35 buckets plan, starting WR of 7.4% - punch holes in me plan

[fluffy]

I'm surprised by the negative reaction to this plan It seems well thought out considering OP's flexibility on spending. I haven't crunched the numbers, but they seem reasonable given that the OP is subtracting SS income and is willing to live with (possibly very significant) fluctuations in income year-to-year. I think people are thrown off by 7.4% WR... but perhaps SS will be providing 50% or more of OP's income after 66?

I would nitpick one math issue... If you are planning to spend 1% less every year, then discounting buckets at 6% and expecting 5% real return is not totally correct. For example, consider the bucket for age 60... You'd put aside $74,000*0.94^10 = $39,900 for it. If it grows at expected 5%, it'll be worth $39,900 * 1.05^10 = $65,000. But if you expect to spend 1% less every year, then your expected income for age 60 should be $74,000 * 0.99^10 = $67,000 or $2,000 more than the age 60 bucket would produce... This error will grow every year and may become significant.

I don't have any useful input on the healthcare costs or SS expectations or psychological impact of lean years in ER But I think the overall methodology of this approach is very reasonable.

 

[youbet]

It's all about tradeoffs I guess.........

If you plan a very spartan lifestyle in RE, your budget will be low, the nest egg you need to accumulate will be relatively smaller and you should be able to RE earlier. But, if you need to reduce spending for any reason, you'll quickly start cutting into non-discretionary budget items.......things you were truly counting on in your retirement years, things that when you cut them result in serious disappointment or even hardship.

If your budget includes a generous helping of discretionary items, the nest egg you need to accumulate will be relatively larger and you'll probably RE later. Bummer. But if you need to reduce spending, you'll be trimming item's that would have been fun to do, but don't impact your basic quality of life: food, clothing, shelter, etc.

I try to appreciate the facts and reasoning behind others' decisions about RE. I took the conservative path and worked longer until the size of my nest egg relative to my RE budget (which includes a fair amount of discretionary spending) resulted in a less than 4% WR (when other sources of income such as pension and SS are considered). The tradeoff is that I worked into my late 50's and now some of the discretionary items in my RE budget might be too strenuous to do extensively. It's just not as much fun to portage a canoe carrying a sixty pound pack these days as it was even a few years ago! It's all a tradeoff.

OP's plan, when tested against the tough years beginning in 1966, calls for a staggering two-thirds cut in spending to avoid depleting the nestegg. For me, that would just suck and I'd be willing to sacrifice a lot to avoid the risk of that. But, everybody gets to make their own choice and what's right for me isn't necessarily right for him.

Citril, as long as you understand the tradeoffs and are willing to accept the risks (painfully deep spending cuts) vs the rewards (RE sooner with a smaller nestegg and spending more early), go for it. It could very well work out for ya!

It would really be great if there was some way we could all check in much later in life and see how things worked out for everybody vs their expectations.

 

[youbet]

I'm surprised by the negative reaction to this plan .......psychological impact of lean years in ER .

Everyone's feelings regarding serious spending cutbacks are their own. Most of the negative reactions seem to be folks, such as me, expressing their true feelings that, for them, giving up one's dreams for travel, entertainment, etc., in retirement would be painful. To say nothing of slashing into non-disretionary spending........

 

[cute fuzzy bunny]

Seems to me that the bottom line is that this would produce the same approximate spending over the course of ones lifetime. It'd just be unpredictable and look like a roller coaster.

Your returns will be the same under either "scheme", no money will magically appear from outer space...

 

[perinova]

I'm surprised by the negative reaction to this plan It seems well thought out considering OP's flexibility on spending. I haven't crunched the numbers, but they seem reasonable given that the OP is subtracting SS income and is willing to live with (possibly very significant) fluctuations in income year-to-year. I think people are thrown off by 7.4% WR... but perhaps SS will be providing 50% or more of OP's income after 66?

I would nitpick one math issue... If you are planning to spend 1% less every year, then discounting buckets at 6% and expecting 5% real return is not totally correct. For example, consider the bucket for age 60... You'd put aside $74,000*0.94^10 = $39,900 for it. If it grows at expected 5%, it'll be worth $39,900 * 1.05^10 = $65,000. But if you expect to spend 1% less every year, then your expected income for age 60 should be $74,000 * 0.99^10 = $67,000 or $2,000 more than the age 60 bucket would produce... This error will grow every year and may become significant.

I don't have any useful input on the healthcare costs or SS expectations or psychological impact of lean years in ER But I think the overall methodology of this approach is very reasonable.

The plan is a repackaged version of the plans around. Only it seems to be based on an assumption of AVERAGE return instead of WORSE CASE. So the probability to run out of money before the end of the plan is very high at 7.4% start WR rather than 4%.

