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How to Calculate your withdrawal rate if spending ...
Old 07-04-2019, 11:09 PM   #1
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How to Calculate your withdrawal rate if spending ...

I have a quick question for the group. It looks like our spending will be coming from dividend and interest from our taxable brokerage accounts 100%. We do not need to liquidate any of our shares in the taxable brokerage accounts, i.e. touch the "principles". We are in our early 50s and both retired and do not have access (or need to) touch our retirement accounts. We are very well of the 4% rule but curious of how to calculate the withdrawal rate in our case.

So using the following #s as an illustration:
1. Total asset value at beginning of the year is 3m with 2m in taxable brokerage accounts and 1m between traditional and roth IRAs.
2. Dividend and interest from the taxable brokerage accounts is about 90K and our actual spending is about 80K.
3. Dividend and interest from the retirement accounts is about 20K.
4. Dividend and interest frequency ranges from monthly, quarterly and semi-annually.
5. At the end of the year, total asset value is 3.3m, with 2.2m and 1.1m each in the taxable vs. retirement accounts.
6. Above values are for investment and retirement accounts only and does not include home value which is about 800K.

My question is, is the withdrawal rate 80K divided by
A. 3m (beginning of the year total value)
B. 2m (beginning of the year value for taxable accounts only)
C. 3.3m (end of the year total value)
D. 2.2m (end of the year for taxable accounts only) ?

And how does the home value come into play?
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Old 07-04-2019, 11:34 PM   #2
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A.

It doesn't. Maybe if you've got an expensive home and plan to downsize at some point you include the difference, but I'd leave that for buffer.
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Old 07-05-2019, 01:55 AM   #3
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A.

It doesn't. Maybe if you've got an expensive home and plan to downsize at some point you include the difference, but I'd leave that for buffer.
This is also how I calculate my WR each year. The original Trinity study suggests calculating the WR from the starting balance the year you retire and I do record that figure just for info. i.e. 4% from the starting balance on year 1 then increase that $ value each year with inflation.

I donít think many people here follow the Trinity study model.
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Old 07-05-2019, 05:36 AM   #4
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A.

It doesn't.
+1
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Old 07-05-2019, 05:45 AM   #5
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I had a hard time understanding your question but if I get the gist of it, you are pulling your first withdrawal at the end of year 1 (so the following year is the start of your retirement). I would divide $80K by the then total $3.3M value of my portfolio to arrive at a SWR of 2.4%. If I was following the standard method I would then inflate the $80k figure by the social security calculated COLA (inflation) to arrive at the next years withdrawal. And so one into infinity based on $80K

Alternative approaches:

1) Set a higher SWR rate (e.g. 3% = $99K as starting withdrawal). Calculate year 2 based on $99K x 1+COLA. Rinse and repeat. There is no reason to spend all of your SW. Just add the remainder back into your portfolio. Set the starting SWR based on your assessment of what is reasonable.

2) Use some other approach to SWR. For example, the Vanguard ceiling and floor approach would have you start as in the original example. That is set a 2.4% SWR against end of year portfolio on year 1. Then apply 2.4% to year 2's ending portfolio value. If the change in portfolio was large you would would limit the withdrawal to no more than 5% higher than year 1 or no lower than 5% less than year 1.
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Old 07-05-2019, 06:25 AM   #6
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A.

spending/assets = wr

I take money out each month to fund our spending. To calculate our wr, I divide our annual spending by our investable asset totals (excludes the house) on our retirement date anniversary (you could use any date - just be consistent from year to year).

Interest, dividends, and capital gains do not impact the wr calculation (other than their impact on asset totals - but the formula already captures these changes). Taxes are counted as "spending". So if money comes from a taxable/or tax deferred account, your spending would be increased to account for any taxes owed. IWO, your spending total will vary depending on where you pull the money from.
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Old 07-05-2019, 06:46 AM   #7
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+1
+2 for sure
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Old 07-05-2019, 08:00 AM   #8
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+1
+3 WR is withdrawals ($80k in OP's case) divided by the fair value of assets when you retire ($3m in OP's case)... 2.67%.

