Actual Withdraw Rates

[Major Tom]

My conclusion after reading this thread is that most people (at least those willing to share their WR) are quite conservative in their withdrawals. Either your portfolios are fairly small and the WR not that material to your overall spending, or you are planning on leaving a large legacy by foregoing spending now?

My portfolio is indeed rather small. The WR actually is material to my overall spending in that it constitutes 95% or more of it (and I sure would like a bit more money to spend), but it's more important to me to attempt to conserve my portfolio as much as possible in the early years of ER.

I'm something of an outlier here, in both my NW, spending level, and overall lifestyle. I began withdrawals 5 years ago. At that point, my portfolio, which constitutes my entire NW (I don't own any property) was just 600K. (I have previously stated it was 640K, but a quick check of the facts reveals that it was lower than my memory indicates.) Ever since then, I have been withdrawing $15,600/year, which represents 2.6% of the starting portfolio value. The portfolio now stands at 780K, so those same withdrawals represent 2% if I were to "reset" and start again.

Early SS comes online for me in 10 years, and I could use that to justify withdrawing more from the portfolio now, but due to the relatively low portfolio value, I'm keeping myself disciplined for the time being. I'm a renter, enjoying fantastically low rent in a high COL area, and it's very possible that my housing expenses will go up quite significantly in the future. This is one big reason I'm doing all I can to ensure a higher income in the future. That, and the fact that I'd like to buy a Chinook or a Lazy Daze to live in

Hope that explains, and that I didn't ramble too much. My situation is not the norm for folks here, but perhaps my presence will help paint a broader overall picture of the many different situations that ER folk find themselves in.

 

[braumeister]

You have no interest in a legacy, yet that will very likely be the case. I guess you have thought a bit about where it might go?

Absolutely!
We have a DAF with regularly scheduled annual disbursements, and beyond a few specific bequests the bulk of it will go there.

Also a possibility of using one or more charitable remainder trusts at some later time, just for simplicity.

 

[Cobra9777]

I think the point of the SWR studies and projections like FireCalc are to help put a foundation on what a reasonable withdrawal rate would be, given your assets in stocks and bonds. I don't see how FireCalc or other calculators like this could give an answer when you have other side business or rental income. These have to be handled separately...

I quite agree that FireCalc is not meant to address alternative investments such as real estate. Its foundation is the US equity and bond markets. In fact, FireCalc probably shouldn't be relied upon for non-US investors, because other markets have behaved differently over time. However, income producing real estate is an investment, so I include my it as part of my diversified investment portfolio.

Thanks. I agree 100%. Although my question didn't really have anything to do with FIRECalc per se. Rather it was was prompted by prior posts suggesting that rental income (and associated value) should be included in the WR calculation same as dividends, interest, and CGs. No one took issue with that, so I wondered if my method was incorrect.

...In my narrow view money from income streams like SS or a pension would not count as withdraw from assets (thus withdraw rate). However, rents, interest, dividends and capital gains that are used for living expenses (not reinvested) would be considered in the withdraw rate...

 

[Hermit]

OK, to be on the same page (sort of) with you guys, here it is;

(Spending - SS income) / net worth = 1.7%

Definitely closer. I think most folks here would use the total of their investable assets instead of their net worth. At least those using FireCalc for a long term view of possible outcomes for their portfolio.

 

[RobbieB]

For net worth I use all the accounts and the value of the house but no personal property so it is a "real number"

 

[Cobra9777]

For net worth I use all the accounts and the value of the house but no personal property so it is a "real number"

Exclude the house and you'll be on the same page. As Hermit said, use investable assets, not net worth.

 

[RobbieB]

With house excluded, 1.9%

 

[audreyh1]

Thanks. I agree 100%. Although my question didn't really have anything to do with FIRECalc per se. Rather it was was prompted by prior posts suggesting that rental income (and associated value) should be included in the WR calculation same as dividends, interest, and CGs. No one took issue with that, so I wondered if my method was incorrect.

No, I don't think rental income should be included. Real estate is not modeled in any of the SWR studies. The SWR studies focus on liquid investments alone that can be withdrawn from and rebalanced - stocks, bonds, cash. Not illiquid investments like real estate that can't be withdrawn from or rebalanced.

