Determining your withdrawal rate

[FREE866]

What is the appropriate method to figure out your withdrawal rate?


Purely hypothetical, but lets say your account balance on January 1st is a $1,000,000. You spend $40,000 during the year. On December 31st your balance is $800,000.



Is your withdrawal rate considered 4% ( $40,000/ $1,000,000) ?or do you consider it to be 5% ( $40,000/$800,000)?


thx

[Car-Guy]

Quote:

Originally Posted by FREE866 What is the appropriate method to figure out your withdrawal rate? Purely hypothetical, but lets say your account balance on January 1st is a $1,000,000. You spend $40,000 during the year. On December 31st your balance is $800,000. Is your withdrawal rate considered 4% ( $40,000/ $1,000,000) ?or do you consider it to be 5% ( $40,000/$800,000)? thx

Numbers is hard... You might want to check your math.

[LateToFIRE]

Quote:

Originally Posted by FREE866 ...lets say your account balance on January 1st is a $1,000,000. You spend $40,000 during the year. On December 31st your balance is $800,000.

Holy smokes, where'd the rest of your money go!

[FREE866]

Quote:

Originally Posted by Car-Guy Numbers is hard... You might want to check your math.

The numbers I posted are purely hypothetical...question is do you calculate the % WR based on beginning or end of year balances in this example?


Its not that hard of a question

[pb4uski]

Quote:

Originally Posted by FREE866 What is the appropriate method to figure out your withdrawal rate? Purely hypothetical, but lets say your account balance on January 1st is a $1,000,000. You spend $40,000 during the year. On December 31st your balance is $800,000. Is your withdrawal rate considered 4% ( $40,000/ $1,000,000) ?or do you consider it to be 5% ( $40,000/$800,000)? thx

Assuming the $40,000 of spending are withdrawn funds then 4%.

Technically, the Trinity Study that resulted in the "4% rule" it ws based on your withdrawals in relation to your retirement date portfolio level. So assuming that your retired on January 1st, it would be 4%. then the next year's withdrawals under the 4% rule would adjusted for inflation, so if inflation in the first year was 3% then the second year withdrawal would be $41,200.

Now that said, as a practical matter, around here we frequently refer to WR as current year withdrawals divided by beginning of year portfolio balance, whether you retired at the beginning the year or 10 years ago.

[FREE866]

Quote:

Originally Posted by LateToFIRE Holy smokes, where'd the rest of your money go!

OMG...guys its a totally fabricated hypothetical ...I used round numbers to keep it simple.....

[pb4uski]

Quote:

Originally Posted by FREE866 The numbers I posted are purely hypothetical...question is do you calculate the % WR based on beginning or end of year balances in this example? Its not that hard of a question

Beginning.

[FREE866]

Quote:

Originally Posted by pb4uski Now that said, as a practical matter, around here we frequently refer to WR as current year withdrawals divided by beginning of year portfolio balance, whether you retired at the beginning ohe year or 10 years ago.

Thank you pb!!


So its the beginning of year balance

[pb4uski]

Quote:

Originally Posted by LateToFIRE Holy smokes, where'd the rest of your money go!

Unrealized losses. Very realistic for 2022 for a 100% equity portfolio where equities lost 20% during the year.

In fact, if you started 2022 with a $1,000,000 position in VTI, reinvested dividends and withdrew $3,333/month ($40,000/year) then at Dec 31, 2022 you would have $801,338.

https://www.portfoliovisualizer.com/...ocation1_1=100

[MichaelB]

Quote:

Originally Posted by FREE866 So its the beginning of year balance

Yes. Or, end of last year balance.

[FREE866]

Thx pb and michael


Think I need to start spending more

[Dtail]

Quote:

Originally Posted by pb4uski Unrealized losses. Very realistic for 2022 for a 100% equity portfolio where equities lost 20% during the year. In fact, if you started 2022 with a $1,000,000 position in VTI, reinvested dividends and withdrew $3,333/month ($40,000/year) then at Dec 31, 2022 you would have $801,338. https://www.portfoliovisualizer.com/...ocation1_1=100

Agree. There are no issues with the math of the OP. If one starts with X and withdraws Y, then the beginning to ending balance difference will not just be the withdrawals.
So whoever is making fun of him, should look at their own math first.

[disneysteve]

Quote:

Originally Posted by Dtail Agree. There are no issues with the math of the OP. If one starts with X and withdraws Y, then the beginning to ending balance difference will not just be the withdrawals. So whoever is making fun of him, should look at their own math first.

Exactly.


And by the same token, you could start the year with $1,000,000, withdraw $40,000, and end the year with $1,100,000. You'd still have a 4% WR, not a negative WR.

[ERD50]

Quote:

Originally Posted by Car-Guy Numbers is hard... You might want to check your math.

I think some people read the $800,000 as being the result of a $40,000 withdraw from the $1,000,000 start. So that math would be off (would be $960,000).

I understood it to be the result of the WD and a hypothetical market fluctuation, so no math error.


edit - ooops, I see others just posted the same....

-ERD50

[Car-Guy]

Quote:

Originally Posted by ERD50 I think some people read the $800,000 as being the result of a $40,000 withdraw from the $1,000,000 start. So that math would be off (would be $960,000). -ERD50

That's the way some of us read it.

[youbet]

Quote:

Originally Posted by Car-Guy That's the way some of us read it.

An easy mistake to make.

[Palmtree]

Trinity Study in a nutshell.
If you start with 1,000,000 on Jan 1, you withdraw 4% the first year. $40,000.

The second year you withdraw the initial 4% ($40,000) plus an adjustment for inflation "I" ($40,000+I)

The third year you withdrawl the same as year 2 plus inflation again ($40,000+I) + I.

Four year is year three's amount plus I again.

If you do this every year for 30 years through wars, market and ups and downs etc., you have a a 95% chance of not going broke.

In the study everything was based on the initial amount, no end of year market return adjustments.

[FREE866]

This thread is kind of falling off the rails. I received my answer
Mods feel free to delete

[Sunset]

Quote:

Originally Posted by FREE866 OMG...guys its a totally fabricated hypothetical ...I used round numbers to keep it simple.....

Quote:

Originally Posted by pb4uski Unrealized losses. Very realistic for 2022 for a 100% equity portfolio where equities lost 20% during the year. In fact, if you started 2022 with a $1,000,000 position in VTI, reinvested dividends and withdrew $3,333/month ($40,000/year) then at Dec 31, 2022 you would have $801,338. ....

A very Good hypothetical example ....

[SecondCor521]

Quote:

Originally Posted by FREE866 This thread is kind of falling off the rails. I received my answer

You received *an* answer, and it was a good one.

I'm just chiming in to say that like most terms used on this board, people define / calculate WR% in somewhat different ways.

For example, I calculate my WR% by dividing my current spending rate by my current FIRE stash value, not my year end or year start value.

I think @W2R might calculate it yet a third and fourth way. She at least chose (reasonably so) to ignore a house purchase and it's attendant expenses from her WR% for one year.

As long as you understand the math and are not trying to deceive, I think you can calculate it any reasonable way. And I agree that the FIREcalc / Trinity method is definitely a reasonable way.