What is your withdrawal rate?

[Dtail]

Very helpful. 3.58% of my 2.5M incl SS+pension is $89,500. Firecalc said $87,871. A much smaller difference, and could just be due to minor differences in mortality used in OpenSS where I gave my age, and Firecalc where I accepted the default of 30 years.

Plus possibly the difference in defaults in Firecalc usage of 75% stock allocation and 0.18% fund fees.

 

[NW-Bound]

I have not run FIRECalc for a while.

Just now, after entering in the data and ask it to find the max spending I can have for 30 years, it says I can double my current spending.

I have no plan to spend that much, but it gives a warm fuzzy feeling.


PS. I do think the 30 years is quite optimistic. But if I ran it for 20 years, it would tell me I could blow even more dough.

 

[RobbieB]

Have fun baby!

 

[pb4uski]

....Now, without figuring out the value of SS and pension, how would I come up with those numbers? The information you have is $2M saved, $2600/month at 67, and $500/month at 65, and I'm now 57.

side fund in lieu of pension from 57 to 65 = $500/mo * 12 * (65-57) = $48,000

side fund in lieu of SS from 57 to 67 = $2,600/mo *12 * (67-57) = $312,000

$2,000,000 - $48,000 - $312,000 = $1,640,000; * 3% WR = $49,200

$49,200 from long-term retirement portfolio + $31,200 from SS side fund/SS + $8,000 from pension side fund/pension = $86,400 spending at 3% WR
First 8 years withdrawals are $88,400/year... including $39,200 from side funds
Next two years withdrawals are $80,400/year... including $31,200 from SS side fund
After that, withdrawals are $49,200/year

Put the $2 million, SS and pension into FIRECalc, 40 years and 60/40 AA it gets 100% success at $86,400 spending and a max spending at 95% success of $94,736... this is because you specified a 3% WR which is conservative... if you use a 3.5% WR the $86,400 becomes $94,600 right near the FIRECalc 95% success max spending.

 

[pb4uski]

The very first thing Firecalc asks for is my spending. I don't want to specify that. I have $50K in base expenses for a fairly comfortable lifestyle. I have expensive hobbies and love exotic travel and could easily spend another $100K. How much can I actually spend given my numbers? And how do I break down my withdrawals before and after SS/pension? Can Firecalc do that? Do I have to iteratively increase my spending and keep rerunning Firecalc to see if it still works? Ugh, that seems burdensome.

You can use the FIRECalc Investigate tab to explore what is the most you can spend annually with a certain level of success... rather than the level of success for spending that you specify which is the default. Try it.

 

[RunningBum]

side fund in lieu of pension from 57 to 65 = $500/mo * 12 * (65-57) = $48,000

side fund in lieu of SS from 57 to 67 = $2,600/mo *12 * (67-57) = $312,000

$2,000,000 - $48,000 - $312,000 = $1,640,000; * 3% WR = $49,200

$49,200 from long-term retirement portfolio + $31,200 from SS side fund/SS + $6,000 from pension side fund/pension = $86,400 spending at 3% WR
First 8 years withdrawals are $86,400/year... including $39,200 from side funds
Next two years withdrawals are $80,400/year... including $31,200 from SS side fund
After that, withdrawals are $49,200/year

Put the $2 million, SS and pension into FIRECalc, 40 years and 60/40 AA it gets 100% success at $86,400 spending and a max spending at 95% success of $94,736... this is because you specified a 3% WR which is conservative... if you use a 3.5% WR the $86,400 becomes $94,600 right near the FIRECalc 95% success max spending.

Fixed a couple numbers I think you had wrong, but I get the point. The one thing I'm unsure about this is that it doesn't consider the time effect on future income. I actually retired at 49, so had I used this method I'd have been 16 years from pension, 18 years from SS at FRA. It may have been less accurate. Since SS is inflation adjusted that's probably ok, but for the pension I'd have been paying myself $6000 in today's dollars but when I actually get it 16 years later, it's worth a lot less. Probably not that big of a deal, and maybe it's helpful for increased spending in the "go-go" years, as another thread covers.

Also note if I use 3.58% as I did in post 150 for the other two methods, I come up with $95,912, which is $6-8K higher than the other two. Seems high, and you had said back in post #121 that using NPV of SS is likely to be overstated, yet yours is the method considerably higher.

Anyway, thanks for clearly illustrating this method. That's two methods at least as easy to calculate as my NPV method, though this all shows that my method is right in the ballpark with the others. So I learned things, and also got some confirmation. A good exercise.

 

[pb4uski]

The inflation impact of the side funds are covered off by interest on that money... IOW if the side funds are in an online savings account or MM fund or CD ladder then the first year withdrawal for the pension side fund would be the $6,000 but the second year withdrawal can be $6,000 plus a year of interest, the third year withdrawl can be $6,000 plus two years interest, etc. So no matter how early you retire, inflation on the side fund cash flows are covered.

