Mental Gymnastics to Make Sure You are Spending Enough

[DawgMan]

I know much is written here about withdrawal methods, some are aggressive % spenders while others are ridiculously conservative. I probably fall somewhere in the middle to too conservative, but would ideally like to set up my "potential spend" mentally so I don't go cheap/chicken out on myself in any given year because of any market fears. I expect to start making withdrawals in 2022 at age 57 and my "planned spend", which has significant discretionary spending, is 2.5% or less. I am comfortable initially keeping only 1 years worth of spend in cash to keep most of my $$ in the market and am underwriting average portfolio returns of 5% (60/40 AA). I am looking to play some mental gymnastics here to help me be prepared to spend, if so desired, what I can without risking things long term.

Initial plan... Dec 31, review portfolio returns for year. If under 5%, takeout 2.5%, if greater, takeout 2.5% + something else This goes into cash to potentially spend for the year. If I spend it all, great. If not, I push it forward into next year's bucket. Rinse/repeat.

The thought here is if I pull the potential spend, particularly after a good return year, I won't be afraid to spend it, whereby if I pull only what I planned to spend, I may set myself up be spooked by next years market movements and leave $$ I might prefer to spend/gift on the table.

Thoughts on this plan? If it makes any sense, at 57, should I be more aggressive than 2.5%? What about ideas on how to define "something else"?

I'm more prone to being too conservative so I need to at least initially, in the go go years, set up some guidelines that help me spend what I can, if so desired.

 

[braumeister]

The thought here is if I pull the potential spend, particularly after a good return year, I won't be afraid to spend it, whereby if I pull only what I planned to spend, I may set myself up be spooked by next years market movements and leave $$ I might prefer to spend/gift on the table.

If that works for you, then it's fine.
Too mechanical for me. I simply spend what I want and monitor it. As long as I stay under a 3% WR most of the time, I'm happy. No need to lock myself into a plan.

 

[DawgMan]

If that works for you, then it's fine.
Too mechanical for me. I simply spend what I want and monitor it. As long as I stay under a 3% WR most of the time, I'm happy. No need to lock myself into a plan.

I hear ya... not trying to over think it, but mainly get my sea legs for the first year or so and defend against being too conservative. Also, not trying to spend for the sake of spending, but also want to be strategic about gifting whether its kids/G-kids or charities. One thought was if 3% was say the safe spend/annual pull from my Dec 31 portfolio balance and 2.5% was all I really wanted/needed to spend, then perhaps doing a forced pull of the additional .5% and spending it as noted above might help me avoid worrying about the "what if" scenarios and do more while I'm here as opposed to waiting for the dirt nap.

Again, I get everyone has their way of doing it, just sounding one approach.

 

[RetiredHappy]

Your approach does not work for me. I have a spreadsheet which I review frequently, at least a couple of times a week, which has everything on it - accounts (taxable, ira etc) and expense line items. It has a 25 years projection, with line item details for the next 8 years. We need about $200K a year to cover our expenses, supported by details on the spreadsheet. We don't restrict spending, including unplanned items. For instance, we just bought $5K worth of golf clubs this year and we don't adjust anything. We are going to Palm Desert CA in January next year for 3 weeks instead of our usual 2 weeks. It means more spending on eating out and golfing, but we don't adjust anything on our projections. I also have another tab on the spreadsheet that tracks projected and actual monthly spending. If we overspent and needed another $10K, I just do a funds transfer out of a taxable brokerage account where there is cash sitting there doing nothing. We adjust throughout the year on how much cash we want sitting in the investment accounts since we do some minor ad-hoc re-balancing.

On my spreadsheet, it includes where the money is going to come from each year to fund our expenditure. RMD withdrawal is based on RMD table, the amount fluctuates with year-end value. SS for my husband has started, mine in 3 years' time. My annuity starts next year. The rest are funded by withdrawals from taxable accounts, mainly through dividends plus some.

Our spending each year is normal and does not fluctuate with returns. Until my SS kicks in and medical cost drops when I turn 65, we need to withdraw more than just dividends in taxable accounts. We keep a decent amount in cash within those accounts for unforeseen spending and also until I turn 65 when we do not need to withdraw more than dividends.

One last thing, we don't even think about WR at all.

