Early Retirees Perhaps Living A Bit Too Much Below Our Means?

[ElizabethT]

Hello to all of you, and thank you for all that you share. Quite amazing I must say, having spent some time now perusing this forum.

At this risk of appearing insincere, which I am definitely not, I'm putting out our current profile to solicit opinions on whether we are approaching out spend too conservatively given our resources. My husband terms it my 'Depression mentality' which is probably apt given our resources, but the truth is I was left permanently scared by the 2008-2011 recession.

Here are our stats:

Age 60 & 54, living off of banked cash primarily, until two small pensions totally $12,000 a year, and SS totaling $30,000 in 2020, then an additional $23,000 in 2026 kick in.

Assets: $5 million, not including our home. As mentioned above, we have enough cash parked in non-retirement accounts to carry us for at least five years.

Current Plan: Our current WR of 2.5% is based on current cash assets only, and is therefore not taking into consideration our upcoming pensions and SS. Our strategy, more for my post-recession peace of mind than anything, is to stay with a 2.5% WR for our remaining lifetimes, and enjoy the 'raises' we'll receive once the pension and SS kick in.

The Question: Are we being unnecessarily conservative in our approach? If so, am curious what WR strategy some of you might employ instead?

And yes, am aware our assets are sizable, but it's a sincere question, and I think one that could apply to someone with $1 mill, $2 mill or whatever if a similar LBYM situation is being created, particularly if a result of fear, which I believe is the case for me.

 

[Meadbh]

Welcome ElizabethT.

If your investments are all in cash, a 2.5% withdrawal rate is prudent, as they will lose purchasing power over time due to inflation.

 

[Niuatoputapu]

Hi Elizabeth, welcome!

Your situation summary fails to mention your intent for your residual assets. If the intent is to leave sizable assets to heirs or charity, the lifetime 2.5% WR seems about right.

 

[Fermion]

So you are currently spending $125,000 a year?

SS plus pension will drop that to under $100k?

You could go 0% stocks and still have enough money for a 40 year retirement with that nest egg and withdrawal rate.

 

[ElizabethT]

Welcome ElizabethT.

If your investments are all in cash, a 2.5% withdrawal rate is prudent, as they will lose purchasing power over time due to inflation.

Sorry if not clear enough here. Our current breakout is 60/40, with the five years of living expenses coming from the 40% side. At some point we will reduce that to 55/45, then to 50/50.

Our 2.5% WR is based on portfolio value each Jan 1, so it ebbs and flows with the portfolio and should not lose out to inflation.

The 2.5% WR would remain in place based on portfolio value each Jan 1, and we do not plan to reduce that once pensions and SS kick in. Instead, we will enjoy the additional funds once they arrive.

The tradeoff in this approach, of course, is that we are deferring some lifestyle choices until that point, wisely or unwisely. And which is really my question, one as much philosophical as financial I would imagine.

 

[Meadbh]

Sorry if not clear enough here. Our current breakout is 60/40, with the five years of living expenses coming from the 40% side. At some point we will reduce that to 55/45, then to 50/50.

Our 2.5% WR is based on portfolio value each Jan 1, so it ebbs and flows with the portfolio and should not lose out to inflation.

The 2.5% WR would remain in place based on portfolio value each Jan 1, and we do not plan to reduce that once pensions and SS kick in. Instead, we will enjoy the additional funds once they arrive.

The tradeoff in this approach, of course, is that we are deferring some lifestyle choices until that point, wisely or unwisely. And which is really my question, one as much philosophical as financial I would imagine.

Thanks for the clarification. I read your OP several times and could find no mention of equities.

Your strategy makes sense to me. Whatever it takes for a good night's sleep.

 

[Major Tom]

The 2.5% WR would remain in place based on portfolio value each Jan 1, and we do not plan to reduce that once pensions and SS kick in. Instead, we will enjoy the additional funds once they arrive.

The tradeoff in this approach, of course, is that we are deferring some lifestyle choices until that point, wisely or unwisely.

Seeing that you have some things you'd like to do that are dependent on a higher income, perhaps you could gradually increase your 2.5% WR in anticipation of the pensions and SS kicking in, before they actually do. Alternately, as your 2.5% withdrawal is calculated from the portfolio value each year, instead of being always calculated from the starting value, if the next few years are kind to you, your 2.5% WR may give you a gradual increase anyway.

In other words, I guess I am basically saying "see how it goes and make adjustments accordingly" which, from what I have read in these forums, is what many (most?) of us are doing!