I think the big advantage of this method is its simplicity, especially for people who are not as fluent in PV as you and some others on this forum. With a lot of people you use the word "present value" and their eyes immediately glaze over. Also, no need to consult immediateannuities.com, etc.

I concede that the flaw in the gap approach is the erosion of inflation on a fixed pension... that is why tools like FIRECalc and QLP are preferable if there are fixed pensions involved... though you can easily shortcut it by just using 1/2 of the pension amount in the gap calculation.

The $95,912 that you derived using 3.58% is close to the $94,736 in the prior post, which is based on FIRECalc with $2m, 40 years, 60/40 AA, $31,200 SS starting in 2029 (10 years) and $6,000 starting in 2027 (8 years) and reflects 95% success.

 

[RunningBum]

I think the big advantage of this method is its simplicity, especially for people who are not as fluent in PV as you and some others on this forum. With a lot of people you use the word "present value" and their eyes immediately glaze over. Also, no need to consult immediateannuities.com, etc.

Yes, conceptually the side fund is probably the easiest to grasp.

The $95,912 that you derived using 3.58% is close to the $94,736 in the prior post, which is based on FIRECalc with $2m, 40 years, 60/40 AA, $31,200 SS starting in 2029 (10 years) and $6,000 starting in 2027 (8 years) and reflects 95% success.

Well, those two numbers are close because they are 3.58% and 3.50% on the same method, yours. So of course they are going to be within .08%. Neither number is based on the Firecalc "Investigate how much I can spend" method. Both numbers are higher than the other methods used. So I'm not sure what you are trying to say. I'll take your word that your numbers can be plugged into Firecalc and get 95% success. I suspect the Firecalc "Investigate" number has higher than 95% success.

 

[pb4uski]

Yes, conceptually the side fund is probably the easiest to grasp.

Well, those two numbers are close because they are 3.58% and 3.50% on the same method, yours. So of course they are going to be within .08%. Neither number is based on the Firecalc "Investigate how much I can spend" method. Both numbers are higher than the other methods used. So I'm not sure what you are trying to say. I'll take your word that your numbers can be plugged into Firecalc and get 95% success. I suspect the Firecalc "Investigate" number has higher than 95% success.

No, the $94,736 IS based on the Investigate tab and 95% success in FIRECalc, using $2m, 40 years, $31,200 SS starting in 2029, $6,000 fixed pension starting in 2027, 60/40 AA. It actually should be $94,043, I found a mistake where in FIRECalc I used $8,000 as the annual fixed pension rather than $6,000 so I fixed it.

 

[RunningBum]

No, the $94,736 IS based on the Investigate tab and 95% success in FIRECalc, using $2m, 40 years, $31,200 SS starting in 2029, $6,000 fixed pension starting in 2027, 60/40 AA. It actually should be $94,043, I found a mistake where in FIRECalc I used $8,000 as the annual fixed pension rather than $6,000 so I fixed it.

OK, gotcha. I used 100% in my run, and 30 years.

 

[HI Bill]

Yes, conceptually the side fund is probably the easiest to grasp.

I'm missing something. Why use the concept of side funds when FIRECALC allows you to adjust spending over time, and your AA is really fixed? A concern with using the side fund concept or adding SS as an asset is that if inflation is much greater than your rate of return on the side funds, the model falls apart as you haven't accounted for it (e.g., having an all-inclusive AA allows the gains in the markets to potentially offset inflationary pressure). What am I not getting? Thanks!

 

[pb4uski]

I agree with you that FIRECalc is preferable... but some users prefer a simpler alternative.

Also, typically the term of a side fund or funds is 5-10 years and the interest from whatever the fund is invested in covers off inflation. It would be unusual that inflation would dramatically exceed short term interest rates since expected inflation is the base for interest rates. While the side fund is often invested in fixed income or cash, it doesn't need to be... it could be the same as the person's overall AA.

The side fund is just a simple concept to use for that 5-10 years between when one ERs and when pensions and SS start to "account" for higher withdrawals before those income streams come online.

If you don't like it then don't use it.

 

[HI Bill]

If you don't like it then don't use it.

I'm just trying to figure our whether it's as valid as using FIRECALC as it was intended. Your results seem to generally agree, so I guess it's as valid?

 

[pb4uski]

Yes, I think it is valid, but I also think a more sophisticated tool like FIRECalc is better, but to those who think FIRECalc and similar tools are too complicated, the side fund approach is a nice, simple alternative that is pretty good... especially if there is no fixed pension involved and only SS or SS and a COLA pension.

