Withdrawals when Market is High?

[tps7742]

Does the market being higher determine your spending? As an example would your expense for travel be more if the markets have a good year.

 

[jazz4cash]

Withdrawal rate? NO! That's determined by expenses.

Asset allocation? Maybe.

 

[razztazz]

Some people who use the constant percentage of assets method would withdrawal the same percentage but, of course it would be more money. So the market being up would impact that. The constant spending power approach would have withdrawals go up by inflation (in needed) but unrelated to whether or not the market is any higher

 

[Animorph]

No, we use a fixed budget. If you want to spend more during good markets you have to be willing to spend less in bad markets. We'd rather smooth things out. Doesn't mean we won't adjust either way if things get too extreme over the longer term.

 

[jebmke]

We spent more money right after the'08-09 down tick because prices were great and there weren't as many tourists out and about.

 

[tps7742]

No, we use a fixed budget. If you want to spend more during good markets you have to be willing to spend less in bad markets. We'd rather smooth things out. Doesn't mean we won't adjust either way if things get too extreme over the longer term.

Yes I think we will like the smooth and steady fixed budget method when we start withdrawing.

 

[Chuckanut]

There is no shame in taking a profit when markets are bumping up against new highs.

If that allows one to pay off some bills, or plan a fancier vacation, great! Or just stash the money away for the day when the market is banging against new lows.

 

[FUEGO]

Does the market being higher determine your spending? As an example would your expense for travel be more if the markets have a good year.

I'm certainly willing to spend more since we have about a half million more than we did when I retired. Long term we'll aim for a "percent of portfolio" method of withdrawal/spending instead of some silly "fixed percent of initial portfolio" method of withdrawal.

Otherwise we would watch our portfolio slowly creep up through the various million dollar milestones while we're still living on the relatively modest budget we started with in 2013.

In practice this means we're spending the summer in Europe (after several years of less expensive summertime travel). We're doing some house upgrades that have been deferred long enough. Mrs. FUEGO eats a lot of caviar and smoked salmon these days (though that's partly to save on the cost of cruise tickets ).

We're still rather frugal but don't mind blowing the budget we set if we find worthwhile things to spend money on.

 

[NW-Bound]

If I have some delayed needs or desires, I would spend more when the market gets frothy, but I am currently satisfied with status quo.

The last few years saw me spent more than I anticipated due to non-recurrent expenses. And I was in the wrong sectors, such as EM, so trailed the market. Hence, my portfolio has not risen as much as the S&P has.

It does not look like I will have new non-recurrent expenses. So, despite a 6-week long in Europe this year my expenses will be lower than in the past. There's nothing wrong with that, as I do not look to spend money if I do not find something worthwhile to spend on.

 

[audreyh1]

Does the market being higher determine your spending? As an example would your expense for travel be more if the markets have a good year.

My income (withdrawal) goes up when the market goes up since I use the % of remaining portfolio method where I draw a fixed % from the portfolio each year. I don't usually spend it all, but I consider any unspent extra to be available for spending in the near future so I keep it in my short-term funds. And who knows, the next year my income may well drop.

So, it doesn't directly determine my spending, but it does increase my short term funds available to spend so I'm more likely to spend a little more, and it helps pad things in case future years are worse.

 

[W2R]

I instinctively want to spend more when the market is up, and less when it is down.

Luckily, in years when the market is up, my portfolio value is up. So, if I withdraw the same percentage, then I get more spending money that year.

 

[RunningBum]

I also set my budget as a % of my remaining assets, so when there's a good year before, I have a little more to spend, but it's spread out over my remaining years. Not that I have a set planned return, but just for example, if my investments made $20K extra the year before, I wouldn't consider that $20K more I could spend the next year. If my VPW rate was 3.2% this year, I would have $640 more to spend ($20K*.032).


This way if my return is off a similar amount next year, I'll be pretty much back to where I was. I don't think you can splurge an extra amount one year unless you are ready to really cut back in a bad year. I'd rather let the high and low returns smooth themselves out.


By the same token, actual spending doesn't really reflect my budget. If I have no major repairs or purchases in a year, my actual spending better be under my budget to counter a year in which I do have major expenses to fix or replace things.

 

[tps7742]

Thanks for everyone's thoughts and perspectives on this topic.

 

[pb4uski]

Not a single year... but certainly yes for the cumulative effect... we splurge more given market returns over the last 5 years that we have been retired have been better than expected... a bit of an implicit ratchet strategy.

 

[kcowan]

Buoyant market do not increase our spending. We might rebalance but never increase withdrawals. OTOH our WR is 1.8% so that might make us a little more flexible

 

[Whisper66]

Does the market being higher determine your spending? As an example would your expense for travel be more if the markets have a good year.

Indirectly, yes. The high market value means our portfolio value is up. We use our start of year portfolio value to set our yearly budget. We spend freely unless we are coming up against our budget, then we cut back. So the high market allows us to spend more. Often however, we will spend what we want but won't come up against the budget.

 

[audreyh1]

Buoyant market do not increase our spending. We might rebalance but never increase withdrawals. OTOH our WR is 1.8% so that might make us a little more flexible

If you have a fixed withdrawal rate (%) based on the current size of portfolio your withdrawal does increase in $ terms when your portfolio goes up.

If your spending and withdrawal is fixed in $ terms then it doesn't, obviously. In that case your withdrawal rate would drop as the portfolio increased.

