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SWR - I've read many posts but still confused
10-06-2007, 01:14 PM
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#1
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Recycles dryer sheets
Join Date: Aug 2007
Location: Mt. Pleasant
Posts: 141
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SWR - I've read many posts but still confused
I thought I knew how to handle the 4% SWR but after reading a few threads and many posts I am confused. I am math dumb so please bear with me.
Here's my hypothetical example. I start retirement with a 60/40 portfolio worth 800k. My first year's withdrawal is 32k.
In year 2, say the portfolio is worth 840k. Do I:
a) take out 4% of 840k, or
b) 32k plus adjusted for inflation.
Now I believe the answer is b) so now my question is:
In year 2, if the CPI is 2.5%, do I take 2.5% of the 32k, or 800K or 840K?
Thank you in advnace for your help.
Larry
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10-06-2007, 01:21 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,000
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b) 32k plus adjusted for inflation.
In your example, your year two draw would be 32.8K (32k + 2.5% of 32K)
If you haven't read this thread, I think it might help.
http://www.early-retirement.org/foru...ate-19234.html
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Numbers is hard
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10-06-2007, 01:25 PM
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#3
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Dryer sheet aficionado
Join Date: Jul 2007
Posts: 35
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I believe the 2nd and subsequent year amounts are adjusted for inflation.
So:
1st Year: $32,000
2nd year: $32,000 + 2.5/100*32000 = $32,800
3rd year: $32800 + 2.5/100*32800 = $33,620
And so on.....
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10-06-2007, 01:31 PM
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#4
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Gone but not forgotten
Join Date: Jan 2007
Location: Sarasota,fl.
Posts: 11,447
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I thought you could also just take 4% from your new amount .Say year one you have I,000,000 so you can take $40,000 .Next year your portfolio has risen to 1,100,000 so you can now take $44,000 ?? Is this correct ?
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10-06-2007, 01:35 PM
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#5
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Recycles dryer sheets
Join Date: Dec 2006
Posts: 197
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Quote:
I thought you could also just take 4% from your new amount .Say year one you have I,000,000 so you can take $40,000 .Next year your portfolio has risen to 1,100,000 so you can now take $44,000 ?? Is this correct ?
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You could do that and be 100% guaranteed of not running out of money. However the problem is when the market drops. For example if the portfolio dropped to 600k, could you live on 24k.
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10-06-2007, 01:39 PM
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#6
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Dryer sheet aficionado
Join Date: Jul 2007
Posts: 35
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The way I am seeing is the 32k figure is your fixed expenses/living allowance which is adjusted for inflation.
If your portfolio does better, I suppose you can take the higher amount but then it works the other way too i.e. what if your portfolio does poorly?
I think staying focused on the Fixed expense/Living allowance adjusted for inflation is probably the wiser choice - but to each his own.
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10-06-2007, 01:40 PM
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#7
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Administrator
Join Date: Jul 2005
Location: N. Yorkshire
Posts: 34,021
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Quote:
Originally Posted by Moemg
I thought you could also just take 4% from your new amount .Say year one you have I,000,000 so you can take $40,000 .Next year your portfolio has risen to 1,100,000 so you can now take $44,000 ?? Is this correct ?
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That is not how the SWR rule works. It it as described above.
After year 1 you may end up taking more or less than 4% each year depending on how the portfolio is performing. The idea is that you have a predictable and stable income. Taking 4% every year of the total will give a variable income.
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10-06-2007, 01:43 PM
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#8
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Recycles dryer sheets
Join Date: Aug 2007
Location: Mt. Pleasant
Posts: 141
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I think I"ve got it!
Thanks to all
Larry
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Retired early and loving it.
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10-06-2007, 02:21 PM
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#9
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Thinks s/he gets paid by the post
Join Date: Mar 2006
Location: Houston
Posts: 4,337
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Quote:
Originally Posted by maxer
The way I am seeing is the 32k figure is your fixed expenses/living allowance which is adjusted for inflation.
If your portfolio does better, I suppose you can take the higher amount but then it works the other way too i.e. what if your portfolio does poorly?
I think staying focused on the Fixed expense/Living allowance adjusted for inflation is probably the wiser choice - but to each his own.
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When you start to vary the withdrawl based on portfolio performance, you venture into Guyton territory. I am personally planning a 4% SWR for my "gotta have" expenses and adjust my travel and extras on Guyton. If the market tanks, my vacation budget tanks; but if things stay strong, I'm living it up. I'm also planning on a shorter time period for this part of my portfolio. I'm pretty sure I won't be very interested in taking extended exotic trips when I'm 85.
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The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
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10-06-2007, 03:13 PM
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#10
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Moderator Emeritus
Join Date: Dec 2002
Location: Oahu
Posts: 26,855
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Quote:
Originally Posted by 2B
I'm pretty sure I won't be very interested in taking extended exotic trips when I'm 85.
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You might want to check into Elderhostels & cruise ships... especially the Elderhostels on cruise ships.
It's a big business, and I'm sure those organizations have comprehensive detailed plans on what to do when their customers wake up dead on the second morning.
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