How to calculate WR?

[FREE866]

Calendar 2017 my Withdrawal rate will be something around 3.7% of the beginning balance. My plan is to really take out what I need each year ( usually on a quarterly basis) as opposed to adhearing to a fixed % amount. Does it make sense to do that?

 

[RunningBum]

Calendar 2017 my Withdrawal rate will be something around 3.7% of the beginning balance. My plan is to really take out what I need each year ( usually on a quarterly basis) as opposed to adhearing to a fixed % amount. Does it make sense to do that?

Sure, but if you find yourself taking out 9% the first year, you might want to reconsider (unless you have a sizable pension + SS still to come).

 

[sengsational]

Boy my method must be FBAR. OK, I calculated a SSWR (somewhat SWR) using online calculators, but I don't pull an annual amount. I just keep paying my bills ....

That's all I do.

I DO keep track of expenses, so, after the fact, maybe every six or twelve months, I go back and sum the expenses and compare to the SSWR. I compare against historical spending, say "gee whiz" and move on. Maybe occasionally I'll take action, but lately, more often than not, I conclude I should be spending more (in order to enjoy life more).

 

[sengsational]

i-ORP is great but I can figure out how to save the file so that I can use it later....seems I hit save and than if I close the window I have to start over....anyone know how to save it?

Saving the results window or your inputs?

There's a "Save Form" button that will save your input parameters, but I think you've probably got that figured out already. In order for that to work the next time you open your browser, you need to assure that you're not deleting cookies for i-orp.com. I'll tell you what I do...not that you want to do it, but I use LastPass, and it just happens to have a function to save all inputs: Sites > Save All Entered Data. This way, my data is not sitting in a plain text cookie.

On the results window, there's a "Download Spreadsheet Summary", but that doesn't have the nice graphs and stuff. It also doesn't save the inputs.

What I do is select the entire results window and paste it into a spreadsheet. At the bottom of the results window, all of your input parameters are shown. So if your "Save Form" cookie gets lost, you at least could re-enter the exact same inputs.

 

[FREE866]

Sure, but if you find yourself taking out 9% the first year, you might want to reconsider (unless you have a sizable pension + SS still to come).

Ha Gotcha....thanks...yeah..it shouldn't be that high, but lets say we have a 40% correction that 3.7% could go up to 5-6%

 

[RunningBum]

Ha Gotcha....thanks...yeah..it shouldn't be that high, but lets say we have a 40% correction that 3.7% could go up to 5-6%

I haven't done the math, but is that based on 100% equities? I don't think many would recommend that. But still, a big drop will have an impact.

Hopefully it would bounce back over the next few years, so most would just ride it out. I use VPW, so it's recalculated each year based on the start of the year balance so I'd target spending less the next year, but probably wouldn't be too strict about it.

 

[Blue Collar Guy]

Calendar 2017 my Withdrawal rate will be something around 3.7% of the beginning balance. My plan is to really take out what I need each year ( usually on a quarterly basis) as opposed to adhearing to a fixed % amount. Does it make sense to do that?

Yeah I like it. Thats the whole flexible withdrawal rate thing people talk about when faced with heavy drops in the market. BTW FBAR, hahahahaha

 

[FREE866]

I haven't done the math, but is that based on 100% equities? I don't think many would recommend that. But still, a big drop will have an impact.

Hopefully it would bounce back over the next few years, so most would just ride it out. I use VPW, so it's recalculated each year based on the start of the year balance so I'd target spending less the next year, but probably wouldn't be too strict about it.

~94% equities

 

[Danmar]

There are lots of valid withdrawal strategies, but this is the first time I can recall someone asking how to calculate the WR? It's the amount you take out of the portfolio divided by the value (usually beginning of year) of that portfolio. The only issue I can think of is whether you include dividends and interest. You do include them if you take them out.

 

[bingybear]

Because I have large unrealized gains in my portfolio, I calculate my net worth in after tax dollars. For WR I add up all my expenses except income tax and divide by the net worth. I my opinion, $1,000,000 in cash has a different value than $1,000,000 of stock that I bought for $500,000.

yes they may be different... or not. If you can cash out your appreciated stock in the 15% bracket and the gains are LT, then there would be no tax. In fact if you don't need to withdraw, you can LTCG harvest to the top of the 15% bracket.

I agree with needing to deal with taxes. It is difficult for me to determine after tax amounts without sorting through a plan for sequence of withdraws to really understand the after tax values. You may be much better than I am.

 

[capjak]

Saving the results window or your inputs?

There's a "Save Form" button that will save your input parameters, but I think you've probably got that figured out already. In order for that to work the next time you open your browser, you need to assure that you're not deleting cookies for i-orp.com. I'll tell you what I do...not that you want to do it, but I use LastPass, and it just happens to have a function to save all inputs: Sites > Save All Entered Data. This way, my data is not sitting in a plain text cookie.

On the results window, there's a "Download Spreadsheet Summary", but that doesn't have the nice graphs and stuff. It also doesn't save the inputs.

