Safe W/D Rate Adjustment

[Packman]

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?

 

[SecondCor521]

I'm a big fan of what was long ago termed the POPR model, or Pay Out Period Reset model. Basically, any time you want, pretend like you just retired today instead of 6 years ago. If the reasoning behind you choosing 3.5% then are still valid, then you can reasonably expect to retire again today on 3.5% of your current portfolio value.

This has two obvious effects:

1. You get to spend more money.
2. You increase your risk of running out of money.

Only you can decide your risk/reward trade off, and it includes your entire financial and personal picture, only a tiny portion of which you've mentioned here. As people sometimes say, "You pays your money and you takes your chances".

If I were in your shoes, I would have a written plan based on my goals which I revise from time to time but at least annually which says what to do in both good times and bad times, and I would follow that plan.

In the scenario you describe, my official plan says to follow the POPR model, so each year I would take my withdrawal and increase it based on inflation (i.e., keep my original retirement date) or increase it based on an increase in my portfolio (i.e., retire again this year). In more concrete terms, if I had decided on 3.5% originally, I would take max( (3.5% * original value * 1+inflation%) or (3.5% * new value) ).

Unofficially and in actual fact, I spend reasonably on what I want and try to keep it below 4% of current FIRE stash and usually do so. I am almost 48, retired about a year, and have three kids who are late teens / early adult stage.

Healthcare expense is obviously a wildcard; I think it's highly individual how people respond to and evaluate that uncertainty. Personally I don't worry about it as much as most people do, but I can understand their point of view.

 

[audreyh1]

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?

We withdraw the same percent of the portfolio value on Dec 31 each year, and don't adjust for inflation. So if the portfolio grows during the year, we get a raise, if it drops during the year, we get an income cut.

This is called the %remaining portfolio method, and you can also model this method in FIRECALC. It's quite robust (you never run out of money) but you also have to live with a variable annual income. For us, that's no problem as we have a lot of discretionary expenses, plus so far our our annual withdrawals have been higher than our spending.

 

[W2R]

I don't have an answer, but I can tell you what I do.

I don't follow the conventional methods for withdrawal with increases based on inflation. Instead, during the first week in January I withdraw a percentage of my portfolio value on 12/31 of the year before, and that is my spending money for the year. For example, on January 1st I withdrew my 2017 spending money based on a percentage of my 12/31/2016 portfolio value.

If you withdraw about the same percentage each year, using this method, as the market rises that percentage will mean a lot more money than it does when the market is down. For me, that kind of takes care of things. When the market drops, I will need to cut back. So, this method works best when you have plenty of discretionary spending that you can eliminate pretty ruthlessly when the market crashes.

EDIT: Eek, I didn't see Audrey's post before posting this. Her description is perfect. I got a lot of my ideas on withdrawal from her methods, which make a lot of sense to me.

 

[pb4uski]

I'm a big fan of what was long ago termed the POPR model, or Pay Out Period Reset model. Basically, any time you want, pretend like you just retired today instead of 6 years ago. If the reasoning behind you choosing 3.5% then are still valid, then you can reasonably expect to retire again today on 3.5% of your current portfolio value.....

+1 I refer to it as ratcheting.... when the portfolio grows you can (but don't have to) ratchet up spending as you retired again for the first time... you keep doing that as long as the portfolio grows... if it declines in a given year then limit yourself to inflationary increases until it grows again.

Hopefully, it prudent avoids running out of money while at the same time mitigating the inverse risk of dying rich.

 

[Gumby]

Not retired yet, but our plan is to withdraw from our portfolio the amount FIRECalc says we can with a 100% success rate. If we spend less than that, we'll just keep the leftover amount in cash. The next year, we'll do the same thing. I realize that we may end up with a large pile of cash if we consistently under-spend our withdrawal (which is likely to be the case), but we don't need to reinvest if we're already running a 100% success rate. There are far worse things than sitting on cash that we don't really need to support the life we lead. Among other things, it is a fine backstop in the event of a market collapse.