As Alan wrote, the Trinity Study was based on first year withdrawals and the retirement asset balances at the date you retire and assumed that withdrawls would then increase annually with inflation so spending power was constant.
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Old 07-05-2019, 08:06 AM   #9
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A. However, we do use a 3 year rolling average formula (50%, 30%, 20%) that keeps us from getting too far ahead of ourselves on big up years for the market and too pessimistic on bad market years. Also, we use a VPW approach to determine yearly withdraw rate.


House is not included and is instead part of LTC self insurance.
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Old 07-05-2019, 08:41 AM   #10
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I thought the 4% rule was passe? Is it back again? Regardless the OP is in great shape IMO. Hats off!

I may change my mind but dont really pay attention to withdraw rates other then to make sure it stays reasonable. 4% or lower.

I will use a 4 year model for safe money used for spending. I have it calculated for inflation and adds in taxes. My model shows me mostly at 1-2% and going up a bit just prior to plan end.

I like FIREcalc, a great tool, but does it take into consideration taxes, or is that understood to be part of spending?
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Old 07-05-2019, 09:07 AM   #11
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I thought the 4% rule was passe? Is it back again? Regardless the OP is in great shape IMO. Hats off!

I may change my mind but dont really pay attention to withdraw rates other then to make sure it stays reasonable. 4% or lower.

I will use a 4 year model for safe money used for spending. I have it calculated for inflation and adds in taxes. My model shows me mostly at 1-2% and going up a bit just prior to plan end.

I like FIREcalc, a great tool, but does it take into consideration taxes, or is that understood to be part of spending?
No, 4% rule is still valid for 30 year retirement duration.

Taxes are part of spending. Taxes are extremely dependent on an individual’s or couple’s situation, so modeling that is far more complex.
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Old 07-05-2019, 09:37 AM   #12
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No, 4% rule is still valid for 30 year retirement duration. ...
Yup, and it is actually the 4.5% rule (Aug 2017):

Quote:
Is the 4% rule still relevant in today’s economy? What safe withdrawal rate would you recommend for someone planning for longer than 30 years of retirement?

The “4% rule” is actually the “4.5% rule”- I modified it some years ago on the basis of new research. The 4.5% is the percentage you could “safely” withdraw from a tax-advantaged portfolio (like an IRA, Roth IRA, or 401(k)) the first year of retirement, with the expectation you would live for 30 years in retirement. After the first year, you “throw away” the 4.5% rule and just increase the dollar amount of your withdrawals each year by the prior year’s inflation rate. Example: $100,000 in an IRA at retirement. First year withdrawal $4,500. Inflation first year is 10%, so second-year withdrawal would be $4,950.

I like to remind people that the 4.5% rule is not a law of nature, like Newton’s laws of motion, which will probably never change. Markets can change, and it is possible that in the future the 4.5% rule, which has held up for 50 years, might be violated. But I haven’t seen those circumstances yet.

Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing OK with 4.5%. However, if we were to encounter a decade or more of high inflation, that might change things. In my opinion, inflation is the retiree’s worst enemy. As your “time horizon” increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example for 35 years, I calculated 4.3%; for 40 years, 4.2%; and for 45 years, 4.1%. If you plan to live forever, 4% should do it.

https://earlyretirementdude.com/summ...ventor-4-rule/
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Old 07-05-2019, 10:43 AM   #13
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Originally Posted by donheff View Post
I had a hard time understanding your question but if I get the gist of it, you are pulling your first withdrawal at the end of year 1 (so the following year is the start of your retirement). I would divide $80K by the then total $3.3M value of my portfolio to arrive at a SWR of 2.4%. If I was following the standard method I would then inflate the $80k figure by the social security calculated COLA (inflation) to arrive at the next years withdrawal. And so one into infinity based on $80K

Alternative approaches:

1) Set a higher SWR rate (e.g. 3% = $99K as starting withdrawal). Calculate year 2 based on $99K x 1+COLA. Rinse and repeat. There is no reason to spend all of your SW. Just add the remainder back into your portfolio. Set the starting SWR based on your assessment of what is reasonable.

