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Old 07-24-2015, 04:46 PM   #21
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Originally Posted by H2ODude View Post
Needing less that 3% helps a lot, I wouldn't want to be counting on 4+% for bare essentials unless I was already in my 70's.


I do think a rigid aversion to increasing as the portfolio grows ignores the fact that most of the models are based on worst case or close to that (in the early years). So if the worst didn't happen, why ignore your good fortune? Party on!

The worst decisions are usually made in times of anger and impatience.
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Old 07-24-2015, 09:13 PM   #22
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And the SWR also increases as the number of years your portfolio has to last declines.

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Old 07-24-2015, 10:48 PM   #23
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Originally Posted by nash031 View Post
Danger using the term "net worth" depending on definition - your home equity, for example, shouldn't enter into it.

We knew we were going to sell our home when we retired to travel for awhile then become renters, so it made sense to include the value of the home in our net worth.

When our SWR applied to net worth could support anticipated retirement expenses (which includes housing) we knew we'd hit our number.
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Old 07-24-2015, 11:35 PM   #24
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Originally Posted by audreyh1 View Post
Some of us don't use the initial portfolio, and don't adjust for published inflation. Instead we use the value of the portfolio at the end of each year. However, this means that some years, if the portfolio drops, we take a cut in income, which is what the original scheme was set up to avoid. If you are comfortable with the occasional cut in income, this is a viable approach. Personally, I was never comfortable with increasing my income by inflation regardless of what the portfolio did. I would rather follow the portfolio performance, even if that means I have to tighten the belt occasionally.
Yep - that's another method with many variants. As I noted in my response, every method has positives and negatives. The positive for
this one is that since you're always withdrawing a percentage of what is in the portfolio now, mathematically, you can not run out of money. But there is a nonzero probability that you may have withdrawals that are below what you need to live on, unless you have another steady source of income (SS, pension, etc.)

Variants include Scott Burns 6%/95% suggestion. Withdraw the larger of 6% of what is in your portfolio or 95% of last year's withdrawal, whichever is larger. Neither of those percentages are cast in stone. But what the method does is limit year-to-year drops in withdrawals if there is an extended bear market.

Another is Guyton-Klinger which has a large set of decision rules that set any given year's % withdrawal from your portfolio.

Then there are other variants which increase the percentage withdrawn year-on-year until the last one is 100%. The RMD method the IRS uses does this as does VPW.

Me? I like a combination. I like a 4%-like rule (with the percentage set much lower than 4%) to provide a steady, inflation adjusted income with a variable added that gives me a bonus when the portfolio does well.

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Old 07-24-2015, 11:46 PM   #25
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Originally Posted by pb4uski View Post
+1 The first year withdrawal is adjusted for inflation, not the percentage. So if you have $5m when you retire it would be $200k the first year and $206k the second year (assuming 3% inflation), $212k the third year, etc.

Also, 4% is probably ok for someone retiring today at age 65, but a slightly lower % would be prudent, particularly if one is retiring significantly earlier than 65.
Not sure if my clarification made it through, but the percentage does increase, but it's the percentage based on your original portfolio, not what's left in it. Mathematically, it's identical to multipllying the previous year's withdrawal by the previous year's inflation.
$5M portfolio
4% rule
3% inflation
Year 1: $200,000
Year 2: $206,000 (or $200,000 * 1.03)
Year 3: $212,180 (or R206,000 * 1.03)
Year 4: $218,454 ($212,180 * 1.03)

$5M portfolio
4% rule
3% inflation
Year 1: 4%*5M = $200,000
Year 2: (4*1.03)%*5M = 4.12%*5M= $206,000
Year 3: (4.12*1.03)%*5M = 4.2436%*5M = $212180
Year 4: (4.2436*1.03)%*5M = 4.3709%*5M =$218454

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Old 07-24-2015, 11:54 PM   #26
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Originally Posted by Davis65 View Post
The 4% was based, as others have noted, on the original portfolio, with adjustments to the withdrawal amount for inflation. There is nothing wrong with calculating your withdrawal on the current value of the portfolio, but 4% has no meaning or basis in this approach. 4% would be a random or arbitrary percentage. Your withdrawal percentage in this case should be related to your income from the portfolio, not a figure taken from a different methodology.
Correct - if are withdrawing a % of your current portfolio, then the choice of % might come from a backtest of historical returns or a monte carlo set of returns. When I've studied this method (and its variants), what I normally look at is the post-inflation effective withdrawal and how low it can become and whether that plus any fixed income would cover living expenses (including taxes). That % is going to be different for everybody.


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