 

[Sojourner]

Initial plan... Dec 31, review portfolio returns for year. If under 5%, takeout 2.5%, if greater, takeout 2.5% + something else This goes into cash to potentially spend for the year. If I spend it all, great. If not, I push it forward into next year's bucket. Rinse/repeat.
Thoughts on this plan? If it makes any sense, at 57, should I be more aggressive than 2.5%? What about ideas on how to define "something else"?

I suspect that withdrawing a set amount (say, 2.5%) and then trying to arrange your spending so that it uses up that amount is going to lead to frustration. I don't think this is how the typical early retiree mind works, especially those of us LBYM types. We tend to simply spend what feels right, which is generally (far) less than we can. IOW, we're frugal. And that's why we have been able to accumulate enough to be FIREd!

I'm more prone to being too conservative so I need to at least initially, in the go go years, set up some guidelines that help me spend what I can, if so desired.

If you can figure out what these guidelines are, I would be interested in seeing them. Maybe they can give me ideas of how to spend more freely myself. I am spending far less than what FIRECalc says I can; but again, this is the byproduct of living a comfortable, LBYM-type lifestyle for many, many years.

If that works for you, then it's fine.
Too mechanical for me. I simply spend what I want and monitor it. As long as I stay under a 3% WR most of the time, I'm happy. No need to lock myself into a plan.

+1
I couldn't agree more.

 

[SecondCor521]

I don't have any thoughts on how to determine how much to withdraw. 2.5% at 57 seems too conservative, but don't rely on my opinion for that. You could run FIREcalc and see what 2.5% with a 5% withdrawal every few years would look like on average.

Since I FIREd, I've just pulled as needed. This has resulted in me spending very little, because it gets to be a little bit of a game or competition with myself about how much I can stretch things.

I think that it is a good idea for you to have some sort of method where you force X% out of your portfolio/investments/FIRE stash into your checking account. I think the buildup of cash there (and maybe a rule not to put it back into investments - either spend it or give it away) will help with your goal. You could even be more aggressive with yourself and say that you can't carry over to next year - a draw all has to be spent or given away by 12/31 of the following year. Maybe with exceptions for a good reason.

I had a thread on a similar topic a while ago, the responses there might be helpful to you:

https://www.early-retirement.org/forums/f28/poll-push-or-pull-98505.html

 

[braumeister]

I simply spend what I want and monitor it. As long as I stay under a 3% WR most of the time, I'm happy. No need to lock myself into a plan.

I should add that this approach has been working well for me since my ER date a bit over 20 years ago, so there is some historical validation.

 

[Major Tom]

I simply spend what I want and monitor it. As long as I stay under a 3% WR most of the time, I'm happy. No need to lock myself into a plan.

I like this type of approach. It's what I do. Like, I suspect, most others here, I have an inbuilt sense for when I'm spending more than usual. When my internal "spidey financial senses" are triggered, I take a closer look at my finances to ensure I that am still on a good path. 10 years of living from portfolio withdrawals and, so far, so good. I am looking forward (sort of) to being retired during a downturn, so that my approach seems more "battle-tested". I don't feel that any of us who began portfolio withdrawals in the last 12 years have much right to proclaim experience in weathering the storms, as there have not been any significant ones.

 

[skyking1]

I should add that this approach has been working well for me since my ER date a bit over 20 years ago, so there is some historical validation.

Indeed! Well done. We are fortunate to have a couple of pensions and an annuity which will cover the household and medical expenses, so the WR is all about the travel and discretionary spending.

 

[DawgMan]

I don't have any thoughts on how to determine how much to withdraw. 2.5% at 57 seems too conservative, but don't rely on my opinion for that. You could run FIREcalc and see what 2.5% with a 5% withdrawal every few years would look like on average.

Since I FIREd, I've just pulled as needed. This has resulted in me spending very little, because it gets to be a little bit of a game or competition with myself about how much I can stretch things.

I think that it is a good idea for you to have some sort of method where you force X% out of your portfolio/investments/FIRE stash into your checking account. I think the buildup of cash there (and maybe a rule not to put it back into investments - either spend it or give it away) will help with your goal. You could even be more aggressive with yourself and say that you can't carry over to next year - a draw all has to be spent or given away by 12/31 of the following year. Maybe with exceptions for a good reason.

