Deviation from calculated SWR

[Sam]

Inspired by Bikerdude post.

So you have done your research. Using various calculators, you have arrived at a specific SWR for you. Will you stick to that rate throughout your retirement?

I think this is the real issue. How will we all react to a down market cutting our nest egg in half? Now the 4% Firecalc assumption is "stay the course" history is on our side. : I just question how many of us (me included) will not cut back in the face of this. Everything looks good on paper but reality is way different IMHO.

 

[kramer]

Sometimes I find it odd that folks base their withdrawal on the current market. For me, what matters is the total portfolio value and my general expectations of long term returns. So if I retired with $1M, and then 10 years later it is $1.3M (adjusted for inflation), I will probably be drawing more. How the market is doing then is irrelevant. In fact, if I was at that dollar amount, and the market had fallen the previous year, I would consider that more positive than if the market had been up the previous year.

But I account for this in my planned SWR number anyway. It is mostly an inflation-adjusted base amount plus a percentage of the port. And if the absolute number gets too low, I might get a job and go for 0% withdrawal for awhile, regardless of how the market had done the prior year or two.

So I didn't answer the poll and just tried to provide an explanation

Kramer

 

[Sam]

Unless I misunderstood your explanation, you fall squarely into the "No. I will do both a) and b)" category. Am I wrong?

 

[scrinch]

I think that I will use 4% as more of a guideline than a hard-and-fast rule. I'll probably be more likely to exceed the 4% when the market is up, but I can't make any guarantees that I won't also when the market is down. Ditto (but opposite) for withdrawing less than 4% also. It will depend to a certain extent on the quality of the spending opportunities that present themselves.

 

[kramer]

Unless I misunderstood your explanation, you fall squarely into the "No. I will do both a) and b)" category. Am I wrong?

Hi Sam, I think your interpretation is wrong here or maybe I didn't explain well enough. The current market is irrelevant (in my case) to the current withdrawal. It has to do with how one has done over the past decade, etc. My own SWR is below 4%, so perhaps even a "normal" market will allow me to increase withdrawals when I am older. Even keeping a constant real value over time would generally mean increased withdrawals as we approach "end of plan" and hopefully SS and medicare. I certainly would like to spend most of it before going.

Kramer

 

[donheff]

Kramer, click on the poll and take it up to 81% - you are an a&b. You just define "the market" in broader terms that one year.

 

[youbet]

Since there are no time or scale dimensions to the choices, answering becomes a matter of the time frame and extent of market variation you assume. In the relatively near term and with moderate market variation, no changes in WR. In the longer term and with large market variation, some changes in WR are possible depending on the specific situation at the time.

Generally, my plan is to be able to afford discretionary spending in the early years of ER, even through a down market and to not harvest the bounty of an up market in the early years. That is, a more or less constant WR.

For example, I'm about six months into ER and have enjoyed the nice performance in the equity markets to date. But, I'm not withdrawing any of these profits beyond my planned WR. If this had been a moderately negative market instead, I'd still be withdrawing to support our spending plans.

If in a longer time frame, say several years from now, the market has performed extremely well or extremely poorly, I will recconsider our position.

In FIRECALC, ending portfolio values vary a lot depending on the year your retirement period begins. I ran a hypothetical test with a one million dollar portfolio and 4% WR starting in 1965 and got ending values varying from about negative one million up to positive twelve million. We all want to avoid running out of money yet not leave a huge pile on the table at the end. We also all want to not wait until we're very old to spend this possible huge pile if we're fortunate enough to have one. But.........

You can't both spend it and keep it. You can't take it to the grave with you. We don't know the future.

If it turned out there was some sort of afterlife, the first thing I'd want to do is log on and see how everyone made out given all the different plans! Facinating stuff.

 

[audreyh1]

I never liked the idea of an initial fixed SWR% plus inflation. I prefer taking a fixed % of the portfolio each year. So, if the portfolio shrinks for a couple of years, then there is simply less money to live off of those years. Hopefully I'll have kept some of the excess from a "good" year to help cushion the "bad".

I guess I like the "last forever" feature of the fixed percent. I also like the increased withdrawal amounts as the portfolio grows.

Audrey

 

[grumpy]

I have approx. five years SWR amount in cash (Vanguard Prime MM) so the current state of the market has no effect on how much I spend in the current year. The only thing that it does effect is when I replenish the cash account and the source I take those funds from. I started ER with that 5 year cushion in order to be ultra cautious until I had a better feel for what our expenses would be in retirement. Now that I see that we are spending freely and still are substantially below a 4% SWR I will probably let the cash account draw down to more like a 3 year cushion until I think about replenishing it.

Grumpy

 

[Bikerdude]

When you talk about market performance you are also taking about portfolio balance. Now I have run Firecalc with 30 yr scenarios and have noticed that on some, my portfolio balance would have shrunk considerably, (say 12 to 15 years into retirement) only to later pull out with a new bull market advance. Now you know that bull happened in Firecalc but when you start with 1 mil. and take 40K per year adjusted for inflation, then 12 years later you have 475K left and your WD is now 56K. That's over 10% of your portfolio balance and if a new bull does not come soon you are going to run out of money in a few years.

Now faced with that situation do you continue to take your 56K adjusted for inflation or do you cut back. Not as simple as you may think when you don't know the future for sure as you do in Firecalc's back testing. I think I would be very nervous but would have cut back along the way. Fear does strange things to well laid plans.

 

[donheff]

When you talk about market performance you are also taking about portfolio balance. Now I have run Firecalc with 30 yr scenarios and have noticed that on some, my portfolio balance would have shrunk considerably, (say 12 to 15 years into retirement) only to later pull out with a new bull market advance. Now you know that bull happened in Firecalc but when you start with 1 mil. and take 40K per year adjusted for inflation, then 12 years later you have 475K left and your WD is now 56K. That's over 10% of your portfolio balance and if a new bull does not come soon you are going to run out of money in a few years.

Now faced with that situation do you continue to take your 56K adjusted for inflation or do you cut back. Not as simple as you may think when you don't know the future for sure as you do in Firecalc's back testing. I think I would be very nervous but would have cut back along the way. Fear does strange things to well laid plans.

That scenario scares me too. I think most of us will cut way back if our portfolio takes a serious drubbing. That is why we need a fair amount of downward wiggle room in our SWR. It is kind of the reverse application of the "start fresh" approach we are currently discussing over in the good returns thread. Yeah, the original projection accounted for the possibility of something like this happening. But back on the Board, the gurus are telling new people getting ready to ER that they would be flaming mad to retire on $500K with a $50K SWR. Why doesn't that thinking apply to me?

 

[Rich_by_the_Bay]

I never liked the idea of an initial fixed SWR% plus inflation. I prefer taking a fixed % of the portfolio each year. So, if the portfolio shrinks for a couple of years, then there is simply less money to live off of those years. Hopefully I'll have kept some of the excess from a "good" year to help cushion the "bad".

So do you indulge yourself the luxury of Bob's 95% rule?

 

[audreyh1]

So do you indulge yourself the luxury of Bob's 95% rule?

My approach is more to not spend all the larger withdrawals in the good years - building up the excess instead to help feather the bad years. But in the bad years keep to that fixed percent withdrawal even though it might mean a significant cut in annual income.

But Bob's 95% rule seems like a good way to do it too.

Audrey