What's your SWR strategy?

[Focus]

Thanks to everyone who's participated thus far in my other SWR poll: What's the highest SWR you're comfortable with? The comments posted there have been very informative and useful.

Obviously, establishing an SWR is only part of the story, as several of you have already noted in your comments to the other poll. The poll on this page (consider it a sequel) helps put your SWR choice in the context of a strategy.

 

[Notmuchlonger]

I don't know about anyone else. But I got around a couple hundred k in credit cards to max out. Part my of my strategy if I need it be.

Oh my poll option came up after my statement! Guess ill go with some variation on the above or another strategy ill share bellow.

 

[Katsmeow]

I put some variation. Part of this is because we will have a higher withdrawal rate for several years (until I'm SS age) and because we will have higher expenses for the first few years.

Knowing me, I will probably at the beginning of every year calculate based on all 4 choices, look at the overall situation and portfolio and then decide. If everything points one way then fine. If one number is a real outlier then I would probably discard it.

 

[W2R]

I chose, "Some variation on the above or another strategy you’ll share below". I guess it's a variation on the first choice given.

This is my first year of retirement and here is how I figured my withdrawal.
Taxable account withdrawal: I withdrew the dividends that I had earned in 2009.
TSP account withdrawal: No SS this year since I haven't claimed it, so I withdrew enough to partially compensate for that and still keep my total withdrawals below 3.5%.

Once I have SS coming in, I can lower my withdrawal rate to 3% by lowering my TSP withdrawals.

Inflation correction: To me, withdrawals only make sense if they are inflation corrected. I want an even, steady income in terms of spending power. I plan to use the CPI-U, yearly averaged, to calculate inflation.

To me, an SWR IS JUST A GUIDELINE. Here are some of the reasons why I might not follow the SWR:

1. Any year with a severe crash like we experienced in 2008-2009, will surely result in no withdrawals at all from my taxable accounts and no change in withdrawals from my TSP. If there is a crash that is not so severe but lasts for years and years, I would probably continue to withdraw from my taxable account but perhaps at a lower percentage.

2. Any rare year with unexpected large expenses may find me needing to withdraw more than my 3.0%-3.5% SWR target. In that case, I would more, perhaps 5%, and consider the extra a loan from me to me which I would repay the following year.

 

[Rambler]

Not retired yet, targeting 2.5%-2.75% initially, looking at a roughly 50/50 AA, anticipate living on bond interest for the most part, and reinvesting the divvies from equities to maintain +/- 50/50 AA and to adjust bond interest throw-off to cover inflation. Will roll with the punches. 2.75% will likely cover more than our needs and lots of wants and lots of play. The other wants/play we will save up for. All of this is contingent on at least a dividend return on equities plus savings from working for the next 2.8 years. If it happens any earlier than that, who knows how it will work out.

R

 

[FIREd]

Retirement is still a few years off for me but I am thinking of using a SWR equal to 3% of portfolio value coupled with the 95% rule. I will try to keep my portfolio's SEC yield above 3%, and therefore expect to be able to live off my portfolio's dividends.

 

[traineeinvestor]

Since I don't believe that there is any such thing as a safe withdrawl rate over a lengthy retirement (40+ years), I will try to maintain the real value of our savings. If that looks like failing, the contingency plans include:

1. send the wife back to work
2. go back to work myself
3. cut expenses
4. downsize the house
5. move to a cheaper country (HK is a very expensive place to live)
6. (late in life) take out a reverse mortgage

 

[Moemg]

I do 4% of the portfolio value on Jan.1 . I usually have money leftover so it is really like 3.5% . When I sell my house it will probably drop to 3% .

 

[rgarling]

my vote was for SWR is a percentage of the portfolio at the beginning of each year.

The idea I plan to use was 'borrowed' from vanguard's managed payout funds. My plan is to use a multi-year average of the previous several years portfolio value and take 5% as a normal distribution and more (up to 7%) if desired (or necessary).

 

[Independent]

I've been working on a list of strategies that I've seen here. This looks like a good time to print them out. In addition to your 4, I have:

5) Modify the traditional SWR (your 1) by reducing spending in years when asset prices are low.

6) Modify the traditional SWR (your 1) by holding both short term and long portfolios. Maintain spending when asset prices are low, without selling anything in the long portfolio, by withdrawing only from the short portfolio.

