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Starting Amount to use with SWR plan?
Old 07-12-2013, 02:57 PM   #1
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Starting Amount to use with SWR plan?

What base dollar amount should we use to calculate our starting SWR amount? We considered the mean or some form of average value of the funds during the final year. I don't recall seeing this discussed in the studies on SWR.

Given market volatility lately this seems to be a significant decision. Does 70/30 EQ/Bonds-fixed matter.

SS and pension will cover required minimum expenses when we retire in 3 to 5 years. I have budgeted reserves for emergencies. I plan to remove these reserves and home value (no mortgage) from my base dollar amount used for the SWR calculations.

Thanks for any suggestions.
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Old 07-12-2013, 03:02 PM   #2
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What base dollar amount should we use to calculate our starting SWR amount? We considered the mean or some form of average value of the funds during the final year. I don't recall seeing this discussed in the studies on SWR.
The "beginning value" in SWR studies isn't an average, it is the amount you have saved/invested for retirement. Based on that, I used the value of my portfolio on the day I retired.
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Old 07-12-2013, 03:38 PM   #3
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Once you subtract funds for emergency reserves and other unique spending, what you have left is the number. Why would you want to use any other?
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Old 07-12-2013, 03:45 PM   #4
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Why would you want to use any other?
For the same portfolio, the numbers in March 2009 would have been drastically different from those in late 2007.

Were they both the correct ones to use (assuming two retirees, one each starting on those dates)?
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Old 07-12-2013, 03:48 PM   #5
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For the same portfolio, the numbers in March 2009 would have been drastically different from those in late 2007.

Were they both the correct ones to use (assuming two retirees, one each starting on those dates)?
Yes.

There are a couple of old threads on this topic - I'll see if I can locate them.
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Old 07-12-2013, 03:54 PM   #6
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Once you subtract funds for emergency reserves and other unique spending, what you have left is the number. Why would you want to use any other?
I can see wanting to do that. It's really just one way to throw in some conservative fudge factor. Since the market has been up recently, the reported WR is not as conservative as when the market is in a trough.

Some people do it on the output - if X.X% WR gives them 100%, they decide to go a bit below that. Six of one, half dozen of the other, but saying "I could do this, even if my portfolio was $X smaller" might 'connect' more for some people?

-ERD50
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Old 07-12-2013, 04:17 PM   #7
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My funds increase over 20% so far this year. So the SWR on January 1st is significantly lower than it would be today.

But, I think the real issue is the power of compounding if you inflation adjust the SWR amount and cherry pick your starting base dollar amount to be the highest point of a market peak you are likely decreasing your success rates.
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Old 07-12-2013, 04:27 PM   #8
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But, I think the real issue is the power of compounding if you inflation adjust the SWR amount and cherry pick your starting base dollar amount to be the highest point of a market peak you are likely decreasing your success rates.
The point is you don't "cherry pick" - you simply use the value of your retirement portfolio when you retire and start spending it down. Per FIRECalc (my bold):
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If you get a "100% success rate" with what you have and what you plan to spend, this means that you would have been able to maintain your standard of living and not run out of money, despite the worst that we've ever seen, including the Great Depression.
As ERD50 points out, whether you use a lesser amount than actual value as a starting point or simply reduce the annual spend/withdrawal amount below what you calculate to be "safe", you are doing the same thing. Nothing wrong with being conservative and there are a number of ways to do so, including what you propose.
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Old 07-12-2013, 04:46 PM   #9
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The point is you don't "cherry pick" - you simply use the value of your retirement portfolio when you retire and start spending it down.

As ERD50 points out, whether you use a lesser amount than actual value as a starting point or simply reduce the annual spend/withdrawal amount below what you calculate to be "safe", you are doing the same thing. Nothing wrong with being conservative and there are a number of ways to do so, including what you propose.
My previous response didn't come across as intended. I agree with ERD and this.
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Old 07-12-2013, 05:08 PM   #10
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I thought it was a no-brainer to use your portfolio value on the day you retire. But I kind of like some things about averaging the last year, to avoid the effects of a temporary high coinciding with retirement. But, you'd have to factor in that the contributions you made in the last year weren't due to market gains and shouldn't be averaged down.
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Old 07-12-2013, 05:11 PM   #11
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Originally Posted by REWahoo View Post
The "beginning value" in SWR studies isn't an average, it is the amount you have saved/invested for retirement. Based on that, I used the value of my portfolio on the day I retired.
They had portfolios way back then?
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Old 07-12-2013, 05:14 PM   #12
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They had portfolios way back then?
+1

And FIRECalc had to be computed by hand...
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Old 07-12-2013, 05:23 PM   #13
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Originally Posted by ERD50 View Post
I can see wanting to do that. It's really just one way to throw in some conservative fudge factor. Since the market has been up recently, the reported WR is not as conservative as when the market is in a trough.

