Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Savings Withdrawl Rate (SWR) Calculation Question
Old 10-07-2020, 12:44 PM   #1
Dryer sheet wannabe
 
Join Date: Jul 2014
Posts: 20
Savings Withdrawl Rate (SWR) Calculation Question

Question on how the SWR is calculated when people say their might be 4% or 3 % etc.

If I have a $4.5M nest egg (assume all in taxable accounts)

If I earn 2% interest =. $90K/year

Assume 20% taxes (just a guess) =. $18K year in taxes

Net interest income after tax =. $72K

My annual spending is $120K a year

So I need $48K in addition to net interest income to cover the living expenses.

So is my SWR $120K/$4.5M = 2.66%?

or is it the net amount needed after interest of $48K/$4.5M =1.01%?

Thanks for your help
philly17 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-07-2020, 01:01 PM   #2
Thinks s/he gets paid by the post
skipro33's Avatar
 
Join Date: Sep 2011
Location: Placerville
Posts: 1,516
Spending $120K a year with a tax burden of 20% (your guess) is a gross income of $144K a year. Out of $4,590,000 (Your nest egg plus it's 2% growth (Interest?), you would be withdrawing 3.14%. First year. Each year will be different % based on your account growth and your spending needs.

****EDIT****
A simple draw down calculator shows that starting with $4,590,000 earning 2% and withdrawing $12,000 monthly ($144,000 annually), your account will last 609 months (50 years, 9 months)

$10,000 a month($120,000 annually), your account will last 869 months (72 years 5 months)
skipro33 is offline   Reply With Quote
Old 10-07-2020, 01:09 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 7,629
Is the 18k a year included in your 120k spending?
If not, then your spending is 138k yearly.
Your income is 90k yearly.
Your net spending is 48k/4.5m = 1.07%WR.
That's my take.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 10-07-2020, 01:24 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 5,067
It's usually just your gross spending (including taxes) divided by your available nest egg.

If your spending exclusive of taxes is $120K and your effective tax rate is 20%, then your gross spending would be $120K / (100% - 20%) = $150K.

Your WR would then be $150K / $4.5M = 3.33%

Additional comments:

1. The SWR acronym most often means "Safe Withdrawal Rate", and it usually means how much a person can withdraw safely from their portfolio on a sustainable basis without running out of money before they die. There's lots of discussions about what that number actually is and how to derive it, but 4% is a commonly used number.

2. I'm assuming that the $90K in interest is what you're earning on some part of that $4.5M. In historical calculations of SWRs by tools like http://www.firecalc.com, portfolio income and growth is usually accounted for by the tool in the portfolio growth calculations. You would *not* want to include the $90K of interest as income (as OP and @Dtail did) *nor* would you want to include it in your portfolio value (as @skipro33 did), because doing so would be double counting.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is online now   Reply With Quote
Old 10-07-2020, 01:34 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 7,629
Quote:
Originally Posted by SecondCor521 View Post
It's usually just your gross spending (including taxes) divided by your available nest egg.

If your spending exclusive of taxes is $120K and your effective tax rate is 20%, then your gross spending would be $120K / (100% - 20%) = $150K.

Your WR would then be $150K / $4.5M = 3.33%

Additional comments:

1. The SWR acronym most often means "Safe Withdrawal Rate", and it usually means how much a person can withdraw safely from their portfolio on a sustainable basis without running out of money before they die. There's lots of discussions about what that number actually is and how to derive it, but 4% is a commonly used number.

2. I'm assuming that the $90K in interest is what you're earning on some part of that $4.5M. In historical calculations of SWRs by tools like http://www.firecalc.com, portfolio income and growth is usually accounted for by the tool in the portfolio growth calculations. You would *not* want to include the $90K of interest as income (as OP and @Dtail did) *nor* would you want to include it in your portfolio value (as @skipro33 did), because doing so would be double counting.
I respectfully disagree. One's WR (not SWR) is based on net needs, not gross needs.
If one has social security of 50k and needs a net spending of 50k, one does not need to withdraw from their portfolio.
Are you still saying their WR is 50k/XXX, when there is no need to take any monies from the portfolio?
__________________
TGIM
Dtail is offline   Reply With Quote
Old 10-07-2020, 01:41 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Location: St. Charles
Posts: 2,545
Quote:
Originally Posted by philly17 View Post
Question on how the SWR is calculated when people say their might be 4% or 3 % etc.

