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WR across asset classes
Old 06-15-2018, 12:40 PM   #1
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WR across asset classes

Hi All,

When the financial community speak of safe withdrawal rates how do asset classes figure in the mix?

When assuming a safe WR, for sake of argument lets say 4%, is that figure based across the total assets in ones portfolio or only the liquid or income producing assets?

Example:
50 year old person retiring in 3 years, $160K annual expenses, 4% WR
$1M home equity, not liquid for 12 years
$1M IRA, not liquid for 9.5 years
$1M estate property, not liquid for 10 years (non income producing)
$1M taxable equities, liquid now, income producing.

If this individual retires in 3 years he/she will only be able to tap into the $1M equities. With $160K annual expenses that $1M will be eaten up fast (16% year one WR), leaving the IRA (the next asset class) to be tapped into next. If all asset classes were liquid that person could withdrawal 1% from each, but in this scenario certain asset classes will be over used until the next asset class becomes liquid.

When calculating a safe WR does it matter that some of the assets are not liquid?

thanks
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Old 06-15-2018, 01:09 PM   #2
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My investment portfolio includes mutual funds, cash, and so on.

It does not include my home or other possessions which are not liquid and immediately investible.

If I choose to withdraw 3%, that is 3% of my investment portfolio (mutual funds, cash, and so on). Generally I withdraw it from my cash allocation (which itself is 5.5%), and then do whatever buying or selling is necessary in order to re-balance on that same day.
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Old 06-15-2018, 01:18 PM   #3
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I think you can include illiquid assets if you intend to liquidate at some point, otherwise if you never intend to sell those, I would not include those.
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Old 06-15-2018, 01:30 PM   #4
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One could make a case for a couple of different denominators as part of the WR equation.
I would just run the numbers through Firecalc, which will naturally adjust for the delays in availability to arrive at a safe withdrawal number, although not technically a SWR.
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Old 06-15-2018, 02:04 PM   #5
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Mind you, WR relates to sequence of returns risk of a stock or stock/... the risk that you may have poor returns in the early years that reduce the portfolio to the degree where future withdrawals at the same rate are not sustainable.

The OP has a liquidity problem, not a WR problem.

If OP retires in 3 years, he'll have 6.5 years to go before he can tap tIRA without penalty, so taxable funds might make it while tIRA and other funds grow. One possible solution would be cash-out refinance or HELOC... or a 72t on the IRA funds beginning when he retires.
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Old 06-15-2018, 02:34 PM   #6
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The $1M taxable will cover you for 7-8 years. But you are going to need $4M in retirement savings to sustain $160k of annual expenses. You will only have $2M. Where's the other $2M going to come from?
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Old 06-15-2018, 02:55 PM   #7
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So the $2M will come from appreciate of all my fixed assets and IRA over the next 12 years, at least that is the plan. I do fortunately live in a booming property market and while past performance is not guarantee for future returns I am fairly confident the amount I have in property will do well over the next 12 years.

$1M equities zeros out by 59
$1M (today's value) in property is sold by 59
$1M (todays equity value) in my home sold by 62
$1M (todays value) IRA starts getting tapped by 58 or 59

So the bottom line what I am hearing from you all, is when a safe WR is calculated it must be against assets that are liquid OR liquid upon a certain date.
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Old 06-15-2018, 03:07 PM   #8
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So the bottom line what I am hearing from you all, is when a safe WR is calculated it must be against assets that are liquid OR liquid upon a certain date.
NO, I cannot speak for others but as for me, that is NOT what I am saying at all. I suggest that you reread the posts on this thread because what you are hearing from us all is what you want to hear, not what we ("all") are saying. I know you don't want to hear it (that much is pretty obvious), but I am saying that an SWR as defined in the original SWR studies is based on stocks, bonds, and cash. I would suggest that you search out and read those studies for yourself before you proceed, because you are not understanding them yet IMO.

If I was in your situation, I wouldn't withdraw more than my chosen percentage of what I had in investible (liquid) stocks, bonds and cash. Then later on, if more became liquid, I'd include it but not until then. Otherwise IMO you are playing games and gambling that your house (for example) will be sellable at a certain price years down the road when you plan to sell it. Fortunes have been lost by making assumptions like that.
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Old 06-15-2018, 05:16 PM   #9
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....So the bottom line what I am hearing from you all, is when a safe WR is calculated it must be against assets that are liquid OR liquid upon a certain date.
Sort of... stocks and bonds and other marketable investments. Real estate is a different animal and your home only counts if you plan to sell it... but then where are you going to live?
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Old 06-15-2018, 05:25 PM   #10
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@W2R, I am listening, I started the thread for goodness sake, but while I do agree it is prudent to primarily look at liquid investments first and foremost, I disagree with completely sidelining the fix assets, pretending they don't exist.