One observation is that if one has a fixed pension that is significant in relation to their spending then the gap to assets approach, with or without a side fund, can result in an overstatement of safe withdrawals due to the potential errosive impact of inflation on the fixed pension... but a short workaround is to simply haircut the pension benefit in calculating the gap.

 

[RunningBum]

I'm missing something. Why use the concept of side funds when FIRECALC allows you to adjust spending over time, and your AA is really fixed? A concern with using the side fund concept or adding SS as an asset is that if inflation is much greater than your rate of return on the side funds, the model falls apart as you haven't accounted for it (e.g., having an all-inclusive AA allows the gains in the markets to potentially offset inflationary pressure). What am I not getting? Thanks!

To each their own on how easy the concept is to grasp.

Including SS as an asset seems logical to me. I have an income flow coming to me in the future. That sounds a lot like an annuity, so I can see what it would cost to buy a matching annuity and just use that as an asset. I don't follow how that breaks with inflation for SS, which has a COLA element. For a pension, you're right. Just like an SPIA becomes a bad deal if inflation goes up a lot after I've purchased it, setting a value now can be off. But I get the point that NPV's and annuities is not a concept clear to all. That's why so many people fall for bad annuities, because they just don't understand them.

FIRECALC is a black box. Not everyone is comfortable with that. Just as an example, I think there was a time when a longer period had a better chance of surviving than a shorter period with all else the same, because the longer period did not include a couple of bad sequences starting in the 1960s. That kind of odd result can make someone uncomfortable unless you make the effort to understand how it really works. Many here do understand it all and are very comfortable with it, and it is a very good tool. But I think under the covers it is doing it's own annuitization on SS and pension. We don't really know, do we, because it's a black box. How else could it be doing it other than making some assumptions on inflation? I'm just not seeing how using FIRECALC fixes the inflation issue. I think it just hides it from your view in the black box. Please explain if you know otherwise. A lot of you know FIRECALC better than me. I know some will say you can use whatever inflation amount you want, but I can tweak my asset method to use a higher rate too.

The side fund is easy in that there's really no hard math formulas to use, no tools, and no looking up annuity values. If you like to see all the numbers laid out in front of you, this is it. It's weakness is that it doesn't really consider inflation that well. pb4 said you could just cut the pension value in half. But do you do that if you're 16 years from collecting the pension, or 8, or what? When you have to fudge numbers like that without a clear rule to do it, it seems less accurate. And if you did add a rule, it starts to lose it's simplicity. It's probably close enough, unless you have a very large pension and/or a lot of years before you collect on it. How large or how many years? I don't know that answer.

That's my take. Willing to learn where I'm mistaken.

 

[big-papa]

To each their own on how easy the concept is to grasp.

Including SS as an asset seems logical to me. I have an income flow coming to me in the future. That sounds a lot like an annuity, so I can see what it would cost to buy a matching annuity and just use that as an asset. I don't follow how that breaks with inflation for SS, which has a COLA element. For a pension, you're right. Just like an SPIA becomes a bad deal if inflation goes up a lot after I've purchased it, setting a value now can be off. But I get the point that NPV's and annuities is not a concept clear to all. That's why so many people fall for bad annuities, because they just don't understand them.

FIRECALC is a black box. Not everyone is comfortable with that. Just as an example, I think there was a time when a longer period had a better chance of surviving than a shorter period with all else the same, because the longer period did not include a couple of bad sequences starting in the 1960s. That kind of odd result can make someone uncomfortable unless you make the effort to understand how it really works. Many here do understand it all and are very comfortable with it, and it is a very good tool. But I think under the covers it is doing it's own annuitization on SS and pension. We don't really know, do we, because it's a black box. How else could it be doing it other than making some assumptions on inflation? I'm just not seeing how using FIRECALC fixes the inflation issue. I think it just hides it from your view in the black box. Please explain if you know otherwise. A lot of you know FIRECALC better than me. I know some will say you can use whatever inflation amount you want, but I can tweak my asset method to use a higher rate too.

The side fund is easy in that there's really no hard math formulas to use, no tools, and no looking up annuity values. If you like to see all the numbers laid out in front of you, this is it. It's weakness is that it doesn't really consider inflation that well. pb4 said you could just cut the pension value in half. But do you do that if you're 16 years from collecting the pension, or 8, or what? When you have to fudge numbers like that without a clear rule to do it, it seems less accurate. And if you did add a rule, it starts to lose it's simplicity. It's probably close enough, unless you have a very large pension and/or a lot of years before you collect on it. How large or how many years? I don't know that answer.

That's my take. Willing to learn where I'm mistaken.

Agree here - if you understand the math and are decent at spreadsheets, then the NPV approach isn't really that difficult, especially when combined with a non-SWR withdrawal method (like VPW, PMT based methods, fixed %, Clyatt, etc) Still probably good to have a "plan B", especially if your spouse outlives you and has no interest in this stuff.