What I do is select the entire results window and paste it into a spreadsheet. At the bottom of the results window, all of your input parameters are shown. So if your "Save Form" cookie gets lost, you at least could re-enter the exact same inputs.

Thanks, I have a MAC and use numbers spreadsheet which apparently i-orp does not like. will try the paste into excel on my old PC

 

[RunningBum]

yes they may be different... or not. If you can cash out your appreciated stock in the 15% bracket and the gains are LT, then there would be no tax. In fact if you don't need to withdraw, you can LTCG harvest to the top of the 15% bracket.

I agree with needing to deal with taxes. It is difficult for me to determine after tax amounts without sorting through a plan for sequence of withdraws to really understand the after tax values. You may be much better than I am.

Wouldn't you have the exact same issue trying to budget taxes as an expense in your future budgets?

Seems like you have 3 choices wrt to taxes on deferred income or capital gains:
1) Treat them as a liability with your best estimate on future taxes
2) Treat them as an expense in your budget with your best estimate on future taxes
3) Don't worry about it

#3 can work if your taxes are low or zero, or you have enough buffer to absorb taxes or reduce non-essentials, or if investment returns are good enough for your plan to work.

 

[bingybear]

Wouldn't you have the exact same issue trying to budget taxes as an expense in your future budgets?

Seems like you have 3 choices wrt to taxes on deferred income or capital gains:
1) Treat them as a liability with your best estimate on future taxes
2) Treat them as an expense in your budget with your best estimate on future taxes
3) Don't worry about it

yes one really does have to make a guess. But I like #3, but I do worry about it. I've been RE for 2 years and have been Roth converting up to the top of the 15% bracket. Not sure that will be enough in the long run. But I'm pealing away at the higher marginal rate at RMD time.

But now taxes are low.

 

[Independent]

I'd like to calculate our WR to make sure we aren't spending down our assets too fast. So far we have been spending what we want, which has been close to what we budgeted. And since the market has done well, our portfolio value is up despite living off our assets for 9 months.

I don't intend to withdraw a certain amount at the beginning of each year or month. I'm planning to just move assets from taxable accounts since we are below 59.5 to cover our spending as it happens. Once we hit 59.5, we may decide to source funds differently depending on tax consequences. Also at some point we'll have income from a pension and a deferred comp plan, neither of which we're tapping yet.

Bottom line - I just want to do a high level "sanity check" to make sure our WR isn't above 5% in the early years of our retirement (pre-pension, deferred comp payouts, and SS).

It isn't fully logical to me that in the WR calculation, taxable portions of the portfolio count the same as tax-deferred portions. Clearly the net after-tax realizable value of an IRA or 401K is significantly less than a portfolio where tax was already paid on all but the unrealized gains. So I was thinking the portfolio value denominator should account for this, but maybe since taxes are included in the numerator, it's ok to include them in the denominator as well.

Okay, you'd like to calculate the WR so you can compare it to a standard of 5%. The obvious question is "How did you calculate the 5%?"

Whatever method you used to arrive at the 5% target is the same method you should use for calculating the actual.

Now, it might be that you didn't think much about taxes. Your plan seemed to generate enough money to live on, and that was good enough. Maybe you implicitly assumed that all your withdrawals would be taxable - now that you're thinking more about it you realize that you've got more spendable cash than you expected because you don't have to pay taxes on your after tax withdrawals.

That could be some good news that doesn't require any action on your part, or it might prompt you to go back and modify your plan with explicit assumptions about taxes. For example you might want to spend down the after tax assets first, but vary your gross withdrawals to result in level after-tax spending. If you do that, you'll have targets for both before and after tax assets that you can read off the plan and then measure your actuals accordingly.

 

[Scuba]

Perhaps the reason for not accounting differently for tax deferred vs after tax portions of the portfolio is the complexity of trying to project after tax account balances. Also many seem to be able to keep taxes very low so in that case, it doesn't matter much.

I suppose I'll just keep following my current approach, which sounds like a hybrid of what bingybear and sengsational are doing. Spend what we want, account for it after the fact, review portfolio balance and if it's up or about the same, all is good. If not, perhaps spending adjustments will be in order.

 

[Independent]

Perhaps the reason for not accounting differently for tax deferred vs after tax portions of the portfolio is the complexity of trying to project after tax account balances. Also many seem to be able to keep taxes very low so in that case, it doesn't matter much.

I suppose I'll just keep following my current approach, which sounds like a hybrid of what bingybear and sengsational are doing. Spend what we want, account for it after the fact, review portfolio balance and if it's up or about the same, all is good. If not, perhaps spending adjustments will be in order.

That works, especially if you know you have additional income sources coming on line later.

I think it means that any WR calculation is just curiosity because you're focused on balances, not WR.

 

[Scuba]

Yes, balances! I got interested in calculating WR because so many on this forum seem to calculate their WR with great precision - e.g., "my WR is 3.06". Good to hear the approach I've been using is a viable option. Thanks!