@pb4uski: I will be living a global existence, AirBnB primarily 3-4 months in different locations. I've done it before for 2 years, glorious lifestyle. When I decide to settle back down I'll simply rent.
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Old 06-15-2018, 07:27 PM   #11
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@W2R, I am listening,
Really? You said (incorrectly),
Quote:
Originally Posted by dcoy View Post
So the bottom line what I am hearing from you all, is when a safe WR is calculated it must be against assets that are liquid OR liquid upon a certain date.
That doesn't seem to me like you are listening, since that was not at all what all of us were saying.
Quote:
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I started the thread for goodness sake, but while I do agree it is prudent to primarily look at liquid investments first and foremost, I disagree with completely sidelining the fix assets, pretending they don't exist.
OH!!! You disagree. Exactly. You're right; we didn't all agree with you.

Have at it. Oh, and good luck....
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Old 06-15-2018, 08:24 PM   #12
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Quote:
Originally Posted by dcoy View Post
@W2R, I am listening, I started the thread for goodness sake, but while I do agree it is prudent to primarily look at liquid investments first and foremost, I disagree with completely sidelining the fix assets, pretending they don't exist.

@pb4uski: I will be living a global existence, AirBnB primarily 3-4 months in different locations. I've done it before for 2 years, glorious lifestyle. When I decide to settle back down I'll simply rent.
I think you’re getting it.......

No doubt illiquid assets such as rental properties, farmland, collectibles, businesses, mineral rights, etc., can be difficult to value and project into the future. Therefore SWR projections are tough and lack any available tools I’m aware of. So, yes, much of the discussion here, and the FireCalc tool, revolve around traditional liquid financial portfolios.

No one here completely ignores illiquid assets of significant value. But you’ll need to swag a future value yourself since they’re somewhat unique (as opposed to holding the S and P 500 for example) and you’re closest to them.
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Old 06-15-2018, 08:29 PM   #13
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....
@pb4uski: I will be living a global existence, AirBnB primarily 3-4 months in different locations. I've done it before for 2 years, glorious lifestyle. When I decide to settle back down I'll simply rent.

That's fine, but you do need to consider the all-in cost of rent against what you sell the home for. It might be considerably less, but you can't count on 100% of it, because some of that goes towards providing you a home.

Now, if you anticipate that future rent & utility costs are less than or ~ equal to your future property tax, utilities and maintenance, I guess that estimate could work.

I would not count on your investments and property growing faster than inflation. If they do, fine. But if your plan depends on it, you need a plan B.

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Old 06-15-2018, 08:33 PM   #14
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Your definition of liquid and illiquid is incorrect. IRA funds are not illiquid before 59.5. A 72T election will allow you to access those funds to meet your spending needs. Will require some planning; but, those assets are not illiquid.
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Old 06-15-2018, 09:02 PM   #15
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The safe withdrawal rate studies were all based on relatively simple portfolios of stocks/bonds/cash, aka liquid assets. They assumed that housing costs were an expense, not income. This is a simplification because if you own rather than rent, and don't have a mortgage, you have a rather significant asset that is not represented in most SWR studies.

The answer is that you need to include housing cost as an expense, which is lower if you don't have a mortgage or rent. So when calculating your required SWR, include property taxes, maintenance, repairs as a pro-rata expense against your liquid portfolio.

The equity in your house is certainly an asset and can be considered in your ER planning, but it is not liquid unless your personal plan include selling it and also includes rent or other housing cost afterwards.

Having paid off my mortgage, I have substantial equity in my house and also in a vacation house I own. I consider those as insurance for long term care or some kind of unprecedented stock market disaster.

Regarding "estate income" which I assume means an inheritance, most guidance says to ignore that and count it as bonus if/when it happens. There a number of problems with assuming inheritance - the biggest of which are how much and when? If your parent(s) live to 95, with 10+ years in a care facility will there really be a remaining estate for your use?
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Old 06-18-2018, 12:57 PM   #16
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Interesting article that might apply,

https://earlyretirementdude.com/summ...ventor-4-rule/
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Old 06-18-2018, 01:57 PM   #17
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I appreciate the feedback, I have a much better understanding of the value I should place on property when determining a SWR. I do find it interesting that many financial calculators when determining the future value of property just use inflation, but I guess when it comes to property it is just too varied to determine a number that works for all locations.
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