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Question about SWR
Old 04-26-2018, 06:38 AM   #1
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Question about SWR

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 ?
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Old 04-26-2018, 07:42 AM   #2
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Here is a way to look at it. Figure what 4% was on the first year of your retirement. Lets say $1,000,000 = $40,000. So you can take out 40k plus inflation each year of your retirement. (i.e. 35 years, 95% chance not to go broke)

Now you are taking out 3.3% or $33k. So if you roll along at this amount plus 4% inflation and in 10 years you will be withdrawing $48,848. However if you were at 4% the withdrawal would be $59,209. In theory that is a safe number.

Your question does bring up an interesting question, 'Can you change SWR during retirement'.

Example: Two people person A and B. A retires at 40 with $1 mil in the bank. Ten years later he has $2 mil in the bank. Person B retires 10 years after A and has $2 mil in the bank. The SWR says that A has 40k+I for retirement and B has 80K+I (A's 40k withdrawal at a 4% inflation would be $59k)

It does not work on the down side because B's money has to last 10 years longer than A's. You could also recompute your SWR based on your life expectancy each year.

Caveat: This could be 100% wrong! It just seems to make sense and that's not always what is.
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Old 04-26-2018, 07:44 AM   #3
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Why not just withdraw what you think you are going to need, rather than some arbitrary percentage?
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Old 04-26-2018, 07:48 AM   #4
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Why not just withdraw what you think you are going to need, rather than some arbitrary percentage?
Thats exactly what I'm doing now....

I was just thinking that lets say the portfolio goes down 40%...then that number I need pushes my withdrawal % up to like 5%.....so if I had taken 4% of the original amount I would have money left over that would allow me to take less from the 40% reduced number....follow?
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Old 04-26-2018, 07:53 AM   #5
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Thats exactly what I'm doing now....

I was just thinking that lets say the portfolio goes down 40%...then that number I need pushes my withdrawal % up to like 5%.....so if I had taken 4% of the original amount I would have money left over that would allow me to take less from the 40% reduced number....follow?
Yes, but I think you are overanalyzing it. It's not going to make a big difference either way, but in theory since the markets go up more frequently than down, if you take money out of the market and put it into a low yield savings account when you don't really need it, you are giving up potential returns for no reason.

In addition, years from now your balance is likely going to be significantly different than it is today, which is going to cause you to reevaluate the original 4% number anyway.

If you have dividend paying stocks and bonds, you could just direct those to your savings account as they are issued and use that as part of your living expenses too.
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Old 04-26-2018, 07:56 AM   #6
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If your calculated SWR is 4% and you only take 3%, you could safely take 5% (4% + the 1% you didn't take) the following year.
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Old 04-26-2018, 07:58 AM   #7
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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 ?
Some forum members do that - take the full 4% (or whatever planned withdrawal rate they use), and if they spend less, put the difference in a savings account for a rainy day.

Other forum members take what they need and leave the rest in the portfolio. No right answer, it's whatever makes you feel more comfortable / sleep better.
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Old 04-26-2018, 08:49 AM   #8
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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.
In this case, the prudent action is to attack the root cause and not the symptoms - namely, adjust your portfolio and reevaluate your spending adjustments. Then let it be and enjoy the ride.

Sticking to making unnecessary withdrawals at a constant annual rate is a self-imposed disciplining borne by a fear that your plan is faulty and/or your doubts in your own ability to execute said plan. Such attributes may be common for the majority of the population, but I find them incompatible with the average savvy e-r.org forum inmate.
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Old 04-26-2018, 08:51 AM   #9
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Some forum members do that - take the full 4% (or whatever planned withdrawal rate they use), and if they spend less, put the difference in a savings account for a rainy day.

Other forum members take what they need and leave the rest in the portfolio. No right answer, it's whatever makes you feel more comfortable / sleep better.
+1
As for myself, I do like the rainy day fund idea, so hopefully the cuts in a down year are minimal. Think about it, for this forum where many retire in their 50's and travel a bit, who really wishes to cut down on that travel drastically and may not be able to do that type of travel in their later years.
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Old 04-26-2018, 10:44 AM   #10
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Here's an example of how I handle this:
  • In January, 2017, I withdrew x% for my 2017 spending.
  • In January, 2018, I planned to withdraw x% once again for my 2018 spending. Then I noticed that I had y dollars left over from my 2017 spending money.
  • So, in January 2018 I withdrew (x% minus y dollars) for my 2018 spending.
This really has the same effect as returning the unspent money.
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Old 04-27-2018, 01:28 PM   #11
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If you are taking a Percentage of Portfolio Balance, such as VPW does, it makes a lot of sense to Withdraw (Not necessarily spend) the Full amount.

