Savings Withdrawl Rate (SWR) Calculation Question
 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
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 10-07-2020, 01:01 PM #2 Thinks s/he gets paid by the post   Join Date: Sep 2011 Location: Placerville Posts: 1,556 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)
 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: 7,952 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
10-07-2020, 01:34 PM   #5
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 Originally Posted by SecondCor521 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?
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10-07-2020, 01:41 PM   #6
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Quote:
 Originally Posted by philly17 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.
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 10-07-2020, 01:44 PM #7 Give me a museum and I'll fill it. (Picasso)Give me a forum ...   Join Date: Jun 2007 Posts: 10,875 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.
10-07-2020, 01:59 PM   #8
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Quote:
 Originally Posted by Dtail 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.
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10-07-2020, 02:07 PM   #9
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Quote:
 Originally Posted by SecondCor521 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.
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 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: 7,952 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
 10-07-2020, 02:56 PM #11 Give me a museum and I'll fill it. (Picasso)Give me a forum ...   Join Date: Jan 2006 Location: Rio Grande Valley Posts: 29,060 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.
10-07-2020, 03:28 PM   #12
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Quote:
 Originally Posted by philly17 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.
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10-07-2020, 09:36 PM   #13
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Quote:
 Originally Posted by philly17 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.
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