What is your withdrawal rate?

[Dtail]

We actually do use a WR% to shape our budget and then spend within that target. This has worked out so far in our short almost 2 years of retirement.

 

[RunningBum]

^^^ Unless you include mortality to derive an expected present value, it seems to me that any valuation of SS is flawed and likely to be overstated... not to mentionunnecessarily complex... why not just use the conventional approach of using the gap (spending less SS) as the numerator?

Can you provide and example? I'm having trouble following your post.

For an early retiree, I don't get how it's unnecessarily complex. I use immediateannuities.com to come up with a value, and I give that number a 25% reduction in case SS benefits get cut. Not sure this is any more flawed than any other estimate of future expenses, portfolio return rate, and inflation. They are all best estimations.

I don't really see another good way, frankly. How do I give myself an even spending rate before and after collecting SS and pension? I'd have to do some kind of side pot to get me to 65 for my pension, then 70 for SS. That seems complex to me.

Once I start taking my pension and SS, I'll probably switch to that gap method.

There's a flaw I see in the gap method, and it comes for those people who say they have, say, a 1% withdrawal rate. That sounds like it should last a thousand forevers, and be totally bulletproof. But if they have SS and pension covering virtually all of their needs in a very modest budget, and only pull $500 out of a $50,000 portfolio, that's 1%. But if they have an unplanned expense of $25,000, say they need to replace a car early, why not go with new since they are fat at 1%, and now they are at 2%. Still pretty safe...but here comes a couple more surprise $10K expenses...now they are at 10%, with a meager $5000 to cover any other surprises. Now they aren't even close to bulletproof.

 

[pb4uski]

You just proved my point... immediateannuities.com quotes are for fixed payout annuities... SS is a COLA adjusted annuity so it would be worth much more than a life annuity for SS benefit when you start taking benefits. In order to properly value SS you need to take into account benefits, inflation, mortality, etc. If you did a run in opensocialsecurity.com with a real rate of return on bonds less a spread for expenses, overhead, taxes and profit then you would be closer... better yet would be a quote for an inflation adjusted annuity, preferably a COLA-adjusted annuity, but IME they are hard to find. I suspect SS would be worth ~150-200% the value of a fixed annuity from immediate annuities.com.

Your perceived flaw in the gap method is a red herring since it is well established that spending should include provision for the lumpy types of expenses that you enumerate... your approach has the same issues if the user excludes lumpy expenses in their assumptions so I don't see any difference there.

 

[RunningBum]

immediateannuities.com has the option to ask for COLA adjustments too. I use opensocialsecurity.com as well, it comes out a little higher. I also use an NPV calculator, which comes out much higher. Perhaps I'm doing that wrong. In any case, I use the lowest value, to be conservative.

The issue in the gap method is that if you used NPV of SS, you would have a more representative WR, probably around 4%, so you wouldn't have the perceived notion of safety comparing your 1% WR to other higher WR you see people writing about. That's the only difference, the perception you might have. The reality is the same.

I still don't understand how I would figure out how to manage my WR for the 7+ years to my pension, and 4-12 years to social security without doing a NPV on them. I don't really need an answer, because I'm not going to switch anyway, but that's why I do as I do.

 

[Dtail]

immediateannuities.com has the option to ask for COLA adjustments too. I use opensocialsecurity.com as well, it comes out a little higher. I also use an NPV calculator, which comes out much higher. Perhaps I'm doing that wrong. In any case, I use the lowest value, to be conservative.

The issue in the gap method is that if you used NPV of SS, you would have a more representative WR, probably around 4%, so you wouldn't have the perceived notion of safety comparing your 1% WR to other higher WR you see people writing about. That's the only difference, the perception you might have. The reality is the same.

I still don't understand how I would figure out how to manage my WR for the 7+ years to my pension, and 4-12 years to social security without doing a NPV on them. I don't really need an answer, because I'm not going to switch anyway, but that's why I do as I do.

