Detailed Distribution-Decumulation-Withdrawal Plan

[Meadbh]

Midpack, I sense your need for control (!) but there are so many unknowns in the future that whatever plan you come up with now will most certainly not represent what actually happens over the next several decades. Think back to your early career. Did you plan the whole thing out till ER date? I'm willing to bet, NOT!

The Russians tried to run the economy of the Soviet Union on centralized 10 year plans, and it just didn't work. It's essential to have a plan, but it's also essential to be flexible. Why not do what most Megacorps do: strategic planning every 3-5 years, with operational planning annually?

I agree with what others have said and the resources they have pointed to. Perhaps the most important issue in the first five years of retirement is the sequence of returns. This will have a disproportionate effect on the longevity of your assets. It seems to me it's important to have a "strategic plan" aimed at preserving capital in the first five years of retirement. After that, the strategic goals can change.

[Rich_by_the_Bay]

Quote:

Originally Posted by Midpack Unless I misunderstand, this approach will a) ensure you never fully deplete your nest egg but b) if your real return (actual return minus inflation) is less than 4%, your expenses will have to decline throughout your retirement. I would like to at least maintain my standard of living..

Clyatt back-tested using a 95%-of-prior-year floor on your annual withdrawal and it stood up well when using the percent of total portfolio approach.

I am among those who feel that a little belt tightening in bad years is less uncomfortable than forging ahead with a fixed damn-the-torpedos 4%+inflation amount.

It's a personal issue, of course. My plan is 4.5% of total, never under 95% of prior year withdrawal, accept a little fluctuation and have a healthy emergency fund for the really bad times. You can play a little catch up when gains exceed 4.5% by a substantial margin.

[Moemg]

Quote:

Originally Posted by Midpack Unless I misunderstand, this approach will a) ensure you never fully deplete your nest egg but b) if your real return (actual return minus inflation) is less than 4%, your expenses will have to decline throughout your retirement. .

I use this approach for two reasons .
1- It is simple to figure out
2- Peace of mind
I retired in Jan. 2008 and no way did I have the guts in Jan.2009 to take 4% of my intial portfolio and an increace after my portfolio had taken a beating so the 4% had me tighten my spending slightly and allowed my portfolio time to recover .

[youbet]

Quote:

Originally Posted by Moemg I use this approach for two reasons . 1- It is simple to figure out 2- Peace of mind I retired in Jan. 2008 and no way did I have the guts in Jan.2009 to take 4% of my intial portfolio and an increace after my portfolio had taken a beating so the 4% had me tighten my spending slightly and allowed my portfolio time to recover .

My portfolio dropped 25% - 30% (don't want to go look, too painful! ). If your's dropped a similar amount, did you actually cut spending by a corresponding amount?

We didn't. As you may recall from earlier threads, I was concerned about continuing to spend at planned rates but also worried about postponing activities that were "now or never" due to our age and other factors. So, while we did postpone some remodeling (that we're doing right now! ) we didn't postpone some travelling and other activities and this resulted in us not cutting spending by the amount our portfolio dropped.

We're really glad we made the decision that way. Had we blindly followed the "percent of current portfolio value" rule, we'd have had to cancel some activities that would have been very painful to cancel. Instead we went ahead and did those things and today, even though our total overall net worth is roughly $8k less than it would have been had we done the full cutback, it seems inconsequential.

YMMV.

[Moemg]

Quote:

Originally Posted by youbet My portfolio dropped 25% - 30% (don't want to go look, too painful! ). If your's dropped a similar amount, did you actually cut spending by a corresponding amount?

No, I only had to cut spending by $4,000 because I have a pension which has a COLA plus I had $5000 left over from the previous year .

[youbet]

Quote:

Originally Posted by Moemg No, I only had to cut spending by $4,000 because I have a pension which has a COLA plus I had $5000 left over from the previous year .

OK, gotcha and that makes sense. Having a significant portion of your retirement income based on pensions, SS, etc., would take much of the pain out of going to a fixed percentage withdrawal algorithm based on the current year's portfolio value.

I thought that was probably your case but wanted to clarify for Midpack ref his question above.

[Independent]

Like you, I built my own spreadsheet. I haven't seen anything online that does anything better. I think it's worth doing the numbers because you have to start somewhere. I use a fixed interest rate instead of a Monte Carlo on the "complicated" version, but I stress tested with inflation plus 2%. I suppose I could have used one of the one of the failure years in FireCalc.

I ran it out to 95, but I also considered the possibility that if things got bad and we were getting old we could "bail out" and buy an annuity.

On your list, I'm confused about how "expenses" got into the output instead of the input.

Of course, things never go as planned. I'm complaining about health insurance on another thread. But I knew how much fat I had in the plan when I started, and that gives me more confidence.

[Moemg]

Quote:

Originally Posted by youbet OK, gotcha and that makes sense. Having a significant portion of your retirement income based on pensions, SS, etc., would take much of the pain out of going to a fixed percentage withdrawal algorithm based on the current year's portfolio value. I thought that was probably your case but wanted to clarify for Midpack ref his question above.

It would be interesting to hear what other retirees did after their portfolio's dropped . Did they continue at the same rate or cut back ? If all my retirement was in my portfolio I would have had to cut back almost 33% . That would have been a real belt tightening .

