Question about calculating withdrawal rates.

[ER Eddie]

I'm two years into retirement. When I calculate my withdrawal rate, should I be using the baseline figure (the amount I had when I retired), or the current value of the accounts?

Just to clarify, I'm not basing my withdrawals on a calculation of withdrawal rate. I'm withdrawing whatever I need, and that figure always falls well below 4%. So the calculation doesn't affect what I withdraw or live on. I just like to know what it is -- to know how much of a ceiling I have, for instance.

It's just a number that doesn't really affect anything. But still, I'm wondering what the "accurate" way to calculate it is -- based on the amount you held in your account at the time you retired, or based on its current value?

 

[REWahoo]

It is the amount you had when you retired.

The withdrawal rate is a fixed percentage of the initial portfolio value; note that it is not a fixed percentage of the current portfolio value as it rises and falls.

https://www.wallstreetphysician.com/trinity-university-study-4-safe-withdrawal-rate-swr/

 

[Time2]

The original study used 4% of your portfolio on the day you retire. Even if it goes up or down you stick with 4% of your original portfolio. Note: you do get to add a inflation raise each your to the 4%. Example 4% withdrawal is $40,000, with 3% inflation you add $1,200 for your 2nd year and $1,236 the 3rd year.
This has been stock market back tested to make your money last 30 years.

Depending on your 30 year returns, you might end up with $1 or 5 times more than you started with. Best of returns to you!
Feel free to read these studies,



https://www.retailinvestor.org/pdf/Bengen1.pdf


https://www.researchgate.net/public...thdrawal_rates_from_your_retirement_portfolio


Also if you aren't, get familiar with FireCalc.

 

[FLSUnFIRE]

I would define your withdrawal rate as the "instantaneous" withdrawal/portfolio balance since you are not withdrawing based off a rate-based rule.



The original withdrawal rate (following the 4% rule/Trinity Study) would be set at 4% and from then on you are not withdrawing based off of a rate but are withdrawing the amount in year 1 adjusted for inflation regardless of actual needs. (It's a useful planning tool but not too practical to implement rigidly!)



In either case, it would not make sense or be useful to calculate your rate as current withdrawal amount/starting portfolio balance! Your dollar amount withdrawn likely will be increasing each year and, hopefully, your portfolio is also growing. It could be conceivable in an inflationary environment that your annual withdrawal amount would be many times your initial withdrawal amount so you could have a 30% or even more annual withdrawal if calculated against your original starting balance.

 

[USGrant1962]

Don't mix up SWR and WR. SWR (e.g., the 4% rule) is a planning tool based on your retirement date portfolio, so the denominator doesn't change.

You actual WR varies year to year and would be (actual withdrawal / current portfolio). Especially in your case where both your withdrawal amount and your portfolio vary.

Mixing up SWR and WR happens all the time around here.

 

[bingybear]

I don't calculate withdraw rate. I did not before retirement. I just know that I live conservative enough that I should be fine.

 

[Time2]

I don't calculate withdraw rate. I did not before retirement. I just know that I live conservative enough that I should be fine.

I'm not how you just know, without crunching some numbers. But then you do say should be fine.

 

[Major Tom]

You can calculate your withdrawal as a percentage of the current portfolio value if you want to. However, be aware that you are effectively beginning a new series of withdrawals. If you constantly increase your spending during the good times, when the market does experience a deep correction, you will have effectively "retired" at the beginning of a bear market. There's nothing wrong with that, but you could be setting yourself up to experience some stomach-churning lows before your portfolio recovers.

 

[bobandsherry]

Funny thing..... almost 6 years into FIRE, and if I were to retire today, with my current portfolio balance, my WR I could now plan for would be 40%+ higher. Maybe I should go back to work for a month and then FIRE again. LOL

BTW, my WR was a little over 5% initially, I had planned for that as once I hit point of collecting SS my WR from my portfolio will dip significantly. Overall, with life expectancy target I'd still be under the target 4%. I'm now down to 4% WR. That said, the % suggestions are good guides, but sometimes you also have to use a bit of common sense.

 

[bingybear]

I'm not how you just know, without crunching some numbers. But then you do say should be fine.

I said that I was conservative. If I need just 2% instead of 4% then I do not need to track closely.

 

[Koolau]

Don't mix up SWR and WR. SWR (e.g., the 4% rule) is a planning tool based on your retirement date portfolio, so the denominator doesn't change.

You actual WR varies year to year and would be (actual withdrawal / current portfolio). Especially in your case where both your withdrawal amount and your portfolio vary.

Mixing up SWR and WR happens all the time around here.

I agree. I only really used the so-called SWR to insure that I had "enough" in my portfolio. From then on, I sort of "winged" it - calculating what I actually withdrew in a given year and being certain it wasn't too much more than 4%. I also cut spending a bit whenever the port took a hit or I had "overspent" the year before. IOW, I measured with a micrometer and cut with an ax.

If I were in OPs position, I'd just do a "reality" check and run FIRECalc on the current balance and assume I would live another 30 years. Of course now, at my age, I've cut the "remainder" down to 26 years (age 100) but YMMV.

 

[Dtail]

Don't mix up SWR and WR. SWR (e.g., the 4% rule) is a planning tool based on your retirement date portfolio, so the denominator doesn't change.

You actual WR varies year to year and would be (actual withdrawal / current portfolio). Especially in your case where both your withdrawal amount and your portfolio vary.

Mixing up SWR and WR happens all the time around here.

Agree.

 

[Time2]

I said that I was conservative. If I need just 2% instead of 4% then I do not need to track closely.

OK, so it seems you have done some calculations. You're probably good.

 

[ER Eddie]

Thanks, folks, appreciate the input. Most people seem to be saying to use the original portfolio balance, rather than the running total, so that's what I'll go with.