Safe W/D Rate Adjustment

[SecondCor521]

I see the % remaining portfolio as an annual recalibration.

There is a difference between the two.

If in year N the portfolio goes up and in year N+1 the portfolio goes down, then the former would see a reduction in withdrawal amount whereas the latter would increase their withdrawal by inflation.

The former has less running-out-of-money risk but has more downside-variability-to-spending risk.

 

[audreyh1]

There is a difference between the two.

If in year N the portfolio goes up and in year N+1 the portfolio goes down, then the former would see a reduction in withdrawal amount whereas the latter would increase their withdrawal by inflation.

The former has less running-out-of-money risk but has more downside-variability-to-spending risk.

Yes, I wasn't trying to say they were the same. I was just saying they were both forms of recalibration. The ratcheting one doesn't go down though, only up, so it doesn't recalibrate annually like the % remaining portfolio does.

 

[jebmke]

Right. But can't to effect the level of the bills? At least to some degree? Or is everything on auto pilot?

yes but withdrawal "rate" is normally not a factor in deciding.

 

[tps7742]

Thanks again for all the valuable information given by everyone. We are presently living off of our traditional pensions and haven't started the withdrawal of our IRAs yet. I am a few years out due to my age but these informational threads are invaluable.

 

[Independent]

I think most people who retire before they start SS can safely withdraw more during the bridge period. (i.e. your original 3.5% was somewhat conservative)

For example, if you're planning to get $30,000 of SS, starting 11 years from now, you can carve out $330,000 for SS bridge income. Take $30,000 from it every year, plus some percent from your remaining $3.0 million (if I'm following the OP correctly).

That gives you more spending money today without mentally committing to an permanent increase in your regular withdrawals.

 

[mickeyd]

Since DB-like cash flow is more than enough to pay for our fixed-costs, we only W/D our RMD at the end of the year as required. I usually exchange it into my cash/ST stash and spend it on vacations etc.

 

[Packman]

It seems that most of you have advised (me, the OP) that with increased portfolio value, one can also increase the withdrawal amount. However, the original SWR study done by William Bengen, stated that the original withdrawal can only be increased by inflation in order to have the portfolio last at least 30 years. The point is to guard against sustained market losses at some time in the future. I understand that if one increases withdrawal rates as you go, you must also be willing to reduce rates in the future which could be troublesome in some cases - though maybe not to us LBYM people.

It seems that everything I read about SWR and sequence of return risk is concentrated on the downside (of course, that is the "risk" equation). With the continuing bull market, I'm surprised that the upside situation (risk of under spending) hasn't been addressed more often by the financial guru's. Or maybe it has, and I haven't seen it. Interesting.

 

[W2R]

"Risk of under-spending"?

"OMG, OMG, batten the hatches, call out the artillery! Somebody died and left some spare change on the table!"

OK, I understand. The phrase just struck me as funny so I had to joke around about it. No slam intended.

At the end of every year, I compute the percentage I spent according to three different methods:

1) The traditional SWR method, that is only increased with inflation
2) The method I mostly use and relate to the best; percent of the prior 12/31 balance
3) Percent of my lowest low portfolio balance on 3/9/2009

I figure that if I am under 4% every year using all three methods, I'll be fine. But I never spend anywhere near that amount, so there is a buffer there to protect me.

Meanwhile, I am using some of the excess $$$ from this thriving market, to prepare for cutting back when (not if) the next market crash comes along. To me, this involves cutting back pretty ruthlessly on regular monthly expenses that I can live without. We have had a lot of threads about cutting the cable, cheaper cell phone service, and dropping the landline, for example. I have no debt and pay my credit card off in full every month.

But I do want to enjoy the money I have at the moment, so I tend to spend my discretionary money more on one time purchases. See the Amazon thread for examples of the kind of silly stuff I fritter away my cash on. Plus, I bought a house in cash, which is definitely a one time purchase for me at this stage in my life. Avoiding the risk of underspending now, while the market is so high, I have been spending on the needed new appliances for my new house, and other big item necessities in order to prepare for the inevitable future crash. I am spending in order to position myself well for the future crash.

I also have several years in cash or cash equivalents.