I had a thread on a similar topic a while ago, the responses there might be helpful to you:

https://www.early-retirement.org/forums/f28/poll-push-or-pull-98505.html

Your other thread was helpful, thanks. Perhaps I will end up doing a "push" for say my 2.5% WR and a pull for up to an additional +/- .5%. My DW is very good at finding ways to spend $$!

 

[daver]

If that works for you, then it's fine.
Too mechanical for me. I simply spend what I want and monitor it. As long as I stay under a 3% WR most of the time, I'm happy. No need to lock myself into a plan.

Just wondering if your WR approach is 3% or less of your portfolio balance each year or have you been using dollar plus inflation?

 

[braumeister]

Just wondering if your WR approach is 3% or less of your portfolio balance each year or have you been using dollar plus inflation?

3% of the prior year's balance. In other words, I look at it as if I were retiring today, so 3% would be safe. The "retire anew each year" model.

 

[Palmtree]

3% of the prior year's balance. In other words, I look at it as if I were retiring today, so 3% would be safe. The "retire anew each year" model.

This might give you a feeling of safety for the first few years but eventually you're going to have to withdraw more than 3% of the ending balance. Otherwise you're not adjusting for inflation. Also, when you do eventually decease, you'll have left 97% of your retirement funds on the table.

 

[MichaelB]

This might give you a feeling of safety for the first few years but eventually you're going to have to withdraw more than 3% of the ending balance. Otherwise you're not adjusting for inflation. Also, when you do eventually decease, you'll have left 97% of your retirement funds on the table.

If your portfolio grows faster than inflation the 3% withdrawal can continue indefinitely.

 

[braumeister]

As I said above:

I simply spend what I want and monitor it.

 

[Ronstar]

^ I do the same. I go through periods when I don't withdraw anything because I don't have any urges to spend. Then there are other times when I go a little crazy. It all balances out, but I don't systematically withdraw. It's all based on impulse.

 

[NW-Bound]

The thought here is if I pull the potential spend, particularly after a good return year, I won't be afraid to spend it, whereby if I pull only what I planned to spend, I may set myself up be spooked by next years market movements and leave $$ I might prefer to spend/gift on the table...

Audrey1 does something like the above. And I think there are others too.

If that works for you, then it's fine.
Too mechanical for me. I simply spend what I want and monitor it. As long as I stay under a 3% WR most of the time, I'm happy. No need to lock myself into a plan.

I also spend on what I need and want, while checking periodically on Quicken to see my "progress". Initially, that was to see how I was doing with respect to the 4% guideline.

Then, as the bull market keeps running and my wants dwindle, my WR is so unexpectedly low, but the habit of periodic checking lives on. All it takes is a click on the Spending tab on Quicken. I usually keep Quicken on the Investing tab to see if the market god is still generous.


PS. I just now notice that Quicken has other tabs labeled "Planning" and "Property and Debt". I have never gone there. And this after more than 10 years of using the program.

There's also a "Bills and Income" tab. Well, my wife takes care of all the bills for me. The payments she makes will show up on Quicken after they are posted. And I already know I have income.

 

[Midpack]

I’m going to start a related corollary thread, so I don’t hijack this one.

 

[COcheesehead]

I work backwards. I track my spending in simple groups of about 6 categories, with just about everything going on a credit card. I update a spreadsheet when my credit card bill comes the middle of the month that calculates our withdrawal rate. I add in any non investment income: eBay sales, an occasional photography gig from my wife, rebates, credit card points.
My withdrawal rate without holding back on anything varies month to month from a high of 2.55% to a low of 2.4%
So I have plenty of extra funds should we need it. We bought a car, had some medical expenses, bought patio furniture, etc and stayed at about 2.42% for the year overall so far.
I don’t try to calculate a yearly amount based on a set percentage. I just spend and see if it stays at a reasonable withdrawal rate.

 

[levindb]

Maybe more aggressive than others, but we plan to run out of money at age 105. I plan an ROI that is 3% over inflation, and then just calculate how much to withdraw/spend to get to $0 at the end of the road. Recalculations happen frequently, as account balances change, and inflation impacts our SSA benefits.

We consistently fail to spend all that we should. Our essential needs are about 50% of this "Die With Zero" amount...so we visit that BTD category occasionally.