I have varying incomes which started at my retirement and change until hitting 70 for SS.
I just used 3% at the current time which includes smaller lumpy expenses (separate emergency fund for larger lumpy expenses) and developed the current budget around that number.
In the short term future years before 70 y.o., the WR% rises for around 8 years out of 10 to ~4.75%, then back to low 2's from 70 onward.
That is how I manage my withdrawal rates. Not particularly sophisticated, but manage my expenses very closely and expect to see it through with the calculators in agreement.

 

[pb4uski]

immediateannuities.com has the option to ask for COLA adjustments too. I use opensocialsecurity.com as well, it comes out a little higher. I also use an NPV calculator, which comes out much higher. Perhaps I'm doing that wrong. In any case, I use the lowest value, to be conservative.

The issue in the gap method is that if you used NPV of SS, you would have a more representative WR, probably around 4%, so you wouldn't have the perceived notion of safety comparing your 1% WR to other higher WR you see people writing about. That's the only difference, the perception you might have. The reality is the same.

I still don't understand how I would figure out how to manage my WR for the 7+ years to my pension, and 4-12 years to social security without doing a NPV on them. I don't really need an answer, because I'm not going to switch anyway, but that's why I do as I do.

Where is the COLA option in immediateannuities.com? I see one on the results page but you have to given them your name and email address and I don't care to do that so I have never tried it.

When I use opensocialsecurity, I set a interest rate that is the nominal bond return less a provision for inflation less 2% for expenses, overhead, taxes and profit (and yes, it is a negative number). I had priced out COLA adjusted annuities a number of years ago and the results seem in line.

On the last part, I also had a fixed pension in 5 years and SS in 10 years. I calculated my "ultimate" WR as:

[Annual spending - annual pension - annual SS PIA]/ [Current retirement nestegg balance - (5 years * annual pension) - (10 years * annual SS)]

Conceptually, it is as if you carved out a couple side funds from your nestegg to fund pension and SS in the early years (between ER and when those benefits start) and then compared your gap once those cash flows are online to the remaining nestegg.

 

[RunningBum]

Where is the COLA option in immediateannuities.com? I see one on the results page but you have to given them your name and email address and I don't care to do that so I have never tried it.

You have to give a name and email address. Neither has to be valid to get to the next page with the quotes.

When a site requires a valid email address and I know I won't have real contact with them, I have an account on excite.com for that. Man, does that account get spammed!

 

[pb4uski]

You're more [-]devious[/-] clever than I am.

What is the ratio the premium for a COLA-adjusted annuity divided by the premium of a fixed annuity assuming the same first month payment?

 

[RunningBum]

immediateannuties.com gives me a range of quotes from $304K-344K for no COLA. That alone seems odd because I thought SPIAs are essentially a commodity due to competition and simplicity.

475K one quote for a COLA using CPI

opensocialsecurity.com gives me $435,111.

I have been using the lowest non-COLA because I am not confident SS will really keep up with COLA. Just another hedge along with further reducing it by 25%.

 

[tb001]

I’m confused by the need to think about a pension or SS in this way. We just look at estimated annual spend, with a chunk of that annual spend set aside for big purchases/maintenance. When SS comes online, our needed $ to support our spend goes down, so our withdrawal rate goes down with it. We are projecting a couple of years of higher spend, with a withdrawal rate of around 5%, then it comes down with SS to around 4%, and steps down again as kids are launched, mortgage is gone etc... with a terminal rate at 3.3-3.5%. When I look at average withdraw rate over our planning horizon it’s ~3.6% over 43 years. The biggest issue with modeling things this was is that so far, the only calculators I’ve seen that manage variable spend are firecalc and fidelity.

I agree one could have a false sense of security with a 1% w/d rate, but if you’re not taking inebriated offs into account, it’s not the fault of the w/d rate!

 

[RunningBum]

How did you arrive at 5%, then 4%, then 3.3-3.5% WR? I get that the last drop is reduced spending as you shed some expenses, but I don't know how you calculated that you could to 5% and then 4% before and after SS. In other words, what is the formula I'd apply to my own situation? I know how to do it when I put a value on SS and pension and include it in my portfolio net worth.

