Withdrawal Rates

[obgyn65]

For what it's worth, I turn 49 in 2014 and plan for 2.5-3% SWR. Time horizon until age 95.

Midpack thanks for the tables, it was real enlightening. The biggest problem I have, and the main reason I joined this site, is that there is little information out there for extended retirement. I am currently only 40 years old. What would those tables look like out to 40 or 50 years of withdrawls? I have told myself that I want to shoot for a 3% SWR, but perhaps that is much too conservative. The difference between 3% and 4% would make a huge difference on when we could retire. But to be honest I would probably sleep better at night with 3%. I am not sure the stock market will be so robust as in the past.

 

[Live And Learn]

For what it's worth, I turn 49 in 2014 and plan for 2.5-3% SWR. Time horizon until age 95.

But your AA has only 10% or so Equities, correct ?

 

[tuixiu]

my 70/30 allocation shows a 143% chance of success at 2.5%

 

[Options]

I suppose the question is then why would we even bother looking at WR in the context of a year-by-year projection expressed in dollars?

I pay no attention to the man behind the SWR curtain because it provides no concrete information in my case Retiring at 60, receiving substantial one-time income at 65 (or earlier), and delaying SS until 70 all make SWR irrelevant. I have run 5 or 6 (lost count) calculators all showing I will have a 6 or 7 figure PF balance at end of life, so I'm unconcerned with SWR as long as spending remains within plan (plan is also for very last check to undertaker to bounce).

 

[Midpack]

I have run 5 or 6 (lost count) calculators all showing I will have a 6 or 7 figure PF balance at end of life, so I'm unconcerned with SWR as long as spending remains within plan (plan is also for very last check to undertaker to bounce).

I'm curious how you'll be able to achieve that plan without

a) annuitizing 100% at some point and/or
b) being willing to vary spending drastically during your retirement (as much as 7X).​

I'd like to 'die broke' but there's no practical way aside from a) & b) above to do so that I know of.

 

[robnplunder]

My process
1. Estimate annual expenses in retirement, including taxes
2. Enter expenses into firecalc
3. On "other income" tab enter 70% of projected SSI starting in appropriate year
4. Fiddle with total portfolio until it says 95% success for 50 years
5. Drink a beer

> 70% of projected SSI?
> 50 years?

Are you over or underestimating your expense?

 

[robnplunder]

In the grand scheme of things, when is it prudent to pursue a withdrawal rate >4% and even much higher?

When you can put the money in good use while you are still healthy enough to enjoy life. I don't mind running out of my money and live modestly on SS + others when I am 82 (if I get there).

I think it's silly to LBYM & save all of your life, RE and maintain LBYM, accumulate even more wealth, and die richer than your favorite charities (or DS/DD) deserve.

 

[AnIntentionalRoad]

Recently I've been considering working long enough to build up an oversized vacation fund, say 100k or so that I'd chuck into something relatively conservative and be able to pull 5k or so a year from.

Not sure if that is stupid or not, haven't thought about it too deeply.

We did something similar. We have a separate account in short term bonds that is outside of our retirement planning. We use it as our no-guilt fun money.

 

[Major Tom]

But your AA has only 10% or so Equities, correct ?

He recently stated that his fixed income allocation is 98%, leaving just 2% for equities.

 

[robnplunder]

(plan is also for very last check to undertaker to bounce).

That'd be my & DW's ideal ending scenario. When the last of us croaks, we want to be in debt . But it's like timing stock market (too much risk with very little chance of getting it right). Instead, I run FIRECALC until I have 100% success rate. I am also ready to live modestly in later years, i.e. front load early retirement years with higher WR.

 

[Options]

I'm curious how you'll be able to achieve that plan without

a) annuitizing 100% at some point and/or
b) being willing to vary spending drastically during your retirement (as much as 7X).​

I'd like to 'die broke' but there's no practical way aside from a) & b) above to do so that I know of.

Ah, there's the rub. Should have said I'd like to die bouncing the undertaker's check, but nope, there is no practical way (dammit ).

lnflation-adjusted planned spending levels account for basics including everything from taxes, fees, travel, medical, etc., etc., and even large emergencies (based on adult lifetime spending history). No annuities planned and WD rate ranges from a high of around 6% in early years to around 2.5% post SS at 70. Also have the flexibility to forego inflation adjustments (which my history demonstrates I already do) and even greatly reduce discretionary spending in the event of another scary 2008 type year.

Should have said the 6 to 7 figure ending balance provides the comfort level needed to not worry about SWR rate or "this time it's different" scenarios (other than an asteroid strike).

 

[bUU]

I pay no attention to the man behind the SWR curtain because it provides no concrete information in my case Retiring at 60, receiving substantial one-time income at 65 (or earlier), and delaying SS until 70 all make SWR irrelevant. I have run 5 or 6 (lost count) calculators all showing I will have a 6 or 7 figure PF balance at end of life, so I'm unconcerned with SWR as long as spending remains within plan (plan is also for very last check to undertaker to bounce).

