Rookie Question - Calculating withdrawal rate

[shotgunner]

When calculating one's actual W/R for 2009 does one use the starting balance as of 1/1/09 or the ending balance on 12/31/09? I have always assumed you take the Portfolio balance at the start of the year and calculate the W/R by using the withdrawals made during the next 12 months.

 

[cardude]

When calculating one's actual W/R for 2009 does one use the starting balance as of 1/1/09 or the ending balance on 12/31/09? I have always assumed you take the Portfolio balance at the start of the year and calculate the W/R by using the withdrawals made during the next 12 months.

I actually use the portfolio balance each month, and figure the W/R each month.

 

[REWahoo]

[Shotgunner, I moved your post to its own thread. Your question is a good one and would get lost in the "Personal Inflation" discussion.]

I'd take the average of your starting and ending balances and use that number.

 

[Ed_The_Gypsy]

IIRC, the IRS MRD uses the value on 12/31. Vanguard will do this for you automatically for your IRA. Check their web site for the correct information. My memory ain't good.

 

[Rich_by_the_Bay]

I'll use the actual balance as of a fixed date (birthday, for example) to calculate my SWR for the upcoming year. Since I am using a variable WR based on percent of portfolio value (the Clyatt approach), the date itself is irrelevant to me, as long as I keep it the same and avoid chasing returns.

 

[Moemg]

I calculate mine on Jan.1 . I use a percentage of my portfolio . I then keep track of my withdrawals from that amount . I take a set amount every month and the rest is for travel ,repairs and large items . Any money left over is rolled into the next year . I'm not sure this is correct bur it works for me .

 

[MichaelB]

I use starting balance of Jan 1.

 

[W2R]

The market is closed on January 1st for the New Year's holiday. So, on 1/2/10 the most current available value would be 12/31/09, wouldn't it? I would take the absolutely most current and updated value for computing my SWR.

For a while, I was thinking that I would use the value on the day I retired (11/9/09), but since I don't plan to withdraw for the first time until January, I'll use the value then.

From what I gather, the idea is that if my withdrawal is $X in 2010, my withdrawal would be that same amount incremented by the CPI for 2011, no matter what my portfolio balance in January, 2011.

Not only no more paychecks, but withdrawing from my accounts? Now this is REALLY going to feel weird until I get used to it. Like REWahoo mentioned on another thread, some of us new retirees may be a little timid about spending very much the first few years.

 

[CuppaJoe]

I avoid the January rush and base my WD on the sweet date of my retirement which was the last date of Aug. '08. I usually transfer the money from my PF every month on the second of the month. I gave myself an increase on Jan. 1, 2009 based on inflation; PF total on Dec. 31-Jan. 1 doesn't matter. I'm taking no increase for 2010 but will adjust my WD because one on my annuity-style payouts will increase slightly on that date.

I don't re-balance in January but did a small rebalance on Dec. 1 and will do more of them randomly throughout the year.

 

[Gotadimple]

Like REWahoo mentioned on another thread, some of us new retirees may be a little timid about spending very much the first few years.

Hey! I resemble that remark!

Rita

 

[Independent]

When calculating one's actual W/R for 2009 does one use the starting balance as of 1/1/09 or the ending balance on 12/31/09? I have always assumed you take the Portfolio balance at the start of the year and calculate the W/R by using the withdrawals made during the next 12 months.

Are you calculating a rate or an amount?

I think most people here are taking a pre-determined rate times a balance to get an amount. But the "W/R" in your post suggests you are dividing a pre-determined amount by a balance to solve for a rate.

 

[RunningBum]

IIRC, the IRS MRD uses the value on 12/31. Vanguard will do this for you automatically for your IRA. Check their web site for the correct information. My memory ain't good.

I'm years from it so I'm not too concerned yet, but are you saying that the MRD for 401Ks and IRAs for 2009 would be based on the 12/31/2009 balance? Or is it the 12/31/2008 balance? It isn't clear because you don't say the year, and the OP said 09.

2009 wouldn't make sense because if the market rose on the final day you might have to take out more.

