When does SWR really begin?

[Pilot2013]

I think I should have posted something I put in the "I am...." forum in here. To make that long story short, I did my own calculations for increase in 401k minus my withdrawals from that 401k at various times:

ER'd and prior to SS at one withdrawal amount, determining the resulting decrease in 401K balance each year.

Different (lower) withdrawal amount after I start SS, determining the resulting decrease in 401K balance each year.

Yet another lower withdrawal after DW reaches FRA and starts spousal SS, determining decrease in 401k balance each year

And finally yet another lower withdrawal after DW starts her higher SS at 70, and running that out for another 20 years to see what the resulting balance in 401K would be.

I couldn't find a "canned program" for that. The Retirement Planner on my 401K website does all kinds of smoothing of income, etc such that I don;t follow it, or therefore, trust it. Seems to me SWR is similar to my 401k website planner...

 

[haha]

No burning any of it!

I let it accumulate in short term investments. We're allowed to spend money left over from prior years whenever we want and we assume we will do so over the next few years.

Thank you Audrey. I have often wondered how people handle, or how they think about, sums that are sequestered from the formal retirement portfolio.

Ha

 

[rodi]

Thank you Audrey. I have often wondered how people handle, or how they think about, sums that are sequestered from the formal retirement portfolio.

Ha

Like Audrey - the sequestered funds are set aside in shorter term funds. In my case I have two pools of sequestered funds... The kids 529's (not counted as part of my retirement funds obviously) and a high interest savings account that has the money for this vacation, the next car, and an emergency fund. We're paying for the remodel out of our regular budget.

I also don't count the HSA money in my retirement funds since I'm trying to accumulate that money for later in retirement and won't be withdrawing from it anytime soon.

Sure, money is fungible... so in theory it's all one big pot but it seems silly to calculate my WR based on money earmarked for one time expenses or other goals like the kids college education or future medical expenses.

 

[Lsbcal]

I kind of understand the sequestered funds idea. I've got 5% allocated to short term investment grade bonds plus cash. That just gets continuously refilled. The travel and fun money comes from there. Seems a bit like a sequestered fund but maybe not quite?

Maybe it's not quite sequestered since if we have no fixed definition of travel spending and if not spent in one year, it's just there the next. But the amount not spent would probably be distributed into the full portfolio segments (stocks, bonds, cash).

I do track basic spending and "fun + discretionary" separately.

 

[David1961]

Thanks to everyone who has shared their method of sequestering funds. I don't do that and the idea does intrigue me. I do like the idea of "taking out" the money for my next car and vacation money, etc. so that when needed I can spend the money and not throw off my budget for the whole year. But how to determine how much to sequester? There are so many "unknown unknowns" that can occur that I cannot possibly account for now.
For those who do, have you ever been tempted to splurge and buy something and take from your sequestered funds that it's not intended for? It seems like it could be a temptation to buy something and not count it as a "withdraw". Are there any other challenges of having this approach? It's all a matter of discipline I suppose.

 

[ERD50]

... I do like the idea of "taking out" the money for my next car and vacation money, etc. so that when needed I can spend the money and not throw off my budget for the whole year. ...

I can't see how this is any advantage, in fact, it seems like a disadvantage.

Essentially, you are creating 'buckets' of cash. In the long run, cash will under-perform a balanced portfolio. So why not just keep the money invested until you need to spend it (unless that causes a tax 'bubble' and would be taxed at a higher rate)?

How are you 'throwing off the budget' for a year? For example, I include a 'phantom' amount in my budget that includes amortized expenses (cars, big maintenance items on the horizon, etc). So what if I spend $X0,000 more one year because I bought a car and replaced a roof? Do I say - Oh no, I can't afford a new car and/or roof, that's half (or whatever) my budget! Makes no sense to me. It's $30,000 in one year, or $3,000 over ten years, etc. Same thing really. Money is money, when it's spent it's gone.

I think this is too much 'compartmentalization', with no benefit.

-ERD50

 

[Independent]

We didn't "sequester" anything. However, I did identify certain large one-time expenses that were still coming up (e.g. the rest of the kids college support). Then, when I calculated our "regular, affordable, level annual spending" number, I did not use our entire portfolio. I deducted these one-time expenses first.

There was no need to set up separate assets for these expenses because we were plenty heavy in fixed income stuff when we retired (that was kind of planned).