7) Modify the percent of current portfolio (your 2) by holding a short term portfolio for smoothing. e.g. the short portfolio starts with 3 year's spending. Each year, sell 4% of the long portfolio and put that in the short portfolio. Then, withdraw 1/3 of the short portfolio for spending.

8) Increasing percent of current portfolio. e.g. withdrawal amount is (current balance) X (1/life expectancy) or maybe (1/years-to-95).

9) Withdraw only interest and dividends

10) Withdraw only net interest and dividends ("net" means leaving some to accumulate to offset inflation)

11) Time buckets. e.g. One bucket has 7 years of spending in short term assets, the second has 7 years in intermediate assets, the third has the remainder in long assets. Completely exhaust the first bucket in the first 7 years. Then rebalance, moving bucket 2 to short term, and some of bucket 3 to intermediate. Repeat.

12) Horizontal buckets. Build a base of solid income, than add a higher risk/reward layer. e.g. the base is SS plus an SPIA to cover basic spending. The rest is in equities with an aggressive withdrawal rule like 7% of current balance

13) Notional lockboxes. Put the first year's spending in something very safe (CD's), the second year's in something almost as safe, ... getting more aggressive with each lockbox until you're 100% equities for the last year's spending. (I've only seen this in some academic stuff posted here, though I think some of us can see how to interpret our investment strategies in these terms.)

13) No explicit plan. Withdraw as needed, review annually, rely on a lifetime of LBYM to make good spending decisions.

14) Different types of floors on the percentage withdrawal (other than your 3). For example, 6% of current balance, with a floor of 3% of the initial balance (inflation adjusted).

 

[Bikerdude]

I guess I use a variation on the 95% rule. However, I do not limit myself to 95% nor do I limit myself on the upside. I take it year by year depending upon how my portfolio is performing.

 

[Independent]

I'm using a combination of (12) and (13) above. We've got a solid base, then plan to spend from the excess "as seems reasonable at the time". I've done enough calculations to convince myself that we can live comfortably for a long time with that approach.

 

[scrabbler1]

I chose, "Some variation on the above or another strategy you’ll share below". I guess it's a variation on the first choice given.

This is my first year of retirement and here is how I figured my withdrawal.
Taxable account withdrawal: I withdrew the dividends that I had earned in 2009.
TSP account withdrawal: No SS this year since I haven't claimed it, so I withdrew enough to partially compensate for that and still keep my total withdrawals below 3.5%.

Once I have SS coming in, I can lower my withdrawal rate to 3% by lowering my TSP withdrawals.

I am glad the OP started this thread because I have been confused when I try to calculate my SWR (for 2009). My portfolio (like those of many others here, for sure) grew a lot in 2009. Using the value of it on 1/1/09 would overstate my SWR but using its value on 12/31/09 would understate it. The best (but probably complex) way to calculate the denominator would be to figure out some weighted average, maybe by month (because most dividends are paid monthly) or at least by quarter.

Also, and this doesn't apply to everyone, I actually use two SWRs. One uses my taxable accounts only as the denominator while another uses both my taxable accounts and my IRA combined (I can't tap into the IRA now because I am only 46). The former will be greater than the latter, of course, but I find it significant because I will be living off the the taxable account's dividends for the next 14 years.

So far, the dividends from my taxable accounts exceed my expenses, so some of them get reinvested anyway. All the cap gains get reinvested, of course. I do not expect this to be this way in 10-15 years if inflation exceeds the total growth in my taxable accounts. But I will surely be fine once the "reinforcements" such as SS, my pension, and actual IRA withdrawals begin to kick in starting at age 60.

 

[Nords]

15) Frugal savers and compulsive investors who just don't see anything of value to spend it fast enough...

... I mean, we use Bob Clyatt's method.

 

[W2R]

I am glad the OP started this thread because I have been confused when I try to calculate my SWR (for 2009). My portfolio (like those of many others here, for sure) grew a lot in 2009. Using the value of it on 1/1/09 would overstate my SWR but using its value on 12/31/09 would understate it. The best (but probably complex) way to calculate the denominator would be to figure out some weighted average, maybe by month (because most dividends are paid monthly) or at least by quarter.