Thanks. It makes me feel better to see others ignoring SWR entirely. I've worked hard for a year and a half to get to the point where I have reliably accurate predictions (yes, I know: oxymoron) of each year's income and out-go, projected out to a reasonable estimate of longevity. I know some people are tweaked by the idea of riding the edge (i.e., using mid-line assumptions and 90% confidence levels instead of conservative assumptions and 95% confidence levels) but, as I mentioned in a thread on assumptions recently, taking the more conservative tack would effectively undercut our dreams of a comfortable retirement. Quite frankly, I'd rather have reality do that than do it to ourselves, i.e., I would rather adjust to unforeseen excessive misfortune rather than live life prepared to withstand any such misfortune unaffected.

To be fair, though, we secretly have a conservative tack built into footings under the foundation of our retirement plan. We live in a relatively high-cost area, the Boston metro area. Our retirement plan is based on expenses in that context. In another thread folks are discussing moving for retirement, generally for tax savings that some states offer, but also in the interest of reducing living expenses. For various reasons, I know that there his hidden strength in our retirement plan, not evident from the more risky assumptions and approaches we've used to get to a green light, in that we can move and thereby reduce our living expenses by 35% easy.

 

[Fermion]

I think SWR has a lot to do with income level.

We plan on a 3% to 3.5% SWR retiring at age 46 but we will be living on $50,000 or less. Because of our lower income we will qualify for lower taxes on gains/SS income.

Someone with a need for $100,000 a year might want a SWR closer to 2.5% to 3% if they are planning a 40 year retirement.

 

[ERD50]

I think SWR has a lot to do with income level.

We plan on a 3% to 3.5% SWR retiring at age 46 but we will be living on $50,000 or less. Because of our lower income we will qualify for lower taxes on gains/SS income.

No, you are confusing two different numbers. For calculating an SWR, your expenses include taxes. So a higher income/spending/taxes does not mean a lower SWR%, it means higher income/spending/taxes.

Plug 4% WR into FIRECalc with a $4,000 spend and a $100,000 portfolio. Now plug 4% WR into FIRECalc with a $400,000 spend and a $10,000,000 portfolio. Same result.

If you don't plug spending with estimated taxes into FIRECalc, you are doing it wrong.


-ERD50

 

[Fermion]

No, you are confusing two different numbers. For calculating an SWR, your expenses include taxes. So a higher income/spending/taxes does not mean a lower SWR%, it means higher income/spending/taxes.

Plug 4% WR into FIRECalc with a $4,000 spend and a $100,000 portfolio. Now plug 4% WR into FIRECalc with a $400,000 spend and a $10,000,000 portfolio. Same result.

If you don't plug spending with estimated taxes into FIRECalc, you are doing it wrong.


-ERD50

I wasn't confused, I was considering things like future increases in taxes and means testing on SS. Lower income will not have to factor these into their portfolio as much as a higher income so they can start off with a higher SWR and have the same chance of success.

I don't know exactly how to calculate it, but a guess of about .5% difference between someone living off $30,000 to $50,000 a year and someone living on $100,000 to $150,000 a year.

It does sound like I am confused. What I really mean is the lower income person likely will have higher after tax returns across their accounts, so they can have a higher SWR. Plus when SS kicks in, they will gain a larger percentage of it tax free.

 

[ERD50]

...

It does sound like I am confused. What I really mean is the lower income person likely will have higher after tax returns across their accounts, so they can have a higher SWR. Plus when SS kicks in, they will gain a larger percentage of it tax free.

Well, IMO, you are mixing/mashing terms, and that does make it confusing.

An SWR is an SWR. Spending (including taxes) is spending (including taxes).

Sure, if your spending rises later in life, and your taxes increase, your total spending increases. To maintain the same safety compared to a flat income person, you need a larger portfolio, or reduced spending in the early years to compensate.

Your portfolio doesn't 'know' about any other sources of income. A person drawing 4% from their portfolio and another 4% from other sources (SS/Pensions) will have a portfolio that looks exactly like another person drawing 4% from their portfolio and no other sources of income. What gets confusing, is some people will say the first person has an 8% WR, but that's not true - they withdraw 4% from the portfolio.

I don't know exactly how to calculate it, but a guess of about .5% difference between someone living off $30,000 to $50,000 a year and someone living on $100,000 to $150,000 a year.

No, plug them into FIRECalc, initial amount has ZERO EFFECT on SWR%.

-ERD50

 

[Fermion]

Assume two taxable portfolios, both invested 100% in TIPS. Assume inflation is 2% and the TIPS are paying 3% (real return of 1%).

A person in a high tax bracket during retirement is only going to realize about a 2% to 2.5% return, or about 0% to 0.5% real.

