Question about SWR

[Montecfo]

Of course reducing the withdrawal rate increases portfolio survival. You have to decide what rate is “good enough” for your goals. Is 100% good enough (constant method)? We don’t know as we can’t predict the future and the survival rate was based on the past.

In the case of the %remaining portfolio, you won’t run out of money. The higher withdrawal rates mean wider swings in income but you also get to spend more initially. Even low withdrawal rates will see wide swings. Only after you exceed 4.35% for the 50/50 AA case does the portfolio start to shrink on average in the later years.

I do like your approach. Previously I was a bit puzzled that you kept your "excess withdrawals" as a rainy day/equalizing find.

But now i understand it. Thanks.

 

[FIRE'd@51]

Withdrawing means selling Stocks/Bonds and moving to a Cash Account.

No it doesn't. If you sell stocks/bonds and move the proceeds into a cash account, that cash account is still very much part of your portfolio until you spend it. If you don't spend it, all you've done is change your asset allocation. Someone living off dividends and interest (and never selling stocks/bonds) is withdrawing from his portfolio.

 

[audreyh1]

No it doesn't. If you sell stocks/bonds and move the proceeds into a cash account, that cash account is still very much part of your portfolio until you spend it. If you don't spend it, all you've done is change your asset allocation. Someone living off dividends and interest (and never selling stocks/bonds) is withdrawing from his portfolio.

When you withdraw annual funds for your retirement income, you have to put those funds somewhere - savings, checking, etc. You don’t spend it all on Jan 1.

I know some folks do their withdrawals monthly or quarterly or on an as needed basis - maybe that’s how often they are rebalancing too, trying to maintain their AA. But that is different from how the models work. The models and backtesting all run on an annual basis and are tied to the start of each calendar year. It was perhaps chosen to keep the models a bit simpler, and because more frequent rebalancing isn’t as beneficial.

So how can you withdraw your annual income from your portfolio at the start of each year and yet still count it as part of your portfolio since you didn’t spend it all Jan 1?

 

[NW-Bound]

I think some of the choices can be to some extent psychological. At least it is for me. Will use the below example (let's set aside the exact math/compounding, etc for illustrative purposes).

If one is fine for portfolio survival with a withdrawal rate of 3.5%, but only uses 3.0% in a typical year and banks the 0.5%, then when one needs to use 4.0%, I would rather use the banked 0.5% vs withdrawing the 4.0% for that year.
More comfortable using the reserve than the higher WR%...

If in a future year, when I need to spend more money or if my stash shrinks due to a market downturn and my WR rises up from its current value of 2.5%, I will look at past WR and say it's OK for me to go up.

So, yes, I also think that I am spending money that was "banked" in past years that I could have spent but did not. That money however is commingled inside the stash, and not sitting out in a separate account.

I know that I can spend more when I need to, because I know my past WR was low, but most importantly my stash is bigger than what it used to be.

No it doesn't. If you sell stocks/bonds and move the proceeds into a cash account, that cash account is still very much part of your portfolio until you spend it. If you don't spend it, all you've done is change your asset allocation. Someone living off dividends and interest (and never selling stocks/bonds) is withdrawing from his portfolio.

In my case, I always have loose cash inside after-tax as well as tax-advantaged accounts. And it is always included in the total AA. I have not needed to sell anything to get cash. When I sell stocks or bonds, it is not for getting cash to spend.

 

[FIRE'd@51]

So how can you withdraw your annual income from your portfolio at the start of each year and yet still count it as part of your portfolio since you didn’t spend it all Jan 1?

Because it is still part of the cash part of your portfolio until you spend it. If you were to to die without spending the entire Jan 1 amount, it would be included in your estate's portfolio.

 

[audreyh1]

Because it is still part of the cash part of your portfolio until you spend it. If you were to to die without spending the entire Jan 1 amount, it would be included in your estate's portfolio.

When you withdraw your annual income and you rebalance the portfolio, you do not include the part you just withdrew in your AA and rebalancing calculation. That’s how the models including FIRECALC work. They assume an entire year of income is removed from the portfolio and they rebalance the remainder.

 

[ShokWaveRider]

Seems like some have too much time to overanalyze this stuff. We simply take what we need when we need it from the stash, and keep 3 years of expenses in cash in a MM Account for general use and unplanned for expenses. Job done.