 

[Major Tom]

How about a partial reset? Theoretically, you could begin withdrawing 3.5% of the current portfolio value, as if you were resetting your retirement period and "retiring all over again". However, as SecondCor521 mentions, this increases the chance of your portfolio hitting some possibly scary lows. Instead of taking 3.5% of the current portfolio value, how about taking 3%, or some other figure, effectively giving yourself a raise, without giving yourself the maximum raise possible.

The more often you adjust your withdrawal up, the greater the chance you will be doing it at a market peak. Even if you do it at a market peak, you probably won't run out of money, but those portfolio dips could be quite steep, and how you'll handle it will depend on how strong your stomach is.

If I were in your position, I'd probably give myself a small raise, but nowhere near the maximum possible. If the market continues to go up in the next couple of years, you can always give yourself another small raise, if you want. Try asking yourself how you'll feel if the market drops steeply in the near future. You know your AA, so can judge how much your portfolio could potentially drop if we experience a sharp decline in equities.

 

[USGrant1962]

Thumbs up on the percent of remaining portfolio approach. IMO drawing 3.5% of $3.3M is very safe. Your income will fluctuate, but it will take a 30% portfolio crash to get back down to what you are drawing now ($2.3M is about 70% of $3.3M). While a 30% bear market in stocks in not uncommon, if you have a balanced portfolio with a decent fixed income component a 30% downdraft is pretty much a worst case.

Also, assuming you are eligible for SS in two to ten years, you will be able to further reduce the draw on your portfolio to a very safe number.

 

[Ready]

Hopefully you have rebalanced to take some equity money off the table and protect it from a down turn. If you have, I see no problem with adjusting your withdrawal rate to reflect the new account balance.

 

[urn2bfree]

One thing I am trying to wrap my mind around has to do with peak portfolio value. This is especially relevant right now, with the market hitting new highs every day. It seems to me that the amount that should be safe is determined by the peak portfolio value.
Example-- say you have $3 Million and plan to withdraw say 3% in early 2008. ($90,000) But you don't retire yet. Your portfolio takes a $1,000,000 hit and you delay retiring. Now it's 2009 and your portfolio is only $2,000,000. You lose your job and decide to hang it up anyway. You should still be able to withdraw $90,000 or 4.5%. Why not? If it was ok to take $90,000 in 2008 and you never took it, it should still be okay to take it a year later. It all relates to the relationship between CAPE and SWR.
So look at your portfolio today. Determine your SWR. And remember that is still the amount you can take even when the inevitable correction comes!
Or consider the Guyton-Klinger Guardrails rules. http://schulmerichandassoc.homestea..._to_Create_Retirement_Withdrawal_Profiles.pdf

 

[Blue Collar Guy]

do you need a raise?

are you living on a tight budget now? if you are then loosen up the purse strings, will 3 % of the new 3.3 million portfolio give u a raise over the 3.5 % ur pulling now? if it is do it 3 % withdrawal basically gives u an infinite time line

 

[ElizabethT]

We withdraw the same percent of the portfolio value on Dec 31 each year, and don't adjust for inflation. So if the portfolio grows during the year, we get a raise, if it drops during the year, we get an income cut.

This is called the %remaining portfolio method, and you can also model this method in FIRECALC. It's quite robust (you never run out of money) but you also have to live with a variable annual income. For us, that's no problem as we have a lot of discretionary expenses, plus so far our our annual withdrawals have been higher than our spending.

We do this as well, other than we do keep a close eye on our portfolio during the year, and we will take a mid-term budgeting haircut if value drops below our starting point.

Another thing we do, which is rather silly on paper, but that gives us piece of mind, is we lower our Dec 31 portfolio value by $200,000 before determining our annual spend. This gives us mental/emotional leeway over the ensuing year if the market dips, such as it did over the last few weeks. We can go along without making changes until such time as the dip is greater than $200,000. At which point we would apply the aforementioned haircut.

 

[audreyh1]

We do this as well, other than we do keep a close eye on our portfolio during the year, and we will take a mid-term budgeting haircut if value drops below our starting point.

