Splurge Growth

[doneat54]

An idea I've had for a while, wondering if anyone else does this. While we don't want for much, it is fun to sometimes just spontaneously buy a new toy, indulgence or take a trip.


I FIRE'd in 2017, DW is still working 2-3 more years. We are not touching our portfolio now.



My though was to plan (of course) for a SWR, say 4% when DW retires. And then sleep well on growth over that if it happens. But then have a "go play" threshold if the markets do very well in a given month/quarter/whatever and go treat yourself to something. Like budget for 4%, leave anything up to 6%, but say, anything over 6% growth for a given period is play money.


Might be some tax sting on that, but life's short..... Been calculating growth on the portfolio monthly and annualized, we are pretty squarely in the 7's with an AA of around 30/70. This over the last year and a half.


Thoughts?

[W2R]

Or, if you withdraw 4% but only spend 3%, then that leaves 1% to be used as "fun money" when the time comes! Do that for three years, and if you haven't splurged at all, you'll have 3% in your pile of fun money. At least that is how it has worked for me.

[pj.mask]

Not sure I follow. It seem to indicate you think short term market performance and long term SWR are strongly correlated?

You need growth to add money so in poor times you don’t drop too much below the original.

[ERD50]

Quote:

Originally Posted by pj.mask Not sure I follow. It seem to indicate you think short term market performance and long term SWR are strongly correlated? You need growth to add money so in poor times you don’t drop too much below the original.

+1

4% isn't all that conservative. If you also take some off the top, you are making it even less so.

ETA: I just noticed the 30/70 AA. A SWR of 4% is even worse at 30/70, that was based on something more like 75/25. Try running that in FIRECalc. And don't expect many years > 6% when only 30% is in the market. But pull that out, and it will just be worse and worse.

W2R's suggestion make far more sense.

More ETA: 30/70 for 35 years (early retirement, right?) @ 4%:[FIRECalc says:For our purposes, failure means the portfolio was depleted before the end of the 35 years. FIRECalc found that 43 cycles failed, for a success rate of 62.3%.

Wow, a failure rate of ~ 38%, and you want to take some off the top?

Denied!

At least a 75/25 AA gets you to: FIRECalc says: a success rate of 93.0%.

That "conservative" 30/70 is a killer (historically)

-ERD50

[HarveyS]

Quote:

Originally Posted by ERD50 +1 W2R's suggestion makes far more sense. -ERD50

+1

[walkinwood]

Quote:

Originally Posted by doneat54 Like budget for 4%, leave anything up to 6%, but say, anything over 6% growth for a given period is play money. Thoughts?

Look into variable withdrawal methods. Guyton & Klinger wrote a good paper on using different rules to ratchet up and down spending based on portfolio performance. His method allows you to start with a higher SWR.

Decision Rules and Maximum Initial Withdrawal Rates - Cornerstone Wealth Advisors, Inc.

There's also VPW which has been discussed here and on the bogleheads forum

And a number of other methods - google.

[dtbach]

Save some $$$ from your 4% withdrawal and then splurge on that. Otherwise you are living a bit dangerously.

[mrfeh]

Quote:

Originally Posted by pj.mask Not sure I follow. It seem to indicate you think short term market performance and long term SWR are strongly correlated? You need growth to add money so in poor times you don’t drop too much below the original.

+2

[jollystomper]

Quote:

Originally Posted by dtbach Save some $$$ from your 4% withdrawal and then splurge on that. Otherwise you are living a bit dangerously.

+1


OP, my approach at FIRE was to ensure that I had my SWR in cash for the years before I plan to take SS. That way I would not be forced to withdraw from investments at times of market downturns. Granted, not everyone agrees with this approach but for me it provides the "sleep and night" ability for the market gyrations. It also helps as my planned SWR was below 2.5%.

In 18 months of FIRE our actual SWR (even with our "blow that dough" attempts) will be less than half of what we planned... so we have a "surplus" going into 2020 that we can be flexible with, as well as probably more cash than we will "need" for the years before SS. With the markets up during these 18 months as well it gives us added flexibility.

[corn18]

Your options:

1. Take out SWR and if you don't spend it all, put it in a blow that dough savings account.
2. VPW if you can live with up and down withdrawals.

If you spend the growth each year, a 40% correction is going to kill your SWR plan and you could go broke.

If you VPW, you'll never run out of money, but you will need some room in your budget to handle a 40% correction year. That might mean a few very lean spending years while you wait for the recovery.