2) Use some other approach to SWR. For example, the Vanguard ceiling and floor approach would have you start as in the original example. That is set a 2.4% SWR against end of year portfolio on year 1. Then apply 2.4% to year 2's ending portfolio value. If the change in portfolio was large you would would limit the withdrawal to no more than 5% higher than year 1 or no lower than 5% less than year 1.
I think you got my question. I was trying to clarify how technically the w/d rate is calculated based on timing of the year as well as the fact that we essentially live on dividend and interest that get distributed throughout the year, instead of doing one big annual withdrawal at the beginning of the year as some forum members described. I also read that some forum members are doing the withdrawal more based on the total asset value at the beginning of the year instead of the original retirement date+inflation, per Trinity study.

Since we do not really do "liquidation" of any asset at any time of the year (simply receiving dividend and interest distributed to us), I was also trying to figure out at what point in the year to use as the denominator. But I think one member simply said to use a date in time and just use it consistently every year.

Really appreciate everyone's input!
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Old 07-05-2019, 10:48 AM   #14
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I thought the 4% rule was passe? Is it back again? Regardless the OP is in great shape IMO. Hats off!

I may change my mind but dont really pay attention to withdraw rates other then to make sure it stays reasonable. 4% or lower.

I will use a 4 year model for safe money used for spending. I have it calculated for inflation and adds in taxes. My model shows me mostly at 1-2% and going up a bit just prior to plan end.

I like FIREcalc, a great tool, but does it take into consideration taxes, or is that understood to be part of spending?
Thanks

Is the 4 year model simply averaging the spending for 4 years and use that as the spending amount? This is our first year of retirement and taxes is a huge part of our spending during our working years, so we are still in the "testing" phase of our spending pattern of this new chapter of our life!
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Old 07-05-2019, 01:55 PM   #15
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spending/assets = wr

Is the formula actually (Spending - Income)/ Invested Assets ? Thus giving credit for Social Security, Pensions, Rent, etc?
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Old 07-05-2019, 02:07 PM   #16
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I do C but also calculate D out of curiosity. Like you, Prague, I am in my 50s and use only the dividends from my taxable account while I leave my tIRA alone. Exclude the home value, too.


Some of my spending, as in income taxes and health insurance (i.e. ACA subsidy) is based on the cap gain distributions I don't receive until the very end of the year. To me, it makes no sense to use start-of-year balances to compare to purely end-of-year spending based on end-of-year account activity. But that's me, the Outlier.
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Old 07-05-2019, 02:37 PM   #17
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Is the formula actually (Spending - Income)/ Invested Assets ? Thus giving credit for Social Security, Pensions, Rent, etc?
Yes. I did not include income since the OP was wondering how to treat dividends and interest and I did not want to confuse those items with income. But, I would treat any wage income, pensions and SS as you have indicated.
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Old 07-05-2019, 02:55 PM   #18
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Is the formula actually (Spending - Income)/ Invested Assets ? Thus giving credit for Social Security, Pensions, Rent, etc?
Yes. It’s spending not covered by pension, SS, wages.
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Old 07-05-2019, 03:27 PM   #19
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This is also how I calculate my WR each year. The original Trinity study suggests calculating the WR from the starting balance the year you retire and I do record that figure just for info. i.e. 4% from the starting balance on year 1 then increase that $ value each year with inflation.

I don’t think many people here follow the Trinity study model.
Same here.

I do not follow the Trinity model, with cost of living increases automatically added to the initial value each year. Instead, I base my spending percentages for a given year on my 12/31 portfolio value just before the year starts. By portfolio value I mean my total investment portfolio that year, including both taxable and tax advantaged accounts, but not other possessions such as my house.

I do figure out what the percentages would have been using the Trinity model, but that is just my idea of a really fun thing to do. I don't actually use that computation for anything at all. I just do it for kicks.
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Yes. It’s spending not covered by pension, SS, wages.
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Old 07-05-2019, 03:34 PM   #20
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As mentioned in other threads and blogs, the Trinity study is a good generic "can I retire" reference point, but rarely used for actual spending.
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