Some people do it on the output - if X.X% WR gives them 100%, they decide to go a bit below that. Six of one, half dozen of the other, but saying "I could do this, even if my portfolio was $X smaller" might 'connect' more for some people?

-ERD50
Don't most posters here "conservatize" all the numbers?

Put SS in at a fraction of what is actually expected "just in case" the gov't changes the rules.

Exaggerate your spending "just in case" you decide you need to spend more than you have historically or that you dream you might in the future.

Understate your FIRE portfolio value "just in case" it turns out you're retiring at the peak of a bubble.

Leave out the value of non-financial assets such as your main home, summer home, Rolls Royce collection, bag of diamonds in the safety deposit box, rare and expensive artwork, major league baseball team, etc.

Assume your employer will not be able to pay your pension.

Then, after retirement, buckle down and try to not spend a penny. Boast about your low spending on the FIRE Forum as much as possible. Learn to enjoy the event of non-spending more than any activity money could buy.

With a huge but understated asset base, a huge but understated retirement income flow and a lifestyle which revolves around never spending a penny, your success rate might be OK for you to sleep at night.

That's how it works, no?
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Old 07-12-2013, 05:46 PM   #14
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One issue is what if you retire, say, in June. Do you do Firecalc as if you retired on January 1 using the January 1 value and using your annual spending or do you use the June value or do you pretend like you are retiring on January 1 of the next year?
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Old 07-12-2013, 06:11 PM   #15
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Originally Posted by youbet View Post
Don't most posters here "conservatize" all the numbers?

Put SS in at a fraction of what is actually expected "just in case" the gov't changes the rules.

Exaggerate your spending "just in case" you decide you need to spend more than you have historically or that you dream you might in the future.

Understate your FIRE portfolio value "just in case" it turns out you're retiring at the peak of a bubble.

Leave out the value of non-financial assets such as your main home, summer home, Rolls Royce collection, bag of diamonds in the safety deposit box, rare and expensive artwork, major league baseball team, etc.

Assume your employer will not be able to pay your pension.

Then, after retirement, buckle down and try to not spend a penny. Boast about your low spending on the FIRE Forum as much as possible. Learn to enjoy the event of non-spending more than any activity money could buy.

With a huge but understated asset base, a huge but understated retirement income flow and a lifestyle which revolves around never spending a penny, your success rate might be OK for you to sleep at night.

That's how it works, no?
heh-heh I often find myself adding multiple fudge factors (for retirement or something else), then realize I should do it straight and just add one fudge factor. If I added all the fudge you listed, I'd probably (try to) go back to work!

I suppose most do go conservative, but there are some who do not. They go with 95% success, figure a low LE, that spending will reduce with age, etc. Others seem to be using a spreadsheet and making some questionable inflation assumptions. I hope they are OK, 'cause then I ought to be doing great!

_ERD50
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Old 07-12-2013, 06:15 PM   #16
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One issue is what if you retire, say, in June. Do you do Firecalc as if you retired on January 1 using the January 1 value and using your annual spending or do you use the June value or do you pretend like you are retiring on January 1 of the next year?

Consider yourself retired for the entire year.

Use your end of career portfolio value including any final bonuses, severance pay, etc. that you invest in your FIRE portfolio.
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Old 07-12-2013, 06:33 PM   #17
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Originally Posted by Katsmeow View Post
One issue is what if you retire, say, in June. Do you do Firecalc as if you retired on January 1 using the January 1 value and using your annual spending or do you use the June value or do you pretend like you are retiring on January 1 of the next year?
You don't have to follow a calendar year. You can have your own fiscal year starting June 1 or July 12 or whatever date you want.
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Old 07-12-2013, 06:34 PM   #18
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Use your end of career portfolio value including any final bonuses, severance pay, etc. that you invest in your FIRE portfolio.
That's the way I did it...
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Old 07-12-2013, 07:43 PM   #19
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That's the way I did it...
You're on your game!
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Old 07-12-2013, 08:43 PM   #20
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The point is you don't "cherry pick" - you simply use the value of your retirement portfolio when you retire and start spending it down.
Some people may tie the value of their retirement portfolio to when they retire. I.e., if you are going retire when the portfolio hits X dollars, you are more likely to retire when the market has a big run up (and hence possibly lower future returns). It's a subtle form of selection bias.

Quote:
Per FIRECalc (my bold): As ERD50 points out, whether you use a lesser amount than actual value as a starting point or simply reduce the annual spend/withdrawal amount below what you calculate to be "safe", you are doing the same thing. Nothing wrong with being conservative and there are a number of ways to do so, including what you propose.
Agree with this. I think many people have a factor of safety built in and there's a gazillion ways to incorporate it -- e.g., in a lower withdrawal rate, a "stash" not counted in the portfolio value, etc.
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