We do not "budget", in the sense of trying to hit a specific annual spending target. We have a "normal lifestyle" and spend as needed to support that lifestyle. For example, regular repairs and replacement of housing items (roof, fridge, garage door opener, whatever) are part of our "normal lifestyle". I don't care if we are unusually heavy in those items one year, we just make the extra withdrawals and spend the extra money. I figure that big year simply means that some other year will be lighter than normal.

 

[David1961]

I can't see how this is any advantage, in fact, it seems like a disadvantage.

Essentially, you are creating 'buckets' of cash. In the long run, cash will under-perform a balanced portfolio. So why not just keep the money invested until you need to spend it (unless that causes a tax 'bubble' and would be taxed at a higher rate)?

How are you 'throwing off the budget' for a year? For example, I include a 'phantom' amount in my budget that includes amortized expenses (cars, big maintenance items on the horizon, etc). So what if I spend $X0,000 more one year because I bought a car and replaced a roof? Do I say - Oh no, I can't afford a new car and/or roof, that's half (or whatever) my budget! Makes no sense to me. It's $30,000 in one year, or $3,000 over ten years, etc. Same thing really. Money is money, when it's spent it's gone.

I think this is too much 'compartmentalization', with no benefit.

-ERD50

I think we are in the same boat. I don't sequester funds but some aspects do intrigue me, and I just wanted to learn more about it. The advantages seem to be that you can more easily account for certain major expenses that you know will occur. I do not amortize major expenses like you do, and that's a good idea as well.

 

[gauss]

OP,

I had a similar question a few years ago and the discussion is available over at this thread.
http://www.early-retirement.org/for...-with-other-varying-income-sources-61123.html

I will have step changes to my income as the years go by as income streams begin and include.Our pension income is also NOT COLA adjusted. I included a bar graph that illustrates my situation.

My proposal for handling this which was included in that post was to come up with an equivalent Net Present Value of all my future income streams and then come up with a sequence of inflation adjusted withdrawals that would be taken each year that would be equivalent.

The downside of this is that it may mask the volatility that you would be opposed to. The other downside may be that I am over-complicating it as suggested by some posters, but for my case I don' think so. I really wanted to know what my equivalent WR would be.

I hope that you will be able to take a look at my writeup at the original thread so I will not repeat it here.

-gauss

 

[hnzw_rui]

Thanks to everyone who has shared their method of sequestering funds. I don't do that and the idea does intrigue me. I do like the idea of "taking out" the money for my next car and vacation money, etc. so that when needed I can spend the money and not throw off my budget for the whole year. But how to determine how much to sequester? There are so many "unknown unknowns" that can occur that I cannot possibly account for now.
For those who do, have you ever been tempted to splurge and buy something and take from your sequestered funds that it's not intended for? It seems like it could be a temptation to buy something and not count it as a "withdraw". Are there any other challenges of having this approach? It's all a matter of discipline I suppose.

I reckon it's very similar to budgeting except you'd likely have to be more conservative in how much to allot to the main portfolio to account for fluctuations in investments.

If you've got sufficient SS and/or pension to cover fixed expenses, then things become so much easier. Right now, my plan is to have the pension + 457b for fixed expenses (targeting pension for 100-110% fixed expenses and 457b as my extra 15-20% margin of error). Everything in the Roth IRA would be discretionary.

 

[marko]

OP,

I had a similar question a few years ago and the discussion is available over at this thread.
http://www.early-retirement.org/for...-with-other-varying-income-sources-61123.html

-gauss

OP here.

Thanks gauss and thanks to all inputs from everyone.

I guess this exercise changed my original impression of SWR (or SWA to get picky). I had viewed the notorious "4% rule" as something --not entirely--but more rigidly followed out over a long period of time with minor tweaks along the way.

My original thought process was sort of "if you can take 4% starting at age 65, --but you don't--how does that change the calculation of as to when you actually start a true portfolio withdrawal, AND, how does taking smaller withdrawals impact your true starting point?".

My big take away is that it seems that many folks here do a reassessment of that calculation every year/few years.

 

[audreyh1]

Thanks to everyone who has shared their method of sequestering funds. I don't do that and the idea does intrigue me. I do like the idea of "taking out" the money for my next car and vacation money, etc. so that when needed I can spend the money and not throw off my budget for the whole year. But how to determine how much to sequester? There are so many "unknown unknowns" that can occur that I cannot possibly account for now.
For those who do, have you ever been tempted to splurge and buy something and take from your sequestered funds that it's not intended for? It seems like it could be a temptation to buy something and not count it as a "withdraw". Are there any other challenges of having this approach? It's all a matter of discipline I suppose.

