Varying Withdrawal rates

[Kevin]

Withdrawal Rates are calculated at the time you start withdrawing from your portfolio - right?

Obviously, if you were to only withdraw 6% of your total portfolio every year - you'd never run out of money. - right?

So if you have a substantial Portfolio - Over a Million.

And were able to live on a lot less than 4% of your portfolio. Because of Social Secuity and other pensions. Would it not make sense to take let's say 10% (of the total portfolio) when the market gained 10% and then only 2% when the market had a flat or losing year. That way you would be forced to sell stocks at at high and not sell as many at a low. Has anyone done a Calculator for this type of system?

Thanks

 

[JWR1945]

Kevin

Has anyone done a Calculator for this type of system?

Yes. There are several sites that can help you. One of them addresses a Don't Go Broke strategy:
http://jjarrett.home.texas.net/

Read this study at that site: July 8, 2002 - Zunna has published a new study concerning spending strategies during retirement and the risk associated with them. Three ending value goals are examined: Don't Go Broke, Maintain Original Value and Maintain Buying Power....

Read what Professor Ponzo has to say about sensible withdrawal rates at his Gummy Stuff web site:
http://home.golden.net/~pjponzo/gummy_stuff.htm

See this write up: http://home.golden.net/~pjponzo/sensible_withdrawals.htm

You can see additional strategies on the FIRE (Financial Independence/Retire Early) discussion board at http://nofeeboards.com

It is best to use all of these resources, this board (along with the FIRECalc) and the others in a complementary fashion.

Have fun.

John R.

P.S. You have identified some good approaches. They work.

 

[dory36]

I played around with the variable rates idea a good bit, and even contributed a few spreadsheets on the idea over at TMF, but was never happy with trying to model the withdrawal strategy.  Too many differences in everyone's ideas of when to take out extra.

I decided personally to take a different approach. Mentally I divide my portfolio into 3 buckets.

Bucket one is what I feel I need to maintain my lifestyle until social security kicks in. I withdraw at the nearly 100% safe rate from this now, nut the time frame is only until SS kicks in.

Bucket two is the part I'll need to add to SS to maintain that lifestyle. No withdrawals now; nearly 100% safe rate starting when I start withdrawals, with a time frame to outlast me.

Bucket three is "play" money, and I feel comfortable withdrawing at a more risky rate, like 85%.

Taking this approach, rather than trying to make a single decision on what I needed, has helped me a lot -- and speeded up my early retirement by about 2 years.

Dory36

 

[Ted]

I decided personally to take a different approach. Mentally I divide my portfolio into 3 buckets.

Dory36

The federal government has done something similar. One "bucket" is called the general fund, and another is called the "Social Security Trust Fund."

Accounting devices like these may be of assistance in making budgeting decisions, but have the disadvantage that they may obscure the reality of what is happening with an individual's overall portfolio or a government's (i.e., its taxpayers') overall ability to finance its programs.

Regardless of how a person divides their assets into separate "accounts," they are all really one account, as long as money can be selectively withdrawn and transferred between them. This is fortunate, because it permits a person to draw down the assets that are performing best at any particular time. In fact, FIRECalc (and similar calculators that assume annual portfolio rebalancing) operate with the inherent assumption that a person will do just that.

Of all possible withdrawal strategies, the only one that I can think of that gives virtually 100% assurance of being able to maintain a constant real (inflation-adjusted) rate of withdrawal is to invest in long-term TIPs and live off of the interest payments :-/ .

By limiting withdrawals to a particular percentage, it is mathematically possible to guarantee that the asssets will never become totally exhausted, but it won't guarantee that the purchasing power of those assets won't drop to a poverty level .

 

[JWR1945]

Dory36's comments about buckets reminded me of something that 1HappyFool posted elsewhere. He mentioned buckets.

When I developed this strategy, others were talking about similar strategies so I don't know who gets credit for the original kernel of deviation from the common 4% SWR. Maybe it was arrete or Dory36 and perhaps my "buckets" analogy was carried over from the basic operating budget vs. discretionary/reserve budget that was used during my career. At least some elements of my strategy seem unique to me.

Reference: Foolishly Happy Investment Strategy on Fri Feb 07, 2003 (not at the Motley Fool's site) http://nofeeboards.com/boards/viewtopic.php?t=468

There have to be some fascinating stories from those days.

Have fun.

John R.

 

[proud_texan]

Greetings,

I'm new to this forum...and also to the idea of early retirement. My wife and I are both 50 and have found ourselves in the surprising position of being able to retire early.

We have a great pension plan that bridges our income until social security kicks in, so our income will remain constant . We will also receive any COLAs that are associated with SS. Our health insurance is 100% paid.