If/when the Big Crash comes, I'll immediately cut back sharply on the one time discretionary purchases. I have been getting my teeth fixed as much as possible, and had my HVAC completely replaced. OK, that was necessary but theoretically the new, energy efficient system will mean lower monthly electric bills. Gradually I'm trying to position myself well for hard times in the future. Hopefully after the crash I will be able to live off SS and mini-pension and dividends, until the economic mess is over, or mostly over. Meanwhile, to keep from selling low, during the crash I can use my cash and cash equivalents to supplement my spending money. I can also use it for rebalancing which would involve buying low.

This is how I plan to spend less when that becomes necessary.

 

[Ready]

I worry about spending too little.

I also worry about spending too much.

I just haven't decided which one I need to worry about more.

 

[Fedup]

Too much worry for me and I'm the worrywart.

 

[Sarpy]

We're both retired now and comfortable, have an income flow at least as much as while we were working, and barely tapping into IRAs and other investments. Told DH to get his new pickup--who knows how long we'll be around, and we have no heirs. So I say go for it--enjoy the fruits of our labor.

 

[Independent]

It seems that most of you have advised (me, the OP) that with increased portfolio value, one can also increase the withdrawal amount. However, the original SWR study done by William Bengen, stated that the original withdrawal can only be increased by inflation in order to have the portfolio last at least 30 years. The point is to guard against sustained market losses at some time in the future. I understand that if one increases withdrawal rates as you go, you must also be willing to reduce rates in the future which could be troublesome in some cases - though maybe not to us LBYM people.

It seems that everything I read about SWR and sequence of return risk is concentrated on the downside (of course, that is the "risk" equation). With the continuing bull market, I'm surprised that the upside situation (risk of under spending) hasn't been addressed more often by the financial guru's. Or maybe it has, and I haven't seen it. Interesting.

I think of Bengen's work as a slap-upside-the-head to people (especially advisers) who were being far too aggressive toward the end of the big bull market.

It recognized that most wage workers wanted a retirement check that looked just like their pre-retirement paycheck - very stable, but increasing with inflation.

He said that if you want something like that, you need to be much more conservative in the early years than people had imagined.

That is a huge message to people who haven't given the draw-down part of retirement planning any thought. IMO, it belongs at the top of the list of topics for people within sight of retirement.

But, people who looked a little realized that in most scenarios, the retirees ended with portfolios that were bigger than they had at the beginning.

IF you want level spending,
you have to start conservatively. But, if the early years do well, there must be some point where you can increase your spending. The question is how to find that point.

And, IF you don't really care about level spending,
if your initial budget has plenty of discretionary spending, there must be some higher initial spending amount.

I think if you look at academic writers, you'll find lots of discussion on "optimal" spending patterns that recognize the "underspending risk". And, you'll find threads here.

The long VPW thread is one example: http://www.early-retirement.org/for...drawal-calculator-ive-seen-to-date-68770.html

 

[cat4ever]

I think it's that time of year, so thought I'd bump this thread to the top. btw, if I go the route of doing an inflation rate adjustment what do folks usually use, the government annual CPI for December?

 

[COcheesehead]

I use a spending based system. My current “cushy” spend level equates to a 2.3% withdrawal rate so I don’t worry much about it.

 

[ERD50]

I think it's that time of year, so thought I'd bump this thread to the top. btw, if I go the route of doing an inflation rate adjustment what do folks usually use, the government annual CPI for December?

Why would you do this?

Spend what you need/want to spend. If your plans exceed the CPI over the long run, then you might need to re-evaluate your spending. But you make it sound as if you will just blindly w/d an amount based on CPI? Maybe I misunderstood?

-ERD50

 

[Time2]

I use a spending based system. My current “cushy” spend level equates to a 2.3% withdrawal rate so I don’t worry much about it.

I just figured my WR at 2.33% for our living expenses! But with 21 days left this year, I still have 17% of my spend left.

In reality I spent much more, on the kids, mostly tuition, health insurance, cellphone, etc. But if all goes right, this year will be the end of almost all of that.


Lesson, need to learn to BTD!

 

[Gumby]

Our withdrawal rate this year has been negative (we saved money). I expect it will be negative next year too. We may finally withdraw something when we can travel more extensively, but who really knows?