Another thing we do, which is rather silly on paper, but that gives us piece of mind, is we lower our Dec 31 portfolio value by $200,000 before determining our annual spend. This gives us mental/emotional leeway over the ensuing year if the market dips, such as it did over the last few weeks. We can go along without making changes until such time as the dip is greater than $200,000. At which point we would apply the aforementioned haircut.

Personally I'd rather pull more out when the portfolio is high, even if it's more than we'll spend that year, as excess can always be held over to help cushion the next. If the portfolio takes a big haircut right afterward the withdrawal, then at least my current year income didn't take the haircut too.

Currently we're only spending about 75-80% of our annual withdrawal, due to the growth of our portfolio, but I refuse to reinvest the excess (i.e. lower our withdrawal rate), especially with the current high market valuations. Since our portfolio is currently large enough to more than support our income needs, I'm fine with parking excess funds in CDs, etc. Who knows when a rainy day (or a thunderstorm) will arrive.

 

[Danmar]

We simply spend our dividends which have a current yield of about 3.5%. Our portfolio had increased quite a lot, as well over our 10 years of retirement. Accordingly I have started augmenting the divs with small liquidations.

I don't think many people set their WR at retirement and keep it there without regard of actual results.

 

[kcowan]

As your portfolio has increased, so has your dividends so essentially you are drawing more of your original portfolio amount.

 

[Fedup]

If I have no kids or my kids are in the billionaire category, I would definitely blow more dough, a lot more dough. I'm still waiting for that day.

 

[Packman]

OP here, thanks for all of the tips. I think I'll raise the budget a bit, but I still want to be wary of a prolonged market correction, along with the big unknown of health insurance costs and availability. Since there is only one health insurer in AZ now, it could mean a forced move to get HI in future years, so I have to set aside funds for that unfortunate possibility.

 

[bw5972]

Sticking to your 3.5% WR, the annual draw has gone from $80,500 to $115,500 in six years. What are you debating as a higher WR or annual draw?

 

[Major Tom]

Sticking to your 3.5% WR, the annual draw has gone from $80,500 to $115,500 in six years. What are you debating as a higher WR or annual draw?

In the original post, the talk was of 3.5% of the portfolio value at the start of retirement, with adjustments for inflation - not 3.5% of whatever the current value was at the time.

 

[Danmar]

As your portfolio has increased, so has your dividends so essentially you are drawing more of your original portfolio amount.

Absolutely. Our divs have almost doubled since retirement. Nice automatic adjustment.

 

[jebmke]

I draw only what I need to pay the bills. No more, no less.

 

[Danmar]

I draw only what I need to pay the bills. No more, no less.

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

 

[bw5972]

In the original post, the talk was of 3.5% of the portfolio value at the start of retirement, with adjustments for inflation - not 3.5% of whatever the current value was at the time.

Ok, I missed that. But at some point in the 'fixed WR + inflation' approach there has to be recalibration points. To take it to extremes, if you start out at 3.5% of 2.3M = 80,500 and then come into a 10 million dollar inheritance 6 years later, do you continue living on 80,500?

I think that was the question by the OP, can he recalibrate.

 

[audreyh1]

Ok, I missed that. But at some point in the 'fixed WR + inflation' approach there has to be recalibration points. To take it to extremes, if you start out at 3.5% of 2.3M = 80,500 and then come into a 10 million dollar inheritance 6 years later, do you continue living on 80,500?

I think that was the question by the OP, can he recalibrate.

Right, the question was about recalibration. Which some of us are doing annually or every few years. Some folks are using the "ratcheting" method, and others are doing the % of remaining portfolio method. I see the % remaining portfolio as an annual recalibration.

In the discussions on withdrawal rates, it appears that most folks here look at the current portfolio value when evaluating withdrawal rates, not the initial portfolio value. From various polls and discussions, etc., it appears that few folks are actually using the SWR from initial portfolio value and annually thereafter increased by inflation (or "constant spending") model.

 

[Major Tom]

I think that was the question by the OP, can he recalibrate.

Yes, that was his question, as well as wondering by how much he should recalibrate, and for how long.