As far as the 1% example, you can say you'll account for unexpected expenses, but sometimes they happen more than you think because they are...unexpected. All I'm saying is that some of those 1% WRers really may not be in that great of shape, though I'm sure most of them are. It was an extreme example of how WR can be misleading. Take it to one more extreme. Someone has all of their expenses, including a reasonable amount of unexpected expenses, covered by SS and pension, with no excess. And they have $1 in savings. 0/1 = 0% WR. But one extra unexpected expense breaks their plan.

 

[RunningBum]

Let me be specific. Say I have $2M now in a taxable account, 0 unrealized cap gain. I use the $435K number for the value of my SS (~$2600/month at 67) and $65K for my pension (~$500/month at 65). I'm 57. How much can I withdraw now if I want a steady 3% WR?

On my system, I add $2M+435K+65K= $2.5M equivalent net worth. 3% of that says I can spend $75K this year and every year (adjusting for inflation). That means effectively I'm taking 3.75% now (from that $2M), but when I get to SS and pension age I get just about half that from those, so I'm only taking 1.875% from my investments to get the same $75K.

Now, without figuring out the value of SS and pension, how would I come up with those numbers? The information you have is $2M saved, $2600/month at 67, and $500/month at 65, and I'm now 57.

 

[HFWR]

Year %Balance %Start
2016 3.98 3.98
2017 4.00 4.25
2018 3.59 4.16
2019 3.90 4.16

 

[CardsFan]

I’m confused by the need to think about a pension or SS in this way. We just look at estimated annual spend, with a chunk of that annual spend set aside for big purchases/maintenance. When SS comes online, our needed $ to support our spend goes down, so our withdrawal rate goes down with it. We are projecting a couple of years of higher spend, with a withdrawal rate of around 5%, then it comes down with SS to around 4%, and steps down again as kids are launched, mortgage is gone etc... with a terminal rate at 3.3-3.5%. When I look at average withdraw rate over our planning horizon it’s ~3.6% over 43 years. The biggest issue with modeling things this was is that so far, the only calculators I’ve seen that manage variable spend are firecalc and fidelity.

I agree one could have a false sense of security with a 1% w/d rate, but if you’re not taking inebriated offs into account, it’s not the fault of the w/d rate!

I agree. I don't see any real value in putting a NPV on SS or a pension. Put everything into Firecalc ( or another calculator of your choosing), and let it tell you what would have worked in the past. Then you need to use your own judgement to assess your risk and decide what you want to do.

In our case, a WR of 4.7% of current assets gives a 100% success rate. We actually pull less than 3%, so we feel safe.

 

[SecondCor521]

On my system, I add $2M+435K+65K= $1.5M equivalent net worth.

I do it the way you do in terms of an NPV on SS.

But when I do the math above, I get $2.5M.

 

[RunningBum]

I do it the way you do in terms of an NPV on SS.

But when I do the math above, I get $2.5M.

Oops! I made half a change. I've corrected the post.

 

[RunningBum]

I agree. I don't see any real value in putting a NPV on SS or a pension. Put everything into Firecalc ( or another calculator of your choosing), and let it tell you what would have worked in the past. Then you need to use your own judgement to assess your risk and decide what you want to do.

The very first thing Firecalc asks for is my spending. I don't want to specify that. I have $50K in base expenses for a fairly comfortable lifestyle. I have expensive hobbies and love exotic travel and could easily spend another $100K. How much can I actually spend given my numbers? And how do I break down my withdrawals before and after SS/pension? Can Firecalc do that? Do I have to iteratively increase my spending and keep rerunning Firecalc to see if it still works? Ugh, that seems burdensome.

 

[CardsFan]

The very first thing Firecalc asks for is my spending. I don't want to specify that. I have $50K in base expenses for a fairly comfortable lifestyle. I have expensive hobbies and love exotic travel and could easily spend another $100K. How much can I actually spend given my numbers? And how do I break down my withdrawals before and after SS/pension? Can Firecalc do that? Do I have to iteratively increase my spending and keep rerunning Firecalc to see if it still works? Ugh, that seems burdensome.

