was done without SS. If I get it/some, all the better.
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