Question about SWR

[audreyh1]

Quote:

Originally Posted by jebmke I tend to do things backwards. In fact, our highest spend was in 2009 when our retirement portfolio was probably cut in half. It was a good year to get some remodeling done (contractor prices) and we had a chance to make a trip to Italy when prices were rock bottom. My withdrawal (absolute dollars) tends to be very low when portfolio is high. It just seems to work out that way - not intentional (except the '09 phenomenon). I count everything that can be converted to food in 2-3 days in my portfolio. Nothing else. House, rental property ... even my stock options when I had them were never included.

I specifically selected a withdrawal method, AA, and target % (based on portfolio survival) as my retirement income strategy. I set aside sufficient funds in my retirement portfolio to provide this income, and I invested the funds according to the AA.

My goal is to draw down my retirement portfolio over my lifetime - well most of it anyway. To do so, I need to avoid an overly conservative withdrawal %, and to consistently remove funds no matter what. I will also need to increase my withdrawal rate as I get older. I’ll probably still die with a larger portfolio.

My withdrawal (absolute dollars) is the highest when my portfolio is high, because that’s when the portfolio has the highest valuation - you know, like at market peaks. This make sense to me - as I get the larger income when things are hopping. My income (withdrawal in absolute dollars) will shrink when things go south.

My annual income varies depending on my portfolio value each year. I have a high degree of discretionary spending, so I can choose to spend more or less depending on my income/market conditions.

[joylesshusband]

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Originally Posted by audreyh1 Huh? I don’t get this logic. Although I suppose if you are referring only to the constant inflation-adjusted withdrawal method which I do not use, maybe I won’t argue for that method as I use the %remaining portfolio method and live with the variable income. But in general sticking to a plan means that you in fact DO have confidence in that plan and your ability to execute it. Who cares whether the withdrawals are “unnecessary”? That has no bearing on portfolio survival which is what choosing a safe withdrawal method is all about. It is totally up to the discretion of the retiree. Having more withdrawn income than one is currently spending is simply an indication that one has the option to spend more if they so choose, or do anything else with it. I see it more like: A portfolio with an AA of YY/ZZ can support an annual withdrawal of X% with a survival characteristic of W%. It answers the question - is my retirement portfolio big enough to meet my income needs? What you do with the money withdrawn has no bearing. And if your retirement portfolio is bigger then you need, it certainly doesn’t say that you should reduce your withdrawal rate. Shrinking withdrawal rates seems to me to indicate lack of confidence. If you think you’ve been too aggressive, fine, change your AA and/or reduce your withdrawal rate. But if you’ve run the models, then sticking to a given withdrawal rate because you’ve decided the AA and portfolio survival characteristics are OK for you - nothing wrong with that.

I was not refering to anything. My focus was to answer the OP's question.
And I did.

Perhaps you should re-read it as you are pontificating on something on a tangent, which has little to do with the original question as asked.

Here it is, again, to help your reading comprehension:
"Does it make sense to take a full 4% even though I don't need that much? This way if the balance goes down the leftover money I have from taking out more than I need will be available as excess. Meaning should I just take 4% even if it's more than I need ?"

[audreyh1]

Quote:

Originally Posted by joylesshusband I was not refering to anything. My focus was to answer the OP's question. And I did. Perhaps you should re-read it as you are pontificating on something on a tangent, which has little to do with the original question as asked. Here it is, again, to help your reading comprehension: "Does it make sense to take a full 4% even though I don't need that much? This way if the balance goes down the leftover money I have from taking out more than I need will be available as excess. Meaning should I just take 4% even if it's more than I need ?"

I have been talking about the concept of taking out the full 4% (or whatever target rate is chosen) even if you don’t “need” it.

You can afford it, and that is something to take advantage of in retirement. Once your retirement income exceeds your “need”, you can do whatever you like with the excess.

[joylesshusband]

Quote:

Originally Posted by audreyh1 I have been talking about the concept of taking out the full 4% (or whatever target rate is chosen) even if you don’t “need” it. You can afford it, and that is something to take advantage of in retirement. Once your retirement income exceeds your “need”, you can do whatever you like with the excess.

Of course you can. But there are nuances and some plays are smarter than others.
It seems you also forgot that a fresh retiree does not yet know that "their retirement income meets their need" since at that point it is still mostly theoretical (run the calcs, run a few simulations, look @ the projected portfolio survival probabilities, try to make sense out of the difference between "98% vs 97.5% probability of survival"...). Being early in the decumulation game, they do not have the frame of reference that you do and are not so sure of themselves...

That's the perspective I inferred from the OP, and that's what I (and others) tried to answer.
The value provided by one's replies differs if one considers (or disregards) the mindset of one's audience.

