Question about spending from nestegg prior to retirement

[BaseballCoach]

Hello,

Thank you for all your help with my previous questions.

I am looking at pulling out a small amount of money each year prior to retirement and making sure I'm using Firecalc correctly.

My question:

I am 13 years away from retirement with a retirement nest egg of $1.4M currently.

I would like to pull $35k each year for the next 13 years. When I run firecalc with these inputs - it shows $3.4M is the average amount I would have at the start of my retirement.

I understand that we could have more or less than this amount in 13 years. If we have less than this, that is a risk I understand I'm taking and I'm okay with it.

My question is - Am I using Firecalc correctly and the $3.4M is the avg. amount from $1.4M in 13 years spending $35k year up to that point?

Thank you for your time.

 

[Backpacker]

Are you still contributing during the next 13 years? I used compound interest calculator and at 7% per year, no contributions and 35k w/d per year i get 2.7m at end of 13 years.

 

[BaseballCoach]

Thank you for checking and responding. I'm running it as I'm not contributing for the next 13 years. I have run it with calculator as well and assume the reason why Firecalc is getting a larger ending amount is due to the avg. returns over the 13 years are larger? That doesn't seem right to me, but that is what I keep seeing on the Firecalc results page. See Firecalc results page below.

FIRECalc looked at the 138 possible 13 year periods in the available data, starting with a portfolio of $1,400,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 138 cycles. The lowest and highest portfolio balance at the end of your retirement was $725,946 to $8,078,376, with an average at the end of $3,411,387. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

 

[Sunset]

....

I am looking at pulling out a small amount of money each year prior to retirement and making sure I'm using Firecalc correctly.

My question:

I am 13 years away from retirement with a retirement nest egg of $1.4M currently.

I would like to pull $35k each year for the next 13 years. ..

I don't recall your previous questions, so I don't have any background info.

However, I hope you have a really good reason for doing this.

Because you will pay an extra 10% penalty plus regular tax on any money withdrawn from IRA/401K prior to age 59.5.

Does this $35K number mean you want to spend $30K and ~$5K is for taxes ? If you want to spend $35K , then you will probably need to take out $42K to pay $7K in taxes, and have $35K.

 

[bltkmt]

I think he said nest egg, so that could mean after tax accounts.

 

[SecondCor521]

My question is - Am I using Firecalc correctly and the $3.4M is the avg. amount from $1.4M in 13 years spending $35k year up to that point?

Without seeing your FIREcalc inputs, it's impossible to tell.

If you recreate your FIREcalc results and then click on the "show input data" link in the upper right corner of the results page and then paste all those inputs here, or click on the other link that is something like "link with input data" and post that link here, someone might be willing to try to make sure that you are using FIREcalc in a way that is aligned with what you are trying to ask it.

The biggest risk I see is that you're not dealing with the "future retirement date" input (which IIRC has a small issue of its own), or you're putting the $35K in as income instead of spending - which can happen if you're putting the $35K in the wrong field or are maybe putting a negative value or negative sign in the wrong place.

 

[BaseballCoach]

Input Data for this model

Withdrawals 35,000
Plan End 13
95% Rule from WorkLess, Live More*
Percentage used for 95% Rule* 0
Bernicke Spending Reductions*
Current Age (for scheduling Bernicke spending reductions)* 48
Starting Portfolio 1,400,000
Percent in Stocks 85%
Expense Ratio 0.18%
Retirement Year* 2021
Contributions until then* 0
Social Security* 0
Starting in* 2034
Spouse Social Security* 0
Starting in* 2036
Other withdrawal change* +0
Starting in* 2024
Inflation adjusted* yes
Other withdrawal change* +0
Starting in* 2026
Inflation adjusted* yes
Other withdrawal change* +0
Starting in* 2030
Inflation adjusted* yes
Lump sum change to portfolio* +0
In year 2024
Lump sum change to portfolio* +0
In year * 2034
Lump sum change to portfolio* +0
In year * 2039
Inflation Rate selected* 0%
Fixed income model * LongInterest
Override start year* 1871
Terminal Value* 0
US Micro Cap** 10
US Small** 10
US Small Value** 10
S&P 500** 40
US Large Value** 40
US LT Treasury** 10
LT Corporate Bond** 15
1 Month Treasury** 5
* - Used in Advanced FIRECalc


FIRECalc Results
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.