A person in a low tax bracket will probably get the full 3%, 1% real return.

If they both settle on the same SWR at start of retirement, the person in the lower tax bracket will have the greater chance of success because they are getting a higher real return.

 

[jebmke]

Assume two taxable portfolios, both invested 100% in TIPS. Assume inflation is 2% and the TIPS are paying 3% (real return of 1%).

A person in a high tax bracket during retirement is only going to realize about a 2% to 2.5% return, or about 0% to 0.5% real.

A person in a low tax bracket will probably get the full 3%, 1% real return.

If they both settle on the same SWR at start of retirement, the person in the lower tax bracket will have the greater chance of success because they are getting a higher real return.

My assumption is the SWR is independent of taxes. Taxes only change what you spend it on. IE, if 3% is a SWR it has to cover food AND taxes (and fund ERs as well).

 

[tuixiu]

I agree. Taxes are just an expense category that can vary over time just like medical. Just one slice of the expense pie that is baked from SWR.

 

[Fermion]

I agree. Taxes are just an expense category that can vary over time just like medical. Just one slice of the expense pie that is baked from SWR.

If taxes affect the rate of growth of a portfolio, how can they just be considered an expense and not be included in expected returns of said portfolio?

 

[RetireAge50]

The withdrawal rate will be the same for all brackets. The lower tax bracket person may get the full 3%. The higher tax bracket person may only get 2.5% and the government will get .5%.

 

[NW-Bound]

If taxes affect the rate of growth of a portfolio, how can they just be considered an expense and not be included in expected returns of said portfolio?

For taxable accounts, where one has to pay taxes on cap gains and dividends, it does reduce the return. And if one is in the 15% bracket, then there's no tax.

Still, if you have to pay taxes, most people would just account for the taxes in the portfolio return, and not in the WR. Then, when you draw 3.5% WR from it, you get to spend the entire 3.5%.

In my case, which is similar to that of many posters here, we have both before and after-tax accounts. The money drawn from before-tax accounts would be fully taxed, and with the WR of 3.5% I would have less than 3.5% to spend.

 

[Options]

Thanks. It makes me feel better to see others ignoring SWR entirely. I've worked hard for a year and a half to get to the point where I have reliably accurate predictions (yes, I know: oxymoron) of each year's income and out-go, projected out to a reasonable estimate of longevity. I know some people are tweaked by the idea of riding the edge (i.e., using mid-line assumptions and 90% confidence levels instead of conservative assumptions and 95% confidence levels) but, as I mentioned in a thread on assumptions recently, taking the more conservative tack would effectively undercut our dreams of a comfortable retirement. Quite frankly, I'd rather have reality do that than do it to ourselves, i.e., I would rather adjust to unforeseen excessive misfortune rather than live life prepared to withstand any such misfortune unaffected.

To be fair, though, we secretly have a conservative tack built into footings under the foundation of our retirement plan. We live in a relatively high-cost area, the Boston metro area. Our retirement plan is based on expenses in that context. In another thread folks are discussing moving for retirement, generally for tax savings that some states offer, but also in the interest of reducing living expenses. For various reasons, I know that there his hidden strength in our retirement plan, not evident from the more risky assumptions and approaches we've used to get to a green light, in that we can move and thereby reduce our living expenses by 35% easy.

I should add that being the paranoid person I am, there is one more calculator I intend to run in a couple of months that I've heard/read really good things about (ESPlanner). I don't expect to differ substantially from the 5/6 calculators I've already run, but it does provide more detail and is more robust, giving me the final confidence I need to pull the plug end of year.

I, too, live in a a very high-cost area and will downsize to a considerably low-cost locale (even thinking about a small farm). Retirement will also involve volunteering in things I feel strongly about, which may lead to a paying job, may not, depends solely on the impact I can make. Wonderful thing about those of us financially independent is we have options, and options is what it's all about IMHO.

 

[tuixiu]

If taxes affect the rate of growth of a portfolio, how can they just be considered an expense and not be included in expected returns of said portfolio?

Taxes affect the growth rate of the portfolio because they are an expense, and expenses affect the growth rate of a portfolio.

If I require 10k per year in prescription drugs that is also an expense that will affect the expected returns, since I'm taking out 10k more per year out of that portfolio every year.

 

[tuixiu]

I wouldn't use FIRECalc for a 50 year span - there aren't enough scenarios. I use 30 years and then try and figure out if my WR (when I'm 81 yo) will be less than 5% with the remaining minimal portfolio (assuming I also get 70% of SSI)..

That is a good point, I've always just run 50 because it seemed the safest but looking at various time spans for my numbers is kinda funny in firecalc it goes back up after 45 years.

Success rate:
30 years 98.2%
35 years 95.4%
40 years 95.1%
45 years 94.9%
50 years 97.8%
55 years 97.7%