Recalculated Withdraw Rate

[txtig]

I was updating some of my spreadsheets following the big hit taken by my IRA’s due to the Coronavirus market collapse. My withdrawal rate (based on today’s portfolio balance) has increased from 2.71% to 3.44%. I think I can live with that. I am really glad that I wasn’t at a 4% WR prior to the big drop. That would have made me uncomfortable.

 

[Dd852]

I’m with you. I know the whole idea of safe withdrawal rates is that one “shouldn’t “ worry about big events like this as long as one has the right AA and is disciplined for the long term, but psychologically.... and certainly the unemployment rates mean that this is not going to any ordinary downturn.

 

[statsman]

I have to wonder about the advice (not necessarily from this forum) to use a 4% WR as a guideline, with the belief that part-time work could be used to generate some income should an early retiree encounter a bad market the first few years of retirement or they miscalculated a bit on how long their funds would last. Sounds somewhat sensible, in theory, except reality has now given us a job environment that will take many months, if not years, to unravel.

 

[FIREd]

My WR calculation depends upon the ability of my tenants to keep paying their rent. And that's a big unknown at the moment. If rents keep coming in, my WR would remain comfortably below 1.5%. If rents don't get paid at all, my WR would jump to 3.3% (assuming I don't cut back on discretionary expenses, which represent a big portion of my spending).

Realistically, I do expect only some rents to go unpaid, and I am in no mood to "blow that dough" anyway, so my WR should remain below 3%.

 

[Livefree]

My WR calculation depends upon the ability of my tenants to keep paying their rent. And that's a big unknown at the moment. If rents keep coming in, my WR would remain comfortably below 1.5%. If rents don't get paid at all, my WR would jump to 3.3% (assuming I don't cut back on discretionary expenses, which represent a big portion of my spending).

Realistically, I do expect only some rents to go unpaid, and I am in no mood to "blow that dough" anyway, so my WR should remain below 3%.

If they have security deposits, is it possible to let them use some, or all of that money, and stipulate that it has to be paid back over time?

 

[FIREd]

If they have security deposits, is it possible to let them use some, or all of that money, and stipulate that it has to be paid back over time?

In my jurisdiction, it would be illegal to do so.

 

[GravitySucks]

Well since 90% of my discretionary spending is not going to happen for two or three months spending this year will probably be less. I'm not going to spend just to spend, but not going to belt tighten otherwise.

 

[ERD50]

I was updating some of my spreadsheets following the big hit taken by my IRA’s due to the Coronavirus market collapse. My withdrawal rate (based on today’s portfolio balance) has increased from 2.71% to 3.44%. I think I can live with that. I am really glad that I wasn’t at a 4% WR prior to the big drop. That would have made me uncomfortable.

That's not how it works.

The 4% guideline ( 95% success, or ~ 3.2% for 100% historical success) means you start at that and adjust for inflation each year. You don't need to adjust down at any point (again, historically).

And in fact, you can adjust the w/d amount up anytime your portfolio increases, and inflation adjust from that point forward. That's the most efficient way to reduce the amount left on the table, and maximize what you can w/d, w/o failing. That's a bit of data-mining of the past data, but the general concept holds.

-ERD50

 

[Dtail]

That's not how it works.

The 4% guideline ( 95% success, or ~ 3.2% for 100% historical success) means you start at that and adjust for inflation each year. You don't need to adjust down at any point (again, historically).

And in fact, you can adjust the w/d amount up anytime your portfolio increases, and inflation adjust from that point forward. That's the most efficient way to reduce the amount left on the table, and maximize what you can w/d, w/o failing. That's a bit of data-mining of the past data, but the general concept holds.

-ERD50

IIRC, the Firecalc success rate at 100% using the defaults is 3.59%, but yeah agree in general.
I also remember reading somewhere that if one took out the 5/6 worst times to retire, then using a 6.5%WR would work in 95% of the cases.

 

[jazz4cash]

I was updating some of my spreadsheets following the big hit taken by my IRA’s due to the Coronavirus market collapse. My withdrawal rate (based on today’s portfolio balance) has increased from 2.71% to 3.44%. I think I can live with that. I am really glad that I wasn’t at a 4% WR prior to the big drop. That would have made me uncomfortable.