 

[ElizabethT]

Thanks for the clarification. I read your OP several times and could find no mention of equities.

Your strategy makes sense to me. Whatever it takes for a good night's sleep.

This made me laugh . . . then realize that the real reason I posted is, perhaps, because I want to be told to loosen up and spend more now . . .

Funny how we so often already know the answer to our own questions isn't it?

My dream is to sell our current home and buy something smaller but with a view. I've been resisting doing so because, well, I don't really know. I really don't want to die having obtainable dreams like this deferred simply due to fear.

 

[marko]

Welcome ElizabethT.

If your investments are all in cash, a 2.5% withdrawal rate is prudent, as they will lose purchasing power over time due to inflation.

I inputted a $1M portfolio with a generic set of data points, including a 7% growth and 3% inflation into the chart below.

The chart shows growth over a period of time but then a slow reduction which I'm pretty sure is a result of inflation eating away at the principal.

When I first saw this chart a few years ago, it made a lasting impression on me on the perils of inflation! I know this is a bit simplistic, but I think the point remains.

 

[pb4uski]

.....The Question: Are we being unnecessarily conservative in our approach? If so, am curious what WR strategy some of you might employ instead?.....

Yes, I personally think 2.5% WR on a $5m portfolio for a couple in their mid/late 50s is too conservative. Check it out with firecalc, but I would think you could go 3% or even 3.5% and still have a 100% success rate.

 

[38Chevy454]

Given your 60/40 split, I think the 2.5% is rather conservative. Assuming you have some reasonable good equity investments, with decent returns and able to keep up with inflation. There seems to be a good chance you can go to 3.5% without much concern.

 

[Hermit]

Greetings Elizabeth,

Your situation is similar to mine in that you will have sizable increases in income when SS kicks in later down the road. As I entered retirement, I planned to live on pension and a small SS based on my late DW's income. After a year in retirement, I came to the conclusion that there really was no need to live that frugally and started taking distributions from my 401k that brought me closer to the level of income I will have once my SS kicks in about 5 years from now. That will smooth my income through retirement and allow more spending at a younger age which I think is appropriate. I can also manage the amount of income to remain within the lowest bracket for Medicare. Others on this board manage the income for remaining within the 15% tax bracket which I cannot achieve.

 

[just walk away]

After a lifetime of saving, it can be very hard to spend money! We are spending a lot more now than we ever have, mostly on travel before our kids go off to college. I kind of freak out when I see the overall spending numbers, but in our case the total is still under our Firecalc 95% success rate. I have not regretted spending money on these experiences at all and in my case, I know that we can always decide to cut back and go camping if the market tanks. If we hadn't taken these trips with the kids, I would regret it later. Still it is hard to get comfortable with the increased spending

 

[Chuckanut]

You are, of course, taking a chance that a big change in health in the future, will deny you the opportunity to do things you can do today. What is that risk worth to you? Within reason, this is my view of putting things off into the future:

 

[ElizabethT]

Hi Elizabeth, welcome!

Your situation summary fails to mention your intent for your residual assets. If the intent is to leave sizable assets to heirs or charity, the lifetime 2.5% WR seems about right.

Not deliberately, but clearly a byproduct of our current approach. In that it would go to our children and grandchildren, all of whom we love, genuinely enjoy and see frequently, we are very much ok with that.

 

[ElizabethT]

To the last five posters - I appreciate the much needed, and gently delivered, kick to the proverbial head.

I will be having a sit down, heart to heart this weekend with my husband, who has been gently trying to say much the same to me for the last several years.

 

[GrayHare]

I think some of us enjoy and prefer a non-wasteful lifestyle. Even if assets allow us to spend 10%, or 50%, or even 100%, more annually we don't want to. Spending merely because it is affordable is inefficient, and to use current phrasing, not "green". Decades of LBYM has made us so comfortable justifying each expense that suddenly not justifying them simply feels wrong.

 

[2017ish]

Elizabeth, you are doing the same type of withdrawal strategy (completely variable with portfolio value) on basically the same level of assets as we are planning for. We will (hopefully) be 57 & 56 at the start, with DW having very long life expectancy. No pensions and conservatively ignoring social and possible inheritence.

Given that we (like you) can live on a small percentage of the portfolio, we plan to spend 4% each year, with 60/40 portfolio. Sure, it might be very lumpy in bad years, but we will never run out of money. And at 1% of the initial portfolio (and on Medicare), we can happily stay local and do cheap things for a long while; at 4%, international travel on a very nice level (esp. by our standards).

