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When does SWR really begin?
Old 04-26-2015, 08:44 AM   #1
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When does SWR really begin?

This may have been discussed at some point at an earlier time or the question may have been asked differently. Apologies if so. And I hope this question makes sense!

Note: this is an academic question.

Starting point: For simplicity: You’ve run all the calcs for starting SWR at 65 and for 30 years; your full SWR comes out at 4%. You understand that once you start taking that 4% you will withdraw that same amount each year adjusted for inflation.

Scenario: You’ve retired at 65 and taking SS. For any number of reasons you won’t be taking your full 4% for a few more years (temporary rental income, spouse still working for 2-3 more years, long term severance, residual business royalties, whatever).

As a result you're withdrawing maybe 1% of your portfolio every year to make up for the income shortfall. Actually, you’re withdrawing about the same amount out of your portfolio per year that you might have withdrawn during your working life--maybe 0.5%-1% to cover a vacation, large purchase or home repair--back then you called it ‘savings’.

But once that temporary income stops you know you’ll be taking the full 4% to cover expenses.

Questions:
Under that scenario, when does your SWR “30 year clock” start? When you first start taking that 1% or only once you get to 4%? What about 3%...or 2.5%? When does that clock start ticking?

More accurately, when does your retirement really start? 65? 68?

OTOH, if that clock starts ticking at the 1% point--when you turn 65--are you banking the other 3% so that once you do hit “full requirement”, you could dip into that bank for an extra 3% (total of 7%) for the same number of years that you banked it?
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Old 04-26-2015, 08:52 AM   #2
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I would say the clock starts when you retire. If you withdraw much less than your safe WR for the first year, you can re-evaluate your whole situation the following year just like that was your new retire date (in this case for a 29 year period). Unless your portfolio value has gone down, it should yield a higher safe WR going forward.
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Old 04-26-2015, 09:28 AM   #3
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I mentioned this in another thread quite a while ago - most people, esp early retirees, will have variable WR over time - so how do you refer to 'your WR'?

Here is my suggestion - enter your specifics, with whatever variable income/spending you plan for. You will come up with a success%, or if 100%, note the minimum ending portfolio.

Now do another run, w/o any extra spending/income. Adjust for same time-frame, and tweak until you get the same success or minimum ending portfolio. That spending % is a sort of 'normalized' number that can be used in discussions with others, for reference, w/o going into all the specifics of your income/spending changes. Make sense?

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Old 04-26-2015, 09:35 AM   #4
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There are a couple different ways of looking at it.

I used to look at it as if I had numerous WRs: one when I retired at age 56, one when my pension starts (between when I retired and age 65), one when DW's SS starts SS at her FRA, another when she bumps up to her spousal benefit at my FRA and one when I start SS at 70. I would focus most on the "ultimate" WR... after my SS starts and as long as that projected WR was 4% or less I was happy with our plan. But looking at it that way was a bit confusing and assumption bound since the ultimate WR was our projected living expenses when I turned 70 divided by our projected nestegg when I turned 70... but since it was ~2% if didn't fret about it too much (perhaps I worked longer than I needed to).

I'm starting to think at a better way to look at it is on an integrated basis, where I would take the maximum "safe" withdrawal (using the success factor of your choosing) from Firecalc including my pension and our SS in the calculation and that divided by our initial nestegg is our WR, but that our actual withdrawals will be reduced each year for my pension and SS as those flows come online.

Your hypothetical would be the inverse of my situation... you would calculate a "safe" withdrawal rate including those early year income flows to get a WR but then reduce your withdrawals by those income flows.