The appropriate way to treat rental income, IMO, would be to just acknowledge it as an income stream, like SS. When you calculate the WR, you subtract income from other sources such as SS, pension, and rental income, and what remains is what needs to be supported by your retirement portfolio. Once you sell a rental property and invest the proceeds in the more liquid assets in your retirement portfolio, then the game changes.

 

[RHONDAVE]

Dear RobbieB


Occam's razor (or Ockham's razor) is a principle from philosophy. Suppose there exist two explanations for an occurrence. In this case the simpler one is usually better. Another way of saying it is that the more assumptions you have to make, the more unlikely an explanation is.


Using this principle, I think you are correct in your thinking. Thank You

 

[RobbieB]

Thanks!

Yes, for the purpose of the calculators, I can see why things have to have a specific meaning for the application to work.

In real life it doesn't matter. My fully paid off house is an asset, it's worth dough and I don't have to pay rent. This makes my WD number much better and it's real too, I spend less (no rent) and it's worth something (I can reverse mortgage if times get tough) or sell it.

But then I haven't drawn the line as close as lots of people here either, I just like to see how much more fun I can have and still be "safe"

 

[lem1955]

I'm only 7.5 months into my first year retired. It's looking like a SWR of 3.4% this year. Only counting investible assets. Don't know if we will spend it all or not.


Sent from my iPad using Early Retirement Forum

 

[mathjak107]

but the paid off house is an expense not income . it still costs money . reducing expenses improves existing cash flow the same as reducing any expense .

there is nothing special about it when it comes to these calculations .

 

[Cobra9777]

No, I don't think rental income should be included. Real estate is not modeled in any of the SWR studies. The SWR studies focus on liquid investments alone that can be withdrawn from and rebalanced - stocks, bonds, cash. Not illiquid investments like real estate that can't be withdrawn from or rebalanced.

The appropriate way to treat rental income, IMO, would be to just acknowledge it as an income stream, like SS. When you calculate the WR, you subtract income from other sources such as SS, pension, and rental income, and what remains is what needs to be supported by your retirement portfolio. Once you sell a rental property and invest the proceeds in the more liquid assets in your retirement portfolio, then the game changes.

I agree. Thanks for confirming. I was pretty confident that was the right answer.

 

[Danmar]

Absolutely!
We have a DAF with regularly scheduled annual disbursements, and beyond a few specific bequests the bulk of it will go there.

Also a possibility of using one or more charitable remainder trusts at some later time, just for simplicity.

Right I would have called that a legacy but really just semantics I guess.

 

[rodi]

I did not include the income from our rental. Nor did I include the rental unit as an asset in the portfolio. (Nor our primary home - which is part of the same lot - and can't be separated.)

For WR - I used:

Money taken from investments in that calendar year. (Aka withdrawals.)
-----------------------------------------------------------------------------
Investable assets (brokerage accounts).


My spending is higher than my WR. That's because DH is on SS and we have rental income. The withdrawals from investments is about 50% of our spending.

I did not include the kids 529's, either - since they are not available for retirement. That said - if we run out of money in our 90's... I'll be reminding the kids they "owe" us. LOL.

 

[braumeister]

Right I would have called that a legacy but really just semantics I guess.

Come to think of it, I suppose you're right. I had it in mind that "legacy" meant bequeathing assets to descendants, but that's really too narrow a definition. Thanks for the clarification.

 

[NW-Bound]

I think the point of the SWR studies and projections like FireCalc are to help put a foundation on what a reasonable withdrawal rate would be, given your assets in stocks and bonds. I don't see how FireCalc or other calculators like this could give an answer when you have other side business or rental income. These have to be handled separately.

For example, if you know or can estimate, what your rental income is, vacancy rate, upkeep expenses, mortgages, etc, then you can estimate how much you can safely spend from this income...

Absolutely. FIRECalc allows you to input extra income from SS, pension, or rental receipts if you wish.

I quite agree that FireCalc is not meant to address alternative investments such as real estate. Its foundation is the US equity and bond markets. In fact, FireCalc probably shouldn't be relied upon for non-US investors, because other markets have behaved differently over time...