If I have a $4.5M nest egg (assume all in taxable accounts)
OP
I would like a clarification on the bolded part above. I have seen "taxable accounts" used for both tax deferred (IRA, 401k, etc.) and after tax accounts (brokerage accounts, savings accounts, etc. with after tax contributions, but which can, and often do, generate a tax burden with interest, cap gains and dividends).

If it is the latter, you might be pleasantly surprised that your effective tax rate will be quite a bit less than your guess.
__________________
If your not living on the edge, you're taking up too much space.
Never slow down, never grow old!
CardsFan is offline   Reply With Quote
Old 10-07-2020, 01:44 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 10,568
If one is selling off some assets from taxable, they won't be taxed on the full amount, just the gain. So they don't need a full $150K with $30K in taxes to generate $120K in spending money unless their basis was 0.
RunningBum is offline   Reply With Quote
Old 10-07-2020, 01:59 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 5,067
Quote:
Originally Posted by Dtail View Post
I respectfully disagree. One's WR (not SWR) is based on net needs, not gross needs.
If one has social security of 50k and needs a net spending of 50k, one does not need to withdraw from their portfolio.
Are you still saying their WR is 50k/XXX, when there is no need to take any monies from the portfolio?
My point was mainly about income generated by the portfolio, the fact that it is automatically calculated and accounted for by tools like FIREcalc, and that subtracting it from expenditures in such a tool would be double counting.

Social Security is obviously different, since it is not income generated by the portfolio.

OP's comments about interest seem more likely to me to be income generated by the portfolio than to be a reference to Social Security income.

People can define and use terms however they like, and it won't bother me in the slightest. But I think it would be wise of the average retiree who is wanting to compare their calculated withdrawal rate to the 4% referenced in the Trinity study or in FIREcalc that they should understand how the latter is calculated so they can make an apples-to-apples comparison (which I suspect the OP is doing).

...

If you want to know how I do it, I calculate an NPV for my Social Security (*), add it to my FIRE stash, and then take my gross spending from that to calculate a gross WR. I then take all my non-portfolio income and subtract that out to get to a net WR. My gross WR is 2.01% and my net WR is 0.63%.

(*) How I do this is lengthy and complex and not necessarily worth going into very much, but I can if anyone cares.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is online now   Reply With Quote
Old 10-07-2020, 02:07 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 7,629
Quote:
Originally Posted by SecondCor521 View Post
My point was mainly about income generated by the portfolio, the fact that it is automatically calculated and accounted for by tools like FIREcalc, and that subtracting it from expenditures in such a tool would be double counting.

Social Security is obviously different, since it is not income generated by the portfolio.

OP's comments about interest seem more likely to me to be income generated by the portfolio than to be a reference to Social Security income.

People can define and use terms however they like, and it won't bother me in the slightest. But I think it would be wise of the average retiree who is wanting to compare their calculated withdrawal rate to the 4% referenced in the Trinity study or in FIREcalc that they should understand how the latter is calculated so they can make an apples-to-apples comparison (which I suspect the OP is doing).

...

If you want to know how I do it, I calculate an NPV for my Social Security (*), add it to my FIRE stash, and then take my gross spending from that to calculate a gross WR. I then take all my non-portfolio income and subtract that out to get to a net WR. My gross WR is 2.01% and my net WR is 0.63%.

(*) How I do this is lengthy and complex and not necessarily worth going into very much, but I can if anyone cares.
Understand your thinking and conceptually agree that one can use an NPV concept with SS or a pension.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 10-07-2020, 02:09 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 7,629
I think the OP also needs to clarify how they are handling the overall taxes including the interest income tax in the expense number, so we know what the true spending is.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 10-07-2020, 02:56 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 28,393
I seriously doubt your Federal income tax rate will be 20% after retiring, and as several folks mention with mostly taxable investments you are taxed on realized capital gains and interest/dividend income, not directly on the assets themselves. It might be worth running some tax calculators to get a better handle on your likely taxes.

SWR = safe withdrawal rate, and you need to run a calculator like FIRECalc to determine what it is, given your portfolio amount, asset allocation, and gross (pre-tax) desired spending to determine this max withdrawal rate for desired portfolio survival.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 10-07-2020, 03:28 PM   #12
Thinks s/he gets paid by the post
jollystomper's Avatar
 
Join Date: Apr 2012
Posts: 3,349
Quote:
Originally Posted by philly17 View Post
Question on how the SWR is calculated when people say their might be 4% or 3 % etc.

If I have a $4.5M nest egg (assume all in taxable accounts)

If I earn 2% interest =. $90K/year

Assume 20% taxes (just a guess) =. $18K year in taxes

Net interest income after tax =. $72K

My annual spending is $120K a year

So I need $48K in addition to net interest income to cover the living expenses.

