For several reasons I do not like the 4% SWR withdrawal plan. First, it plans for a worst case scenario, with no provision for increasing withdrawals in better times. Second, you always die with money in the bank which we would like to avoid because we have no children. Third, it is not clear how to incorporate SS, annuities, spending changes, etc in the withdrawal rate. Finally, I want to spend more than this, especially when I am young.
I have read about some of the plans with spending rules - Guyton etc. I guess what I am proposing is taking these to the extreme.
I have been thinking about alternatives and have come up with what I call the "35 bucket plan" for lack of a better name. Basically, the plan is to take the starting portfolio and divide into one bucket for each year of retirement spending. The amount in each bucket is discounted at an annual (real) rate of 5%. So, for example, I plan to retire at age 50, so the age 50 bucket will start with $74,000, the age 51 bucket will start with $74,000 * .95, the age 52 bucket will have $74,000 *.95 *.95 and so on until age 85. So, if the portfolio returns exactly a 5% real return then you will have $74,000 inflation adjusted to spend each year.
Next, incorporate the changes mentioned earlier. Expected Social Security is subtracted from the buckets starting at age 70. I plan to annuitize the last bucket at age 85 so it starts with six times its normal amount to provide lifetime income after 85. Finally, I plan to spend 1% less each year, so I actually discount at 6% rather than the 5% I expect the portfolio to return.
The main advantage of this plan is a much higher starting withdrawal rate, a starting WR of 7.4% A second advantage is no chance of running out of money. Another advantage is that you end up spending the entire portfolio, although this would be a drawback if you would like to leave an inheritance.
Obviously, the drawback to this plan is that spending will vary greatly from year to year. Because my income during my working years also varies up to 50% (some years I get a bonus some years not, some years my wife works, some years not, etc) I am used to this already.
I have stress tested by seeing what would have happened to someone who retired in 1966 with 100% equities. With a starting portfolio of $1M, they would have had $74,000 to spend in 1966. By 1981 they would have gotten to spend only $25,400 (inflation adjusted). After that the portfolio recovers, and SS kicks in. I consider this to be a worse case scenario because an actual portfolio will have some fixed income along with equities, and conditions are unlikely to be as bad as this.
What is everyone's opinion of this plan? Are there any drawbacks that I am not considering or underestimating? Is 5% real a reasonable return over the next few decades?
I am also looking for advice on a couple of questions from people who are already ER'd.
1. While I am used to income and spending fluctuation, is it different psychologically when you are already ER'd?
2. Is the 1% decrease in inflation adjusted spending realistic given health care costs etc.
I have read about some of the plans with spending rules - Guyton etc. I guess what I am proposing is taking these to the extreme.
I have been thinking about alternatives and have come up with what I call the "35 bucket plan" for lack of a better name. Basically, the plan is to take the starting portfolio and divide into one bucket for each year of retirement spending. The amount in each bucket is discounted at an annual (real) rate of 5%. So, for example, I plan to retire at age 50, so the age 50 bucket will start with $74,000, the age 51 bucket will start with $74,000 * .95, the age 52 bucket will have $74,000 *.95 *.95 and so on until age 85. So, if the portfolio returns exactly a 5% real return then you will have $74,000 inflation adjusted to spend each year.
Next, incorporate the changes mentioned earlier. Expected Social Security is subtracted from the buckets starting at age 70. I plan to annuitize the last bucket at age 85 so it starts with six times its normal amount to provide lifetime income after 85. Finally, I plan to spend 1% less each year, so I actually discount at 6% rather than the 5% I expect the portfolio to return.
The main advantage of this plan is a much higher starting withdrawal rate, a starting WR of 7.4% A second advantage is no chance of running out of money. Another advantage is that you end up spending the entire portfolio, although this would be a drawback if you would like to leave an inheritance.
Obviously, the drawback to this plan is that spending will vary greatly from year to year. Because my income during my working years also varies up to 50% (some years I get a bonus some years not, some years my wife works, some years not, etc) I am used to this already.
I have stress tested by seeing what would have happened to someone who retired in 1966 with 100% equities. With a starting portfolio of $1M, they would have had $74,000 to spend in 1966. By 1981 they would have gotten to spend only $25,400 (inflation adjusted). After that the portfolio recovers, and SS kicks in. I consider this to be a worse case scenario because an actual portfolio will have some fixed income along with equities, and conditions are unlikely to be as bad as this.
What is everyone's opinion of this plan? Are there any drawbacks that I am not considering or underestimating? Is 5% real a reasonable return over the next few decades?
I am also looking for advice on a couple of questions from people who are already ER'd.
1. While I am used to income and spending fluctuation, is it different psychologically when you are already ER'd?
2. Is the 1% decrease in inflation adjusted spending realistic given health care costs etc.