 

[pb4uski]

My solution to the above is to have a portion (5% in my case) of cash in a 1.5% online savings account that is part of my retirement portfolio. When I rebalance I replenish the cash back up to 5%. I have an automatic monthly transfer from this online savings account to the local credit union account that we use to pay our bills.... those transfers are my withdrawals since I don't view the local credit union account as part of my retirement portfolio. That account usually has $5-20k in it.

The models assume annual because it is easier with a 30-40 year model vs 360-480 months and the conclusions would not be any different.

 

[ShokWaveRider]

Honestly, we do not bother tying to get a max interest rate on our 3 years stored cash for expenses etc. Money. It is so insignificant in the grand scheme, so we keep it in the same CU that we use daily. OK we get only .5% interest, but Heck... "Blow that Dough".

 

[Dtail]

When you withdraw your annual income and you rebalance the portfolio, you do not include the part you just withdrew in your AA and rebalancing calculation. That’s how the models including FIRECALC work. They assume an entire year of income is removed from the portfolio and they rebalance the remainder.

+1
It just shows that there are different opinions as to whether withdrawn monies for the year and unspent monies from prior years are part of NW and the Investment Portfolio, or just part of NW.

 

[NW-Bound]

People have different ways of dividing their stash, counting it, as well as spending it. It's all OK, if it makes them happy.

But no matter how they do it, it comes down to a simple truth.

You spend too much, your stash shrinks. You spend little, it will grow.

PS. The problem is that the market is often so devious, it shrinks your stash even if you do not spend. No accounting method can fix that.

 

[Cut-Throat]

No it doesn't. If you sell stocks/bonds and move the proceeds into a cash account, that cash account is still very much part of your portfolio until you spend it. If you don't spend it, all you've done is change your asset allocation. Someone living off dividends and interest (and never selling stocks/bonds) is withdrawing from his portfolio.

Yes, it Does ! .... The Cash Account is NOT Part of MY Asset Allocation, because it is not part of MY Portfolio. It is a separate Account that is NEVER to be invested in Stocks or Bonds again. It is completely Different than Cash in the Portfolio, which may be invested at some point in time.

 

[pb4uski]

It all depends on how one defines their retirement portfolio.... some include cash and others do not... there is no right answer. But I think it is right to say that once the money leaves your retirement portfolio, however you define it, that it is a withdrawal.

 

[Dtail]

Yes, it Does ! .... The Cash Account is NOT Part of MY Asset Allocation, because it is not part of MY Portfolio. It is a separate Account that is NEVER to be invested in Stocks or Bonds again. It is completely Different than Cash in the Portfolio, which may be invested at some point in time.

+1

It all depends on how one defines their retirement portfolio.... some include cash and others do not... there is no right answer. But I think it is right to say that once the money leaves your retirement portfolio, however you define it, that it is a withdrawal.

+1 that was easy.

 

[MichaelB]

It all depends on how one defines their retirement portfolio.... some include cash and others do not... there is no right answer. But I think it is right to say that once the money leaves your retirement portfolio, however you define it, that it is a withdrawal.

No right answer? Blasphemy! This is the interwebs, of course there's one right answer. In fact, there may be more than one.

 

[NW-Bound]

... Withdrawing means selling Stocks/Bonds and moving to a Cash Account... You don't have to spend it.

No it doesn't...

Yes, it Does ! ...

...I think it is right to say that once the money leaves your retirement portfolio, however you define it, that it is a withdrawal.

When I transfer stock shares in-kind from my IRA account to a brokerage account , or even a Roth, within the same institution, not even selling anything to convert to cash, the IRS calls it a withdrawal. Yes, they tax me. And I suffer some "asset shrinkage". No change in AA, except for some cash loss due to tax.

When I transfer cash from an after-tax account to a checking account within the same institution, well, I call it a transfer.

When the cash leaves my checking account to go to those greedy vendors and service providers, I call it spent.

And only when it is spent that it stops showing up on my Quicken screen, and is no longer reflected in the AA summary that Quicken shows me. To do anything different than that takes more work. And I don't want more work.

 

[FREE866]

PS. The problem is that the market is often so devious, it shrinks your stash even if you do not spend. No accounting method can fix that.

Actually the opposite is true. The market usually goes up! If you look at history its up 2/3 of the time!

