A review of basic withdrawal stratagies in retirement.

[Chuckanut]

I agree, the numbers currently look great but adjusting for inflation is critical. Otherwise we are just fooling ourselves.

+1

I found this calculator which gives the total inflation rate over a date range:

InflationData.com's Cumulative Inflation Calculator

 

[W2R]

This is exactly my plan 3.5% fixed percent of portfolio. I am only 20 months in, so am very interested in your experience, as 2000 was not the best time to retire, your success is an inspiration.

I agree -- to me, Audreyh1's financial choices in retirement have been both sensible and inspirational, to me, anyway.

Have you been using this withdrawal method since you first retired 15 years ago, or have you modified it along the way?

I retired in 2009, and this is my 7th year of retirement. My initial plan was to withdraw 3.5% fixed percent of my portfolio as of 12/31 each year. I have been spending a bit less because that is all that I want/need, and returning the excess to my portfolio.

Back in 2009, for all I knew the market would plummet further and if it had, I would have needed 3.5%. But it didn't crash.

All is good and when the next market crash happens, I plan to address it by any or all of the following:

(1) tightening my belt
(2) spending the entire 3.5%
(3) adding cash from my cash reserves if need be.

(edited to add: My cash heavy, 45% equity portfolio is 18% higher than it was when I retired, despite the expenses related to buying my dream house in cash, selling my paid off but less expensive old house, and moving, so that is what I mean by "All is good" above. I thank Mr. Market for that.)

 

[big-papa]

I wouldn't use personal inflation because all of the models like the Bengan are based on the CPI. So how can one choose a safe withdrawal rate based on personal inflation?

I chose to avoid the whole inflation adjusted withdrawals because I would rather track portfolio performance. That's why I do a fixed percent of portfolio on Dec 31 each year. Currently I am using 3.5%.

I figure over long periods of time my portfolio should keep up with or beat inflation since I have >50% in equities. But in the short term it may fall behind for several years, and so will my income. But when the portfolio zooms ahead, I get to increase my withdrawal.

I agree if you're withdrawing using a variable method based on portfolio performance. You're already ignoring inflation in the withdrawals, though you still might want to check on what the "effective" withdrawals are relative to inflation over the years. But if you're not participating in the entire breadbasket of items in the same proportions that go into the CPI, then the only thing that matters is what you're spending money you're money on and how much it has increased over the years. On the other hand, basing the calculation on the reported CPI pretty darned easy.

 

[Lsbcal]

I agree -- to me, Audreyh1's financial choices in retirement have been both sensible and inspirational, to me, anyway.

You ladies seem to have missed out on the testosterone fueled market planning. Helps me to hear your views and pull back from unnecessary risks.

...Back in 2009, for all I knew the market would plummet further and if it had, I would have needed 3.5%. But it didn't crash.

Well, it felt like enough of a crash to me. But I have to agree, the path in the 1930's was similar to the 2008 to March 2009 path, but just kept going down ... and down ... and down.

All is good and when the next market crash happens, I plan to address it by any or all of the following:

(1) tightening my belt
(2) spending the entire 3.5%
(3) adding cash from my cash reserves if need be.
...

Are (1) and (2) consistent?

I know we would spend less then 3.5% in a badly down market. But I'd try not to reduce too much. These years are precious now and I don't want to miss the fun. Plus bargains abound when times are rougher. We could reduce spending fairly easily to 2% of the portfolio and still live very nicely with a modest vacation or two. Even 1% is possible and still able to eat out and buy some stuff.

My plan in a really bad market is to spend from FI and let the stocks recover. I will not rebalance until a reasonable uptrend is established. I have my own way of measuring an uptrend so it's not just a "feeling".

 

[Mulligan]

Yes this is easy for me to say because my withdrawal strategy is my monthly pension and what I don't spend gets invested. Completely the opposite strategy faced here. But I do enjoy reading these threads, and respect all who are facing this. My useless opinion is based on anecdotal evidence of a dozen or so friends and relatives who are in their 80s nearing the finish line.
None of them even know what a withdrawal strategy is. The closest they have is complaining about the government forcing them to liquidate a part of their IRA assets each year they don't want or need to spend.
Most of them have way less money than people here and a few have a small pension of $500-$700 a month non cola'd.
My point is they all have said they have more money now than they ever had (inflation adjusted I have no idea, and neither would they). They are simple conservative people and making it to the finish line just fine. I am willing to bet most here will do way better since they are more sophisticated investors. Plan yes, worry excessively...no. Anyone smart enough to work and save a nice nest egg, will be smart enough instinctively to adjust when necessary in spending and protecting it.