 

[finnski1]

I like this type of approach. It's what I do. Like, I suspect, most others here, I have an inbuilt sense for when I'm spending more than usual. When my internal "spidey financial senses" are triggered, I take a closer look at my finances to ensure I that am still on a good path. 10 years of living from portfolio withdrawals and, so far, so good. I am looking forward (sort of) to being retired during a downturn, so that my approach seems more "battle-tested". I don't feel that any of us who began portfolio withdrawals in the last 12 years have much right to proclaim experience in weathering the storms, as there have not been any significant ones.

This pretty much describes me to a tee as well! And you're right. The market has done nothing but gone up since March of 2009. Heck it (S&P) closed at an all time closing high yesterday.

 

[RobLJ]

Your other thread was helpful, thanks. Perhaps I will end up doing a "push" for say my 2.5% WR and a pull for up to an additional +/- .5%. My DW is very good at finding ways to spend $$!

For the last 3 years, I've been withdrawing up to the top of the 12% bracket and scraping into a brokerage account that is about 2/3 closed-end income funds and 1/3 cash. I call it the slush account; due to not spending all of the withdrawals and dividends/investment gains the last 3 years, the account is up about 105%. The account is there to fund any emergency or urge to BTD (we withdrew from it in March to pay for about 1/2 of the RAV Prime; the rest will be paid in February from tax/govcredit for the E-vehicle). 110K is a big slush fund, but I don't worry about having to overspend for a year or two.

It's allowing me to be comfortable spending between 4-5% per year, but that withdrawal % goes down quite a bit when I take SS and less than 1/2 when DW starts taking SS. I didn't want to underspend in our late 50s/mid 60s then see a huge wad of money in retirement accounts when we slow down.


Edit: NW reminded me that Audrey does something similar; I couldn't remember whether it was her or scrabbler.

 

[audreyh1]

I just take X% out of the portfolio every Jan based on the prior year Dec 31 value. Simple. This means that if the value of my portfolio drops during the year, I have less income and vice versa.

Because I pull out a year’s with of income at the start of each year I am generally able to ignore market volatility for the rest of the year.

According to the models* I have run for a 50/50 allocation you can take up to 4.35% annually and still maintain the portfolio on average over 30 years keeping up with inflation. And worst historical case you ended up with 1/2 the original portfolio adjusted for inflation.

Annual income can vary widely though, so this works best if you have a lot of discretionary sending including gifting and charity.

*This withdrawal method is modeled as %remaining portfolio in FIREcalc.

Also, we do tend to have the income drive the spending, gradually increasing it during good times, although we tend to run behind what we could spend. We’re also using a pretty conservative 3% withdrawal rate. At our ages (60s) it should probably be higher.

 

[Finance Dave]

It seems to me you ARE overthinking it, but some people are more comfortable with a lot of details...so go for it.

We are still figuring out our exact methodology, but basically I set an "end of year" goal for our net worth (less primary residence) and if we're above it, we'll spend more the next year.

What I'm having a bit of difficulty with is applying the 4% rule in our case, as we are not yet collecting SS, and when we both get on it...4% will be too much whereas we could use more than that now and for the next 5-6 years until we start collecting SS.

I'm still doing a small amount of handyman w*rk, which brings in about $8,000/year...and we have about $30k of rental income...so the rest comes out of retirement accounts.....but admittedly we don't have a formula yet...just take out what we need to live on and then check at end of year against our net worth goal. Over time we'll figure out a more precise approach, but we're both pretty thrifty so for now this is working for us.

 

[SecondCor521]

What I'm having a bit of difficulty with is applying the 4% rule in our case, as we are not yet collecting SS, and when we both get on it...4% will be too much whereas we could use more than that now and for the next 5-6 years until we start collecting SS.

There are at least three ways to do so:

1. Use FIREcalc and plug in your SS numbers on the second tab. Run the simulations, and draw from the portfolio based on them.

2. Throw your SS numbers into an NPV calculator and generate NPVs for your benefit streams. Add those to your FIRE stash, then take 4% (or whatever you deem safe) from that.

3. Figure out how much "bridge" money you need for these next 5-6 years (basically take your SS incomes multiplied by 5 or 6). Subtract that amount from your portfolio. Subtract your SS incomes from your spending. See if the remaining spending is less than 4% of the remaining portfolio.