[audreyh1]

Quote:

Originally Posted by FREE866 This may have been covered already, but had a question about SWR. I withdraw from my account what I need each quarter for my expenses. My WR for 2017 ended up being 3.3% of the total portfolio. Does it make sense to take a full 4% even though I don't need that much? This way if the balance goes down the leftover money I have from taking out more than I need will be available as excess. Meaning should I just take 4% even if it's more than I need ?

Yes, it makes sense as long as you are comfortable with a 4% withdrawal rate. How did you choose 4%?

[NW-Bound]

I do not use Audrey's method, but I can see that it has some merits.

Quote:

Originally Posted by joylesshusband What's the point in slaughtering more chickens than you can eat? The consequences of shoving the poultry in the freezer are: 1. the chickendom now has reduced ability to reproduce (reduced portfolio) 2. the frozen poultry has limited shelf life (inflationary erosion). The worry that a market drop would hurt the portfolio to the extent of having to slaughter more chickens at some point in the future than you had originally planned indicates that you don't trust your portfolio (AA and expected performance) and you don't trust your ability to adjust spending...

To use the above analogy, you may want to kill the chicken and stuff it in the freezer, because it is at its prime right now. Wait another year, and the chicken becomes tough and stringy.

Audrey "harvests" her WR, and if she does not spend it this year, she saves it for the next. You have a good year with the market, you harvest some gains, and preserve it in a CD account for later consumption. Just like one culls her flock of chicken while it is juicy, and preserves it in her freezer.

[FREE866]

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Originally Posted by audreyh1 Yes, it makes sense as long as you are comfortable with a 4% withdrawal rate. How did you choose 4%?

That seems to be the agreed upon % that is "safe". I've actually read it's higher than that.

I think I'm just going to continue to do what I have been doing and take out what I need and not take excess to make it 4%.
thank you for all your replies.

[bingybear]

Quote:

Originally Posted by FREE866 Does it make sense to take a full 4% even though I don't need that much? This way if the balance goes down the leftover money I have from taking out more than I need will be available as excess. Meaning should I just take 4% even if it's more than I need ?

And if you pull out the the extra money and your investments go up, then you you missed out on the gain. Would this be like pulling all the dollars out of your investments because they might go down?

[bingybear]

Quote:

Originally Posted by FREE866 That seems to be the agreed upon % that is "safe". I've actually read it's higher than that. I think I'm just going to continue to do what I have been doing and take out what I need and not take excess to make it 4%. thank you for all your replies.

4% has been used (based on studies) for a 30 year retirement. It also assumes a certain range of asset allocations.

But one thing to note is that this is gated buy a bad sequence of economic events. (investment returns). It is likely you will do better... unless you have bad timing.

[FREE866]

great points Bingybear....

Yeah, I'm almost 52 so my withdrawal amounts will go down substantially when I hit 70 and start taking SS. I know a lot can change in 18 years , but that is kind of my plan.

When I backtest my portfolio it does very well unless we have 2 big bear markets like we did in 2001 and 2008. Even then should be OK , but would make it tight.

[USGrant1962]

Quote:

Originally Posted by FREE866 This may have been covered already, but had a question about SWR. I withdraw from my account what I need each quarter for my expenses. My WR for 2017 ended up being 3.3% of the total portfolio. Does it make sense to take a full 4% even though I don't need that much? This way if the balance goes down the leftover money I have from taking out more than I need will be available as excess. Meaning should I just take 4% even if it's more than I need ?

Quote:

Originally Posted by FREE866 great points Bingybear.... Yeah, I'm almost 52 so my withdrawal amounts will go down substantially when I hit 70 and start taking SS. I know a lot can change in 18 years , but that is kind of my plan. When I backtest my portfolio it does very well unless we have 2 big bear markets like we did in 2001 and 2008. Even then should be OK , but would make it tight.

From your first post above, you have a good grasp of the difference between WR and SWR, a distinction that a lot of people miss. And you have hit upon what I sometimes call the "two-step SWR" where if you take 4% in ER and don't change your budget, you are then usually taking 3% or less when SS kicks in. This scenario is very conservative compared to historical SWR studies due to inflation-adjusted SS kicking in.

So in answer to your original question, there is no logical, historical or mathematical reason to withdraw from your portfolio in excess of your needs, but it is still quite safe to withdraw up to ~4% in ER when you have SS or a pension coming later. All of the SWR studies assume you are living just on your portfolio and neglect other income streams.

With that in mind, you have covered your needs - but what about your wants and desires? I'm still shopping for a Miata and am unconcerned that some of our all-inclusive vacation spots are a little expensive. Enjoy!