YMMV and I'm not convinced that there is a single "right" answer.
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Old 04-26-2015, 10:01 AM   #5
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Somewhere we have a thread focusing on the issues presented by SWR rate resetting. Interesting discussion with a lot of ifs, and, or buts. The bottom line is you can always recalculate with today's portfolio and today's spending horizon. You will be no different than some other Joe with an equivalent portfolio who is starting out today without all the previous history.
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Old 04-26-2015, 10:31 AM   #6
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I see it as variable as different income streams come into play (e.g. pension, SS). The real dilemma for me is when I turn 70.5 and will need to pull more from my IRAs thereby pushing me into higher tax territory

That brings up again the pro/con of deferring taking SS.
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Old 04-26-2015, 10:31 AM   #7
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Quote:
Originally Posted by donheff View Post
Somewhere we have a thread focusing on the issues presented by SWR rate resetting. Interesting discussion with a lot of ifs, and, or buts. The bottom line is you can always recalculate with today's portfolio and today's spending horizon. You will be no different than some other Joe with an equivalent portfolio who is starting out today without all the previous history.
This is one reason why I ditched the SWR method, in favor of the "percent of what I have at the end of each year" method. It is hard to wrap my mind around the SWR method, especially because I retired in 2009. If I re-computed it today as though I was retiring right now, the results would be much different.

After the fact, each year I still compute what percentage my annual withdrawal would have been according to the SWR method if I began it in 2009, just as a matter of curiousity and caution, but to me it is nothing more than that.
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Old 04-26-2015, 10:34 AM   #8
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I see it as variable as different income streams come into play (e.g. pension, SS). The real dilemma for me is when I turn 70.5 and will need to pull more from my IRAs thereby pushing me into higher tax territory

That brings up again the pro/con of deferring taking SS.
Ok, but if one has done the calculators correctly, the SWR doesn't change as the "different income streams come into play", right? And MRD is again different from SWR isn't it?
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Old 04-26-2015, 11:22 AM   #9
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When you run retirement calculators with your current portfolio value and future AA, you don't know where you are in the current cycle. So that "SWR" is kind of a theoretical one. In other words, the calculator will look for worst case historical patterns but you don't know (1) if you are currently at the top of the market or somewhere in the middle, (2) if the future pattern is going to be even worse then say 1929 or 1968 starts, (3) I'm sure I've left something out here .

So I would venture to say that the SWR should be revisited frequently. It's just a guess anyway.
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Old 04-26-2015, 11:28 AM   #10
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Ok, but if one has done the calculators correctly, the SWR doesn't change as the "different income streams come into play", right? And MRD is again different from SWR isn't it?
Well for DW and me, SS and pension have not kicked in yet, so our present WR rate from nest egg is currently greater than it will be after those kick in, and will again increase when MRD commence. I guess it depends on your definition of SWR. Should it be 4%, 3%, 2.5%, etc. averaged over XX/yrs or looked at as a different rate yearly as income streams come into play and/or portfolio performance changes; one can probably call it anyway they want.
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Old 04-26-2015, 11:54 AM   #11
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For me - I looked at my proposed budget for the year. The budget is based on actual spending over the previous years as well as planned extras*. (This year it's my bathroom remodel).

I take the budget, subtract out the income from non-portfolio sources, and that's my withdrawal for the year. I make sure that it's "safe" by using all the calculators.

* I kind of cheated a bit with this first year - since our vacation this year is significantly more than typical (trip of a lifetime)... so I took that money out of the retirement funds, set aside and not included, before retiring - and am not counting that in my annual budget. With this "set aside funds for non-typical vacation" our WR is 3.2%. The WR will go down as my pension and SS come online. It will also go down as the kids get launched, 10 years from now. My annual budget includes a hefty travel fund... but not quite so hefty as to cover a europe trip for 4 people for 9 weeks.

I just did an accounting last night - excluding the trip we're on track for our annual spend - even with our higher than expected medical (so far this year 1 hospitalization, 1 broken elbow, and now a broken face... Kids in sports are expensive... I picked a bad year to switch to high deductible.)
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Old 04-26-2015, 11:57 AM   #12
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I don't really believe in determining a SWR and taking that amount each year. I do run Firecalc every year to see what it would say (and sometimes other planners as well), really to see how it changes over time.