 

[bosco]

I start my own "fiscal year" on April 1 every year. I also rebalance at this point. I figure this puts me out of sync with most others, and I generally know what my tax refunds are at that point, so I can figure future tax withholdings into my updated budget.

 

[REWahoo]

I start my own "fiscal year" on April 1 every year. I also rebalance at this point. I figure this puts me out of sync with most others, and I generally know what my tax refunds are at that point, so I can figure future tax withholdings into my updated budget.

And if things don't work out, you can always claim you were just playing a practical joke on yourself.

 

[shotgunner]

Are you calculating a rate or an amount?

I think most people here are taking a pre-determined rate times a balance to get an amount. But the "W/R" in your post suggests you are dividing a pre-determined amount by a balance to solve for a rate.

What I was trying to do was determine what my actual W/R was for calendar year 2009. As I close in on 12/31/2009 I will be able to see what I actually spent as a percentage of my portfolio vs. what I planned to spend. I wanted to know if I divided that number by my starting balance (which is what I normally do) or the ending balance, or as someone else suggested an average between the two. Since this has been an up year so far it seemed to me using the balance from 1/1/2009 would give a better picture.

My projected numbers look good thanks to working part-time. I kept my W/R in 2009 to about 2.9%, yea me!

 

[Alan]

I calculate mine on Jan.1 . I use a percentage of my portfolio . I then keep track of my withdrawals from that amount . I take a set amount every month and the rest is for travel ,repairs and large items . Any money left over is rolled into the next year . I'm not sure this is correct bur it works for me .

This is pretty similar to what I plan to do starting this Jan 1

 

[Ed_The_Gypsy]

RunningBum,

No. What I meant was, the total distribution for (for example) 2009 would be based on the value of the account on Dec 12, 2008.

For the IRS's MRD, they have a table (used for the 72T distribution, too), which consists of the reciprocal of our expected lifespan in years based on our age, which of course changes every year. If, for example, I am 58 and the actuarial table says that people age 58 will live on the average 28.3 more years (I made this up), the MRD for the coming year (say, 2010) would be 1/28.3 * your IRA value on 12/31 at the end of this year (12/31/2009).

 

[Independent]

What I was trying to do was determine what my actual W/R was for calendar year 2009. As I close in on 12/31/2009 I will be able to see what I actually spent as a percentage of my portfolio vs. what I planned to spend. I wanted to know if I divided that number by my starting balance (which is what I normally do) or the ending balance, or as someone else suggested an average between the two. Since this has been an up year so far it seemed to me using the balance from 1/1/2009 would give a better picture.

My projected numbers look good thanks to working part-time. I kept my W/R in 2009 to about 2.9%, yea me!

Okay, you've already withdrawn the money, now you want to calculate the rate.

In your case, I'd divide by the balance on the date you took the withdrawals - that's the measure of how deeply you are digging into your balance. i.e. if you took $40k from a portfolio that was $800k on the day you did the withdrawal, then you reduced your portfolio by 5%. It doesn't matter that the portfolio happened to be $1,000k on the first or last of the year, your portfolio is still 5% less than it would have been at year end if you hadn't made a deduction.

If you took more than one withdrawal, I'd divide each by the balance on it's day, and add up the percentages for the yearly total.

 

[shotgunner]

Okay, you've already withdrawn the money, now you want to calculate the rate.

In your case, I'd divide by the balance on the date you took the withdrawals - that's the measure of how deeply you are digging into your balance. i.e. if you took $40k from a portfolio that was $800k on the day you did the withdrawal, then you reduced your portfolio by 5%. It doesn't matter that the portfolio happened to be $1,000k on the first or last of the year, your portfolio is still 5% less than it would have been at year end if you hadn't made a deduction.

If you took more than one withdrawal, I'd divide each by the balance on it's day, and add up the percentages for the yearly total.

