Perpetual Income?

[Ohio Retiree]

Can I get some feedback on my calculation of withdrawal and growth of an IRA or 401k after retirement?

The values below are just round numbers to show my theory of your retirement account and also some growth. I'm looking for some kicking of my theory, am I right?

The synopsis, your account has $1,000,000 in it. Say that you withdraw annually $16,800, that's taxed at say 15% income tax, then the balance less the withdraw and the income tax of $2,520 is then $980,680. Then say you have your account with moderate growth mutual funds, and you average 2% growth, and then have a new balance of $1,000,293.60.


401k/IRA bal $1,000,000.00
withdrawn $(16,800.00)
tax rate 15% $(2,520.00)
balance $980,680.00
401k/IRA growth 2% $19,613.60
balance $1,000,293.60

Am I missing anything from this equation? Is it this simple that the fund regenerates?

The 15% income tax on the withdrawn amount is my guess at the tax rate in retirement. I know it's different for each situation. And I realize that at income tax time, some of the SS dollars may become taxed income, but again that depends on the situation.

I'm really just trying to see how long an amount will last. I know there are many calculators online, but none I found that shows the theory in this way.

What do you all think?

 

[OldShooter]

... Is it this simple that the fund regenerates? ...

Well, if you take money out more slowly than money comes in, then the balance will grow. It doesn't matter how you spend the money you take out. The retirement issues are in the next level down. You don't know for sure what you will have to take out and you know even less about what the total return of the portfolio will be. You also don't know when you will die and no longer need to draw at all.

Actually our portfolio balance and the balance of many others here has stayed level or increased over the past decade +/- of good market returns. It's been a great ride but continuation is hardly guaranteed.

 

[Ohio Retiree]

Well, if you take money out more slowly than money comes in, then the balance will grow. It doesn't matter how you spend the money you take out. The retirement issues are in the next level down. You don't know for sure what you will have to take out and you know even less about what the total return of the portfolio will be. You also don't know when you will die and no longer need to draw at all.

Actually our portfolio balance and the balance of many others here has stayed level or increased over the past decade +/- of good market returns. It's been a great ride but continuation is hardly guaranteed.

I agree, there are unknowns, and you never know what may be ahead. What I'm going into is a retirement with no debt. I have monthly expenses as we all do. I'll have to pay for insurance for three years, then onto Medicare and drop insurance to a supplemental plan.

My main goal in life is to live a quiet country life. I've travelled a lot in my life, and now just wish to be home. And maybe meet some of the people in the small village I've lived in for 35 years. I was just never here traveling for work.

I'm just very tired of the day to day grind of working. Waiting a couple more years for a little bit of SS money increase just isn't worth it to me.

 

[aja8888]

I don't know how old you are, but when you hit RMD age (72), your mandatory withdrawal from the tax sheltered account will be around 4% per year.

 

[Ohio Retiree]

I don't know how old you are, but when you hit RMD age (72), your mandatory withdrawal from the tax sheltered account will be around 4% per year.

That's good info, I remember reading somewhere that there was a point of larger distribution. I wonder is it the same if you keep the funds in the 401k? I guess no real reason to move it to an IRA if I'm no longer contributing to it?

FYI, I'm 61, and am thinking of retiring in 2021 when I'm 62.

 

[Souschef]

I don't know how old you are, but when you hit RMD age (72), your mandatory withdrawal from the tax sheltered account will be around 4% per year.

Yes, but you do not have to spend it.With DW's RMD, I just move the amount or shares to her taxable account,

 

[Ohio Retiree]

Yes, but you do not have to spend it.With DW's RMD, I just move the amount or shares to her taxable account,

Agree, I'm putting a sheet together now that shows me what the balance is month by month with growth assumptions. Also the amount withdrawn each much adjusts for inflation. I'm using values that are higher than probable. That way I should be see better numbers in reality

 

[Out-to-Lunch]

Your "theory" seems correct, but it implies that you have saved a LOT of money. You will have saved more than 50 times your annual expenses.

