Is it legit to re-run when market rises?

[letsquit]

Is it legitimate to recalculate my maximum safe withdrawal over time, and increase it when the market is good? Do I have to decrease it when the market is bad, or does my original calculation remain safe even when the market drops over time? Thanks.

 

[ERD50]

Is it legitimate to recalculate my maximum safe withdrawal over time, and increase it when the market is good?

Historically - yes.

If you think about how a historical reporter like FIRECalc works, (and this is easier to discuss if you assume you went for a 100% Safe Withdraw Rate), the periods of almost failing, but didn't, were when that period started at a market peak. No where to go but down.

You are entering a fixed number (let's say $1M) and clearly, that $1M is worth more at the bottom of a trough than at the peak. But with 100% success, it still succeeds.

A poster on Bogleheads was discussing a 'retire again and again' strategy, which was exactly that - recalculate each up year, and use that higher WR, inflation adjusted going, forward. Historically it works (it has to).

Do I have to decrease it when the market is bad, or does my original calculation remain safe even when the market drops over time? Thanks.

See above.


That said, many of us want some buffer, as the future could be worse than the worst of the past. You still have to do what feels comfortable, and be ready to live with the results.

-ERD50

 

[harley]

If you are using the standard 4% SWR, you are supposed to start with 4%, then increase the draw by your chosen inflation rate each year. Definitely not supposed to recalculate each year. If you do, then you would absolutely need to recalculate when the market is down too.


Having said that, I don't know of anyone who does a straight 4% WR. Most are flexible, at least on the down side. I drop my spending when the market is down, but I don't necessarily raise it when the market is up. I'm more concerned with longevity than maximum SWR. If I leave some money to my heirs I'm fine with that.

 

[audreyh1]

Is it legitimate to recalculate my maximum safe withdrawal over time, and increase it when the market is good? Do I have to decrease it when the market is bad, or does my original calculation remain safe even when the market drops over time? Thanks.

I reset every year .

I also reset down when the market falls.

It's called the % of remaining portfolio method. There is no inflation adjustment - just whatever the markets do.

I take a fixed % of whatever my Dec 31 portfolio value is each year.

 

[ERD50]

If you are using the standard 4% SWR, you are supposed to start with 4%, then increase the draw by your chosen inflation rate each year. Definitely not supposed to recalculate each year. If you do, then you would absolutely need to recalculate when the market is down too. ...

Actually, that is not true (historically).

This is the supposed 'paradox' of the person A retiring one year after person B. If the market went up higher than inflation, why can't person A increase his/her WR (above inflation)? They can.

Historically, it has to work. If I had 100% success at all points in history, then I had... 100% success at all points in history! Think about it.

-ERD50

 

[NW-Bound]

What ERD50 says is correct about increasing one's WR (in dollar terms) when the market is good not necessarily resulting in your bankruptcy.

What happens is that, if you look at the huge range of possibilities that FIRECalc shows you, when you increase your spending for good market times, you are taking away the chance of your portfolio going up and up with the years. You are working yourself towards the worst-case trace that skims the zero line, like a sea-skimming missile.

You may be trading the good time now for sleepless nights later in your retirement. Or you may not, but it does increase the risk.

 

[audreyh1]

If your goal is to leave little remaining at the end of life, this can be an effective strategy.

Even so, I wouldn't be able to keep increasing inflation-adjusted withdrawals in the face of a shrinking portfolio.

 

[marko]

I suspect that many of us here started FireCalc (and other) runs years before we needed to start withdrawals.

If so, a few good market years would increase the portfolio's starting point at retirement time but not necessarily the 4% SWR of that increase.

For me, I haven't needed to fully access my 4% SWR as of yet (more like 1.5%) so I view that extra 3.5% as 'annual savings' in case I need to overwithdraw from time to time in the future. Not sure if that is safe but that's my thinking.

 

[donheff]

What ERD50 says is correct about increasing one's WR (in dollar terms) when the market is good not necessarily resulting in your bankruptcy.

What happens is that, if you look at the huge range of possibilities that FIRECalc shows you, when you increase your spending for good market times, you are taking away the chance of your portfolio going up and up with the years. You are working yourself towards the worst-case trace that skims the zero line, like a sea-skimming missile.

You may be trading the good time now for sleepless nights later in your retirement. Or you may not, but it does increase the risk.

+1 ERD is correct. The standard method simply says you have 100% (or whatever) likelihood of success based on what happened in the past. But with each raise in initial valuation (recalc) you are eliminating the numbers of historical scenarios that apply and are skating closer and closer to the worst case historical scenarios. Not a good idea if you don't have a plan B.

 

[marko]

I reset every year .

I also reset down when the market falls.

It's called the % of remaining portfolio method. There is no inflation adjustment - just whatever the markets do.

I take a fixed % of whatever my Dec 31 portfolio value is each year.

Audreyh1, do you use an approximate 4% for that calc or a different number? (I know this has been discussed in many earlier threads)

 

[Travelwanted]

I reset every year .

I also reset down when the market falls.