You have yourself in a position that lends itself to a lot of flexible options.

 

[REWahoo]

Not deliberately, but clearly a byproduct of our current approach. In that it would go to our children and grandchildren, all of whom we love, genuinely enjoy and see frequently, we are very much ok with that.

Be careful.

Although you'll not be around to see how it works out, a 'nice' inheritance can end up being the source of many problems for your heirs. Nothing wrong with leaving them some $, but how much is too much?

We've decided to spend a bit more on ourselves rather than taking the chance of ruining the lives of our children and grandchildren. You'd think they would be more grateful, but kids these days...

 

[H2ODude]

Sort of along the lines of the thread...I think a lot of the philosophy espoused here will result in large sums left over, and that's OK. But you can overdo it. Plugging in everything to the FIDO RIPlanner says we are underspending for a 92 year lifespan, using only 80%. We're currently taking 2.8%, and won't touch SS until 70 in 6 years.

Yesterday at lunch we were reminiscing about parents and what they did in their 70's, the decade of life 3/4 passed in (mine were both smokers); only her mother hangs on at 89 in end stages of heart failure (last 7 years have been pretty miserable from general deterioration).

We'd like to think our active healthy lifestyle will earn us years, but after lunch we started the process of getting rid of the perfectly good 2003 Acura in favor of a new BMW or the like. If you take that cash out of the equations, it just about doesn't even make a difference. So yeah, I think you can overdo the conservatism, especially as you move into the later years.

 

[2B]

Welcome to the forum,

I think you could loosen up the purse strings but do you really want to spend that much? The "rule of thumb" is that you could spend $200k/yr and have a safe 30 year retirement. The $200k would increase with inflation. This doesn't include SS or any of your pensions.

I'll tell you my approach. I have a couple of small non-COLA pensions. I plan on deferring my SS to age 70 and DW will start taking her spousal SS when I turn 66. The total income from these sources is safely above what I consider to be our basic cost of living.

I have created a sinking fund to cover these income streams and medical care until Medicare kicks in. This is subtracted from our portfolio. I then take 5% of this reduced portfolio and add in the phantom SS and added medical costs to this amount. This becomes my maximum spending allowance for the year. 2015 is the first year of my retirement plan.

This works because I can live comfortably with just the SS and pension income while on Medicare. No matter what happens to my equities I won't go hungry. Our paid for house is the fall back funding of any extended assisted living/nursing care.

I've considered going with 6% but I can't comfortably get that aggressive. I also don't think I'd want to spend that much.

As for your house with a view, I doubt that this would make a substantial impact on your portfolio unless you were really moving way up in housing cost.

 

[Midpack]

Apologies if I am missing it, but what's your withdrawal methodology (often left unspecified here)?

Many experts (real & imaginary) have been suggesting a 3% WR for folks substantially under 65 yo, in contrast to the often publicized 4% SWR methodology which was/is meant for 65 yo's expecting to live 30 years in retirement. So at your relatively young ages, 2.5% inflation adjusted annually thereafter (SWR methodology) isn't necessarily too conservative.

However, 2.5% of remaining portfolio is dramatically more conservative (and cannot fail theoretically). Reading between the lines it appears you mean % of remaining portfolio, which I would agree is unnecessarily conservative.

I wonder which methodology the replies you're getting are assuming?

But if it were me, I'd first ask if you actually feel deprived at your current level of spending? If not, I'd ask myself what I'd do with more spending before I'd target some unknowable inflation adjusted % WR.

 

[flyingaway]

I would suggest the OP to have a higher withdraw rate before other incomes kick in. People usually spend less as they get older (except the medical bills). If it were me, I would spend more money when I still have energy to spend the money.

 

[swakyaby]

I think your husband is right. If you are foregoing some things both of you would like because of worry you might outspend your savings, it seems you're being too conservative. At $5 million investable assets and not counting the equity of your home and not counting the income bump later in life with SS and small pension, withdrawing 3% or even 3.5% seems rather safe. I also think it's true that, generally speaking, when many retirees reach their 70's, discretionary spending begins to slow down, even as your income rises with SS and a small pension.

So I join others in encouraging you and your husband to enjoy that well-earned raise in discretionary spending, while you're both still young and healthy enough to appreciate it.

 

[Major Tom]

Apologies if I am missing it, but what's your withdrawal methodology (often left unspecified here)?

I believe she answered that in this post -

Our 2.5% WR is based on portfolio value each Jan 1, so it ebbs and flows with the portfolio and should not lose out to inflation.