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[big-papa]

And personal inflation for many/most people would be so noisy/erratic as to be very hard to use. One year you have big medical bills, the next year you take a big vacation, then the following year the house needs a new roof.

I will take my withdrawal amounts based on the year-end balance of my portfolio. I'm dependent on our investments and their growth to support my spending long term, and those investments don't "know" or care what inflation has been. But tracking the value of our portfolio against general inflation over the long term provides a good check on whether we are slowly losing (or gaining) altitude and therefore need to adjust our spending.

I agree -monitoring your portfolio this way is a good gauge of where you are in the long term and what's left in your portfolio really is the final score.

My original comments, though, were for the basics of living (housing, food, insurance, etc) and what one's personal inflation might be for that portion of your spending if you're is using a Bengen style withdrawal method that's based on inflation and not on portfolio performance. Less noisy.

Of course you'll still need to budget for the unexpected (health, roof, car repairs, etc) either as part of the withdrawal itself or as cash held back just for such situations.

The variable methods (fixed % of the portfolio, VPW, Gummy's sensible withdrawals) are among my favorites since they can last longer than the Bengen style withdrawals, but one must be able to still pay for the basics of life in those unfortunate scenarios where inflation and a bear market reduce the spending power of your annual withdrawals and where it may take a number of years for your portfolio to recover. Same situation applies for making sure that there is always some left over for the unexpected.

As mentioned earlier, there are so many ideas for withdrawal methods and no one method meets everybody's needs.

 

[W2R]

You ladies seem to have missed out on the testosterone fueled market planning. Helps me to hear your views and pull back from unnecessary risks.

I do have a tiny Roth IRA that I invest as I wish (inspired by UncleMick's testosterone investments that are also not part of his main portfolio). This is less than half of 1% of my portfolio and in the past it has done terribly, so right now it is sitting in a less adventuresome fund, Wellington. But the rest I invest according to my written financial plan that I devised before I retired.

Well, it felt like enough of a crash to me.

I didn't retire until November of 2009, and so the 2008-2009 crash was over by that time. I just didn't KNOW it was over with, and wondered if the worst was yet to come.

All is good and when the next market crash happens, I plan to address it by any or all of the following:

(1) tightening my belt
(2) spending the entire 3.5%
(3) adding cash from my cash reserves if need be.
...

Are (1) and (2) consistent?

Well, if the market crashes my portfolio will be smaller, so my 3.5% on 12/31 of that year will be much smaller. So, if it is less than I am used to spending, I will tighten my belt and draw on my cash reserves. Actually tightening my belt will probably be instinctive at that point since I might be worried.

I know we would spend less then 3.5% in a badly down market. But I'd try not to reduce too much. These years are precious now and I don't want to miss the fun. Plus bargains abound when times are rougher. We could reduce spending fairly easily to 2% of the portfolio and still live very nicely with a modest vacation or two. Even 1% is possible and still able to eat out and buy some stuff.

Yes, I have been funding my spending through dividends only, every year until this one when I bought a house.

My plan in a really bad market is to spend from FI and let the stocks recover. I will not rebalance until a reasonable uptrend is established. I have my own way of measuring an uptrend so it's not just a "feeling".

I rebalance the first week in January every year because it is easy since I just got my December distributions in cash.

 

[big-papa]

I rebalance the first week in January every year because it is easy since I just got my December distributions in cash.

+1 That and because I usually have time off in late December which gives me time to review the year...

 

[CaliforniaMan]

Yes this is easy for me to say because my withdrawal strategy is my monthly pension and what I don't spend gets invested. Completely the opposite strategy faced here. But I do enjoy reading these threads, and respect all who are facing this. My useless opinion is based on anecdotal evidence of a dozen or so friends and relatives who are in their 80s nearing the finish line.
None of them even know what a withdrawal strategy is. The closest they have is complaining about the government forcing them to liquidate a part of their IRA assets each year they don't want or need to spend.
Most of them have way less money than people here and a few have a small pension of $500-$700 a month non cola'd.
My point is they all have said they have more money now than they ever had (inflation adjusted I have no idea, and neither would they). They are simple conservative people and making it to the finish line just fine. I am willing to bet most here will do way better since they are more sophisticated investors. Plan yes, worry excessively...no. Anyone smart enough to work and save a nice nest egg, will be smart enough instinctively to adjust when necessary in spending and protecting it.