In our case, we knew when DH retired and I went very part-time on working that we would be withdrawing way more than 4% for the first several years because of kids at home and in college. We knew that wasn't our final WR.

If we tried to withdraw the amount we are withdrawing this year over the long-term we would go broke for sure. Of course, we don't plan to do that long-term.

Still, each year I look at Firecalc and put in variable spending over the next few years and then put in projected spending at a specific amount for the rest of the 3 years (I still use 30 years every time I run it even though DH has been retired 3 years -- 30 years would put him over 95 and me under 95 so it seems a reasonable time to use. I do occasionally run it with a long term).

At this point, for example, the ending amount of spending that would put at 100% is higher now than it was 2 years ago (mostly because of how well investments did).

Once we get kids out of school, I'll see where the WR is then and will use it as a guideline. I wouldn't just blindly follow it though.
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Old 04-26-2015, 11:57 AM   #13
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As far as RMDs - An RMD is not the same as a withdrawal. BUT, the taxes paid on the RMD are part of your spending for the year. Nothing says you MUST spend the RMD amount - it can be reinvested in a post tax account.

RMD is just forcing taxes to be paid on an amount of your tax preferred savings... the taxes are an expense that might increase your total/overall WR, but the total disbursement is not assumed to be spent/withdrawn... the net can be redeployed back into savings.
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Old 04-26-2015, 02:06 PM   #14
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Quote:
Originally Posted by marko View Post
This may have been discussed at some point at an earlier time or the question may have been asked differently. Apologies if so. And I hope this question makes sense!

Note: this is an academic question.

Starting point: For simplicity: You’ve run all the calcs for starting SWR at 65 and for 30 years; your full SWR comes out at 4%. You understand that once you start taking that 4% you will withdraw that same amount each year adjusted for inflation.

Scenario: You’ve retired at 65 and taking SS. For any number of reasons you won’t be taking your full 4% for a few more years (temporary rental income, spouse still working for 2-3 more years, long term severance, residual business royalties, whatever).

As a result you're withdrawing maybe 1% of your portfolio every year to make up for the income shortfall. Actually, you’re withdrawing about the same amount out of your portfolio per year that you might have withdrawn during your working life--maybe 0.5%-1% to cover a vacation, large purchase or home repair--back then you called it ‘savings’.

But once that temporary income stops you know you’ll be taking the full 4% to cover expenses.

Questions:
Under that scenario, when does your SWR “30 year clock” start? When you first start taking that 1% or only once you get to 4%? What about 3%...or 2.5%? When does that clock start ticking?

More accurately, when does your retirement really start? 65? 68?

OTOH, if that clock starts ticking at the 1% point--when you turn 65--are you banking the other 3% so that once you do hit “full requirement”, you could dip into that bank for an extra 3% (total of 7%) for the same number of years that you banked it?
I think you are giving too much credence to concepts that are fundamentally illogical.

There is a thread currently running about Dirk Cotton and sequence of returns risk. From my pov, SWR ideas should be purged and if one wants a straightforward guideline, go with the variable withdrawal hypothesis. As Cotton points out, using variable investments to fund a retirement, one cannot used a fixed (or fixed + inflation cash withdrawal). Cotton would rather accept adjustments to the withdrawal amount (IOW sometimes less, sometimes more in $$) than hold cash withdrawals constant and accept larger variances to the corpus.

None of these things is perfect, or magic. But one will keep you from finding yourself under a rock that you cannot move, while the variable return will allow some possibly very lean years in lifestyle.

You take it in the shorts, or in the head. But reality is what it is.

Ha
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Old 04-26-2015, 10:38 PM   #15
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Originally Posted by marko View Post
This may have been discussed at some point at an earlier time or the question may have been asked differently. Apologies if so. And I hope this question makes sense!

Note: this is an academic question.

Starting point: For simplicity: You’ve run all the calcs for starting SWR at 65 and for 30 years; your full SWR comes out at 4%. You understand that once you start taking that 4% you will withdraw that same amount each year adjusted for inflation.