I am in a similar circumstance but I take a much different view. First, I wouldn't bother making that calculation. My expenses dictate a 2% withdrawal rate, but I wish I had taken a full 4% out of the portfolio at the start of the year. It would've been protected from the market upheaval. Just because I take it out of the portfolio doesn't mean it will be automatically spent

 

[audreyh1]

I am in a similar circumstance but I take a much different view. First, I wouldn't bother making that calculation. My expenses dictate a 2% withdrawal rate, but I wish I had taken a full 4% out of the portfolio at the start of the year. It would've been protected from the market upheaval. Just because I take it out of the portfolio doesn't mean it will be automatically spent

I always take out my allowed withdrawal rate at the beginning of the year whether I think we’ll spend it all or not.

But I also use % remaining portfolio method, so the % withdrawn is fixed, but the actual $ amount depends on the Dec 31 portfolio vale each year. Income rises while the markets are happy, pay cut the year after markets sell off.

 

[DrRoy]

I took 2.7% for this year which was extra to cover several remodeling projects, and a lot of travel. Some of the travel and projects are done, some deferred. For next year, I am thinking 3%, which will be fewer $'s, but let me do a final project and really anything else I need.

 

[Dtail]

I always take out my allowed withdrawal rate at the beginning of the year whether I think we’ll spend it all or not.

But I also use % remaining portfolio method, so the % withdrawn is fixed, but the actual $ amount depends on the Dec 31 portfolio vale each year. Income rises while the markets are happy, pay cut the year after markets sell off.

Pretty much the same here, except I take it out monthly. Conceptually that works better in up markets.
As of now, will take a pay cut next year, but don't worry what the WR% is based on current portfolio.

 

[Mark1]

I also use a % remaining portfolio method, but I have a three year rolling average component (i.e. 50/30/20) in my spreadsheet calculation to help smooth out the big yearly swings that can sometimes occur.

 

[audreyh1]

I also use a % remaining portfolio method, but I have a three year rolling average component (i.e. 50/30/20) in my spreadsheet calculation to help smooth out the big yearly swings that can sometimes occur.

So you withdraw less in % after a big up market year? And more in % after a big down year?

 

[athena53]

I've used a 70-30 weighting that's more conservative in down markets. Using a 3.5% withdrawal rate and 3% inflation, I give 70% weight to (3.5% of assets when I retired, increased for inflation) and 30% weight to (3.5% of assets as of the beginning of the year). This year's alternative estimate, of course, is very high because of the values as of 1/1/2020, but my withdrawals should be nowhere near the weighted amount. Even with a pretty disastrous decrease from where we are now, next year should be sustainable as well.

I know I'm blessed, and I'm trying to be particularly generous with charitable giving to places such as food banks I just hope I don't have to replace the car before things improve, which is the only major catastrophe I can imagine right now- there's 40+ years left on the guarantee for the roof and hopefully Medicare protects me against high OOP medical costs.

 

[Mark1]

So you withdraw less in % after a big up market year? And more in % after a big down year?

Yup, that is generally true. My withdraw percentages are already set for the next 45 years with an increase each year somewhat consistent with the Bogleheads VPW method (except I ignore their stock/bond ratio approach in the calculations and just focus on my year end portfolio amounts). Therefore, the percentage for each year is set regardless of the market, but the prior two years do enter into the calculation, so in the end I do withdraw less % after a big up market year and a greater % after a big down year.

 

[audreyh1]

OK, interesting combo of VPW-like % increase each year and averaging.

I realized long ago when I adopted the %remaining portfolio method, that we probably shouldn’t just automatically ramp up our spending as quickly as our portfolio was growing during the good years in case of running into a sudden drop. I also realized that we would probably do this naturally anyway, due to our fiscally conservative personalities. As a consequence we’ve had lots of excess income withdrawn for many years and recently (Jan) gifted a good chunk of the accumulated income to family members - couldn’t have been better timing for them as they’ve all been financially impacted since.

My principle is to pull as much as we “safely” can out of the portfolio each year in case we run into a bad year. But in practical terms our withdrawal rate is still rather low - 3.5% of taxable which works out to 3% of all retirement assets. Still darn conservative as we are now in our early 60s. At some point I’ll increase the % more, but haven’t decided how yet.