Burns column in Dallas Morning News mentions Firecalc. Nothing new, but discussion of withdrawal strategies..
Bengen found that a typical retirement portfolio could survive for 30 years if you withdrew 4 percent at the start. After that, you adjusted the withdrawal upward for inflation.
So you’ll be pretty secure if you retire at 65. The problem: When your portfolio survives you 97.4 percent of the time, you leave behind money you could have spent.
How much? As much as five times what you retired with. The average amount you leave behind will be 1.5 times what you start with.
Is there a workaround that will make things better?
Yes, there are two easy methods. The first is to follow the required minimum distributions dictated by the Internal Revenue Service. It’s that simple. As I’ve pointed out in earlier columns, this method is likely to provide a rising income for a long retirement. You’ll never run out of money, but if you make it to 95, your income may be shrinking.
The second method is also simple. Be flexible. This means you spend a little less after your portfolio has had a bum year.
Withdraw the greater of 90 percent of your previous year’s withdrawal or 6 percent of your current portfolio, and your long-term spending may be more or less than the inflation-adjusted initial 6 percent. But you’ll never run out of money.
I am a fan of Burns among others. Withdrawal strategy summary from link above.
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The second method is also simple. Be flexible. This means you spend a little less after your portfolio has had a bum year.
Withdraw the greater of 90 percent of your previous year’s withdrawal or 6 percent of your current portfolio, and your long-term spending may be more or less than the inflation-adjusted initial 6 percent. But you’ll never run out of money.
Withdraw the greater of 90 percent of your previous year’s withdrawal or 6 percent of your current portfolio, and your long-term spending may be more or less than the inflation-adjusted initial 6 percent. But you’ll never run out of money.
You're right, you need to finish your coffee.I haven't finished my morning coffee, so the brain cells are not fully firing yet....
so - I'm not following the second method. Up front Mr Burns tosses out the stat that at 6% initial WR firecalc gives a concerning 50.9% success -which he states is 'not good'.
But then the second method says to do just that - withdraw the greater of 90% of last years amount or 6% of the remaining portfolio.
So how is that supposed to guarantee 'you'll never run out of money'?
You're right, you need to finish your coffee.
In the first case, the 6% WR methodology starts with an initial withdrawal of 6%, with all subsequent withdrawals inflation adjusted thereafter, regardless of how the portfolio does. Evidently that would historically lead to a 50% failure rate. Follows the SWR methodology, that's been documented ad nauseum.
In the second he's talking about withdrawing 6% of remaining portfolio each year. So there's no inflation adjustment, withdrawals go up and down with the total portfolio value each year. By definition you can't run out of money using the remaining portfolio method - if you're withdrawing any set percentage, the portfolio can't go to zero (but it can get too close for comfort).
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spend with new found courage.
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Thanks...drinking coffee right now...feel better
The drop year-to-year is limited to 10%. The Burns 6% is similar to Guyton's variable withdrawl method. Guyton had an upper case (from my limited memory) of 6.2% that worked in many situations. As you say your income will vary but the drop is limited. I think Guyton limited it to 5% but I'm not sure.Also known as the variable withdrawl method, which also means your income will vary each year, sometimes drastically.
The drop year-to-year is limited to 10%. The Burns 6% is similar to Guyton's variable withdrawl method.
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Making a variable withdrawl strategy work requires having the ability to vary spending. That means your budget can't be bare bones food, clothing, shelter... Something has to be able to be cut.
For those of us who have deferred retirment past the bare bones point, variable spending seems completely logical. My SS and pensions will cover my basic requirements without any economizing. Our house is our final LTC "insurance" if other assets are depleted. The key is bridging the gap until SS and medicare kick in for me and DW. After this bridging amount, I've decided to start drawing down 5% with no limitation on either the upside or downside. Since this money is for vacations and gifting, it can be made completely variable. In the event of a prolonged drop in assets, it also front loads spending when DW and I are young enough to enjoy it.
Without intentionally doing it, I also have a combination of methods.Having bare bones spending covered is akin to essential versus discretionary spending, or even Bernstein's liabilities matching. I agree if bare bones is covered variable spending is a good strategy. Personally, reading Pfau's paper mentioned above confirmed my intention to use a combination of the methods.
Most of this is fluff. What counts is how much you have, how you invest it, and how much you take out. It is true that a % of remaining portfolio will never run out on paper, but in the real world you need a certain amount of money, and when your % withdrawals no longer provide that you go back to work if you can, at whatever you can do, or apply for subsidies ( you know, like ACA), food assistance, etc.
The rest is really entertaining to ER buffs, and makes good living for many otherwise untalented writer people, but it is only window dressing.
Ha