A "Ratcheting" SWR - Kitces

[walkinwood]

Kitces suggests ratcheting up inflation adjusted spending by 10% every time the portfolio increases multiples of 50% over the initial value. These increases are limited to once every 3 years.

https://www.kitces.com/blog/the-rat...ore-dominant-version-of-the-4-rule/#more-7411

I am a fan of variable SWR methods that adjust with portfolio valuations, inflation and age. However, I still use a %age of current portfolio value.

 

[Meadbh]

Good article, thanks for posting. I like this model because it establishes a low risk "floor" (whether that floor should be at 4% or lower is debatable) and allows more flexibility if the portfolio is thriving. A 50% increase during the withdrawal phase certainly represents a thriving portfolio and would be a good signal to loosen the reins a little, even for the most frugal of us. I just checked, and I am 33% of the way there after 2.5 years.

 

[fosterscik]

I really like that article too. I'm a year away form pulling the trigger and Kitces has given me extra to think about!

 

[Andre1969]

I like the article, as well. I had always figured that if the portfolio grew too quickly after I retired, I'd ratchet up spending somehow. But, this gives me an idea on how to do it.

My portfolio has increased about 50% over the last three years. However, I'm still w*rking, so that includes continued investing. Haven't had to live off of the nest egg yet!

 

[KrissK]

Very helpful...THANKS for sharing.

 

[Meadbh]

My portfolio has increased about 50% over the last three years. However, I'm still w*rking, so that includes continued investing. Haven't had to live off of the nest egg yet!

The withdrawal phase is a whole different ball game!

 

[Corporateburnout]

The withdrawal phase is a whole different ball game!

+1

It's been almost a year since I retired and it's definitely been a different ball game to spend down rather than add.

Thanks to the OP for posting this article.

 

[ejman]

Interesting article. I'm at about 200% of my NW upon retirement 12 years ago. Maybe time to loosen the belt a bit along the lines of the article. Hard to do though. Present lifestyle is comfortable and at this stage of life I've learned that satisfaction from more spending is very transitory.

 

[ERD50]

Good article, thanks for posting. I like this model because it establishes a low risk "floor" (whether that floor should be at 4% or lower is debatable) and allows more flexibility if the portfolio is thriving. A 50% increase during the withdrawal phase certainly represents a thriving portfolio and would be a good signal to loosen the reins a little, even for the most frugal of us. I just checked, and I am 33% of the way there after 2.5 years.

Yes, it is interesting.

It reminds me of a plan discussed from time to time, the "Retire Again and Again" plan.

https://www.bogleheads.org/forum/viewtopic.php?t=121138#p1771077


In its simplest form, it is more extreme, and ratchets up spending anytime your portfolio buying power increases. Mathematically, sticking to the historical data-set, it has to work (easier to see if you start with a historically 100% safe withdraw rate). And it answers that paradox about two people retiring on different dates - why can't the earlier retiree increase their withdraws to match the new retiree (if the market has gone up enough to cover withdraws and inflation)? The answer is "they can" (historically).

I haven't looked in a while, but I'm pretty sure it provides the most 'efficient' withdraws - minimizing the portfolio end value, and maximizing withdraws, across all historical paths.

Of course, when taken literally, this is getting into data-mining territory, but the concept is sound and worth thinking about.

-ERD50

 

[walkinwood]

For those who like this idea, read Guyton's Decision Rules paper. It demonstrates a method that allows increases and decreases in consumption with portfolio performance.

Advisor Perspectives

The part I am a little hesitant. about is the use of a higher initial SWR based on the rules.

 

[ERD50]

For those who like this idea, read Guyton's Decision Rules paper. It demonstrates a method that allows increases and decreases in consumption with portfolio performance.

Advisor Perspectives

The part I am a little hesitant. about is the use of a higher initial SWR based on the rules.

Agreed. That's fine for someone with considerable discretionary spending that can cut back those items. But I'd really prefer to keep spending at a reduced initial rate with less chance of needing to cut back.

-ERD50

 

[mathjak107]

i like bob clyatt's 95/5 method and use that.

