Up WR or Wait a Few More Years?

[Cayman]

A bit over a year into ER and wondering if our WR is too low or not.

Given our circumstances and goals below, I'm interested to hear your thoughts about upping our spending rate a bit (be it charitable donations, gifts, more travel, etc.) or sitting tight --- at least until the "magic" 5 year sequence of returns is passed.

Current lifestyle is v. good. We'd spend any extra $ on donations, gifts, travel (no expenditures that would require ongoing $ commitments, so we'd easily adjust in down years).

• We're both 51, ER'd by LBYM lifestyle.
• Small pensions at 65, and social security at 70 planned.
• No debt. AA is approx. 65/10/25.
• WR is just below 2%, and our goal is to die with what we started ER with (inflation adjusted), or up to 50% less.

Thanks.

 

[lhamo]

I'd be fine with adjusting upward in a planned way -- personally what we are probably going to do is budget to spend a little more in years when the market is up 10% or more (e.g. decide that is the year to take a big trip or replace the car, or do a small remodeling project or whatever), and ratchet back to a lower more no-frills budget in years when the market gains are lower or we've seen on-paper losses. We are keeping a hefty cash stash to live off of, so easy to make these kinds of adjustments without having to do major sell offs of long term investments anyway.

 

[Ready]

I wouldn't spend more just to spend more, but I wouldn't hold back on increasing your WR if there's something you've been wanting but have been holding back from spending the money on. 2% is very low.

 

[audreyh1]

I think 3% withdrawal rate is still very conservative in your case.

If you are using % of remaining portfolio, over 30 years, a 3% withdrawal rate 50/50 total stock market/5 yr treasuries means you end with about 1.4x the starting portfolio on average in real terms, and over 75% of the starting portfolio real in the worst historical case.

You can actually be more aggressive, 4.35% over 30 years means 1x real ending portfolio on average, and 50% real ending portfolio worst case. Same AA as prev paragraph.

But you do have to look at longer time frames - 40 or 45 years.

Like pb4uski says you can run these scenarios in Firecalc.

 

[pb4uski]

I think you can easily set up that scenario in FIRECalc and solve for the spending level.

 

[Dtail]

I think you can easily set up that scenario in FIRECalc and solve for the spending level.

+1 although SORR is probably longer than 5 years.

 

[Elbata]

I think 3% withdrawal rate is still very conservative in your case.

I must be overly optimistic. With pensions and SS still to come online, 5% is conservative to me, 150% increase in what OP does now.

 

[audreyh1]

I must be overly optimistic. With pensions and SS still to come online, 5% is conservative to me, 150% increase in what OP does now.

They do have some caveats. They don’t want to deplete their portfolio. They didn’t say they would drop their withdrawal rate when pensions and SS come online, although that is clearly an option. They are only 51.

They do need to run some Firecalc models.

 

[Cayman]

+1 although SORR is probably longer than 5 years.

How much longer than 5 years, and any details you'd care to add would be appreciated.

 

[Cayman]

I'd be fine with adjusting upward in a planned way -- personally what we are probably going to do is budget to spend a little more in years when the market is up 10% or more (e.g. decide that is the year to take a big trip or replace the car, or do a small remodeling project or whatever), and ratchet back to a lower more no-frills budget in years when the market gains are lower or we've seen on-paper losses. We are keeping a hefty cash stash to live off of, so easy to make these kinds of adjustments without having to do major sell offs of long term investments anyway.

Sounds like we're pretty similar in our approach and planning - including the cash stash. Your plan to spend a little more in up years in a planned way sounds good, thanks.

 

[Cayman]

I think 3% withdrawal rate is still very conservative in your case.

If you are using % of remaining portfolio, over 30 years, a 3% withdrawal rate 50/50 total stock market/5 yr treasuries means you end with about 1.4x the starting portfolio on average in real terms, and over 75% of the starting portfolio real in the worst historical case.

You can actually be more aggressive, 4.35% over 30 years means 1x real ending portfolio on average, and 50% real ending portfolio worst case. Same AA as prev paragraph.

But you do have to look at longer time frames - 40 or 45 years.

Like pb4uski says you can run these scenarios in Firecalc.

Thanks Audreyh1. I've given my keyboard a work-out with Firecalc and other tools over the past 5 years and all say we can safely spend >3.5% over a 40 year period and meet our goal of ending with at least 1/2 of our stash in real (constant) dollars, even in the worst scenario.

