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I have a very simple withdrawal question
Old 06-12-2017, 08:52 PM   #1
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I have a very simple withdrawal question

Do you take your same withdrawal each year from your total account at some arbitrary number that you decide is enough?

So if you decide on 4% and your number is 1,000,000 you would take $40,000 every year.

.....or would you adjust your number every year based on the size of your portfolio?

So if your portfolio grows to 1.5 mil, that year you'd take $60,000.

And then if it dropped in value, you'd adjust down accordingly.

My understanding of the research is, take that same number each year knowing some years your portfolio will be up and some years down.

Am I on track for this theory?
(Yes, I realize some people hold cash to use in the down markets so they don't have to pull out investments)
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Old 06-12-2017, 08:59 PM   #2
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The theory is that the initial amount (lets say it is $40,000) is increased in subsequent years to match inflation (regardless of what the portfolio does). So next year, after you took out $40k this year, and after (lets say) 1% inflation, you get to take out $40,400. Then if that 2nd year we had 1% inflation again, you would in the 3rd year take out $40,804. Etc!

As to what that initial amount is, that was nominally "4%", but the big debate is always, what is the correct percentage today? The new low interest rate environment suggests 4% may be too high. This is an area of much research and even more discussion!
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Old 06-12-2017, 09:10 PM   #3
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Quote:
Originally Posted by TrophyWife View Post
Do you take your same withdrawal each year from your total account at some arbitrary number that you decide is enough?

So if you decide on 4% and your number is 1,000,000 you would take $40,000 every year.

.....or would you adjust your number every year based on the size of your portfolio?

...
It depends (of course!).

If you are following a strict academic sustainable withdrawal rate, you figure the number for year one and then adjust only for inflation going forward. This is the "SWR" that is frequently referenced.

Many people (including moi) see that as a procrustean bed and have serious doubts that anyone would blindly follow it into a zero portfolio value if they lived for 31 years (versus 30) in a challenging retirement investment scenario. There are other withdrawal methods, ranging from percentage of 12/31 portfolio each year, to VPW, to myriad adjustments/rails/limits to SWR. Here is a cursory,
beginning overview:https://www.bogleheads.org/wiki/Withdrawal_methods
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Old 06-12-2017, 09:39 PM   #4
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Quote:
Originally Posted by TrophyWife View Post
Do you take your same withdrawal each year from your total account at some arbitrary number that you decide is enough?

So if you decide on 4% and your number is 1,000,000 you would take $40,000 every year.

.....or would you adjust your number every year based on the size of your portfolio?

So if your portfolio grows to 1.5 mil, that year you'd take $60,000.

And then if it dropped in value, you'd adjust down accordingly.

My understanding of the research is, take that same number each year knowing some years your portfolio will be up and some years down.

Am I on track for this theory?
(Yes, I realize some people hold cash to use in the down markets so they don't have to pull out investments)
yes, in your example if u decided that you want 40k to start u take it out plus inflation every year there after regardless of the size of the portfolio.
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Old 06-12-2017, 09:51 PM   #5
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I think this is up to you on how you want to set up. I get as much as I need, luckily, it's much lower than 3-4%.
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Old 06-12-2017, 10:27 PM   #6
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I'm in Year 1 of ER. Right now I'm taking out whatever I want. I'll check on where we stand at the 1 year mark. If we took out too much, I'll adjust. If our WR is low, I won't adjust it upwards unless there is some specific thing or experience we want to spend more on in Year 2. I expect our withdrawals to be dynamic over time, partly based on our wants and needs, and partly based on portfolio performance.
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Old 06-12-2017, 10:45 PM   #7
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We don't have the same expenses every year nor every month. So no, we don't take the same withdrawal every year nor every month.

We don't make once a year withdrawals. We withdraw every month as needed. Some months, no withdrawals are necessary since dividends are automatically sent to our checking account. But I suppose a dividend paid is a withdrawal.
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Old 06-13-2017, 03:38 AM   #8
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There are multiple withdrawal methods. The "fixed amount + inflation" method was developed for folks who want a predictable income every year, and has been heavily modeled. After the first year it ignores portfolio value.