[audreyh1]

Quote:

Originally Posted by FREE866 That seems to be the agreed upon % that is "safe". I've actually read it's higher than that. I think I'm just going to continue to do what I have been doing and take out what I need and not take excess to make it 4%. thank you for all your replies.

Most early retirees here (those that could be retired more than 30 years) run FIRECALC to look at this more carefully. Especially to look at the portfolio survival, even for the 30 year case.

For 4% withdrawal rate over 30 years, survival is not 100% - there are a few worst cases that run out of money, and it depends on your asset allocation.

FIRECALC can also model the scenario where you start taking SS at a certain age. That will improve survival.

It’s work and requires some study and running models. But you find out things like - average ending portfolio value, lowest and highest ending portfolios, whether you run out of money.

And it is also good to learn about different withdrawal methods.

Of course that all is dependent on historical data. And the future may be different from the past, but it’s really the only information we have. Some folks might make different assumptions about the future.

[audreyh1]

Quote:

Originally Posted by bingybear And if you pull out the the extra money and your investments go up, then you you missed out on the gain. Would this be like pulling all the dollars out of your investments because they might go down?

The models already take this into account. You can answer it by comparing a 3.5% versus 4% withdrawal rate in FIRECALC. You can see the differences in annual income, in portfolio survival rates, and in the average, worst, and best ending portfolio values.

In general the lower the withdrawal rate, the better the survival rate, and the higher the ending portfolio. But what is your goal? To have more money available later, maybe, or to leave more for heirs? Versus having more income sooner when you are younger and healthier and can take more advantage of it? What portfolio survival rate do you think is “good enough”? Those are the trade offs and you get to choose as best you can given that you are working with historical data. It’s also important to think about how you might handle things if you do run into one of the worst scenarios with a major shrinking portfolio. How flexible is your spending, etc?

[pb4uski]

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Originally Posted by audreyh1 ....For 4% withdrawal rate over 30 years, survival is not 100% - there are a few worst cases that run out of money, and it depends on your asset allocation. ...

True... the 4% "rule" was based on the Trinity Study... for a 30 year time horizon the portfolio survival rates where withdrawals were adjusted for inflation were as follows:

100/0 95%
75/25 98%
50/50 95%
25/75 71%
0/100 20%

[ReadySetGo]

Yeah, I'm almost 52 so my withdrawal amounts will go down substantially when I hit 70 and start taking SS. I know a lot can change in 18 years , but that is kind of my plan.[/QUOTE]


Are you considering that you will be paying RMDs at 70 1/2? Even when you take social security, your withdrawals may not be low, and will be based upon the value of your portfolio

[Dtail]

Quote:

Originally Posted by ReadySetGo Yeah, I'm almost 52 so my withdrawal amounts will go down substantially when I hit 70 and start taking SS. I know a lot can change in 18 years , but that is kind of my plan.

Are you considering that you will be paying RMDs at 70 1/2? Even when you take social security, your withdrawals may not be low, and will be based upon the value of your portfolio[/QUOTE]

Except for the taxes owed on the RMD's, one doesn't need to spend the forced withdrawal and thus RMD withdrawal effectively isn't calculated/doesn't count as a WR% unless one is spending all those monies.

[pb4uski]

+1 An RMD is not a withdrawal if you take the RMD and reinvest it in your taxable account.

[mrfeh]

Quote:

Originally Posted by FREE866 This may have been covered already, but had a question about SWR. I withdraw from my account what I need each quarter for my expenses. My WR for 2017 ended up being 3.3% of the total portfolio. Does it make sense to take a full 4% even though I don't need that much?

No.

[Rustic23]

The RMD would not be a withdrawal, but the Tax is.

[jebmke]

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Originally Posted by Cut-Throat Don't confuse Spending with Withdrawal Amount.... You don't have to spend what you withdraw.... Withdrawing means selling Stocks/Bonds and moving to a Cash Account. So you want to Withdraw when your Portfolio is High (Buy Low, Sell High)... You don't have to spend it.

I have no cash account. If I spend money, I sell something (unless dividends are enough that month). Every month I "withdraw" only what I need to pay the bills. When I spend, I don't look directly at what my portfolio is worth.

When I created my budget over 10 years ago, I had a good feel for the sustainability. Tracking aggregate spending has demonstrated that the overall budget was pretty accurate but we don't even consider "the budget" when we spend money. We realize that our lifestyle generally conforms to our expectations 10 years ago so we get on with life.

The only two things I look at now are (a) is the portfolio allocation within the desired allocation and (b) are there any unrealized losses in taxable that need to be harvested. I do that once a month when I "sell stuff for food."