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SWR vs SS age and Expenses
Old 03-06-2014, 08:37 AM   #1
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SWR vs SS age and Expenses

For those that practice the SWR approach for systematic withdrawals do have you strictly adhered to the 4% 'guideline' from the moment you started retirement to your estimated 'end game'?

As I look at our own situation, I see several phases where, overall, expenses taper down later (ie our mortgage is reasonable now, but will not be paid off until I am 70, kids will be moved out in 5-6 years - oh I hope so! :-) ), and income streams change.

For instance whatever age I elect to collect SS that would positively affect my SWR.

And - I have different 'pots' for retirement savings: after tax, tax deferred (401k), and tax free (Roth).

Do you apply the SWR to each type of savings you have or is your SWR averaged across all types?

I see different SWRs for each type and during each of the 3 'phases' of my own retirement: some 'pots' a bit higher than 4%, then changing to be lower later, but overall across all my assets the SWR is below 4%.

Was just curious as to how other people are approaching their own SWR.

And - thank you for sharing!
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Old 03-06-2014, 09:12 AM   #2
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Quote:
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For those that practice the SWR approach for systematic withdrawals do have you strictly adhered to the 4% 'guideline' from the moment you started retirement to your estimated 'end game'?
I'll go out on a limb and predict no individual follows the SWR withdrawal method literally throughout retirement (overfunded endowments might), and you're not supposed to according even to the academics/authors who originated the studies. The inflation adjusted withdrawal method was just a basis for academics to look back at market history to study the probabilities of $X lasting Y years while spending $Z/yr initially and inflation adjusted thereafter.

Like your example, it's always more complex, various income sources and asset classes, timing, actual market sequence of returns, end of life planning, marital/family status, taxes/regulations (and changes), etc.

There are lots of threads on SWR, here's one attempt to grapple with some of the same questions you're asking about (the possibilities are endless) The Shortcomings of SWR After Retirement
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Old 03-06-2014, 09:30 AM   #3
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Well, I am not retired yet, but my projections show fluctuating percentages based on other income coming in - I'll get a pension at 57, assume SS at 67, and 5 years later, assume my DH's SS when he turns 67. The SWR goes down each time a new income source comes in.

Side note- I need to adjust my SS assumptions for DH to get SS based on my SS when he turns 62, I think....
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Old 03-06-2014, 10:20 AM   #4
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As Midpack says, I doubt that anyone sets a WR at the beginning of their retirement period, and sticks to it faithfully (with small adjustments for inflation each year) for their entire retirement. We each have our own individual approaches.

For instance, imagine you retire near, or at, the bottom of the market, as has happened to some recent retirees. You set your WR based on the size of your portfolio at retirement. After, say, 5 or 10 years, the market has recovered handsomely, and then some. Do you stick doggedly to the same WR you decided on when you retired, or do you revise it upwards a little? I think most of us would do the latter. The very conservative (and perhaps also those who are particularly concerned with leaving an estate) might stick to the same WR. Conversely, those who retired at a market peak and set their WR based on a historically high portfolio size may feel more comfortable revising their WR downwards in future years, even if Firecalc indicated their portfolio would probably survive. It all depends on your individual risk tolerance.

There's nothing to stop you from resetting your WR as often as you want. Firecalc is just a guide (albeit a very useful one). You are the one to decide how to interpret the results it gives.

As for how to include different income streams, to state the obvious, that is up to you as well. I began portfolio withdrawals at age 47 with a WR of ~2.5%, and completely ignored SS in my calculations. I wanted to be fairly conservative so that, as SS gets closer, I can either choose to include it in my calculations to gradually give myself larger and larger raises as I get older, or continue to ignore it, which will result in a nice fat raise when I begin claiming.

It's all up to you. This is the fun of it!
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Old 03-06-2014, 10:22 AM   #5
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I guess this may be picky, but for us there is a difference from taking 4% and spending 4%. While we currently take 4%, slightly above our RMD, we will be taking more in another four or five years. However, we do not spend that every year. Have a friend that does not follow that, however, he says that when he moves it out of savings it is going to be spent!