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Actually I find it a very useful opinion! Sometimes I wish I could just stop thinking about all this financial stuff, look at the market once a year and take what I get and be done with it. Too much overthinking reminds me of my mom. She used to worry about everything. What got her in the end was not what she worried about, so what good did all the worrying do, but make life more difficult and less enjoyable.

There are way too many experiences in this world of ours to enjoy, without wasting time worrying about things we really have no control over anyway.

I think the part I bolded is probably true for most of the people here. If you have made it this far, you are probably pretty well setup for whatever the future will bring.

 

[REWahoo]

If you have made it this far, you are probably pretty well setup for whatever the future will bring.

+1

Ten years into retirement and having celebrated my last birthday with a leading six, I'm beginning to think I have more to fear from the grim reaper than the grim portfolio.

 

[CaliforniaMan]

No, actually, I had other investments that I managed to live off of and didn't start withdrawing from the retirement portfolio until 2013. Also, the first two years I used 3.3%, then when I reached 55 I decided to go up to 3.5%. But those rates aren't including our IRAs yet. If I include those the rate is like 3%.

I retired really early, 39, so I set aside what I considered to be "enough" for a long term retirement portfolio, but I didn't want to tap into it right away, preferring to let it grow for at least 10 years. Managed to last 13.

That's why I use inflation adjusted total net worth over all those years to track how I did, since the retirement portfolio is a subset of all our investments, and we've only been drawing from it for a few years.

So, I'm not sure if I am a good model, although the other investments were actually riskier. Most of those years I was drawing down company stock. If it had ever gone to zero, or dropped really low, I would have switched to the retirement portfolio. Fortunately that didn't happen.

I confess to belts, suspenders, and more belts, and more suspenders.

Thanks for your reply, your posts are always interesting and helpful. While I retired much later than you, I am in a somewhat similar situation in that I have not had to draw down my retirement funds so far for the first two years because I have some residuals from past work that has funded the equivalent of a 3.5% withdrawal rate, without having to actually withdraw. They might continue for a while, diminish next year or end tomorrow. At any rate, rather than considering it "found money" it is helpful for my thinking to just consider it as a withdrawal and spend accordingly. That way I am prepared for when it ends. But I have to say, withdrawing from my stash, even a dollar, makes me cringe. I don't know why, as I mentioned in my previous post, I should just chill out.

 

[CaliforniaMan]

+1

Ten years into retirement and having celebrated my last birthday with a leading six, I'm beginning to think I have more to fear from the grim reaper than the grim portfolio.

Yes! Good point. Probably the most important one to consider!

 

[pb4uski]

+1

Ten years into retirement and having celebrated my last birthday with a leading six, I'm beginning to think I have more to fear from the grim reaper than the grim portfolio.

+1 but only 4 years retired for me though I now have that leading six.

Especially while now watching a good friend go through getting a new knee and some back problems.

 

[Mulligan]

Actually I find it a very useful opinion! Sometimes I wish I could just stop thinking about all this financial stuff, look at the market once a year and take what I get and be done with it. Too much overthinking reminds me of my mom. She used to worry about everything. What got her in the end was not what she worried about, so what good did all the worrying do, but make life more difficult and less enjoyable.



There are way too many experiences in this world of ours to enjoy, without wasting time worrying about things we really have no control over anyway.



I think the part I bolded is probably true for most of the people here. If you have made it this far, you are probably pretty well setup for whatever the future will bring.

"The greatest threat to ones assets accumulated over a lifetime of work isn't the withdrawals in retirement; its the second and third generation family members who inherit and blow it!"



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[aja8888]

"The greatest threat to ones assets accumulated over a lifetime of work isn't the withdrawals in retirement; its the second and third generation family members who inherit and blow it!"



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They will have to find it first!

 

[audreyh1]

But tracking the value of our portfolio against general inflation over the long term provides a good check on whether we are slowly losing (or gaining) altitude and therefore need to adjust our spending.

Yep - which is why I do it. If our investments are falling behind inflation, we want to know it.

 

[audreyh1]

+1

I found this calculator which gives the total inflation rate over a date range:

InflationData.com's Cumulative Inflation Calculator

That's what I use. For my compare, I use Dec 1999 through prior month to get the inflation adjustment to use to compare to our net worth change since Dec 31, 1999. Through Nov 2015, almost 16 years, the cumulative inflation is 41.02%. That's a big number.

The US Bureau of Labor Statistics publishes the CPI for the prior month (and year) every month. It can be found here (their new release each month): Consumer Price Index

When that is published, the inflationdata site is usually updated later that day.