 

[David1961]

Interesting article. I cannot imagine many scenarios where a retiree's portfolio will increase by over 50% in three years, unless their WR is really low, but I am sure it is possible.

 

[ArkTinkerer]

Interesting article. I'm at about 200% of my NW upon retirement 12 years ago. Maybe time to loosen the belt a bit along the lines of the article. Hard to do though. Present lifestyle is comfortable and at this stage of life I've learned that satisfaction from more spending is very transitory.

One concept from the MMM site that sticks with me is when he transitioned to a mode of spending and working as if neither involved money. In other words, would he take something if it was free and would he do certain work if he was not paid for it. Really the next step after FI. Clearly you can't do that on large things (I don't think I can finance a spacecraft!) but more and more of your life comes under this rule as you grow your assets.

 

[big-papa]

Yep - read the article last night. I am also a fan of variable withdrawal methods and like the idea of a safe floor with variable potential upside. Gummy's "sensible withdrawals" also falls into that category. Kind of reminds me of bonus programs at work. You might get a COLA raise, but if you do very well, you get a bonus.


I've looked at Guyton/Klinger and yes it works as well. For me, though, simplicity is the key. I like Scott Burn's 6%/90% method as well. I've played around with making the 6% variable such that it's a higher number for, say the first 10 years of retirement (when I'm healthiest and most likely to enjoy travelling), then dropping it down to something lower later on. It isn't inflation adjusted. But because it fundamentally is taking a % of the portfolio, it isn't likely to run out of money. But it is still highly variable and without further modification there is nothing to guarantee it doesn't drop below a fixed floor.


Nothing is ideal. For me, it's a tradeoff of wanting to be able to withdraw more early on, having it not drop below a floor ever, never running out of money and having relatively easy calculations for the withdrawal. Too much to ask, I know!

 

[big-papa]

Interesting article. I cannot imagine many scenarios where a retiree's portfolio will increase by over 50% in three years, unless their WR is really low, but I am sure it is possible.

Good point - even without withdrawals, it takes about a 14.5% per year return to get to a 50% increase after 3years.

 

[big-papa]

Yep - read the article last night. I am also a fan of variable withdrawal methods and like the idea of a safe floor with variable potential upside. Gummy's "sensible withdrawals" also falls into that category. Kind of reminds me of bonus programs at work. You might get a COLA raise, but if you do very well, you get a bonus.


I've looked at Guyton/Klinger and yes it works as well. For me, though, simplicity is the key. I like Scott Burn's 6%/90% method as well. I've played around with making the 6% variable such that it's a higher number for, say the first 10 years of retirement (when I'm healthiest and most likely to enjoy travelling), then dropping it down to something lower later on. It isn't inflation adjusted. But because it fundamentally is taking a % of the portfolio, it isn't likely to run out of money. But it is still highly variable and without further modification there is nothing to guarantee it doesn't drop below a fixed floor.


Nothing is ideal. For me, it's a tradeoff of wanting to be able to withdraw more early on, having it not drop below a floor ever, never running out of money and having relatively easy calculations for the withdrawal. Too much to ask, I know!

Refreshing my memory, I went back and looked at Gummy's "sensible withdrawals". There are some similarities. Instead of waiting for the retirement account to be 50% greater than it started, it looks at whether, after the year's withdrawal, is the amount remaining in the portfolio greater than the previous year, after inflation). If so, then take a % of the "extras", maybe 25%. So, you get the instant bonus instead of waiting 3 years and that means you'd probably drop the initial withdrawal to something less than 4% if you can live on that.

sensible withdrawals

 

[Andre1969]

Good point - even without withdrawals, it takes about a 14.5% per year return to get to a 50% increase after 3years.

Plus, those numbers are supposed to take inflation into account, right? So that 50% increase in 3 years would have to be on top of inflation?

I think the only time in recent memory I've seen 50% or greater in 3 years would've been 2009-2011. However, that was coming out of the Great Recession, and I had lost a ton of money in 2008. And, I seriously doubt I would've had the guts to pull the trigger and retire willingly in the middle of the Great Recession!

Actually, I might have seen a 50%+ increase during a 3 year period sometime between 2003-2007. I remember all 5 of those being good years. So that's a scary thought...if I had been retired, I might have given myself a nice 10% raise, right on the eve of the crash!