 

[RetireBy90]

I started projecting year end balance of my retirement funds several years ago, maybe 10 years or so. My draw rate is 3-3.5% and my projection is for 6% return. I’m only 2 years into retirement but the 6% projection has been lower than actual returns each year. My suggestion is you can use a higher return rate and still be conservative in your projections. My opinion only, but is has worked for me well.

Best of luck when you do retire.

 

[ut2sua]

Can I get some feedback on my calculation of withdrawal and growth of an IRA or 401k after retirement?

The values below are just round numbers to show my theory of your retirement account and also some growth. I'm looking for some kicking of my theory, am I right?

The synopsis, your account has $1,000,000 in it. Say that you withdraw annually $16,800, that's taxed at say 15% income tax, then the balance less the withdraw and the income tax of $2,520 is then $980,680. Then say you have your account with moderate growth mutual funds, and you average 2% growth, and then have a new balance of $1,000,293.60.


401k/IRA bal $1,000,000.00
withdrawn $(16,800.00)
tax rate 15% $(2,520.00)
balance $980,680.00
401k/IRA growth 2% $19,613.60
balance $1,000,293.60

Am I missing anything from this equation? Is it this simple that the fund regenerates?

The 15% income tax on the withdrawn amount is my guess at the tax rate in retirement. I know it's different for each situation. And I realize that at income tax time, some of the SS dollars may become taxed income, but again that depends on the situation.

I'm really just trying to see how long an amount will last. I know there are many calculators online, but none I found that shows the theory in this way.

What do you all think?

Bold is mine. OP, what you showed is a possible scenario. There is no guarantee that you will have a gain in any particular year. So your final balance of $1,000,293.60 could be anything North or South of that. But in general, if you have a mix of stock/bond between 75%/25% to 25%/75%, there is historical data showing that you can withdraw 3%->4%, and you $ can last 30 years or more in the worst historical case.
One thing I have notice is you may confuse yourself by separating your "withdraw" from your "tax" $ while intending to get both out of your before tax accounts. As far as the IRS is concern, any $ coming out of your before tax IRA is taxable. How you spend that $ is up to you.

 

[Ohio Retiree]

Bold is mine. OP, what you showed is a possible scenario. There is no guarantee that you will have a gain in any particular year. So your final balance of $1,000,293.60 could be anything North or South of that. But in general, if you have a mix of stock/bond between 75%/25% to 25%/75%, there is historical data showing that you can withdraw 3%->4%, and you $ can last 30 years or more in the worst historical case.
One thing I have notice is you may confuse yourself by separating your "withdraw" from your "tax" $ while intending to get both out of your before tax accounts. As far as the IRS is concern, any $ coming out of your before tax IRA is taxable. How you spend that $ is up to you.

Thanks for the input and feedback. There for sure is no guarantee that things grow like we want. But as you said, historically they do if we have the right funds. The funds that my 401k is in now have been good to me. I see the proposed doubling of the account about every four years. But that also includes contributions. People forget that part.

Based on only SS and a small withdraw from my retirement fund, I expect to have 60% of my current take home pay. It could be more if I take more out. But I can live pretty much as I do now on 60%. I blow a lot of money on fun stuff and toys, EI: guns, motorcycles, etc. I have plenty of toys to keep me busy, I won't need to buy more. That has been the plan the last several years, get the stuff I want before I retire.

I just have to get comfortable with the idea. That's where some of you come in.

 

[Ohio Retiree]

I started projecting year end balance of my retirement funds several years ago, maybe 10 years or so. My draw rate is 3-3.5% and my projection is for 6% return. I’m only 2 years into retirement but the 6% projection has been lower than actual returns each year. My suggestion is you can use a higher return rate and still be conservative in your projections. My opinion only, but is has worked for me well.

Best of luck when you do retire.

Thanks! I know it should work ok, but I have to get my mind there in the next couple of months.