Scenario: You’ve retired at 65 and taking SS. For any number of reasons you won’t be taking your full 4% for a few more years (temporary rental income, spouse still working for 2-3 more years, long term severance, residual business royalties, whatever).

As a result you're withdrawing maybe 1% of your portfolio every year to make up for the income shortfall. Actually, you’re withdrawing about the same amount out of your portfolio per year that you might have withdrawn during your working life--maybe 0.5%-1% to cover a vacation, large purchase or home repair--back then you called it ‘savings’.

But once that temporary income stops you know you’ll be taking the full 4% to cover expenses.

Questions:
Under that scenario, when does your SWR “30 year clock” start? When you first start taking that 1% or only once you get to 4%? What about 3%...or 2.5%? When does that clock start ticking?

More accurately, when does your retirement really start? 65? 68?

OTOH, if that clock starts ticking at the 1% point--when you turn 65--are you banking the other 3% so that once you do hit “full requirement”, you could dip into that bank for an extra 3% (total of 7%) for the same number of years that you banked it?
You're starting with a bad assumption.
If you're using FireCalc, you will not get a "Safe Withdrawal Rate" of 4% or any other percent. There is no "4% clock" because there is no 4%.

You will get a "Safe Spending Amount" which may include some withdrawals from your portfolio, but it also includes Social Security, pension, earnings, or whatever. Your plan is to withdraw the difference between your "Safe Spending Amount" and your other sources of income. Since those other sources may vary over time, the amount you withdraw from your portfolio will vary over time.

There is (also) no fixed-in-stone 30 years. FireCalc will tell you the SSA is safe over "n" years, because you input "n". There's no confusion over when n starts or ends, because you determined n and gave it to FireCalc.
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Old 04-26-2015, 11:19 PM   #16
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For me - I looked at my proposed budget for the year. The budget is based on actual spending over the previous years as well as planned extras*. (This year it's my bathroom remodel).

I take the budget, subtract out the income from non-portfolio sources, and that's my withdrawal for the year. I make sure that it's "safe" by using all the calculators.

* I kind of cheated a bit with this first year - since our vacation this year is significantly more than typical (trip of a lifetime)... so I took that money out of the retirement funds, set aside and not included, before retiring - and am not counting that in my annual budget. With this "set aside funds for non-typical vacation" our WR is 3.2%. The WR will go down as my pension and SS come online. It will also go down as the kids get launched, 10 years from now. My annual budget includes a hefty travel fund... but not quite so hefty as to cover a europe trip for 4 people for 9 weeks.

I just did an accounting last night - excluding the trip we're on track for our annual spend - even with our higher than expected medical (so far this year 1 hospitalization, 1 broken elbow, and now a broken face... Kids in sports are expensive... I picked a bad year to switch to high deductible.)
I don't consider that cheating. That's simply setting money aside for another purpose, and as long as it isn't included in the withdrawal cals, there is no cheating or fudging going on.

We deliberately set up a separate travel splurge fund when we retired.
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Old 04-26-2015, 11:26 PM   #17
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The withdrawal clock starts ticking as soon as you start taking money out.

I don't use the inflation adjusted method so I don't have to worry about having the withdrawals constantly ramping up to adjust for inflation regardless of my portfolio performance. I've never been comfortable with that approach.

Several folks here deal with different phases as different income streams come on line. Seems like that ultimately would have to do a recalculation at some pont. It's not our case so I haven't studied the issue.
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Old 04-27-2015, 08:49 AM   #18
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We deliberately set up a separate travel splurge fund when we retired.
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?
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Old 04-27-2015, 09:16 AM   #19
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I believe the 4% rule is based on a 30 year expected retirement life and is intended to be used as a tool for making a crude estimate of required assets. A more accurate estimate of SWR requires incorporating many variables. I just posted this link to an article in a new thread and it may be helpful to you.

https://www.fidelity.com/insights/re...ithdrawal-rule
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Old 04-27-2015, 01:54 PM   #20
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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?
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.
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