Absolutely true too. And even in the US, we have had numerous discussions on whether the US economy in the next 30 or 40 years will be like the past years that FIRCalc draws on for its statistics.

 

[braumeister]

whether the US economy in the next 30 or 40 years will be like the past years that FIRCalc draws on for its statistics.

Wait a minute. Are you saying past performance is no guarantee of future results?

Preposterous!

 

[bingybear]

I agree. Thanks for confirming. I was pretty confident that was the right answer.

Ok... so if we consider rental income as an income stream, then what was your WR compared to you planned WR as the OP demonstrated in his post.

Whether rental income is seen as investment income or not... to make any sense some common metric need defined for evaluation.

 

[Cobra9777]

Ok... so if we consider rental income as an income stream, then what was your WR compared to you planned WR as the OP demonstrated in his post.

Whether rental income is seen as investment income or not... to make any sense some common metric need defined for evaluation.

Actual and planned are both 1.7% as described in my first post.

 

[Just_Steve]

I am one of the outliers on this forum.
I withdraw 20% of my small 457 plan, this account was never intendant to be a long term drawdown just an income bridge to a smaller 401k that also is just an income bridge to SS.
So between my pension and the bridge I do just fine. Still able to put some money into savings.
Even if our govt cuts my anticipated SS benefits by 50% I will be doing ok.

 

[Hermit]

With house excluded, 1.9%

With that withdrawal rate you should be good until at least 120!

Enjoy your dough. You earned it! Or bump the withdrawal rate and enjoy it even more!

Actually, I think what most folks here do is analyze the crap out of their numbers to decide what is safe and then pick something much lower - just to be safe.

 

[Done]

This was an interesting exercise, especially to find that, despite all the discussion on withdrawal rates here, there is no general agreement on what WR includes. I have always considered rentals as income, not part of the investment portfolio, because retirement studies and tools are designed to estimate success rates of a portfolio consisting of stocks/bonds/cash. I haven't used any tools that can include real estate in the simulation, but perhaps some do model REITs? So rental real estate, for me, is income with its own diversification benefits, inflation protection and risk.

I consider a withdrawal to be any $ spent from the stocks/bonds/cash portfolio, including interest and dividends if spent. Spending includes mortgage principal because I don't consider the equity in my residence.

So my stocks/bonds/cash portfolio WR (compared to portfolio value at previous year end):
2013 1.0%
2014 0.4%
2015 1.1%

If I include spent rental income (compared to portfolio + rental real estate value), this is more of a spending rate than a withdrawal rate.
2013 1.4%
2014 1.8%
2015 2.0%

This second set of numbers is less useful to me. When I make more rental income, I should be withdrawing less from the portfolio and see a lower WR. What I want to know is how much I'm spending from the stocks/bonds/cash portfolio to make it last.

 

[REWahoo]

What I want to know is how much I'm spending from the stocks/bonds/cash portfolio to make it last.

Exactly.

I don't see rental income as anything other than just that: income. Like money from SS or a pension, rental income reduces the amount you have to withdraw from your invested assets each year to achieve your desired level of spending.

 

[audreyh1]

This was an interesting exercise, especially to find that, despite all the discussion on withdrawal rates here, there is no general agreement on what WR includes. I have always considered rentals as income, not part of the investment portfolio, because retirement studies and tools are designed to estimate success rates of a portfolio consisting of stocks/bonds/cash. I haven't used any tools that can include real estate in the simulation, but perhaps some do model REITs? So rental real estate, for me, is income with its own diversification benefits, inflation protection and risk.

I consider a withdrawal to be any $ spent from the stocks/bonds/cash portfolio, including interest and dividends if spent. Spending includes mortgage principal because I don't consider the equity in my residence.

None of the SWR studies model REITs, nor do they model income/withdrawals from assets other than stocks and fixed income. They handle other sources of income simply by subtracting that income from the amount that would need to be withdrawn from an investment portfolio.

Joe needs $50K a year in retirement. He receives $20K from SS, therefore he will need $30K from his retirement portfolio.