 

[DireWolf]

If you read up on safe withdrawal rates (SWR), you’ll quickly come across the Trinity Study research and the 4% Rule. 62 is basically close enough to the study’s 30 year horizon that it applies to you (early retirement, like, years and years before SS kicks in, need to account for the longer horizon and use a slightly lower rate, like 3.5%). The problem with the constant dollar fixed percentage SWRs is that are built around surviving really bad historical sequences of returns. In most cases, your portfolio ends up growing, even at 4% withdrawals after inflation (because the market has typically average more like 7%). Your example, with like 2% withdrawals, you’d be looking at having a massive portfolio in 30 years.

 

[Ohio Retiree]

If you read up on safe withdrawal rates (SWR), you’ll quickly come across the Trinity Study research and the 4% Rule. 62 is basically close enough to the study’s 30 year horizon that it applies to you (early retirement, like, years and years before SS kicks in, need to account for the longer horizon and use a slightly lower rate, like 3.5%). The problem with the constant dollar fixed percentage SWRs is that are built around surviving really bad historical sequences of returns. In most cases, your portfolio ends up growing, even at 4% withdrawals after inflation (because the market has typically average more like 7%). Your example, with like 2% withdrawals, you’d be looking at having a massive portfolio in 30 years.

You are correct. Just based on straight input out to age 85, my fund grew to seven times it's original value. I need to tune it up and add inflation, some lower return years etc, to try to get a closer fix on what would be real.

I will look up the SWR and read up on that as well. Thanks for that.

 

[rodi]

As DireWolf suggested - what you are talking about is a proposed withdrawal rate. For many calculators - that includes taxes as part of your withdrawal... so you might need to withdraw more when you hit RMD age to cover the extra taxes.

A 2% WR is perpetual, even with extended down cycles like the great recession most recently. 4% WR works for a 30 year horizon in 95% of the cases (Trinity Study). (40k GROSS withdrawal for your $1M example). Many 'experts' have suggested that a 3-3.5% withdrawal rate is safer for a longer retirement. Success with Trinity was not going negative before 30 years... so in many of the cases principle was eaten into to.

You can probably afford to withdraw more than your example.

 

[RunningBum]

Firecalc will give you a more realistic view than whatever it is that you are doing. I see you looked at it a bit in your "Hi" thread. I'd spend a little more time making sure your inputs to that are correct.

It doesn't hurt at all to come up with your own calculations, but I just don't think you are taking into account everything, like what happens if we have a downturn for the first few years of your retirement. With a pandemic still going and slowing down the economy a lot, and the govt going trillions of $ more in debt, it could certainly happen.

However, if you are talking about a 2% WR right now, you are probably fine.

 

[DireWolf]

Yeah, FireCalc is really good, especially if you just plan on a fixed withdrawal rate. When you’ve got a SS/pension floor, I am a big fan of Bogleheads VPW method. The variable rate adjusts as the market changes and you age. If the market takes a dump, you don’t withdraw as much, but even the lowest it gets in the historical backtesting might be enough atop SS for you (iirc the worst case years it pulled in something like $27k on a starting 1M portfolio, but in good years, it might pull in way, way more safely). I like how it runs out much longer than 30 years.

 

[Ohio Retiree]

Firecalc will give you a more realistic view than whatever it is that you are doing. I see you looked at it a bit in your "Hi" thread. I'd spend a little more time making sure your inputs to that are correct.

It doesn't hurt at all to come up with your own calculations, but I just don't think you are taking into account everything, like what happens if we have a downturn for the first few years of your retirement. With a pandemic still going and slowing down the economy a lot, and the govt going trillions of $ more in debt, it could certainly happen.

However, if you are talking about a 2% WR right now, you are probably fine.

Yes, I'm calculating everything conservatively. If that works, then anything over that is gold. I like to make my own calculations as well because that way I understand the data. I like looking at several angles.

 

[Ohio Retiree]

As DireWolf suggested - what you are talking about is a proposed withdrawal rate. For many calculators - that includes taxes as part of your withdrawal... so you might need to withdraw more when you hit RMD age to cover the extra taxes.