 

[SecondCor521]

But I think under the covers it is doing it's own annuitization on SS and pension. We don't really know, do we, because it's a black box. How else could it be doing it other than making some assumptions on inflation? I'm just not seeing how using FIRECALC fixes the inflation issue. I think it just hides it from your view in the black box. Please explain if you know otherwise. A lot of you know FIRECALC better than me. I know some will say you can use whatever inflation amount you want, but I can tweak my asset method to use a higher rate too.

...

That's my take. Willing to learn where I'm mistaken.

While we don't know for certain, it is my understanding that SS is treated as a revenue stream that comes online when you specify, reducing the need for portfolio withdrawals at that point. That's how FIREcalc says it works, and I have no reason to doubt the author of the tool.

Inflation, like rates of return on asset classes, is based on history. So as FIREcalc does a run for each given year, it increases your asset classes by their historical rate of return for that year and increases your spending by this historical rate of inflation for that same year.

There are options to turn off inflation adjustments for various off chart spending increases or reductions. I found those useful for my mortgage and child support payments, both of which were fixed dollar amounts that didn't increase with inflation. (And they were a large part of my spending, so it was worth it to enter the data.)

Hope that helps.

 

[pb4uski]

+1 My understanding is that if you use the Total market or Mixed portfolio modes of FIRECalc under the Your Portfolio tab it uses historical inflation just like it uses historical returns.

These examples use real numbers, real inflation, and real market performance for those years.

As far as it being a black box, it arguably is but if one really wants they can download the results and sift through them.... at the end of the day arguably no more black box than any other Monte Carlo calculator. If one doesnt like the historical approach that FIRECalc uses you can always select the Monte Carlo option on the Your Portfolio tab... of even use an assumed rate of return and rate of inflation for a deterministic view.

 

[Cobra9777]

My take

I've enjoyed following this discussion. The concept of WRs can be somewhat confusing for early retirees because they change radically as different income streams come online. FireCalc seems like a great tool for pulling together the big picture and providing some easy-to-understand metrics. But yes, it's just another black box like i-ORP and RIP. I'm not totally comfortable with any of those tools. But when they all give more-or-less the same answer, which also more-or-less aligns with my spreadsheets, then I feel pretty good.

The NPV method seems fine to me and I've used it in the past to get a more comprehensive or representative WR for the entire plan, not just various stages. And yes, the resulting WR is much higher than my gap-method number, which can be eye-opening. There are tools to calculate NPV but I agree that this is not for everyone. Some people just won't accept that a future income stream is an asset, and that's fine.

The sidefund concept is certainly interesting. I think it would be very useful for someone with 5-7 years to SS/pension and the money is actually parked in a short-term MMF or online savings. For longer periods, I would not be inclined to park that much money in cash. If it's invested in the same AA as the non-sidefund, then it starts to feel a bit like mental accounting. But the simplicity is definitely a plus for people uncomfortable with black boxes and TVM concepts, but who still want a more detailed understanding of cashflows in various stages of ER.

 

[pb4uski]

.... The sidefund concept is certainly interesting. I think it would be very useful for someone with 5-7 years to SS/pension and the money is actually parked in a short-term MMF or online savings. For longer periods, I would not be inclined to park that much money in cash. If it's invested in the same AA as the non-sidefund, then it starts to feel a bit like mental accounting. But the simplicity is definitely a plus for people uncomfortable with black boxes and TVM concepts, but who still want a more detailed understanding of cashflows in various stages of ER.

It is a bit more substantial than a mental accounting exercise because it recognizes that withdrawals in the early years before certain income sources will be higher and it adjusts for them.

I think most people that actually do side fund prefer to select investments that match their expected cash flows... like a CD ladder... but you don't have to. You could just leave the whole retirement portfolio 60/40 but the side funds recognize that certain amounts will be withdrawn more quickly and adjusts for it in that that money is not subject to the overall 3.5% or 4% WR.

 

[dtbach]

I think it's about all the time you spend less than your portfolio makes and your net worth continues to rise. I have had this many years. You spend a hundred grand and yet your net worth goes up 2 hundred grand.

It's one of the reasons I came up with "Blow That Dough" -

Same thing happened to me this year. I took out over $100K and put it into a travel fund. Should give me some fine trips for the next couple of years.

 

[4nursebee]

OMG, so much calculated discussion.
I prefer to keep it simple for purposes of tracking.
How much of my retirement portfolio do I need to or want to withdraw to meet my needs?

 

[big-papa]

OMG, so much calculated discussion.
I prefer to keep it simple for purposes of tracking.
How much of my retirement portfolio do I need to or want to withdraw to meet my needs?

The reasons for the calculations is because many want to know how much they can withdraw each year so that they don't run out of money before they die. That's what's prompts most of these discussions.