 

[Lsbcal]

Also you can look up "fed cpi data". They publish graphs and Excel downloadable data for cpi measurements.

 

[audreyh1]

You ladies seem to have missed out on the testosterone fueled market planning. Helps me to hear your views and pull back from unnecessary risks.

Not entirely in my case. I definitely embraced the roller coaster at first.

>95% of my net worth was tied up in my company stock until about 1 year before retirement. I hung on to this high risk/potential reward bet, and that's how I retired very early.

During the year before retiring, I divested about 2/3 of my company stock and averaged into a classic retirement AA type portfolio. This was enough to create what I thought was the essential retirement nest egg. Then the idea was fund the initial years of retirement by spending down most of the remaining 1/3 company stock over the next 10 years, and let the AA retirement portfolio grow. Lucky for us the stock, even with wild swings, did pretty well during the 2000s, and the bet paid off. If things had gone awry, we would still have our retirement portfolio to fall back on. But I can see a lot of people considering such a bet as too risky.

Once we get away from the original company stock, or the few stocks we had bought in the 90s, our investments are definitely on the passive side, mutual funds, rebalancing, no tactical stuff, etc.

 

[audreyh1]

But I have to say, withdrawing from my stash, even a dollar, makes me cringe. I don't know why, as I mentioned in my previous post, I should just chill out.

Yes - that was a big step for me. And the first three years, 2013 - 2015, were encouraging years as the portfolio grew a lot (2012, 2013 were good growth years). But this year my portfolio hasn't (yet) recovered from the Jan withdrawal, and here I am about to draw again, so it's a little disheartening.

But - whatever. What I have set up is supposed to be able to handle long periods of underperformance, so I try not to worry about it.

 

[Corporateburnout]

But - whatever. What I have set up is supposed to be able to handle long periods of underperformance, so I try not to worry about it.

This was my first full year of retirement (retired in June 2014) and with a few days left our portfolio performance just barely kept up with inflation assuming no major changes in the market for the next few trading days. Spending withdrawal of 4% at the beginning of the year made the portfolio balance down by the same percentage.

We will not reduce expenses yet but a couple more years of inflation adjusted underperformance will definitely make us consider reducing expenses or claiming early SS.

 

[Tushar]

I think mutual funds can sustain market swings well. How about having 60% of the retirement corpus parked in diversified MFs? Of course, this investment in MF has to be done as SIP for at least 10 years before the retirements. This usually covers both good and bad market years and balances the units.
On retirement, having a SWP i.e. systematic withdrawal plan on the MF units, you will be just withdrawing the gains and keeping the principle intact. Additionally, these withdrawals are tax free in India after 1 year lock in.
For the bad market days/ surplus in case of emergency, can be drawn from the tax free bond interests

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[Tushar]

Actually, the best way to plan is have most your post retirement income from tax free instruments.
There are so many such tax free options available in India.
Public providend fund (PPF) yields 8.7% p.a.
Tax free bonds yield 7.5% p.a.
MF SIP approx will give 9% growth but is of course variable
Unit linked life insurance plans yield about 6%

Considering 7% average inflation rate over the years, these beat the inflation well. A 4% withdrawal strategy then may help you sustain for next 25 years.

Most of the retirement corpus therfore can be parked in these instruments after clearing all debts.

It is a good idea to keep a seperate health fund, emergency fund and have ur health, home, vehicles and property insured from a good and reputed insurance company.

This will ensure happy retirement. Any thoughts friends?

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[REWahoo]

Actually, the best way to plan [-]is[/-] may be to have most your post retirement income from tax free instruments.

FIFY

Individual circumstances and applicable taxation laws means a "one size fits all" strategy isn't always realistic.

I would have never been able to retire early or with a comfortable nest egg had I not taken advantage of our company 401k plan, including employer matching funds. As a result, most of my retirement income is taxable.

 

[sherrywilliam]

This was my first full year of retirement (retired in June 2014) and with a few days left our portfolio performance just barely kept up with inflation assuming no major changes in the market for the next few trading days. Spending withdrawal of 4% at the beginning of the year made the portfolio balance down by the same percentage.

We will not reduce expenses yet but a couple more years of inflation adjusted underperformance will definitely make us consider reducing expenses or claiming early SS.

First full year of retirement and drawing on portfolio this year and we are down around 4 percent also. I am going to draw down less percentage in 2016, and do a roth conversion on rest for the aca and use more savings if the scenario in 2016 is similar to 2015 or worse. I do not want to do early ss and lose that 8 percent increase each year