You really should look at your SWR, though, as others have pointed out. 4% is aggressive. If your budget is fat, then you could do a modified VPW and spend less in bad years but never spend more than 4%.

[doneat54]

Thanks for all the insights. Admittedly I was over looking the need of the good growth intervals to ease/ride out the bad ones, in this very loosely thought out idea. Yes, we are looking at a 30-35 yr horizon, but we are all but ignoring SS at this point which, both of us with 30 years of contributions in high tech salaries, we could live off of alone if we had to.

I do agree that banking extra $$ from the SWR distributions would be a safer idea. Remains to be seen when/if we can cut fat out of our budget (of course we CAN) and to what extent it will be needed.


As for the suggestion of keeping SWR in cash until SS kicks in to make ourselves bulletproof from fluctuations, I presume that would be moving holdings into munis and money market type holdings IN the accounts and not actually extracting large amounts of cash and banking it and taking a horsewhipping tax wise?

And yes 30/70 (maybe more like 35/65 actually) is conservative but having lived through 2008/09, I'd rather stay conservative for when the next one hits...

Thanks again all...... and happy holidays.

[jollystomper]

Quote:

Originally Posted by doneat54 As for the suggestion of keeping SWR in cash until SS kicks in to make ourselves bulletproof from fluctuations, I presume that would be moving holdings into munis and money market type holdings IN the accounts and not actually extracting large amounts of cash and banking it and taking a horsewhipping tax wise?

If you already have the money in the accounts, that makes sense. But aren't you going to be exposed in any case sooner or later? Perhaps move enough that does not impact you existing tax rate?

Since I started planning for retirement about 6 years before I actually retired, I just funneled more of my income to cash holdings (MM/higher yielding savings accounts/CDs) to reach the desired level.

[doneat54]

Quote:

Originally Posted by jollystomper If you already have the money in the accounts, that makes sense. But aren't you going to be exposed in any case sooner or later? Perhaps move enough that does not impact you existing tax rate? Since I started planning for retirement about 6 years before I actually retired, I just funneled more of my income to cash holdings (MM/higher yielding savings accounts/CDs) to reach the desired level.

Well across the portfolio we are pretty bond fund heavy right now. Sure, I could feel better about kicking some of that into munis/etc. but then of course, we'd give up growth. I feel pretty good with the AA now to ride out what may be coming.

Unfortunately, we bought a second, lake home this past summer and are pretty cash starved right now. Plan when DW retires however, is to sell one (or more properties) but then have to hope the housing market is viable.

Your plan of building cash up years out sounds like a good one BTW....

[jollystomper]

Quote:

Originally Posted by doneat54 Your plan of building cash up years out sounds like a good one BTW....

It works for us. However, it is easy to argue that we should have invested the money and waited until actual retirement to withdraw - after all, the S&P 500 more than doubled from the beginning of 2012 until I retired in June 2018, even before counting dividends. So we gave up the gains (even after taxes) we could have had investing the cash over that time. But my focus was shifting from growth to preservation, so I was happy to do that. It has not negatively impacted our planned retirement spending.

Of course, if I had known in (or had great confidence) in 2012 that the S&P would double in that time, I certainly would have been 100% invested... Everything is a tradeoff...

[DrRoy]

I have a pension equivalent to .7% WR and took 2.2% from investments this year for a comfortable spend. Next year will splurge on a heady 2.8% WR plus pension. Gonna blow that dough on remodeling and travel.

[ncbill]

4% "fixed" (inflation-adjusted) withdrawal is 100% success for a 60/40 AA over 30 years.

So, yes, it is conservative for a typical retirement.

Retirees in most years (i.e. not the top 5-10 worst starting years) could withdraw 6+% "fixed" & still be fine for those 30 years.

Nobody knows, of course, if they've picked one of the "worst" years to retire until years (or decades) later...

[GravitySucks]

Back to splurging after a strong year, I think yearly is too often. My plan is to reassess every 5 years.
90% of the time not upping your spending is going to leave you with wealthy heirs or being the richest guy in the cemetery.

Kitces has a good article on ratcheting up your spending here: https://www.kitces.com/blog/the-ratc...of-the-4-rule/

[HI Bill]

Consider using the variable percentage rate calculator. This affords you some measure of safety (spending goes up and down based on the year-end portfolio value), while allowing one to outspend the 4% rule, on average.

https://www.bogleheads.org/wiki/Vari...age_withdrawal