 

[RobbieB]

Yes, balances. I don't know what my WR is and I don't care. I care about how much dough I have. I know I'm not spending too much because I have more dough than ever.

 

[kcowan]

That's all I do.

I DO keep track of expenses, so, after the fact, maybe every six or twelve months, I go back and sum the expenses and compare to the SSWR. I compare against historical spending, say "gee whiz" and move on. Maybe occasionally I'll take action, but lately, more often than not, I conclude I should be spending more (in order to enjoy life more).

yes that is my method as well. KISS

 

[W2R]

Yes, balances. I don't know what my WR is and I don't care. I care about how much dough I have. I know I'm not spending too much because I have more dough than ever.

Not me. Due to the bull market, today I only have $9K less in my portfolio than my all time portfolio high. That was right before buying my dream house two years ago. I really can't conclude that I can afford to buy a dream house every two years. It is all so complicated that I would get a headache doing it your way. Nothing wrong with your way, each to his/her own, but I just handle these things differently.

In my case, I prefer to record every penny that I spend. At the end of every month, I add it all up and do analyses comparing to previous years, and seeing if I am still on track for this year.

I really like doing this. My spending is an aspect of my life that I feel I can, and should control and micromanage.

 

[RunningBum]

Balances are as dependent upon the market as they are your spending, maybe more. What are you all going to do if the market is flat for a couple of years? Not spend anything at all, because that's the only way to keep from having less dough?

IMO you should have some idea of your WR, and a rough target of your spending, because the good times aren't going to last forever, and some of you may not find it so easy to back off the spending you've gotten used to. Others may not find it so hard to switch from Wagyu to prime beef.

 

[RobbieB]

I'll probably go down after all the home improvements go in. Sorta making my current place into my dream house.

I'm really not worried, my SS survivor benes cover all my fixed costs except food, drink, entertainment and travel. In 4 years I'll claim on my own account and double my SS income. In 3 years I'm on Medicare.

Wagyu and caviar are still treats, not everyday. I've never had a budget, never tracked my spending and never balanced a checkbook. I plan to keep it that way -

 

[W2R]

I'll probably go down after all the home improvements go in. Sorta making my current place into my dream house.

I love that you are doing this! You are going to be so happy when your house is just the way you want it. At least, I am now that my house is what I always dreamed of. It makes a huge difference every single day. And yes, from what you are saying there is no question that you can afford it. I had forgotten about your SS survivor benefits.

 

[bingybear]

That works, especially if you know you have additional income sources coming on line later.

I think it means that any WR calculation is just curiosity because you're focused on balances, not WR.

For us the the only additional income stream really is SS that will come on later. I guess you could add a small annuity that I was sold when I was young and put $5500 into it. Not really enough to mention.

Not me. Due to the bull market, today I only have $9K less in my portfolio than my all time portfolio high. That was right before buying my dream house two years ago. I really can't conclude that I can afford to buy a dream house every two years. It is all so complicated that I would get a headache doing it your way. Nothing wrong with your way, each to his/her own, but I just handle these things differently.

In my case, I prefer to record every penny that I spend. At the end of every month, I add it all up and do analyses comparing to previous years, and seeing if I am still on track for this year.

I really like doing this. My spending is an aspect of my life that I feel I can, and should control and micromanage.

DW had my shopping gene removed as partial requirement before marriage, so there is little need for micromanaging my spending. And for DW, she never had that gene.
Now on your portfolio being back near the all time high after a expensive purchase. I would look at that an likely consider I could continue my normal (non-exceptional) spending. If I was going to buy a significantly more expensive home, I would do some spending homework.

Balances are as dependent upon the market as they are your spending, maybe more. What are you all going to do if the market is flat for a couple of years? Not spend anything at all, because that's the only way to keep from having less dough?

IMO you should have some idea of your WR, and a rough target of your spending, because the good times aren't going to last forever, and some of you may not find it so easy to back off the spending you've gotten used to. Others may not find it so hard to switch from Wagyu to prime beef.

The title of this thread was really unfortunate, "how to calculate WR"; desired spending/pile of assets. Maybe figuring out your budget is more important as it is really the variable with ones portfolio being a fixed value at a given point in time. When I was planning for ER in 2014 I took 2013 spending (sans taxes) and added 10k for health insurance and 10k to cover max out of pocket. For me that came to (IIRC) 1.5% WR. This WR allows for a lot of slop.
Taxes at this point are low as I'm roth converting to the top of the 15% bracket, not touching TIRA (other than conversion) and most of the income is qualified dividends. I don't consider hsa contributions as spending as they are invested, not redeemed.
I likely would be doing more tracking if I were using a WR of 4% or more.

 

[Blue Collar Guy]

Yes, balances. I don't know what my WR is and I don't care. I care about how much dough I have. I know I'm not spending too much because I have more dough than ever.

Hahahahahaha+1