A 2% WR is perpetual, even with extended down cycles like the great recession most recently. 4% WR works for a 30 year horizon in 95% of the cases (Trinity Study). (40k GROSS withdrawal for your $1M example). Many 'experts' have suggested that a 3-3.5% withdrawal rate is safer for a longer retirement. Success with Trinity was not going negative before 30 years... so in many of the cases principle was eaten into to.

You can probably afford to withdraw more than your example.

I agree. And I plan to walk into the first couple of years slowly, not blowing money. I have the ability to earn side cash income as well if I choose. I'm just pretty sure I'm done working. I want to take better care of myself, and get as healthy as possible.

 

[rodi]

Yes, I'm calculating everything conservatively. If that works, then anything over that is gold. I like to make my own calculations as well because that way I understand the data. I like looking at several angles.

I did that. And to make sure my spreadsheet and assumptions were correct I also used a variety of calculators.
Firecalc,
Quicken Lifetime Planner (deterministic when it comes to returns - but allows flexibility on big ticket annual deviations in spending like weddings/college/selling a house)
Fidelity's retirement planner - has a mode that lets you inflate some costs at a higher rate of inflation (eg college and health insurance)
i-ORP - good for looking at tax benefits of roth conversion (or not).

With each calculator - I then modified my personal spreadsheet with the details I'd discovered from the new/different calculator. In the end I had a pretty solid plan.

 

[Sunset]

OP - Since you seem to be new to this.

I'll mention you should look at the expenses of your 401K, some have high expenses, and some have very low expenses (normally in my little experience, the small company ones have high expenses).

If you find your 401K has high expenses, you can move it (roll it over) to an IRA, and invest in whatever you like, including the exact same funds or better cheaper ones.

Feel free to ask folks once you find out your fees for the 401K and the funds within it, if yours are expensive or cheap.

 

[Ohio Retiree]

OP - Since you seem to be new to this.

I'll mention you should look at the expenses of your 401K, some have high expenses, and some have very low expenses (normally in my little experience, the small company ones have high expenses).

If you find your 401K has high expenses, you can move it (roll it over) to an IRA, and invest in whatever you like, including the exact same funds or better cheaper ones.

Feel free to ask folks once you find out your fees for the 401K and the funds within it, if yours are expensive or cheap.

That's on the list of things to investigate. Currently the 401k resides at Fidelity.

 

[racy]

..., I'm putting a sheet together now that shows me what the balance is month by month with growth assumptions. Also the amount withdrawn each much adjusts for inflation. ...

This comment made me a little nervous. A spreadsheet will do the math and present huge balances if growth outpaces withdrawals. But what's really important is the concept of "sequence of return risk". Real life returns won't be like your spreadsheet. (And, probably your withdrawals).

 

[WestUniversity]

A calculator I use in conjunction with Firecalc that I really like is called Rich Dead or Broke. It allows you to input a spending flex percentage thus allowing the spending amount in your plan when necessary to flex based upon the percentage set thereby increasing the likelihood of success for your plan.

In our case the biggest flex amounts in our budget are travel and dining out, which combined make up a healthy double digit percentage of our spending. If there were a market retreat or say even a pandemic, needless to say our spending would and has adjusted accordingly, which obviously affects the success rate of the plan, as opposed to say having a constant rigid withdrawal amount over the life of the plan.

Like Firecalc It also has the functionality to layer in other income or expense streams and apply beginning and ending dates to each of those streams. Additionally it brings in the death component to our planning which can also be eye-opening.

I use it and Firecalc in conjunction with my own spreadsheet in my routine financial planning and review. The link is provided below. See what you think...

https://engaging-data.com/will-money-last-retire-early/

 

[pb4uski]

... What do you all think?

I think with a 2% rate of return and 1.93% WR that it is obvious that one would have a 100% success rate.... especially if withdrawals are not adjusted for inflation.

I think you need to consider the impact of inflation on withdrawals if they are you spending and the impact of pying taxes on RMDs even if you don't spend the RMD and other have pointed out.

Finally, I'm not quite sure what the point of the whole exercise is.