That's an interesting idea, and one that hadn't occurred to me. I just computed my withdrawal for my first year of retirement, 2010, based on my portfolio on the first day of 2009 (plus my TSP contributions in 2009) as well as the first day of 2010. It did come out higher - - 3.79% based on 1/09 instead of 3.45% based on 1/10 - - though I think this is still OK since it is temporarily high until I claim social security.

Also, and this doesn't apply to everyone, I actually use two SWRs. One uses my taxable accounts only as the denominator while another uses both my taxable accounts and my IRA combined (I can't tap into the IRA now because I am only 46). The former will be greater than the latter, of course, but I find it significant because I will be living off the the taxable account's dividends for the next 14 years.

I just use the SWR for the combined portfolio: taxable, Roth, and TSP. If I did it just for taxable, it would only reflect the dividends as a percentage of total in my taxable account and that would be pretty meaningless for my purposes. I am tentatively planning to claim SS in four years when I turn 66, though I am uncertain and might change my mind.

So far, the dividends from my taxable accounts exceed my expenses, so some of them get reinvested anyway. All the cap gains get reinvested, of course. I do not expect this to be this way in 10-15 years if inflation exceeds the total growth in my taxable accounts. But I will surely be fine once the "reinforcements" such as SS, my pension, and actual IRA withdrawals begin to kick in starting at age 60.

Anything left over from my withdrawal will be reinvested (or, to be more specific, next January I will reduce my withdrawal by the amount I have left over). I am making great inroads on the task of spending it, though.

 

[audreyh1]

I am glad the OP started this thread because I have been confused when I try to calculate my SWR (for 2009). My portfolio (like those of many others here, for sure) grew a lot in 2009. Using the value of it on 1/1/09 would overstate my SWR but using its value on 12/31/09 would understate it. The best (but probably complex) way to calculate the denominator would be to figure out some weighted average, maybe by month (because most dividends are paid monthly) or at least by quarter.

I believe the models have you taking out money at the beginning of each year, and most of us look at the SWR in terms of the value of the portfolio THAT DAY of withdrawal. Just like the version for retirement look at the portfolio the first day of retirement and have you withdraw the 4% or whatever that first day. There is no looking back at portfolio values a year earlier.

Not sure exactly what your confusion is?

Audrey

 

[scrabbler1]

I believe the models have you taking out money at the beginning of each year, and most of us look at the SWR in terms of the value of the portfolio THAT DAY of withdrawal. Just like the version for retirement look at the portfolio the first day of retirement and have you withdraw the 4% or whatever that first day. There is no looking back at portfolio values a year earlier.

Not sure exactly what your confusion is?

Audrey

I understand that the models use the first day's portfolio amount. The spreadsheet I created is based on Fidelity's and I use the first day, too.

But in real life, I don't withdraw a whole year's worth of money to cover my total expenses. Via dividends, I withdraw 1/12 of the year's amount in the first month, another 1/12 in the second month, and so on. It is just that my November and December 1/12ths are against a much larger portfolio than January's and February's. Hence, a lower SWR in the later months.

 

[akck]

I've created a spreadsheet that charts out all the sources of retirement income and expected expenses each year. After everything is added/subtracted, the balance is what our withdrawal rate will be. The plan shows heavy withdrawals for the first 3-5 years and essentially drops to 0% once the mortgage is paid off and every income source comes online. Withdrawals don't start up again until year 20.

I've inflated expenses by 3% while any inflation proofed income sources uses 2.5%. If you average out withdrawals over 35 years against the starting balance, it's about a 3.5% withdrawal rate. I also projected the balance of my retirement portfolio under several return rates. One nice thing the projections show is that the plan will survive for 35 years with a 2% rate of return.

 

[walkinwood]

I selected the 95% rule, but last year, we didn't use it. We just used 4% of the portfolio value, even though it was well below 95% of the previous year's withdrawal.

Bob Clyatt advised against using the 95% backstop in the early years of retirement.

I also have an emergency account (~5% of portfolio value at ER) that I can dip into if the 4% of portfolio doesn't meet the needs in any particular year. And can replenish in a good year. I look at it as a way to smooth the SWRs in an otherwise volatile method.

The emergency account is virtual in the sense that the money is part of my investment portfolio, but is not used to calculate the 4% withdrawal. There is no magic to the ~5% that I chose to use. It just seemed like a good amount.