 

[Time2]

Our withdrawal rate this year has been negative (we saved money). I expect it will be negative next year too. We may finally withdraw something when we can travel more extensively, but who really knows?

Not sure if you are talking about growth of assets? But I'm pretty sure most of us saved if that's where you are headed. My growth is 6 times what I spent this year. So I saved too! I have a negative WR!

 

[chassis]

At retirement about 6 years ago, I budgeted a withdrawal rate of 3.5% of an investment portfolio of $2.3 M. Since then, our portfolio has grown by about a million, courtesy of the running bull market. Conventional wisdom states that you maintain your withdrawal rate with only inflationary increases. I've read about adjusting your withdrawal rate downward in bad times, but what about the other way? If I increase it, when? How much and for how long?

I'm quite conservative since we have only investment income to live on, until SS. On the other hand, no kids so I want to enjoy our savings and not die with it. And, if it makes any difference, a full 30% of our expense budget goes to pay for health insurance for six more years, providing we can get it. Thoughts?

You can live on 3.5% of $2.3m, or something around $80k per year. You now have more than $2.3m.

Spend as much as you like with the knowledge that you may need to take a break from spending if conditions warrant.

In other words do whatever feels good to you. Your base budget is sound.

 

[MRG]

Good thread to bring back to life. Timely for me anyway. We both turn 65 next year and will be on Medicare and not having to control our income. Been retired for 8 years now but never came close to 4%, except last year.

My SS at age 70 is half our monthly expenses and DW gets hers now. I think we'll do 4% or more from our current assets and treat 2022 as the first year of a 30 year plan. I feel OK going to 5% for the next 5 years until my SS kicks in.

 

[RunningBum]

Why would you do this?

Spend what you need/want to spend. If your plans exceed the CPI over the long run, then you might need to re-evaluate your spending. But you make it sound as if you will just blindly w/d an amount based on CPI? Maybe I misunderstood?

-ERD50

Isn't this what the 4% "rule" has you do? 4%+inflation?

 

[COcheesehead]

I just figured my WR at 2.33% for our living expenses! But with 21 days left this year, I still have 17% of my spend left.

In reality I spent much more, on the kids, mostly tuition, health insurance, cellphone, etc. But if all goes right, this year will be the end of almost all of that.


Lesson, need to learn to BTD!

We’re similar. We have 14% left which in all likelihood will get rolled into 2022. We bought a car, stuff for the house, did 3-4 trips all on our 2.3% rate.

 

[Gumby]

Not sure if you are talking about growth of assets? But I'm pretty sure most of us saved if that's where you are headed. My growth is 6 times what I spent this year. So I saved too! I have a negative WR!

No, growth of assets is a separate issue. I meant exactly what I said - we did not take from our portfolio this year. We added to it. Specifically, our two pensions plus my social security exceeded our spending this year, so our checking account is larger now than it was last December. Separately, the invested assets in our portfolio, none of which were withdrawn, have grown by 13% (the dollar amount of the gain was more than 3 times our annual spending).

 

[cat4ever]

Why would you do this?

Spend what you need/want to spend. If your plans exceed the CPI over the long run, then you might need to re-evaluate your spending. But you make it sound as if you will just blindly w/d an amount based on CPI? Maybe I misunderstood?

-ERD50

Yes I think you basically understand it. I use my yearly spend allocation to create a monthly budget.
I used FIRECalc assuming my spending will rise by the inflation rate each year, and got a 100% rating before deciding to retire, based on a certain spend rate. I want to stick to that assumption, especially in the early part of my retirement. And no, I don't want to spend any less, I want to spend as much as possible, especially while still relatively young, but not feel like I'm dooming myself to an old age of serfdom.

 

[cat4ever]

No, growth of assets is a separate issue. I meant exactly what I said - we did not take from our portfolio this year. We added to it. Specifically, our two pensions plus my social security exceeded our spending this year, so our checking account is larger now than it was last December. Separately, the invested assets in our portfolio, none of which were withdrawn, have grown by 13%

That's certainly not me. I'm still "young" (57) I want to spend now as much as possible without breaking the bank 20-30-40 years down the line. That's the goal anyway.