FIRECalc looked at the 138 possible 13 year periods in the available data, starting with a portfolio of $1,400,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 138 cycles. The lowest and highest portfolio balance at the end of your retirement was $725,946 to $8,078,376, with an average at the end of $3,411,387. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 13 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.

Understanding the charts below: Don't try to follow any individual line -- with most scenarios, there are just too many of them. But if you look at the mass of lines, and the zero axis, you can get a clear visual representation of how frequently your strategy would have failed (dropped below zero) or succeeded. The objective of presenting the information this way is to allow you to get a "big picture" sense of the way your strategy would have performed historically.

 

[BaseballCoach]

It is after tax - Vanguard account - where I would pull the yearly $35k from.

 

[SecondCor521]

So I was able to recreate your scenario with the inputs you posted.

I think the one choice you've made that I have not done and would not do is to assume 0% inflation. Personally I leave it as the default choice of "CPI", and when I make that one change and leave everything else the same, I get an average ending value of about $2.4M. Which is, notably, about $1M less than your result.

The wording in FIREcalc says that it adjusts pretty much everything for inflation. I know that it applies those to withdrawals (so that $35K would be adjusted for CPI). If you set it to 0%, then your spending would remain at $35K exactly annually. But the historical returns you're testing it against (those 138 cycles) would not be adjusted for inflation. In the past, there have been periods of high inflation and high returns, and you're making those periods look better in your results because you're basically telling FIREcalc that even if inflation is going up at 10% a year, you'll manage to still only spend $35K each year for the next 13 years.

What I am also not certain about, and this is sort of a general caution to you, is how that $2.4M or $3.4M should be interpreted. When inflation is set to "CPI", then I believe that it is adjusted to present value (so $2.4M or $3.4M in today's dollars). When inflation is set to 0% as you have done, I'm not sure what FIREcalc does.

Other than that, yeah, I think your inputs match the scenario you described in your original post.

 

[youbet]

I think the one choice you've made that I have not done and would not do is to assume 0% inflation. Personally I leave it as the default choice of "CPI", and when I make that one change and leave everything else the same, I get an average ending value of about $2.4M. Which is, notably, about $1M less than your result.

Very much agree.

Setting inflation to zero is a pretty extreme scenario to model for a 13 year period. I agree with you SC521, set it to CPI.

OP should also note that the "average" ending portfolio value is not necessarily the "most likely" ending portfolio value. The distribution of outcomes is significantly skewed to the right. Most folks here seem to focus on the lowest ending portfolio value.

 

[BaseballCoach]

So I was able to recreate your scenario with the inputs you posted.

I think the one choice you've made that I have not done and would not do is to assume 0% inflation. Personally I leave it as the default choice of "CPI", and when I make that one change and leave everything else the same, I get an average ending value of about $2.4M. Which is, notably, about $1M less than your result.

The wording in FIREcalc says that it adjusts pretty much everything for inflation. I know that it applies those to withdrawals (so that $35K would be adjusted for CPI). If you set it to 0%, then your spending would remain at $35K exactly annually. But the historical returns you're testing it against (those 138 cycles) would not be adjusted for inflation. In the past, there have been periods of high inflation and high returns, and you're making those periods look better in your results because you're basically telling FIREcalc that even if inflation is going up at 10% a year, you'll manage to still only spend $35K each year for the next 13 years.

What I am also not certain about, and this is sort of a general caution to you, is how that $2.4M or $3.4M should be interpreted. When inflation is set to "CPI", then I believe that it is adjusted to present value (so $2.4M or $3.4M in today's dollars). When inflation is set to 0% as you have done, I'm not sure what FIREcalc does.

Other than that, yeah, I think your inputs match the scenario you described in your original post.

Thank you very much for this answer. This makes total sense and was what I was looking for. I see my mistake. Thank you for spending the time to send this over.

 

[BaseballCoach]

Very much agree.

Setting inflation to zero is a pretty extreme scenario to model for a 13 year period. I agree with you SC521, set it to CPI.

