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Old 04-27-2015, 02:05 PM   #21
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Audrey:

To make sure I understand, when you retired, you set aside money as a travel splurge fund and treat this separately from your portfolio. It is not included as part of your "official" portfolio. When you decide to have a "travel splurge" (which I assume is not that often) you just take from that amount and don't treat it as a withdraw from your portfolio. Is that correct?

What would you do if and when your travel splurge fund is depleted? Would you then take from the portfolio?
This is an interesting twist. I like this idea of setting aside a certain amount, not counting it in any calculations and using it for splurge money.

Reminds me of an old trust funded aunt; "oh, dearie, I'd never touch the principal, I just bought it with my 'other money'..."
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Old 04-27-2015, 02:08 PM   #22
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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.
So you withdraw it, sometimes you don't spend it or give it away or burn it- what do you do with it in those years?
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Old 04-27-2015, 02:36 PM   #23
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This is an interesting twist. I like this idea of setting aside a certain amount, not counting it in any calculations and using it for splurge money.

Reminds me of an old trust funded aunt; "oh, dearie, I'd never touch the principal, I just used my 'other money'..."
I think it makes a lot of sense. When working, people may save for their kid's college and save for a down payment on a house, or that remodeling job or new car they wanted. These funds are usually treated separately from the long term savings set aside and invested for retirement.

It's a tenet of financial planning when setting aside money for a goal, to take into account the time frame of when the money is needed. If you are saving for a house down payment in a couple of years you are probably not going to put it in something volatile. You probably wouldn't mix your kid's college money investments with your retirement investments.

So in the same way I have funds earmarked for things other than retirement. They are invested and managed separately from the retirement fund that we withdraw from each year. There are two reasons for this: 1) We don't include those funds when calculating how much we may withdraw from our retirement portfolio each year and; 2) those funds are invested in very short term vehicles to be used when the money may be needed.

I just made sure the retirement fund could cover our planned regular expenses in retirement, and set aside enough money to cover that in the long run. I didn't put every last dollar in there. It was more like - OK here is a nest egg that should be enough to survive for decades. And I invested to to meet that goal (picked an AA) and picked a withdrawal rate that matched the AA and duration (good chance of survival). We actually lived on some other assets for a while before starting to draw on the retirement portfolio.

There is no rule that all your investable assets have to be in the retirement portfolio you draw from. It can be a subset of your total assets, as long as you only use that subset to calculate your annual withdrawal.
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Old 04-27-2015, 02:43 PM   #24
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Not to side step the SWR question; but in the scenario you posited at the beginning of the thread, I would not have taken my social security while only drawing 1% from the portfolio....provided you have a normal or better life expectancy, I would guarantee myself a healthy return by holding off on the social security until I needed it, or age 70.
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Old 04-27-2015, 02:50 PM   #25
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So you withdraw it, sometimes you don't spend it or give it away or burn it- what do you do with it in those years?
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.

Our retirement portfolio has grown quite a bit even though we retired in 1999. As a consequence our withdrawal is now quite a bit larger than our annual spending, compounded by the fact that our annual spending didn't go up with inflation. But I didn't want to lower our withdrawal % because my philosophy is that when we withdraw from the retirement portfolio, we have "won the game" with that amount, and I don't want to subject it to the investment risk of our retirement portfolio. I have our withdrawal % set so that it is prudent enough for long term portfolio survival but I am also trying to avoid taking out so little that we end up with a large remainder when we pass.

We're working on spending more, quite frankly. And we will probably be more aggressive about gifting more. We're really trying to make the most of it while we are younger and healthy, and alive! But the ramp up is very gradual.

And who knows when we'll have to live through another 2008 and face a smaller retirement portfolio and smaller withdrawals for several years in a row?

Make hay while the sun shines is my philosophy. I believe that money spent today is more valuable than money spent a few years from now because each year we are older and we don't know what might happen to our health and well being as each year passes. It will probably degrade.
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Old 04-27-2015, 03:07 PM   #26
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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...
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Old 04-27-2015, 05:10 PM   #27
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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
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Old 04-27-2015, 05:39 PM   #28
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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.
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Old 04-27-2015, 06:52 PM   #29
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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.
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Old 04-28-2015, 08:32 AM   #30
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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.
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Old 04-28-2015, 08:57 AM   #31
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... 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
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Old 04-28-2015, 09:00 AM   #32
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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.
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Old 04-28-2015, 09:13 AM   #33
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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.
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Old 04-28-2015, 09:15 AM   #34
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OP,

I had a similar question a few years ago and the discussion is available over at this thread.
Correctly calculating WR with other varying income sources?

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.

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Old 04-28-2015, 09:34 AM   #35
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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.
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Old 04-28-2015, 10:43 AM   #36
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OP,

I had a similar question a few years ago and the discussion is available over at this thread.
Correctly calculating WR with other varying income sources?

-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.
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Old 04-28-2015, 11:14 AM   #37
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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.
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Old 04-28-2015, 11:16 AM   #38
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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.
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Old 04-28-2015, 02:27 PM   #39
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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.
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Old 04-29-2015, 04:05 AM   #40
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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.
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