[RonBoyd]

Quote:

Originally Posted by walkinwood Try ESPlanner. It may give you most of what you need.

Or start with the book first:

Spend 'til the End: Raising Your Living Standard in Today's Economy and When You Retire

[walkinwood]

Quote:

Originally Posted by Moemg It would be interesting to hear what other retirees did after their portfolio's dropped . Did they continue at the same rate or cut back ? If all my retirement was in my portfolio I would have had to cut back almost 33% . That would have been a real belt tightening .

Our portfolio fell 27% in 2008.

We cut our 2009 budget by 13%, and may end up coming in about 25% below our 2008 budget. We're using 4% of the portfolio (Bob Clyatt's approach), but instead of doing the 95% thing, I put aside an emergency fund to withdraw from when the portfolio dropped by too much or for emergency expenses. Didn't expect to tap it in the very first year.

We ER'd in May 08. I am also looking for work to help repair the portfolio.

[lemming]

Market volatility makes it hard to rely on a single spread sheet formula. You have to be able to run multiple simulations not averages.

Firecalc-the planner associated with this website does a pretty good job of pointing out what the historical records show. Even still it is possible to paint too rosy a scenario by being too optimistic about rates of returns, Use the Monte Carlo option and see what different possibilities show up.

[Midpack]

Quote:

Originally Posted by Independent I think it's worth doing the numbers because you have to start somewhere.

Appreciate all the responses. For the many who have said you can't predict what the future holds, we all recognize that --- as I've said several times including in the original post on this thread. And for SIRE folks, it probably isn't very important, but I am essentially all FIRE (no pension or retiree health care). So without any concrete plan, how would you know when you're starting to get off track and make adjustments? I don't want to wait until it's intuitively obvious (and potentially too late), I'd rather have a plan as some sort of early warning system. So having a core plan mapped out over 30-40 years is a very good idea for me. YMMV

[Gotadimple]

Midpack:

I don't understand the distinction you make for FIRE as without a pension or retiree health care. FI means financially independant -- I'd prefer to think of it as using all the financial resources available to me. Those without a pension can create one using an annuity. The cost of health care continues to increase regardless of whether one has access to a group health plan or not.

Regarding how you know if you're getting off track. It sounds like for your comfort level, you need to know what your portfolio amount should be in each year of your retirement. Create a simple model in Excel that includes:

a basic assumption for inflation that increases consistently
a basic assumption for portfolio yield, which varies over a 7 year period (gains and losses)
a basic assumption for your first year's draw on your portfolio

Increase your annual draw by inflation. Increase/decrease your portfolio after the draw by the yield assumption. Do the simple math to get a new balance.

When you get to 35 or 40 or whatever number of years you expect the money to last, see if you have any left. Note that there are no IRR's or compounding formulae in the model. Just multiplication, addition, and subtraction.

If you do, you now have a simplified "magic number" for each year of your retirement.

ORP does this for you in a more sophisticated manner, including showing you which account take your draw from, and the probable income tax you'll pay each year. FIRECALC tells you if you have high probability of success to retire with the money you need to fund your retirement.

Don't overthink this! And don't think you're the first one to want to see what each year might look like. I did this simple model to prove to myself that I was OK and to provide a guide for where I should be in each year of my retirement.

-- Rita

[LOL!]

Quote:

Originally Posted by Midpack .... So without any concrete plan, how would you know when you're starting to get off track and make adjustments? I don't want to wait until it's intuitively obvious (and potentially too late), ....

I believe Otar wrote that there was really no way to know when you were off track until way too late. Thus, he recommended inflation-indexed life annuities (perhaps laddered) and a low sustained withdrawal rate. Have you read his book? You will like it.

[jdw_fire]

Quote:

Originally Posted by LOL! I believe Otar wrote that there was really no way to know when you were off track until way too late. Thus, he recommended inflation-indexed life annuities (perhaps laddered) and a low sustained withdrawal rate. Have you read his book? You will like it.

speaking of otar here is an article he wrote on the subject http://retirementoptimizer.com/articles/Article113.pdf

[Midpack]

Gotadimple: I did not draw the SIRE vs FIRE distinction, I picked it up here in a thread a long while back. Simply meant to distinguish between those with COLA'd pensions and full retiree health care at one extreme (call it 100% SIRE) and those with no pension or health care whatsoever at the other extreme (call it 100% FIRE). I'm sure you'll agree the latter is dealing with considerably more risk, a significant distinction. SIRE has little longevity risk and some inflation protection at least. And many of us are somewhere in the middle of the SIRE to FIRE continuum.

Thanks for your thoughts, I am indeed just looking for a number for each year as a rough guide. I have built a spreadsheet that is as accurate as I know how to make it (although projected taxes out that far is probably hopeless) and I was just looking for a second opinion source.

LOL!: I have read Otar and agree it's excellent. Here is another excellent article http://spwfe.fpanet.org:10005/public...ging%20Ret.pdf in only 12 pages on a very similar approach that defines exactly how to know when to annuitize and it makes good sense to me. I do realize that one could still miss the boat, but you'd know where you stood all along - which is very reassuring to me. YMMV