We have a decent 401K portfolio of slighty over a 270K, plus various real estate investments with income.

I've been reading with interest the concept of varying SWRs and was hoping that one of you fine people could offer some advise.

Since the logic behind a 401K was to save "pre-tax" dollars, then withdraw them when you are in a lower tax bracket, then doesn't it make since to make larger withdrawals in the beginning while in the lower tax bracket? Because of my age, I will be stuck with whatever I choose until age 59-1/2.

Our calculations show us that if we take the recommended 4% withdrawal rate, it will keep us in the 25% Tax bracket and preserve and grow our principal. However, if I take a larger percentage each year, we will have enough to last for 35-40 years, but will be pushed into a higher tax bracket.

It's all a little bewildering trying to strike a balance. Any suggestions?

 

[unclemick]

GREAT QUESTION - I DON'T KNOW THE ANSWER EITHER!
ER'd in 1993 - age 49 - our 401k/IRA has grown untouched for about ten years - our pensions keep us in the 15% bracket except years when I sell 'hobby' stocks for play money.Dividend reinvestment (taxable) has grown to 20% of our income stream.

I chickened out on Roth conversion in 1998. How to factor in the lower dividend tax is another problem.

Now at age 60 I need to figure how
to set up the comparion - Roth, IRA, dividend - the three card monte. BTY our 1993 IRA/401k was ballpark close to yours.

HAS ANYBODY OUT THERE figured out how to run the numbers to max ER dollars and lower IRS dollars!!!!?

 

[proud_texan]

We had considered leaving our investments alone to let them grow until age 70-1/2 when we would be forced to withdraw the money. By that time (20 years hence) the balance could be sizable.

But, then it suddenly dawned on me that, heck, I'm not going live long enough after age 70 to enjoy that money! And if withdrawals are based on your life expectancy at the time of the withdrawal, then my annual income would put be in an even higher tax bracket than I had when I was working!!

So, I know I'll probably set it up to start withdrawal immediately, but I'm still concerned about it being eaten up with taxes.

I'm a firm believer in that "it's not what you make, it's what you keep. I just want to figure out how to keep what I have.

 

[unclemick]

I'm leaning toward Rothing laddering 'buckets' of IRA withdrawals at our low tax rate - just in case we are still spunky in our 80's(20 yrs). We have our core expenses covered and have a track record(last ten yrs) of spending in bursts - discresionary play money.I'm trying to think of maybe multiple FIREcal runs added up to make one portfilio or I may say the heck with it and pay higher taxes at 701/2.

 

[proud_texan]

I'm not familiar with " Rothing laddering 'buckets' of IRA withdrawals"

Do you mean reinvesting into taxable investments, but locking in the lower tax rates at the time of investment?

Forgive my ignorance. I'm something of a newbie with this stuff.

 

[unclemick]

I don't know either- but I think I can take chunk(bucket) from reg. IRA to Roth IRA wait 5 years(more like 20) and then the Roth is tax free. BUT the chunk is taxable(adds to taxable income) in the year you do it. So the chunk plus other taxable income needs to be below a livable tax rate, some extra money for taxes or out of the IRA chunk, AND you pobably need to watch safe withdrawal rates so you don't compromise your trad. IRA.In 1998 I looked at total conversion and the tax bill scared me even through I could have averaged it over (4?) years.

I'm a rookie to this forum too (july 03) and just starting to play with FIREcal this week. IT would be nice if someone has run similar tradeoffs. I am trying to read some of the older posts to this forum - have a ways to go.

 

[proud_texan]

My wife and I (we both work at the same place) are planning to retire on January 30, 2004. I'm 50, she's 51.

We've taken a common sense approach to money for as long as we've been together and it's brought us to this point. We're out of debt and have been socking away the maximum in our 401K for sometime now. We enjoy life, but live well below our means.

I told my wife it's kind of like having your parachute packed, but not knowing when you're going to jump. It's a little scary standing at the door of the plane, but when that chute opens, it's a great relief.

I'm going to check into the ROTH IRA situation. I already have one of those in place. If I can use that to avoid taxes, great! :

 

[proud_texan]

Here's the IRS's take on IRA contributions:

"An individual retirement arrangement, or IRA, is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. IRA's cannot be owned jointly. However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.

To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year and you, or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self–employment. In addition, taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes.

Compensation does not include earnings and profits from property, such as rental income, interest and dividend income or any amount received as pension or annuity income, or as deferred compensation.

The most you can contribute to your traditional IRA for 2002 is the smaller of $3,000 or your taxable compensation for the year. For 2002, the $3,000 is increased to $3,500 if you are 50 or older. Keep in mind that contributions on your behalf to a traditional IRA reduce your limit for contributions to a 'Roth IRA'. If neither you nor your spouse is covered by a qualified retirement plan at any time during the year, your allowable contributions to a traditional IRA will be fully deductible.