So is my SWR $120K/$4.5M = 2.66%?

or is it the net amount needed after interest of $48K/$4.5M =1.01%?

Thanks for your help

The bolded items is closer to the way I look at it, on simple thems. Then then again, my goal in retirement is to simplify my financial life, including the calculations .

At the beginning of each year I look at our known income(pension + DW SS). I leave the calculation simple and more conservative by adding in estimated interest income but not dividend income, as we still reinvest the majority of my dividends. I subtract that from our planned spending for the year (which includes taxes), divide the the result by our current stocks/bonds/cash nest egg, and voila, we have our planned SWR for the year.
__________________
FIREd date: June 26, 2018 - wwwwwwhat a rush!
jollystomper is offline   Reply With Quote
Old 10-07-2020, 09:36 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 28,556
Quote:
Originally Posted by philly17 View Post
Question on how the SWR is calculated when people say their might be 4% or 3 % etc.

If I have a $4.5M nest egg (assume all in taxable accounts)

If I earn 2% interest =. $90K/year

Assume 20% taxes (just a guess) =. $18K year in taxes

Net interest income after tax =. $72K

My annual spending is $120K a year

So I need $48K in addition to net interest income to cover the living expenses.

So is my SWR $120K/$4.5M = 2.66%?

or is it the net amount needed after interest of $48K/$4.5M =1.01%?

Thanks for your help
4% is a WR that is expected to not run out of money 95% of the time assuming a mix of stocks and bonds.

Your tax estimate is probably high. If you are married filing jointly and had $90k of interest your federal tax would only be $7,432 (8.26%). Check out https://www.dinkytown.net/java/1040-tax-calculator.html

So if you need $120k of spending, your withdrawals will include principal if your entire nestegg is fixed income. If you have equities, any "principal" would probably be offset by equity appreciation.

So for example, if your AA is 30% stocks that have a dividend yield of 2% and total return of 10% and 70% fixed income that yields 2% then your portfilio would still be growing since $4.5m * 30% *10% + $4.5m * 70% * 2% > $120k.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 10-08-2020, 06:35 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 10,257
I think all the talk about interest rates and taxes at the outset just confuses the situation. Start with the SWR based on your portfolio and then see if it will support your needs. The traditional SWR is simply a percentage of the portfolio taken in year 1. That dollar amount (not percentage) is then adjusted upward by inflation each year thereafter. The original SWR study concluded that the initial withdrawal amount could be 4% of a balanced portfolio of stocks and bonds (I think it was 50/50). Some of us are concerned that 4% may be too generous for a long retirement and ratchet that down a bit. Others think it is still a good benchmark. Trying to determine the interest rate at the outset is irrelevant. Interest rates change. The point of the SWR is to be relatively safe across all the bumps and falls in return over decades.

So pick your percentage and apply it to your ~$4M starting portfolio. At 4% your available spending would start at $160K and would increase by the Social Security COLA each year. If you want to be conservative, use 3% ($120K), That amount needs to cover all of your expenses including taxes. As others have pointed out your taxes may be lower than you are used to if you are pulling solely from taxable accounts. If a big portion of that portfolio is in tax deferred accounts, your taxes could go up significantly when you turn 72 and have to start taking RMDs.

Take some time to get your hands around real expenses - go thru your check book, look at your CC bills for the last couple of years, add in unusual big items like cars, roofs, etc. There are a lot of worksheets available around the Internet to help you get a handle of those expenses. Make sure you realistically figure out medical (insurance and out of pocket). Add in a fudge factor for peace of mind. When I did this I inflated my expected travel expenses and then added 10% of total expenses to add further breathing room. Over 15 years of ER my actual spending came in a lot lower than that inflated figure but it helped me sleep at night.
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Financial Planner Safe Withdrawl Rate Presentation sengsational FIRE and Money 5 12-11-2013 05:12 PM
wondering about new no 4% withdrawl rate mathjak107 FIRE and Money 11 10-12-2008 02:40 PM
Age and safe withdrawl rate DMS FIRE and Money 19 05-01-2007 10:23 AM
Safe withdrawl rate for young retirees claire Young Dreamers 12 10-08-2006 11:25 AM
Safe Withdrawl Rate -- 6% 2B FIRE and Money 91 03-25-2006 04:21 PM

» Quick Links

 
All times are GMT -6. The time now is 09:48 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2021, vBulletin Solutions, Inc.