This is kind of like reverse Dollar Cost Averaging, which means you are selling more stocks when the Market is Higher and selling less Stocks when the Market is Lower.

This formula is designed to keep you on track and keep your emotions out of the picture.
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Old 04-27-2018, 02:39 PM   #12
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Why not just withdraw what you think you are going to need, rather than some arbitrary percentage?
Because it’s not arbitrary.

I did a lot of modeling to figure out what was a reasonable AA and % to withdraw each year and still have the portfolio survive. I see no reason to take less out each year.

BTW - I use the %remaining portfolio method.

My portfolio will likely still end up having grown a lot by the time I pass. I don’t want make it even bigger by taking less out (reducing my withdrawal rate).

You can’t take it with you.

I’m youngish and healthy enough now, I don’t know when that situation might change. I feel that it’s important to enjoy what I can now.

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if you take money out of the market and put it into a low yield savings account when you don't really need it, you are giving up potential returns for no reason.
Think about this point: “For no reason?” What is your goal then - to die with a bigger stash?

Some folks may want to pass more on to heirs if they can, that is not my case. I’d rather be generous in gifting while living.
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Old 04-27-2018, 03:10 PM   #13
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Sticking to making unnecessary withdrawals at a constant annual rate is a self-imposed disciplining borne by a fear that your plan is faulty and/or your doubts in your own ability to execute said plan. Such attributes may be common for the majority of the population, but I find them incompatible with the average savvy e-r.org forum inmate.
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.
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Old 04-27-2018, 03:29 PM   #14
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I calculate my WD rate as total expenses/portfolio value.

Moving money around isn't a WD in my system.
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Old 04-27-2018, 03:40 PM   #15
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I calculate my WD rate as total expenses/portfolio value.

Moving money around isn't a WD in my system.
You've got it completely backwards...... Your Portfolio Value drives Expenses ... You have no idea of what your Expenses are until you have calculated a Budget based on your Portfolio Amount. You have to calculate your Expenses first based on a 'Workable Withdrawal Rate'. Expenses are an unknown Number that depends on your Portfolio Amount.

Maybe you can afford to Fly First Class instead of Coach? Or, Maybe you can't afford to live in that house that you now reside in?
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Old 04-27-2018, 04:17 PM   #16
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I calculate my WD rate as total expenses/portfolio value.

Moving money around isn't a WD in my system.
So you aren’t using a target withdrawal rate. Some of us do.

What if you can afford to spend more or had better spend less? Isn’t that is what a target withdrawal % lets you figure out?

I actually physically remove X% from my brokerage account every Jan, and then rebalance to my target AA. Withdrawn = taken out.

Those funds go to savings and checking from which I can spend. That’s not part of my retirement portfolio - it’s money I can spend whenever I please.

Maybe I choose to take a bigger trip next year because I didn’t spend all my travel budget this year?

There is no rule that says you must spend money in the same year for it to “count” as a withdrawal.
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Old 04-27-2018, 04:22 PM   #17
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So you aren’t using a target withdrawal rate. Some of us do.

I actually physically remove X% from my brokerage account every Jan, and then rebalance to my target AA. Withdrawn = taken out.

Those funds go to savings and checking from which I can spend. That’s not part of my retirement portfolio - it’s money I can spend whenever I please.
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.
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Old 04-27-2018, 04:29 PM   #18
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Everyone looks at this differently.

I have no intention of reducing my portfolio. I draw from my investments at a rate such that my portfolio grows.
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Old 04-27-2018, 04:29 PM   #19
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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.
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.
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Old 04-27-2018, 04:35 PM   #20
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Everyone looks at this differently.

I have no intention of reducing my portfolio. I draw from my investments at a rate such that my portfolio grows.
Your heirs will thank you while they are sipping Cool Ones on the Beach!
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