 

[big-papa]

Plus, those numbers are supposed to take inflation into account, right? So that 50% increase in 3 years would have to be on top of inflation?

I think the only time in recent memory I've seen 50% or greater in 3 years would've been 2009-2011. However, that was coming out of the Great Recession, and I had lost a ton of money in 2008. And, I seriously doubt I would've had the guts to pull the trigger and retire willingly in the middle of the Great Recession!

Actually, I might have seen a 50%+ increase during a 3 year period sometime between 2003-2007. I remember all 5 of those being good years. So that's a scary thought...if I had been retired, I might have given myself a nice 10% raise, right on the eve of the crash!

Not sure it's 50% after inflation - I looked again and can't find that.

 

[big-papa]

There's also a discussion on this going on over at Bogleheads:
https://www.bogleheads.org/forum/viewtopic.php?t=167066

 

[Taxman59]

Interesting article. I cannot imagine many scenarios where a retiree's portfolio will increase by over 50% in three years, unless their WR is really low, but I am sure it is possible.

The rule doesn't require a 50% increase in 3 years, but rather when the account has grown by 50% over the initial balance, increase the spending by 10%. Then for the next three years keep it at the new level and if you are still up 50+%, increase another 10%. The natural inclination is to increase the spending by the 50% when the account is up 50%, but this builds in some caution should the account bounce down after the first increase.

 

[rayvt]

Agreed. That's fine for someone with considerable discretionary spending that can cut back those items. But I'd really prefer to keep spending at a reduced initial rate with less chance of needing to cut back.

-ERD50

You realise that using Guyton-Klinger that you don't have to use a larger initial SWR, right?

You can start with 4% or even 4.5% and just go with the flow, letting the increases happen as you hit the guardrails. Start at 4%, and when/if your account grows enough that your draw will be 80% of that (3.2%) then you increase your dollar draw amount by 10%.

Kitces's complaint about Guyton's method is that there is the possibility of having to reduce the draw amount. But if you start at 4% -- instead of 5.5% as Guyton suggested -- then a cut is unlikely to ever be necessary.

The only things I dislike about Kitce's method here is that the jumps will be large and infrequent, and there is no automatic rule for reductions (in the case that a reduction is called for). With Guyton's method the increases will be gradual, small and frequent. Reductions (when & if necessary) also small gradual.

 

[Turn_the_Page]

I'm still sold on Burns 6% of portfolio or 90% of last years WD. This gives you some freedom to loosen up after a good year.

http://www.early-retirement.org/forums/f28/firecalc-in-scott-burns-column-74927.html

 

[audreyh1]

Kitces suggests ratcheting up inflation adjusted spending by 10% every time the portfolio increases multiples of 50% over the initial value. These increases are limited to once every 3 years.

https://www.kitces.com/blog/the-rat...ore-dominant-version-of-the-4-rule/#more-7411

I am a fan of variable SWR methods that adjust with portfolio valuations, inflation and age. However, I still use a %age of current portfolio value.

Same here with %age of portfolio value. That method exactly tracks portfolio performance ignoring inflation. It is super easy to compute. We're comfortable with the annual income variability since we have a lot of discretionary spending plus are still living below our withdrawal rate these days.

 

[ERD50]

You realise that using Guyton-Klinger that you don't have to use a larger initial SWR, right?

You can start with 4% or even 4.5% and just go with the flow, letting the increases happen as you hit the guardrails. ....

Right, but as you say (with G-K), you have to be ready to cut spending. I personally would rather approach things with my conservative WR% with the hope that I never have to cut the buying power amount.

The more I think about it, the "Retire Again and Again" method is the simplest, and makes the most sense for me. If you picked a WR% you were comfortable with initially, why not just re-run it every few years? Or to say it another way - if this method was good enough for you at the start, isn't it still good?

If you chose a H(istorically) S(afe) WR%, then cutbacks will only be needed if the future is worse than the worst of the past. Historically the odds are that you will be able to increase your WR% over time, and never need to cut back below the initial amount (inflation adjusted).


-ERD50