That said, there's alot of experience here and having you and others on this board take a look is helpful. Curious to hear what you and others think about sequence of returns risk if we move our WR to 3.5% now as opposed to waiting a 5 more years to do so. DH and I are 1 year into ER and 51yo. If needed, we'll adjust our WR down when the small pensions and SS come on line.

 

[audreyh1]

Thanks Audreyh1. I've given my keyboard a work-out with Firecalc and other tools over the past 5 years and all say we can safely spend >3.5% over a 40 year period and meet our goal of ending with at least 1/2 of our stash in real (constant) dollars, even in the worst scenario.

That said, there's alot of experience here and having you and others on this board take a look is helpful. Curious to hear what you and others think about sequence of returns risk if we move our WR to 3.5% now as opposed to waiting a 5 more years to do so. DH and I are 1 year into ER and 51yo. If needed, we'll adjust our WR down when the small pensions and SS come on line.

Are you modeling using the % of remaining portfolio method? Did you input your expected asset allocation?

The results - worst case - do already assume an initial bad sequence of returns.

 

[Cayman]

Are you modeling using the % of remaining portfolio method? Yes, at 100% of prior year spend, or 3.5% whichever is greater. In reality, we'll reduce spending during downturns so this is conservative. When I model a constant spend of 3.5% the success rate is 100% and worst case scenario leaves 1/2 of what we started with (inflation adjusted) Did you input your expected asset allocation? Yes.

The results - worst case - do already assume an initial bad sequence of returns. Good point.

Guess we'll work on spending a bit more, and target a 2.5% WR in 2019.

Thanks - Headed over to the Blow that Dough! thread for inspiration.

 

[Lagniappe]

I am in a similar situation to you. I am very concerned about sequence of return risk, and don't feel that I am sacrificing anything with my current withdrawal rate.

I am 53, and using a 2% of year end portfolio withdrawal rate. That includes a lot of discretionary travel, entertainment and dining (at least for now). I can't think of anything useful to do with more money - I am already in a house that is way too big, travel well, give a fair amount to charity.

Given market levels and the fact that I have a pretty sweet life already, I am probably not going to adjust my withdrawals upwards until the year I turn 60. At that point I will go to 2.5%, then at 65 to 3%, at 70 to 3.5%.

Good luck with moving to the 2.5% rate- it has a 100% success rate, even without your upcoming pensions and ability to reduce your spending.

 

[audreyh1]

Yes, at 100% of prior year spend, or 3.5% whichever is greater. In reality, we'll reduce spending during downturns so this is conservative. When I model a constant spend of 3.5% the success rate is 100% and worst case scenario leaves 1/2 of what we started with (inflation adjusted)

Guess we'll work on spending a bit more, and target a 2.5% WR in 2019.

Thanks - Headed over to the Blow that Dough! thread for inspiration.

Your income will drop anyway during market downturns, so you are kind of forced to reduce spending anyway, unless you set aside some unspent funds from the good years to compensate.

That may be the next thing you want to look at - how your income might vary during a volatile sequence of returns. 1966 is an educational start year. Just so you know who much your income could potentially swing.

 

[Bir48die]

Do you have kids? Do you want to leave an estate? Are you asking to spend more just because your WR is lower than the "suggested" rate? Do you live conservatively or do you live to enjoy your fruits?

 

[audreyh1]

Do you have kids? Do you want to leave an estate? Are you asking to spend more just because your WR is lower than the "suggested" rate? Do you live conservatively or do you live to enjoy your fruits?

They already stated that they would like to leave at least 50% of the portfolio behind, and ideally 100%.

 

[Cayman]

I am in a similar situation to you. I am very concerned about sequence of return risk, and don't feel that I am sacrificing anything with my current withdrawal rate.

I am 53, and using a 2% of year end portfolio withdrawal rate. That includes a lot of discretionary travel, entertainment and dining (at least for now). I can't think of anything useful to do with more money - I am already in a house that is way too big, travel well, give a fair amount to charity.

Given market levels and the fact that I have a pretty sweet life already, I am probably not going to adjust my withdrawals upwards until the year I turn 60. At that point I will go to 2.5%, then at 65 to 3%, at 70 to 3.5%.

Good luck with moving to the 2.5% rate- it has a 100% success rate, even without your upcoming pensions and ability to reduce your spending.

For me, it's a game to see how well we can optimize our resources given the parameters in my original post, and planning for a long life (which may be shorter than I'd like - who knows). Like you, our lifestyle is very good and our WR should support it for our lifetimes. I'm struck by how fortunate the members of this board are - even with hard work, planning and discipline - few folks will ever achieve this and I have alot of gratitude for my circumstances. Thanks for your helpful feedback and sharing your approach, Lagniappe.