Taking the same percentage of the current portfolio value each year is an alternative. It can also be modeled in FIRECALC and is called the % remaining portfolio method. As you noted, this method means income will go up and down each year depending on how the portfolio does.

We use the % remaining portfolio withdrawal method. We withdraw the same percent each year regardless of what our actual spending is. We do this every Jan, based on the Dec 31 portfolio value, and rebalance if needed after withdrawal.

So far, our spending has been lower than our withdrawals, so money that is not spent in a given year is allowed to accumulate in short term funds for whenever we might need it in the near future. This is the main way we deal with highly variable income and the fact that some years we may have to deal with a large drop in income because the portfolio took a large hit due to a bear market. Note that we are still withdrawing from the portfolio "investments' even when it shrinks. Rebalancing means we will generally be taking $ from fixed income in years where equity is down and vice versa.

As you'll probably see here, many folks use neither method. They take what they need each year and leave the rest invested for the long term. They may just make sure it doesn't exceed some X% they consider "safe".
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Old 06-13-2017, 05:13 AM   #9
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I use 3% as a guide but wind up using dividends as they are released in addition to whatever else is needed throughout the year. I do want to start taking more out and adding to cash and short term bond reserves as the market returns better than 5% annually. Once I bring my reserves to a 5 year austerity level, I will be in the position to take less out of investments during poor market years. Just my own spin on the fixed percentage rule. I have a sliding scale chart which I use to illustrate the process but have no idea how to include it in the post!
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Old 06-13-2017, 05:49 AM   #10
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Some years are better than others for our W/D. We haven't (yet) gone over 4% --despite DW's best efforts--but some years are 2% others 3.8% or something like that.

While our base expenses are fairly stable we do get hit with some high-end surprises some years (new roof, boat problems, etc)

Considering that we've been 'banking' a few % per year of that 4%, if we did go to 5% or such, I'm not going worry about it.
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Old 06-13-2017, 06:42 AM   #11
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Originally Posted by audreyh1 View Post
There are multiple withdrawal methods. The "fixed amount + inflation" method was developed for folks who want a predictable income every year, and has been heavily modeled. After the first year it ignores portfolio value.

Taking the same percentage of the current portfolio value each year is an alternative. It can also be modeled in FIRECALC and is called the % remaining portfolio method. As you noted, this method means income will go up and down each year depending on how the portfolio does.

We use the % remaining portfolio withdrawal method. We withdraw the same percent each year regardless of what our actual spending is. We do this every Jan, based on the Dec 31 portfolio value, and rebalance if needed after withdrawal.

So far, our spending has been lower than our withdrawals, so money that is not spent in a given year is allowed to accumulate in short term funds for whenever we might need it in the near future. This is the main way we deal with highly variable income and the fact that some years we may have to deal with a large drop in income because the portfolio took a large hit due to a bear market. Note that we are still withdrawing from the portfolio "investments' even when it shrinks. Rebalancing means we will generally be taking $ from fixed income in years where equity is down and vice versa.

As you'll probably see here, many folks use neither method. They take what they need each year and leave the rest invested for the long term. They may just make sure it doesn't exceed some X% they consider "safe".

Do you reinvest the dividends or the dividends are part of the withdrawal in your case? Just curious. I retired a couple of years ago and I consider my dividends (from my after tax accounts) to be part of my withdrawal (No DRIP since I already paid taxes for them) but I wasn't sure if this was the best approach and I wanted to hear how you are doing yours if you don't mind sharing.
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Old 06-13-2017, 06:46 AM   #12
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I take the same percentage but not same amount.

If my number is 1,000,000, 4% of that is $40,000.

But next years might be 1,050,000 or 950,000. In those years I'd take 4% of 1,050,000 and 4% of 950,000.