It's called the % of remaining portfolio method. There is no inflation adjustment - just whatever the markets do.

I take a fixed % of whatever my Dec 31 portfolio value is each year.

I like this one, too. % of remaining portfolio is reassuring in that you should never run out of money. In an up year, you get to spend more, but in a down year you need to be prepared to spend less. I'm ok with that.

 

[audreyh1]

Audreyh1, do you use an approximate 4% for that calc or a different number? (I know this has been discussed in many earlier threads)

I chose 3.3% as my target and will probably increase it as we get older.

 

[audreyh1]

I like this one, too. % of remaining portfolio is reassuring in that you should never run out of money. In an up year, you get to spend more, but in a down year you need to be prepared to spend less. I'm ok with that.

You don't have to spend everything you withdraw in the same year. If you set aside a little of the increase after a good year, it can be available for spending after a bad year.

For us withdrawal is > spending, so we have an accumulating short-term cushion anyway.

 

[Gatordoc50]

The problem with firecalc is that it doesn't know whether you just had a good year or bad one as the data isn't included. If I were to adjust my swr based solely on firecalc, I would use probably do it based on results a few years in arrears.

 

[Which Roger]

I look at it this way: If I retire with a 90% FireCalc success rate (and say a 4% withdrawal rate), and the market tanks in the first few years of retirement, I've eliminated most if not all of the positive outcomes, so my success rate is now significantly less than 90%. The success rate has changed because I have a lot more information after a few years than when I retired. I can lower my spending to get it back up to 90%.

Conversely, if I retire at the start of a bull market, after a few years, I've eliminated almost all of the negative outcomes, and my success rate is now more than 90%. I can increase my spending to get it back down to 90%.

 

[haha]

This just shows how goofy the premise of FireCalc is. That a fundamental question like this could engender a long discussion with a lot of differing ideas makes this clear. Unless someone is a proven successful trader, then what counts is what Warren Buffet calls "look through earnings". When you retire you aim to replace your labor earning power with the earning power of your portfolio. What somebody is bidding for that earning power is meaningless, unless you are selling it to them at that price.

Also, the idea that Firecalc could contain some sort of ratchet mechanism that, like a come along, allows you to increase your spending but does not compel you to decrease it is very strange on the face of it.

Ha

 

[2B]

This is my first year of retirement so I'll have to see how what I do works out over the next few years.

I have a target amount of small pensions and social security as my base budget. I have a "sinking fund" for the deferred SS until age 70 for me and age 64 for DW plus private medical insurance between now and medicare. The total amount needed for this will drop year by year until I reach age 70 and start my SS.

I take my total portfolio and the start of the year and subtract the remaining sinking fund. I take 5% of this total and add my pensions, eventual SS and medical insurance cost. This becomes my total spending available for that year.

I expect to have a highly variable amount of spending during my retirement. I can reduce my traveling, charities and gifts if the market tanks. I also expect the Bernicke effect to kick in so I won't want to travel as much when I get older. I've thought about using 6% and may switch to that as my factor. I'm making Year 1 more conservative.

IMHO there is no absolute answer except don't spend freely into a financial disaster. Have a "downside" you can live with if spending needs to be reduced.

 

[Midpack]

The problem with firecalc is that it doesn't know whether you just had a good year or bad one as the data isn't included. If I were to adjust my swr based solely on firecalc, I would use probably do it based on results a few years in arrears.

Problem? FIRECALC uses actual market history from 1871 to present which includes starting in good years/periods AND bad (including the Great Depression, 1965-1983, 1987, 2000, 2008 etc.). It doesn't need to "know" - that's kinda the whole point of FIRECALC.

The "problem" with FIRECALC is there's no crystal ball, e.g. if future real returns are significantly worse than any period from 1871 thru present. That's the Achilles heel of all retirement calculators and the reason many use to withdraw more conservatively than their historic SWR.

And "a few years in arrears" could just as easily be up, as down.

Frankly I like using % of remaining portfolio methodology (like audreyh1, 5 year timeframes IIRC) for retirement income at the outset, and maybe going to inflation adjusted (Classic SWR, like FIRECALC) only when we reach 75-80 years old or thereabouts. YMMV

 

[utrecht]

FireCalc also doesn't know when you retired so if I retire in 2005 and it says I can withdraw $40,000, but in 2014 my portfolio is much higher, there's no reason I cant re-run FireCalc as if I was retiring in 2014 and if it says its safe to withdraw $62,000, then I should be able to increase my withdrawals to $62,000. There's no reason I would have to lower my withdrawals from there just because the market took a hit anymore than I would have to lower them from the original $40,000 in 2005 if the market took a hit.

 

[ERD50]

This just shows how goofy the premise of FireCalc is. That a fundamental question like this could engender a long discussion with a lot of differing ideas makes this clear. Unless someone is a proven successful trader, then what counts is what Warren Buffet calls "look through earnings". When you retire you aim to replace your labor earning power with the earning power of your portfolio. What somebody is bidding for that earning power is meaningless, unless you are selling it to them at that price.