 

[Cut-Throat]

PS. The problem is that the market is often so devious, it shrinks your stash even if you do not spend. No accounting method can fix that.

And this is exactly why you don't want to take an Inflation adjusted Fixed amount withdrawal. The Market Shrinking is exacerbated by continuing to withdraw into the teeth of a Bear Market.

 

[audreyh1]

Actually the opposite is true. The market usually goes up! If you look at history its up 2/3 of the time!

On average it goes up. But there are periods where it really goes down. And one has to make it through those periods and survive.

The %remaining portfolio method is dominated by portfolio ups and downs. The modest withdrawals make little difference in the face of large market swings.

 

[USGrant1962]

And this is exactly why you don't want to take an Inflation adjusted Fixed amount withdrawal. ...

Historically the Trinity Study, Bengen, ERM, et al say otherwise if your WR is about 4%, or slightly less for longer periods. "Historically" includes both the Great Depression and the Great Inflation, so it covers some pretty extreme economic conditions.

I intend to be more flexible than a fixed inflation-adjusted withdrawal and suspect most people will too, but the SWR math works with fixed inflation-adjusted withdrawals.

 

[FREE866]

On average it goes up. But there are periods where it really goes down. And one has to make it through those periods and survive.

The %remaining portfolio method is dominated by portfolio ups and downs. The modest withdrawals make little difference in the face of large market swings.

True, but If you look at calendar years there has not been ONE year that the S and P was down greater than 50% and there has been ONE year down more than 40%

The number of years that market has been down more than 10 % in a calendar year is TEN.....pretty rare....

and that is in almost a 100 year time frame....

 

[NW-Bound]

To see the past periods when the market was down or flat for many years and got decimated by inflation, one can easily run FIRECalc with a WR of 0.

 

[audreyh1]

True, but If you look at calendar years there has not been ONE year that the S and P was down greater than 50% and there has been ONE year down more than 40%

The number of years that market has been down more than 10 % in a calendar year is TEN.....pretty rare....

and that is in almost a 100 year time frame....

You can’t just look at a single year in isolation - it’s the sequence of years plus inflation that gets you.

I have already been through two nasty bear markets since retiring. Markets can go down multiple years in a row - look at 2000-2002. It took a long time for the S&P500 to recover from the 2000-2002 drop - and just in time next even nastier bear. Now, pile on top of that withdrawals from the portfolio AND inflation. Portfolios seriously shrink in real terms!

I know from modeling the %remaining withdrawal method with 50/50 AA, that I have to be prepared for my real income to drop as much as 60% - and that it could take as long as 16 to 25 years before finally turning around. Things have gotten that bad in the past and can’t be ignored.

Sure, I’ve already been through two nasty bear markets by historic standards, but that doesn’t mean that I won’t see another nasty bear any time in the next 30 years.

 

[Cut-Throat]

Historically the Trinity Study, Bengen, ERM, et al say otherwise if your WR is about 4%, or slightly less for longer periods. "Historically" includes both the Great Depression and the Great Inflation, so it covers some pretty extreme economic conditions.

I intend to be more flexible than a fixed inflation-adjusted withdrawal and suspect most people will too, but the SWR math works with fixed inflation-adjusted withdrawals.

I certainly understand that "Historically" the WR of 4% may work...... But, I am preparing for something "Unprecedented". Maybe much worse than "Historically".... And the solutions here that I often see proposed are SWRs of 3.5%, 3% or even 2.5% ..... How Low can we go?

I am not interested in setting my WR below 4%... I prefer 5% or more of my portfolio balance using VPW..... Which is much safer than 2.5% fixed SWR....

 

[Dtail]

I certainly understand that "Historically" the WR of 4% may work...... But, I am preparing for something "Unprecedented". Maybe much worse than "Historically".... And the solutions here that I often see proposed are SWRs of 3.5%, 3% or even 2.5% ..... How Low can we go?

I am not interested in setting my WR below 4%... I prefer 5% or more of my portfolio balance using VPW..... Which is much safer than 2.5% fixed SWR....

I like the VPW and the Clyatt 4/95 methodologies. Prefer the Clyatt at this point, as not willing to take the large hit of VPW in a 2008 scenario.

Probably less upside than VPW with Clyatt, but also probably less downside, although in agreement with the % of remaining portfolio as the starting point.