I don't think of it as sequestering my other funds. I may change my mind about what to spend them on, etc. nothing wrong with that. What I carefully sequester is the retirement portfolio itself. That is the one strictly maintained, rebalanced, and that has set rules about the annual withdrawal.

 

[audreyh1]

OP here.

My big take away is that it seems that many folks here do a reassessment of that calculation every year/few years.

I think that is what it comes down to.

 

[Options]

I don't think of it as sequestering my other funds. I may change my mind about what to spend them on, etc. nothing wrong with that. What I carefully sequester is the retirement portfolio itself. That is the one strictly maintained, rebalanced, and that has set rules about the annual withdrawal.

Thanks for posting the follow-up. I've been following your posts and thinking this is exactly the plan I am following. I have a set discretionary amount (to cover big ticket items such as auto, housing maintenance needs, etc.) as part of my annual withdrawal budget. Depending on spending needs, this withdrawn discretionary amount might be spent and might not. If not, it rolls over into the next year, and not included in PF value as once withdrawn I consider the monies earmarked to be spent. I use this same methodology for travel, although I suspect I will always be exhausting my annual discretionary travel fund withdrawal every year.

It was asked above why "sequester" funds, and the main benefit is market volatility. I don't want monies I've set aside for specific projects falling victim to down markets.

 

[mathjak107]

we will be using bob clyatt's method.

we take a snap shot every year of the portfolio and take 4% or if a down year 5% less than the previous year or 4% . which ever is higher is what you draw.

simple and works in real time.

 

[mathjak107]

I can't see how this is any advantage, in fact, it seems like a disadvantage.

Essentially, you are creating 'buckets' of cash. In the long run, cash will under-perform a balanced portfolio. So why not just keep the money invested until you need to spend it (unless that causes a tax 'bubble' and would be taxed at a higher rate)?

How are you 'throwing off the budget' for a year? For example, I include a 'phantom' amount in my budget that includes amortized expenses (cars, big maintenance items on the horizon, etc). So what if I spend $X0,000 more one year because I bought a car and replaced a roof? Do I say - Oh no, I can't afford a new car and/or roof, that's half (or whatever) my budget! Makes no sense to me. It's $30,000 in one year, or $3,000 over ten years, etc. Same thing really. Money is money, when it's spent it's gone.

I think this is too much 'compartmentalization', with no benefit.

-ERD50

depends how much cash is kept. many times buckets vs equal systematic withdrawals perform the same since the equities in a bucket system are actually increasing as you spend down and maintain higher levels ..

in a 3 bucket system with years of cash and bonds as those are depleted you may be 80 years old and 80% equities until you refill.

so you may have more cash and bonds in the beginning but more equities down the road before refilling .

usually there is no difference using buckets of cash and bonds vs maintaining the same allocation year after year pulling from all pieces of the pie.

 

[marko]

Anyone care to comment on the second part of the question?

If you only withdraw 1% one year from a calculated 4% SWR/A, does that mean you've banked 3% and could withdraw 7% the next year?

Not that you would, but could you, and still keep the original model assumptions in place?

 

[Golden sunsets]

It was actually so we could spend a lot extra on travel the first few years beyond what was covered in our initial budget. It was just to fund excess travel as wanted. It doesn't impact how much I take from my retirement portfolio each year, just how much I have available to spend on travel. I withdraw 3.5% from my portfolio each year regardless of how much I spend.

But if you don't spend the entire 3.5 percent what happens to the unspent $$$. Wouldn't it technically be reinvested or decrease the next year's 3.5 percent withdrawal?

 

[donheff]

I too "sequester" extra funds similar to Audrey. I don't keep a separate cash account, I just maintain a line item on my portfolio spreadsheet to track the "mad money" account. The funds are simply part of the portfolio. At the end of the year I adjust the amount up or down to reflect overall portfolio growth over the year. I tapped it to the tune of $20K last year to make some upgrades to my weekend house preparatory for sale. I would also tap it if I wanted to take an excessive trip of a lifetime like a Antarctica trip with National Geographic or something. In theory, this fund will level spending somewhat in prolonged downturns. In reality, I suspect that with a big enough, long enough downturn I would forget about spending it and just roll it in to cushion the losses.