Um, try the investigate tab ("Given a success rate, determine spending level for a set portfolio, or portfolio for a set spending level"), and input the success rate you want. Pretty simple.

 

[Nature Lover]

RB,

After putting in all your info, including an estimate for exps, you can use the "Investigate" tab to search for how much you can spend under a XX% success rate scenario. That'll help you see a "max" spend, considering the income sources and portfolio assumptions you specified. As always, remember that the max spend it calculates is a gross total (meaning you have to pay your taxes out of that total, too).

NL

(Oops...CardsFan beat me to it.)

 

[RunningBum]

Um, try the investigate tab ("Given a success rate, determine spending level for a set portfolio, or portfolio for a set spending level"), and input the success rate you want. Pretty simple.

RB,

After putting in all your info, including an estimate for exps, you can use the "Investigate" tab to search for how much you can spend under a XX% success rate scenario. That'll help you see a "max" spend, considering the income sources and portfolio assumptions you specified. As always, remember that the max spend it calculates is a gross total (meaning you have to pay your taxes out of that total, too).

NL

(Oops...CardsFan beat me to it.)

Alright, yes, it sure does. I put in max spending, and 100% success, and it tells me I can spend $87K. Higher than my $75K but the 3% I used is very conservative.

I'm still sticking with my method (for now, at least), but thank you for showing that it is easy to do through Firecalc as well. I'm not afraid to change when I've learned new things. I'd have to think about how to apply it to VPW though.

 

[Dtail]

I agree. I don't see any real value in putting a NPV on SS or a pension. Put everything into Firecalc ( or another calculator of your choosing), and let it tell you what would have worked in the past. Then you need to use your own judgement to assess your risk and decide what you want to do.

In our case, a WR of 4.7% of current assets gives a 100% success rate. We actually pull less than 3%, so we feel safe.

Bolded by me - I assume you are referring to a gross WR %, not a net WR%, unless that is your current WR% but it reduces in the future.

My current gross WR% is 6%, but the net WR% is 3% which is what counts in the end.

 

[CardsFan]

Alright, yes, it sure does. I put in max spending, and 100% success, and it tells me I can spend $87K. Higher than my $75K but the 3% I used is very conservative.

I'm still sticking with my method, but thank you for showing that it is easy to do through Firecalc as well.

You can also go to the Spending Model page and use: Bernicke's Reality Retirement Plan. You will need to iterate with this one, but it assumes your spending will decrease over time, so you can start with a higher number.

 

[Dtail]

Alright, yes, it sure does. I put in max spending, and 100% success, and it tells me I can spend $87K. Higher than my $75K but the 3% I used is very conservative.

I'm still sticking with my method (for now, at least), but thank you for showing that it is easy to do through Firecalc as well. I'm not afraid to change when I've learned new things. I'd have to think about how to apply it to VPW though.

At the default AA% ratios, Firecalc effectively provides a 100% success rate up to a 3.58% WR.

 

[CardsFan]

Bolded by me - I assume you are referring to a gross WR %, not a net WR%, unless that is your current WR% but it reduces in the future.

My current gross WR% is 6%, but the net WR% is 3% which is what counts in the end.

Actually, Firecalc gives a spend rate, not WR, but since I am not yet collecting SS, and do not have a pension, they are the same number for me right now. Sorry for not being clear. 4.7% of current assets is what we CAN spend with a 100% success.

Our actual WR of 3% will likely go down when we take SS, unless we take RobbieB's advice and "Blow that dough".

 

[RunningBum]

At the default AA% ratios, Firecalc effectively provides a 100% success rate up to a 3.58% WR.

Very helpful. 3.58% of my 2.5M incl SS+pension is $89,500. Firecalc said $87,871. A much smaller difference, and could just be due to minor differences in mortality used in OpenSS where I gave my age, and Firecalc where I accepted the default of 30 years.