Oh, but of the yearly withdrawal, I probably won't spend it all during the year (LYBM, old habits die hard ).
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Old 06-13-2017, 06:49 AM   #13
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Quote:
Originally Posted by strathglass View Post
The theory is that the initial amount (lets say it is $40,000) is increased in subsequent years to match inflation (regardless of what the portfolio does). So next year, after you took out $40k this year, and after (lets say) 1% inflation, you get to take out $40,400. Then if that 2nd year we had 1% inflation again, you would in the 3rd year take out $40,804. Etc!

As to what that initial amount is, that was nominally "4%", but the big debate is always, what is the correct percentage today? The new low interest rate environment suggests 4% may be too high. This is an area of much research and even more discussion!
This is the theory. I've never used it to make my withdrawals. I only used the "concept" to decide how much of a retirement stash I needed to start ER. IOW, if I ran the numbers and used, say 3.85% as my Safe Withdrawal Rate, with a spend level of say $50K/year, then working backward, I would need a beginning "stash" of about $50,000/0.0385 = $1,298,701 before I retired.

In practice, once I got my "stash", I played everything by ear. If markets were down, I wouldn't take as much. If markets were up, I'd feel comfortable taking more. I agree that most of us would not blindly follow the "theory" as the plane spun into the ground, so to speak! Naturally, YMMV.
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Old 06-13-2017, 07:01 AM   #14
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I take what I need monthly to pay the bills for the next month.
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Old 06-13-2017, 07:12 AM   #15
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Originally Posted by tmm99 View Post
Do you reinvest the dividends or the dividends are part of the withdrawal in your case? Just curious. I retired a couple of years ago and I consider my dividends (from my after tax accounts) to be part of my withdrawal (No DRIP since I already paid taxes for them) but I wasn't sure if this was the best approach and I wanted to hear how you are doing yours if you don't mind sharing.
I set aside my dividends and on occasion my CGs to a short bond fund at TR Price. I keep about 2 1/2 years expenses there. Deplete after tax first, then pre-tax.

I then W/D a large chunk two or three times a year -as needed- to a 'holding account' in the bank where my checking is.

From there, a monthly amount is transferred to checking.

I tried having the monthly amount transferred directly from TRPrice to checking but there was always a few days delay--not good if your checking suddenly goes negative!!
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Old 06-13-2017, 07:28 AM   #16
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Originally Posted by audreyh1

As you'll probably see here, many folks use neither method. They take what they need each year and leave the rest invested for the long term. They may just make sure it doesn't exceed some X% they consider "safe".
Yep, that nicely summarizes my approach
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Old 06-13-2017, 07:31 AM   #17
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Can I add a question? What are people using for inflation rates? Not sure what the best source is as every month the # changes and it varies widely if you used the BLS stats... ie April was 2.2 but Feb was 2.7
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Old 06-13-2017, 08:20 AM   #18
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My first three years of ER may be a bit of an anomaly so far but dividends and capital gain distributions have exceeded my spending rate, have not surpassed 3%, and do not require me to sell any actual shares of my funds.

I'm sure this won't be the case every year going forward and I'll be forced to sell actual shares when dividends/distributions are down. But in the end the max withdrawal rate I calculated at the beginning of my ER based on the balance of my portfolio at that time for long term success was 4.8%. It did not account for SS and frankly was more than I actually spend each year so I'm comfortable with it.
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Old 06-13-2017, 08:30 AM   #19
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In year two of ER. I set a budget for myself. At the beginning of my fiscal year I take out enough for expenses for the year and put it in cash. I do my best to stick to that budget. The budget in includes pots for maintenance, travel, etc.

The WR is under 3.5% and it is my goal to stick with that for a few years to see how the market and my portfolio performs. I will not increase it as my portfolio grows. However as in this past year if I do have a major improvement I withdraw the amount I need to cover that expense.
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Old 06-13-2017, 08:51 AM   #20
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I have a more free-swinging approach to WD. We take whatever we want/need to enjoy the riches of life since our pensions and SS are more than enough to pay for the basics of life and our investment stash keeps growing.
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