 

[audreyh1]

I can't see how this is any advantage, in fact, it seems like a disadvantage.

Essentially, you are creating 'buckets' of cash. In the long run, cash will under-perform a balanced portfolio. So why not just keep the money invested until you need to spend it (unless that causes a tax 'bubble' and would be taxed at a higher rate)?

I think this is too much 'compartmentalization', with no benefit.

-ERD50

Earmarked funds is just a different method of budgeting. Budgeting is compartmentalization, whether it's done by earmarked funds, or amortizing costs over several years, or setting aside ("saving") unspent annual income toward some goal. And the last thing anyone needs to worry about is the long term performance of funds they have set aside for short term goals - stability is the key. One must just make sure that funds for long term goals such as the retirement portfolio have good enough performance to survive inflation and withdrawal. And it only needs to be good enough - it doesn't have to be optimal.

 

[Golden sunsets]

I think we are in the same boat. I don't sequester funds but some aspects do intrigue me, and I just wanted to learn more about it. The advantages seem to be that you can more easily account for certain major expenses that you know will occur. I do not amortize major expenses like you do, and that's a good idea as well.

We do include a monthly contribution for big ticket items as well which go into a special sequestered account that is not included as part of our portfolio. The sequestered account also holds money deposited monthly for items that are not evenly spent throughout the year, e.g real estate taxes, charitable contributions, travel, kennel, dental, etc.

 

[REWahoo]

"When does SWR really begin?"

Reminds me of the question of when life begins. I'm pretty sure that occurs when the last kid moves out and the dog dies...

 

[audreyh1]

But if you don't spend the entire 3.5 percent what happens to the unspent $$$. Wouldn't it technically be reinvested or decrease the next year's 3.5 percent withdrawal?

Neither. I don't put unspent funds back in the retirement portfolio. I still take the same percent out the next year.

Any withdrawn funds not spent last year can be spent this year however I want! Or put towards some other short-term goal.

Say you had $5000 left of from last year's spending. Do you:

• Keep it to spend soon, or
• Put it back in your retirement portfolio where now theoretically 3.5% of that $5000, or $175, might be available for the rest of your life, subject to market fluctuations of course.

More questions:

• Do you only take out of the retirement portfolio what you actually spend each year, or
• Do you take out what is considered "safe" by the withdrawal method of choice regardless of whether you spend it all during the same year.

It depends on your goals. If you are trying to leave a legacy, you will probably minimize your withdrawals. If you want to avoid leaving much of a legacy, you might want to not reinvest unspent funds.

 

[Golden sunsets]

I think this will be the first year of withdrawals for us - not sure yet, as residual income from a business wind down plus pensions, ss, etc may exceed our anticipated spend rate. I still have yet to decide how to pull the $$ out next year. I think we will create an automatic monthly w/d of something less than our anticipated spend to supplement penions and take more out if necessary toward the end of the year. I guess the legacy piece is the important consideration. I also don't trust this market and fear that our initial WD may coincide with a market slide. Fortunately our planned withdrawal rate is much lower than it could be.

So many decisions!!

 

[Independent]

Anyone care to comment on the second part of the question?

If you only withdraw 1% one year from a calculated 4% SWR/A, does that mean you've banked 3% and could withdraw 7% the next year?

Not that you would, but could you, and still keep the original model assumptions in place?

The 4% concept is for people who really want level spending. They want to start at some dollar amount and be confident they will never need to spend less than that. Because they have no downside flexibility, they need to be cautious at the start. Hence, they take only 4% in the first year, even though they can see that their mix of assets has historically averaged 6%.

To me, if that person only takes 1% in some year, that means he/she does in fact have downside flexibility, and has shown a willingness to use it. This person does not fit the profile assumed by the calculators that spit out the 4% SWR. This person should have a different spending strategy.

Here's one possibility. Maybe this person has SS plus a COLA'd pension that meets all of his/her "basic" spending. Withdrawals from the portfolio are used entirely for "nice to have" spending. In this case, the individual has unlimited downside flexibility on withdrawals. If this person takes 1% in one year, he/she could take 0%, 4%, 7%, or 100% in the next year. He/she has no need to be conservative to protect some minimum withdrawal amount.