 

[Gone4Good]

I haven't (and won't) model this plan but, for me, the virtue of a high initial withdrawal rate is completely offset by what appears to be a greater than 50% chance of having to reduce real spending in the future. Backing into an initial withdrawal rate based on "average" future returns guarantees that half the time you'll be cutting spending. Factor in market volatility and you might have a plan that will require spending cuts ~75% of the time. Other than the terminally ill, I'd be surprised to find anyone who would knowingly sign up for that kind of "retirement".

 

[Gone4Good]

Also, the math does not work.

Assume $74,000 year one spending adjusted for inflation each year. According to the OP he would invest $74,000 *.95 (or $70,300) for year two. Assuming 3% inflation and a 5% real return (8% nominal) year two would look like this:

Spending: $74,000 * 1.03 = $76,220
Yr-2 Bucket: $70,300 * 1.08 = $75,924

 

[citril]

Thanks everyone for the comments. It's good to see that at least a few people don't think I'm crazy.

This plan certainly does involve a tradeoff between the stability of a 4% SWR and the wide swings in year-to-year spending that this plan produces.

There have been several comments that cutting non-dicretionary spending would really suck. I agree and so for me to implement this plan I wouldn't want to go below about $36K or so for the worst case scenario. I'll either have to scale everything up by starting with a higher portfolio than 1M, or figure out how to reduce the downside risk somehow (puts, annuities, more fixed income etc). However, for me discretionary spending is ... well, discretionary. So cuts there won't hurt me nearly as much as missing out on the best early years of ER.

As a couple people have pointed out, the math is not quite right. It may be something like dividing by 1.05 rather than multiplying by .95, but you can get the gist of what I'm talking about.

Seems to me that the bottom line is that this would produce the same approximate spending over the course of ones lifetime. It'd just be unpredictable and look like a roller coaster.

Your returns will be the same under either "scheme", no money will magically appear from outer space...

I think the effect of this plan would be to spend during my lifetime the amount that would have been left in my estate if I had used a 4% SWR. So in a bad starting year like 1966 the total spending would be about the same (but this plan would spend more in the early years and less in the later years). In a good starting year like 1940 this plan would spend a lot more during all years and leave an estate of 0, while a 4% SWR would spend a lot less each year but leave a $3M estate. So no money appears from outer space, but I will get to spend all of the money that does appear.

Anyway, I am still several years away from FI, so I have plenty of time to contemplate this plan vs. all of the others.

I appreciate the comments.

 

[Gone4Good]

As a couple people have pointed out, the math is not quite right. It may be something like dividing by 1.05 rather than multiplying by .95.

I don't think that is the problem. I think the problem is that you don't, and can't, know what the right discount rate is. Discounting by the expected "real" rate will understate the amount you need invested for any future period where inflation is greater than zero. The higher inflation is, the greater the error. So even if you actually earn a 5% real return in the future, your standard of living will decline as long as inflation is positive.

Using your methodology, I'd invest $27,890 today to have real spending of $74K 20 years from now. If I earn 5% and inflation is zero, I'll have exactly $74K to spend in year 20. If inflation is 3% I'll only have $71,974 in today's dollars, and if inflation is 10% I'll only have $67,850.

That's assuming I earn 5% real - which will be true only half the time based on historic returns.

Also, the NPV of $74,000 annually for 35 years at 5% is $1,272,275 (beginning discounting in year 2) . . . so a 5.8% withdrawal rate, not 7.4%.

 

[citril]

I don't think that is the problem. I think the problem is that you don't, and can't, know what the right discount rate is. Discounting by the expected "real" rate will understate the amount you need invested for any future period where inflation is greater than zero. The higher inflation is, the greater the error. So even if you actually earn a 5% real return in the future, your standard of living will decline as long as inflation is positive.

Using your methodology, I'd invest $27,890 today to have real spending of $74K 20 years from now. If I earn 5% and inflation is zero, I'll have exactly $74K to spend in year 20. If inflation is 3% I'll only have $71,974 in today's dollars, and if inflation is 10% I'll only have $67,850.

Maybe I'm using the term "real rate" incorrectly. What I mean is that if inflation is 10% and real rate is 5% then in twenty years the balance grows to (1.1 * 1.05)^20 = 17.85 * 27,890, or in nominal dollars $497,838. Spending will grow to $74000 * 1.1^20 = 6.7275, also $497,838.

Also, the NPV of $74,000 annually for 35 years at 5% is $1,272,275 (beginning discounting in year 2) . . . so a 5.8% withdrawal rate, not 7.4%.

I am planning to reduce spending by 1% per year. Also, once SS kicks in that will reduce the amount I need in the buckets by about 2/3 from age 70-85. These two things get the PV down to just over $1M.

 

[d]

I plan to annuitize the last bucket at age 85 so it starts with six times its normal amount to provide lifetime income after 85.

... assuming an immediate, inflation adjusted, lifetime-only annuity, where can you get this 16.6% payout? (also assuming i understand correctly what you're suggesting)