If you, your spouse, or both of you are covered by a qualified retirement plan, your IRA deduction may be reduced or eliminated, depending on the amount of your Modified Adjusted Gross Income and your filing status."

 

[unclemick]

Conversions not contributionns. We ER'd in 1993 and haven't contributed since except during a temp job in 1995/6. There is stuff/articles/calculaters all over the internet. Just now starting to search and see if anything makes sense in our case. BTY the rules change some after 591/2( now 60 jul. 03, was 49 in1993).

 

[LA_Newsboy]

Hey guys, have you seen or used this calculator. It does something most calcs don't, which is figure the tax ramifications of withdrawals. It might answer some of the Qs you have.

Dick

http://www.i-orp.com/

 

[Ted]

Here's a general observation about taxes on investments that most people don't appreciate.

If you are working, you generally try to earn as much as you reasonably can despite the tax consequences.  Whatever taxes you pay on your investment income is therefore essentially based on your marginal (top) rate, which is established mainly by your earned income.  So, if you are in, say, the 30% federal tax bracket, and paying additional income tax to the state (6% here in Missouri), your effective tax rate on your investment income is 36%.

If you defer taxes on this income until you retire (and no longer have significant earned income), you get two benefits.

First, the taxes you pay on your investment earnings will, in effect, be at your (future) average tax rate rather than your (future) marginal rate.  You will probably be in a lower marginal tax bracket anyway, but your average tax rate will always be less than your marginal tax rate (except in the unlikely event that tax rates are made totally flat with no exempted income).

Secondly, by deferring taxes on your investment earnings you get the full benefits of compounding, per my comments on August 5 in the "You Gotta See This...ORP is Back" discussion.

If you have enough income to pay significant taxes after you retire, then you will have enough income to enjoy life regardless of the taxes! Just don't withdraw your retirement savings in a lump sum!

 

[Mr._johngalt]

Hi Ted! If one of my biggest ER disappointments was
the problem of affordable health insurance, probably
the happiest discovery was my ability to hold off on
dipping into my IRA. Ten years now and I have not
touched it yet. Now, my taxable income is so low
that the tax impact will be minimal, which illustrates your point.

 

[proud_texan]

All this talk about safe withdrawal rates got me ta' thinkin'.

What if any experience has anyone had with withdrawing funds pre-591/2 without the 10% penalty?

I would like to take advantage of the exception to the rule by taking regular annual disbursals. Our pensions (me & the Mrs.) are more than sufficient, so our investments will offer a nice padding and plenty of money to enjoy our early years of retirement. My concern is that at age 50, my life expectancy is rated at 38.3 years. For our balance, that will only yield about $7500 per year.

Is anyone familiar with other methods of withdrawal that will allow me to take out as much as twice that?

Right now my money is in a 401K, but I'll be rolling it over to a traditional IRA come January when I retire.

 

[unclemick]

Look in the retire early index to start. When I looked into this in 1993 it was more diificult to ferret out the information. I didn't do it in the end - turned out we didn't need the money. The calculator I looked at tonight is showing 5-9% as an acceptable IRS withdrawal rate. Good Luck.

 

[dory36]

The best concise summary is at http://retireearlyhomepage.com/wdraw59.html

Dory36

 

[patnbj]

I played around with the variable rates idea a good bit, and even contributed a few spreadsheets on the idea over at TMF, but was never happy with trying to model the withdrawal strategy.  Too many differences in everyone's ideas of when to take out extra.

I decided personally to take a different approach. Mentally I divide my portfolio into 3 buckets.

Bucket one is what I feel I need to maintain my lifestyle until social security kicks in. I withdraw at the nearly 100% safe rate from this now, nut the time frame is only until SS kicks in.

Bucket two is the part I'll need to add to SS to maintain that lifestyle. No withdrawals now; nearly 100% safe rate starting when I start withdrawals, with a time frame to outlast me.

Bucket three is "play" money, and I feel comfortable withdrawing at a more risky rate, like 85%.

Taking this approach, rather than trying to make a single decision on what I needed, has helped me a lot -- and speeded up my early retirement by about 2 years.

Dory36

I take a similiar approach to figuring out how much money I can spend during early retirement. I created an Excel spreadsheet that lets me divide up the money into the various buckets. Here's a tip that I would like to share--let's say you have a certain portfolio size and you want to know how what is the total withdrawal amount that maximizes your withdrawal from each bucket. To get that number, I use the "goal seek" function found under the "Tool" menu. You might find this helpful if you want to adjust your withdrawal amount say for a a POPR.