Goofy? I really don't see that, though clearly it is only a look at history. It provides information, what you do with it is another thing. I'll probably move to some sort of RMD-like weighted approach at some point, but right now, the historical reports from things like FIRECalc make me feel pretty comfortable with a conservative ~ 3%-3.5% WR

Also, the idea that Firecalc could contain some sort of ratchet mechanism that, like a come along, allows you to increase your spending but does not compel you to decrease it is very strange on the face of it.

Ha

Many things are strange on the face, until you dig in and understand the underlying premise. It took me some time to get my head around the 'ratchet up but not down' approach, and have the light bulb come on. But when applied to the historical data, it absolutely works. It has to, by definition.

Another simple way to look at it, (again, I like to use a 100% success WR rate to keep this simple), FIRECalc is conservative, and reports what will succeed in any period. A large number of periods will end up with as much or more than you started with, sometime much, much more. Each of those periods would have succeeded with a higher WR% than the conservative 'succeed all periods' number.

So if you started out in one of those many 'good periods', you can increase your WA (Amount not % - edit/add - but it is a higher % of the original portfolio), because we know that % succeeded every period in history, and this is now just one of those periods. And it has already passed, with any downturns that follow, with no reduction in WR%. Like I said, it has to, by definition.

In fact, if you use a tool that supports this mode, you will see that it is absolutely provides the best results of getting the most out of your portfolio w/o failing, and leaving the least 'on the table'. But that is also getting into data-mining territory, as it is really matching withdraws to that history.

But more pragmatically, for me, a conservative take on the data provided by these calculators tends to converge on any other conservative analysis. A 3-3.5% WR is pretty much in-line with a spend the distributions approach.

-ERD50

 

[rodi]

This just shows how goofy the premise of FireCalc is. That a fundamental question like this could engender a long discussion with a lot of differing ideas makes this clear. Unless someone is a proven successful trader, then what counts is what Warren Buffet calls "look through earnings". When you retire you aim to replace your labor earning power with the earning power of your portfolio. What somebody is bidding for that earning power is meaningless, unless you are selling it to them at that price.

Also, the idea that Firecalc could contain some sort of ratchet mechanism that, like a come along, allows you to increase your spending but does not compel you to decrease it is very strange on the face of it.

Ha

This suggests (unless I'm misreading what you're trying to say) that you should never touch principal. If you only touch the earnings of your portfolio (divs/cap gains) then you need a much bigger pile of money (or conversely, a much smaller spending budget.) Many of us are fine with slowly consuming the principal over time and leaving a lesser inheritance to those that survive us. Firecalc assumes this as well.

In an ideal world I would have a big pension, full SS, health care covered by a retirement plan, and enough dividends to make up any shortfall. In reality I have a very small pension (<500/month) starting next year, DH's SS, my smallish SS 10 years or more out, some rental income - and the rest comes out of my portfolio... some of it is in the form of principal since my investments are in broad index funds rather than funds that target dividend production. Even still I'm only at a 3.3% WR now (which will drop as the pension and my SS come online.) I also expect my spending to drop as the kids move out.

 

[REWahoo]

FireCalc also doesn't know when you retired so if I retire in 2005 and it says I can withdraw $40,000, but in 2014 my portfolio is much higher, there's no reason I cant re-run FireCalc as if I was retiring in 2014 and if it says its safe to withdraw $62,000, then I should be able to increase my withdrawals to $62,000. There's no reason I would have to lower my withdrawals from there just because the market took a hit anymore than I would have to lower them from the original $40,000 in 2005 if the market took a hit.

The above is true, especially when you consider your money needs to last nine fewer years...

 

[Totoro]

Another simple way to look at it, (again, I like to use a 100% success WR rate to keep this simple), FIRECalc is conservative, and reports what will succeed in any period. A large number of periods will end up with as much or more than you started with, sometime much, much more. Each of those periods would have succeeded with a higher WR% than the conservative 'succeed all periods' number.

Agree with you, but just want to emphasize one thing:

FIRECalc reports what HAS succeeded. If you navigate on firecalc numbers the central premise is that the investment future will be at least as good as the worst past.

Not a bad premise, but good to always keep in mind.

 

[haha]

This suggests (unless I'm misreading what you're trying to say) that you should never touch principal.

You are correct, and this is my approach, but I do not think it is the only one. I do think however, that it is possible to get blindsided by adherence to the Firecalc type approach. Many here swear by it, and I do not want to oppose any of you. I am interested in logical inconsistencies, and I also am wary of thoughts that are sometimes suggested by words. For example, one poster on this thread mentioned that Firecalc is fine as long as the future is not worse than the past. Worse is a big word, and might be be hard to identify in advance. Also, remember than the 120 years or whatever of Firecalc history is a very small number of independent trials. Since I don't use this approach, I don't want to debate it, others likely have much more fully formed ideas about it.

Ha

 

[haha]

Right. You just wanted to do a verbal drive by shooting:

Ya shure, you betcha, chief.