Thanks, it might be a bit tedious that way as I spend some of the fixed portion of my portfolio every day. However since the fixed portion I used to live on this year (and I still have a balance as we reach year end) is in checking and savings accounts earning a paltry amount of interest, I think a calculation of what I spent (which is less than what I planned) divided by the years starting portfolio balance will get me very close to determining my actual W/R for 2009.

 

[donheff]

I calculate mine on Jan.1 . I use a percentage of my portfolio . I then keep track of my withdrawals from that amount . I take a set amount every month and the rest is for travel ,repairs and large items . Any money left over is rolled into the next year . I'm not sure this is correct bur it works for me .

I am planning to start something similar in January (DW retires this year). I will pull the years funds at one time and move them to another account where I will pull monthly for the year's expenses. Left over money (if any) will get rolled into a mad money/emergency fund. Like R-I-T I plan a Clyatt style variable rate.

 

[Alan]

I am planning to start something similar in January (DW retires this year). I will pull the years funds at one time and move them to another account where I will pull monthly for the year's expenses. Left over money (if any) will get rolled into a mad money/emergency fund. Like R-I-T I plan a Clyatt style variable rate.

To be more specific about my plans, I will calculate the amount based on the Jan 1st balance - say it is $36k for the coming year. I will then move it into my spending account once a quarter, since that is when Wellesley spits out it's dividends. If my Wellesley account pays out $5k end of a quarter then I will add $4k to it from my RE cash accounts.

Since this is my first year coming up I am only speaking about my plan, I have no experience at this yet but it sounds simple and I like simple

PS - if the amount "planned" is greater than 4% then I will only withdraw 4% and cut spending that coming year

 

[Rustic23]

This seems a little like the 'measure with a micrometer and cut it with a meat ax' discussion. First one of those disclosures, 'I don't depend on SWR for retirement.' However, I do have IRA's and such and do want to know what I can draw out and have them last my entire retirement.

Having said that, and reading much about the SWR on this board and other placed, it is just not that accurate of a forecast. If I understand it, which may be the problem, it is initial amount and rate you can withdraw from your savings increasing each year for inflation. If this amount is set for the initial withdrawal then the amount is key not necessarily the rate for future withdrawals. I know many on this board manage the rate depending on what their portfolio does, however, IMHO, in those cases you are not really using a SWR, and that makes perfectly good since. Running out of cash at 89 is not a option for most of us.

If the SWR is truly a valid number, then it should not make any difference when you calculate it. It has never made since to me that an investor that retires on Jan 1 with 1,000,000 can withdraw 40,000, however, if he retires one year later with 500,000, he can only withdraw 20,000. According to SWR theory he will withdraw 40,000 plus inflation from his 500,000 portfolio in his second year. If the reason for his portfolio drop is 'economic' i.e. he did not take out 500,000 to purchase something or such, then it seems to me he is in the same place the second year.

 

[Moemg]

.

If the SWR is truly a valid number, then it should not make any difference when you calculate it. It has never made since to me that an investor that retires on Jan 1 with 1,000,000 can withdraw 40,000, however, if he retires one year later with 500,000, he can only withdraw 20,000. According to SWR theory he will withdraw 40,000 plus inflation from his 500,000 portfolio in his second year. If the reason for his portfolio drop is 'economic' i.e. he did not take out 500,000 to purchase something or such, then it seems to me he is in the same place the second year.

That is what happened (maybe not as drastic a drop ) to a lot of us that retired just as the market melt down started . By the time Jan. 2009 rolled around my portfolio had taken a major hit so I did take a cut . It was not drastic as I still had my pension and SS survivor benefit but it was a cut of several thousand dollars . Luckily I had a lot of padding so it was not too painful . I just did not feel comfortable taking my amount from 2008 and giving myself a raise when the meltdown was still occurring . Plus leaving that money in the market helped me get back a lot of my losses .
So I feel the SWR and the way you calculate it is emotional as well as financial .

 

[cashflo2u2]

The Journal of Financial Planning is going to have this article in the Jan. 2010 issue. It is a subject I have been considering. It will probably be worth a read- "Achieving Sustainable Retirement Withdrawals: A Combined Equity and Annuity Approach".