Also on this I was fooling with FireCalc the other day. Put in 0 for spending and left the amount in savings at $750,000. I then went to the ''investigate" tab and set success rate to 100% for a given income level. As expected, for each year I decreased the expected life i.e. 30 to 29 and so on. The percentage of withdrawal went up. So therefore, you could run firecalc each year with a years less expectancy and use that for your withdrawal.
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Old 03-06-2014, 10:32 AM   #6
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I'm "nearing" retirement and my plan is to have a sinking fund to draw on while I wait on SS and medicare to kick in. This sinking fund would allow me to spend my SS now and pay for my pre-medicare HI before I'm eligible for the real thing. For the remaining portfolio, I plan on being allowed to spend up to 5% of the balance at the start of the year. It will be moved to cash and available during the year. If things go well, I'll have lots of money to spend. If things don't go well, I'll get less and less as time goes by. Since my SS and small pensions cover my basic living expenses, spending out of the main portfolio only serves to enhance my lifestyle.
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Old 03-06-2014, 10:51 AM   #7
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I use SWR as a gauge for sustainability, not necessarily to create a budget.
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Old 03-06-2014, 10:52 AM   #8
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Like many RE's, we have a small frozen pension at 55, my SS in about 11 years, DW's SS in about 16 years, kids finishing college, and eventually the mortgage running out. We'll be way over 4% portfolio withdrawals, starting this year when DW finally RE's. When everything is finally online our withdrawals will be well under 4%, hopefully.

My detailed planning, with all income, spending, and taxes calculated, uses simple constant yearly market gains. In the spirit of FIRECalc I require a giant portfolio at the end of retirement in order to keep portfolio withdrawals at reasonable levels during retirement. I'll use this to ensure withdrawals are reasonable as long as I can continue maintaining it.
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Old 03-06-2014, 12:03 PM   #9
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I basically ignore the whole concept of SWRs. It's not an operational method to be strictly followed after retirement, nor is it a substitute for a detailed, well-thought-out budget and overall retirement plan.

In our case, we have a realistic, year-by-year projection of expenses through our actuarial life expectancy. This includes detailed assumptions for each of about 30 categories of expense, including for example: changes in consumption patterns with age, life events, pricing, inflation, etc. The results are quite non-linear... nothing remotely resembling a simple assumption of today's total expenses plus inflation.

Once you've got a handle on that, the other side of the equation is relatively straightforward... first, carve out pensions, SS, annuities, part-time work, rental income, etc, etc, in whatever amounts and timeframe they come into play. Then balance each year from the portfolio of investments. Not surprisingly, the resulting/calculated WR is also quite non-linear and even negative in certain years. So, not very meaningful except maybe as a long-term average. We then use any number of readily-available tools (including FIRECalc) to make sure our portfolio balance and AA provide a reasonable confidence level of success.
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Old 03-06-2014, 12:57 PM   #10
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For those that practice the SWR approach for systematic withdrawals do have you strictly adhered to the 4% 'guideline' from the moment you started retirement to your estimated 'end game'?
For me, 3.5% is a "hard limit" even now, before claiming SS. I have never spent more than this amount and always considerably less.

However I think there is justification for spending more before SS kicks in if a retiree feels the need to do so. I just don't feel that need and I admit it, I am a security junkie.
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And - I have different 'pots' for retirement savings: after tax, tax deferred (401k), and tax free (Roth).

Do you apply the SWR to each type of savings you have or is your SWR averaged across all types?
I calculate my WR using my entire portfolio, not just my taxable or tax deferred accounts, so I might withdraw more from one type of account than another for a given year depending on tax planning, but the overall percentage is considerably below 3.5%.
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Old 03-06-2014, 02:17 PM   #11
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I calculate my WR using my entire portfolio, not just my taxable or tax deferred accounts, so I might withdraw more from one type of account than another for a given year depending on tax planning, but the overall percentage is considerably below 3.5%.
+1. It's the total portfolio withdrawal that matters. Take the withdrawals from whatever account(s) will minimize taxes (maximize after-tax income) over your entire retirement. Usually that's something like taxable accounts first, then IRA/401k, then Roth, but it might also be a combination from all three that keeps you in a lower tax bracket.
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Old 03-06-2014, 02:58 PM   #12
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My withdrawals will vary considerably before versus after SS starts at 70 for a number of reasons specific to my situation. I am more concerned with impact of market action on withdrawals. To this end, I have only recently decided to draft a withdrawal policy statement (the inverse of the investment policy statement). I agree with the research that it's a good idea to have a plan ahead of bear or bull markets for taking withdrawals. That way, withdrawals are based on logic versus emotion. For me, this will set a floor as well as a ceiling for withdrawals regardless of what the market is doing.
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Old 03-06-2014, 03:13 PM   #13
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With fixed pensions coming in and now and in the future, along with SS and UK SS, then I have no fixed or targeted SWR. I do track what % is withdrawn each year and last year it just happened to be 4% of the start of year portfolio, but it was just coincidence. Inflation will be a big factor on WR since the pensions are fixed.
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