Your income will drop anyway during market downturns, so you are kind of forced to reduce spending anyway, unless you set aside some unspent funds from the good years to compensate.

That may be the next thing you want to look at - how your income might vary during a volatile sequence of returns. 1966 is an educational start year. Just so you know who much your income could potentially swing.

Good point - 1966 to the early 80's . With AA at 65/10/25 and the 25% pretty liquid (CDs,mmkts) that should help. Sacrificing return for piece of mind with the liquid portion of our AA. The 25% is 10 yrs. expenses for us, if inflation doesn't go too crazy.

 

[walkinwood]

We use the percentage of portfolio method (that Audrey and others use) and while our withdrawal rate is higher than the OP's 2%, and we enjoy a good standard of living, I still worry that we're being too conservative. We don't take into account our home value when calculating withdrawal rates.

We don't have pensions, but we both will get SS which we plan to take at 70. If SS amounts are what is promised, it will take care of more than half our current expenses (adjusted for inflation). So, at that time, our withdrawal rate would be much lower to maintain the same standard of living.

Increasing WR is a tough decision since it increases risk of failure - even though the risk is already quite low. I guess that's the tradeoff involved in funding a relatively non-volatile retirement using volatile investments.


Edit: A point often forgotten is investment expenses. Make sure that you enter the right % into firecalc.

 

[Reach]

We are in a pretty similar situation and time horizon to you and a few others in this thread.

DH and I (55/49) FIRE'd 10 years ago and are not following a strict withdrawal strategy. However, we (I) track everything and our annual spending has averaged right around 2% of our portfolio. We also live off of a cash portion as a buffer against withdrawals.

Without a specific WR, we self-correct naturally. During market down-time (2009-2013), we tried to minimize any spending and withdrawals, especially that early in our retirement.

Very comfortable in our spending in recent years, we are taking more travel and other big expenditures, but still get unhappy if our spending creeps up (over 2%).

Our portfolios are in great shape. Even though we didn't incorporate into our early planning corporate pension and SS (just being conservative), it looks like they are going to contribute double our [current] annual spending when we eventually hit retirement age.

Perhaps we should also open up a bit on our spending, yet I see us staying around 2% WR for now. We're hedging on being prepared for some major event (the 2009 crash really shook us up) or perhaps a big opportunity (tbd!!) that our "extra" finances would cover for us over the next decade.

 

[audreyh1]

Good point - 1966 to the early 80's . With AA at 65/10/25 and the 25% pretty liquid (CDs,mmkts) that should help. Sacrificing return for piece of mind with the liquid portion of our AA. The 25% is 10 yrs. expenses for us, if inflation doesn't go too crazy.

It doesn’t really matter how liquid that 25% CDs,mmkts is covering 10 years expenses. If your 65% equities gets cut in half, a huge chunk of that 25% cash equivalents will be needed to rebalance sacrificing some years of covered expenses. Unless you decide not to rebalance......

 

[big-papa]

Retirement researcher Michael Kitces wrote about a systematic way to ratchet up your withdrawal rate here: https://www.kitces.com/blog/the-rat...l-rate-a-more-dominant-version-of-the-4-rule/

 

[Reach]

Retirement researcher Michael Kitces wrote about a systematic way to ratchet up your withdrawal rate here: https://www.kitces.com/blog/the-rat...l-rate-a-more-dominant-version-of-the-4-rule/

From the article: "Thus, for instance, the “rule” might be that any time the account balance is up 50% over the original value, spending is increased by 10% (over and above any ongoing inflation adjustments), but such spending bumps can only occur once every 3 years at most (to avoid having spending ratchet too high too quickly)."

Interesting article overall! Thanks for sharing.

 

[big-papa]

From the article: "Thus, for instance, the “rule” might be that any time the account balance is up 50% over the original value, spending is increased by 10% (over and above any ongoing inflation adjustments), but such spending bumps can only occur once every 3 years at most (to avoid having spending ratchet too high too quickly)."

Interesting article overall! Thanks for sharing.

No problem! One of the things that Michael didn't clarify in the article is whether the 50% number is inflation adjusted or nominal. Somebody asked the question in the feedback section at the bottom of the article, but it went unanswered. Because I'm not a fan of any fixed-percentage-increased-by-inflation type of withdrawal method, I haven't backtested it. But not knowing anything else, I would suspect that the 50% number is inflation adjusted.