 

[marko]

Maybe I'm misunderstanding the SWR rule but my view is that up markets make up for down markets and thus maintain the portfolio through rough times. Spending more in up markets would put the portfolio at risk when the inevitable "buying opportunity" arrives.

In our case, because we live below our SWR (LBSWR?) our lifestyle determines our spending not the other way around. As I've noted before, our spending remains fairly constant year to year; we spend about the same but on different things.

 

[audreyh1]

Maybe I'm misunderstanding the SWR rule but my view is that up markets make up for down markets and thus maintain the portfolio through rough times. Spending more in up markets would put the portfolio at risk when the inevitable "buying opportunity" arrives.

In our case, because we live below our SWR (LBSWR?) our lifestyle determines our spending not the other way around. As I've noted before, our spending remains fairly constant year to year; we spend about the same but on different things.

The constant spending/withdrawal method from the initial portfolio value is very conservative, allowing the portfolio to increase more during good times, thus providing additional funds for the bad times. But this method has some downsides: it stresses the portfolio by increasing for inflation in the face of a bad market run out of the starting gate, can run out of funds in fact, but otherwise tends to leave a very large terminal portfolio value - great for the heirs, but maybe not optimal for the retiree.

So some of us prefer to use a % of remaining portfolio method which doesn't adjust for inflation, forces the retiree to adjust to lower income during bad market runs, but also allows income to ramp up faster during good market runs and leaves, on average, a lower terminal value of the portfolio meaning the retiree got to withdraw more over their lifetime. It also does not run out of money. This method does not, in fact, put the portfolio at more risk in terms of survival because when things go south, the retiree is taking less $ out, just like they were taking more $ out when things were going great guns.

So it comes down to which kind of income (whether you need very steady or think you can live with variable) and average terminal value you prefer.

 

[marko]

So some of us prefer to use a % of remaining portfolio method which doesn't adjust for inflation, forces the retiree to adjust to lower income during bad market runs, but also allows income to ramp up faster during good market runs and leaves, on average, a lower terminal value of the portfolio meaning the retiree got to withdraw more over their lifetime.

So how does one determine what % to use? I'm curious.

 

[mpeirce]

So how does one determine what % to use? I'm curious.

One approach is to follow what many endowments do.

Every year, university endowments on the average withdraw 4 to 5% of their asset value for current use

 

[Whisper66]

So how does one determine what % to use? I'm curious.

One method is to use I-ORP each year to determine the maximum spend that your assets can support. Then your withdrawal for that year can be anything you choose up to that amount. This method is discussed as the "3-PEAT Withdrawal Strategy" on the ORP website. This is the method we are currently using.

 

[marko]

One method is to use I-ORP each year to determine the maximum spend that your assets can support. Then your withdrawal for that year can be anything you choose up to that amount. This method is discussed as the "3-PEAT Withdrawal Strategy" on the ORP website. This is the method we are currently using.

So I come out roughly at the same percentage that if I use the more popular SWR calculation. Just a smidge more.

Is the only difference that you just take a regular percentage of the existing balance instead of calculating inflation back from your first withdrawal?

 

[Whisper66]

So I come out roughly at the same percentage that if I use the more popular SWR calculation. Just a smidge more.

Is the only difference that you just take a regular percentage of the existing balance instead of calculating inflation back from your first withdrawal?

The key difference in the 3-PEAT methodology is you are recalculating each year the maximum allowable withdrawal rate rather than staying with a single rate. The recalculation allows you to take into account potential major impacts such as: large swings in the market expectations (rate of return on equities/fixed assets), changes in your expected longevity (say you were diagnoised with a significant illness), major expenses that may come up, change in income (such as loss of spouse and their SS benefits) or changes in tax laws.

Under some situations and years, your % withdrawal calculated by 3-PEAT may be similar to the standard % method. But it can vary quite a bit. Figure 2 of the white paper on 3-PEAT (link) provides a chart showing how much the yearly withdrawal rate for 3-PEAT can vary vs a fixed rate method. In most years, you can withdraw more using 3-PEAT than the standard rate....but your allowable withdrawal can vary dramatically so the user must be aware of this and be able to manage such swings. The same Figure shows the total amount spent over the retirement period. The 3-Peat is higher total available spend....this is expected as it is one of the main goals of this method. It's a good paper to read. I would attach the figure here but it's not readable here, too much info for small space. Worth a quick look if you are interested.

 

[audreyh1]

So I come out roughly at the same percentage that if I use the more popular SWR calculation. Just a smidge more.

Is the only difference that you just take a regular percentage of the existing balance instead of calculating inflation back from your first withdrawal?

This is true when comparing constant withdrawal to % remaining portfolio withdrawal, but that makes a big difference.

So how does one determine what % to use? I'm curious.

My calcs show 4.35% is probably the safe withdrawal rate for 30 years with a portfolio of 50% total stock market and 50% 5-year treasuries, compared to 4% usually quoted for the constant inflation-adjusted $ withdrawal. And you won't run out of funds either, but you will have to do some serious belt tightening during a bad run of down markets as your income could drop to up to 60% in real terms - so it's best if your budget has a high % of discretionary spending. However, the average ending portfolio is 100% of what you started with in real terms after 30 years, and the lowest ending portfolio is 86% of what you started with real - not shabby at all. In fact you could almost think of this as a "perpetual" rate, and it does hold for 40 years (smaller data set though), but starts slipping at higher durations, so it's not quite perpetual.

FIRECALC models this - use the % remaining portfolio method to play with it and determine what you think your withdrawal rate should be.