OP should also note that the "average" ending portfolio value is not necessarily the "most likely" ending portfolio value. The distribution of outcomes is significantly skewed to the right. Most folks here seem to focus on the lowest ending portfolio value.

Thank you for the response. I agree, most people on here are very conservative - which is a good thing. But I also view having 1.5x or 2x what I need at retirement as a mistake. That is wasted time working or building the business that I didn't need to do. I could have stopped. I understand hindsight is 20/20 and you can't be that accurate with future return amounts - but I want to be wise and when there is good chance we will have enough - I want to stop and enjoy it.

Having too much at retirement will bother me just as much as not having enough.

Thank you again to all that have answered.

 

[SnowballCamper]

But I also view having 1.5x or 2x what I need at retirement as a mistake. That is wasted time working or building the business that I didn't need to do. I could have stopped. I understand hindsight is 20/20 and you can't be that accurate with future return amounts - but I want to be wise and when there is good chance we will have enough - I want to stop and enjoy it.

The beautiful thing about retiring is that you can do it when you have enough. No one forces you to make the mistake of having too much. OTOH you'll never know if you have too much until the day you die, and then it doesn't matter. But if you run out before you die, that is a mistake that will matter to you. So the prudent thing to do is be certain that you have enough. This is why we all focus on getting 100% (or nearly 100%) with firecalc.

 

[RobbieB]

Yeah, it doesn't matter in the least what we think. It matters what you think.

Do what you want to do.

I post stuff here that I did. No recc's, no advice, just history.

 

[BaseballCoach]

The beautiful thing about retiring is that you can do it when you have enough. No one forces you to make the mistake of having too much. OTOH you'll never know if you have too much until the day you die, and then it doesn't matter. But if you run out before you die, that is a mistake that will matter to you. So the prudent thing to do is be certain that you have enough. This is why we all focus on getting 100% (or nearly 100%) with firecalc.

You might want to google the professors involved in the Trinity Study (Firecalc based on) and read their thoughts on confidence levels. They discuss anything over 80% is overkill. I'm not going to argue, but I thought just like you and really dove into the study and what the professors believed. It changed my mind in many areas.

 

[Exchme]

I suggest OP look at how many cases have significantly depleted values after these early withdrawals. It's hard to read all the squiggles but maybe 10% of the cases would be down 30% or more and many more didn't grow much with the early withdrawals.

I also recommend a comparison to a Firecalc run without any withdrawals. The difference looks pretty significant to me.

The historical perpetual withdrawal rate is around 3.3% for a high equity allocation like this, so say $46K on the current funds. If that funds retirement, then starting with draws less than that seems reasonable. But if the idea is that this nest egg will grow in the next 13 years to multiple millions, the best way to assure that is not to get your hand in the cookie jar too early.

 

[SnowballCamper]

You might want to google the professors involved in the Trinity Study (Firecalc based on) and read their thoughts on confidence levels. They discuss anything over 80% is overkill. I'm not going to argue, but I thought just like you and really dove into the study and what the professors believed. It changed my mind in many areas.

Ahhh well, it's too late. Retired at about 43, four years ago. Good luck!

 

[RetiredHappy]

If you need to withdraw only $35K each year, I don't see you running out of money. Personally I don't trust FireCalc numbers and use Fidelity retirement calculator as well as my own Excel spreadsheet to project future numbers.

The greater question is what if you need to withdraw more than $35K, as in medical emergencies and max'ing out deductibles, OOP costs, need for expensive drugs, home replacement items - HVAC, roof etc.

When I was your age, $4M was my number to retire, but we do like nice things. Different priorities.

 

[BaseballCoach]

If you need to withdraw only $35K each year, I don't see you running out of money. Personally I don't trust FireCalc numbers and use Fidelity retirement calculator as well as my own Excel spreadsheet to project future numbers.

The greater question is what if you need to withdraw more than $35K, as in medical emergencies and max'ing out deductibles, OOP costs, need for expensive drugs, home replacement items - HVAC, roof etc.

When I was your age, $4M was my number to retire, but we do like nice things. Different priorities.

Thanks, but that wasn't my question.