SORR and Spending Now

[RobLJ]

Perhaps I should post this in the BTD thread, but I ran across a reference to this study on another site and thought I might post it. Someone likely has posted it in the past. Those of you who are familiar with FireCalc output curves probably already "know" this, but it kind of reaffirms my bent to

a) take out 4-5% and reevaluate if/when markets go way up
b) BTD within reason (take that Euro vacation next year when nomalcy returns; buy that RAV Prime this March)

c) use yearly extra/unneeded/unspent money to our two sons, the grandkids and their college fund, and charity, while I/DW are alive to see the fruits.


I'm not suggesting YOU should do the above; I think many/most here are doing what they do aware of the likely repercussions. But I do think about it when I hear of withdrawal rates below 2.5% or so which seems to frequently come up.



https://www.kitces.com/blog/url-ups...eturn-risk-in-retirement-median-final-wealth/

 

[Dtail]

I would say that the general bent of many posters here is a conservative nature of spending, especially some who got to FIRE more so by their LBYM ways.

 

[Montecfo]

I think anyone that retired since 2008 has pretty much defeated SORR just by the sheer market elevation.

Not to mention that of course SORR is already contemplated in the 4 percent guideline.

Having said that, most people will spend less freely in tougher financial times even if flush, and that is not a bad idea.

For those in accumulation phase it is something to be aware of, but the stats suggest the 4 percent rule is already very conservative.

 

[Lewis Clark]

Some folks - like me - may have low withdrawal rates today, but we are also self-funding for the possibility of long term care which is a huge question mark for many of us.

Having too much money is probably better than running out of money should the sequence of returns suddenly become unfavorable.

Although we have a conservative withdrawal rate at current market valuations, we want for nothing and willingly spend on things of value to us.

 

[audreyh1]

Well I’m trying…. (to spend more now)

 

[Koolau]

Well I’m trying…. (to spend more now)

Even after successful FIRE and 16 years FIREd, it IS hard to adjust to spending more. We seem to be able to give away more, but spend? Not so much. I guess we just don't want much. Travel will open up and I've promised myself I will at least LOOK into a higher level of air travel this time. BUT, probably not. YMMV

 

[SecondCor521]

Having too much money is probably better than running out of money should the sequence of returns suddenly become unfavorable.

I think part of Kitces' point is that if you have "good SORR" at the beginning for long enough, then "SORR suddenly becom[ing] unfavorable" isn't really an issue to worry about.

Someone like me who retired in 2016 and has been invested in the S&P500 has seen the following returns (https://www.slickcharts.com/sp500/returns):

2016 - 11.96
2017 - 21.83
2018 - (4.38)
2019 - 31.49
2020 - 18.40
2021 - 12.52 (YTD through 5/27 market close)

Which if I did my math right, means $1M in 2016 has turned into $2.28M today. Which means a 4% withdrawal has been reduced to a 1.75% withdrawal. A 1.75% WR may not be 100% bulletproof, but it does cover a multitude of scenarios.

Whether one is willing to include LTC or high inflation (or any other potential FIRE issue) in the covered scenarios is up to each of us.

ETA: There's another important caveat to the data above. It assumes 100% S&P, and many of us are not. I'm at 97/3 now and have always been above 90/10, so the above numbers are close. Even so, the idea that Kitces espouses in the article stands: good SORR up front for long enough can create runaway FIRE stashes, an effect which many here have seen and experienced first hand.

 

[ERD50]

Perhaps I should post this in the BTD thread, but I ran across a reference to this study on another site and thought I might post it. Someone likely has posted it in the past. Those of you who are familiar with FireCalc output curves probably already "know" this, but it kind of reaffirms my bent to

a) take out 4-5% and reevaluate if/when markets go way up ...

I've discussed this as part of a "Retire-again-and-again" scenario, you might try searching on terms like that.

For a short version, look at it this way. First, let's assume a historically 100% safe WR, it's just easier to talk about. Let's say that is 3.4% for 40 years (it's close, you can do a run to verify).

So, based on this history, if 3.4% was successful in every single 40 year time frame, then clearly, you can do just that and take 3.4% at any starting point (yes, that is redundant, I don't know how else to state what is mathematically obvious, if not obvious otherwise).

So if you started with $1,000,000 portfolio and $34,000 withdraw amount (3.4%), and next year the market is good and you are at $1,200,000 you can then draw 0.034 ⋅ 1200000
= $40,800 (and inflation adjust that in subsequent years) instead of an inflation adjusted $34,000. Because that is exactly what someone starting that year with $1,200,000 could do. The data can't tell the difference, there is no difference.

Raising your W/D amount is no more risky than the retiree a year after you. Of course, taking more out makes you more vulnerable to a "worse than the worst in history" future sequence than you would have been, but that should be expected. There's only so much money there, and no magic.

Another way to think of it is, unless you had historically retired in the very worst year, you have a buffer. You can raise your spending. I've done some detailed analysis if this, and as you'd expect, that worst year retiree *never* gets to raise their W/D above the 'normal' inflation adjusted amount. It is the absolute best way to maximize your lifetime withdrawals without dropping the portfolio negative (with that historical data set!).

It probably won't work quite as well in real life, as the data will be different. But raising a conservative WR% anytime your portfolio has grown should still have a lot of safety built i.

-ERD50

 

[daylatedollarshort]

Some folks - like me - may have low withdrawal rates today, but we are also self-funding for the possibility of long term care which is a huge question mark for many of us.

Having too much money is probably better than running out of money should the sequence of returns suddenly become unfavorable.

Although we have a conservative withdrawal rate at current market valuations, we want for nothing and willingly spend on things of value to us.

+1. I see having a zero or low withdrawal rate while living well as an achievement I've worked towards, not a problem to be solved.

 

[SecondCor521]

I've discussed this as part of a "Retire-again-and-again" scenario, you might try searching on terms like that.

For a short version, look at it this way. First, let's assume a historically 100% safe WR, it's just easier to talk about. Let's say that is 3.4% for 40 years (it's close, you can do a run to verify).

So, based on this history, if 3.4% was successful in every single 40 year time frame, then clearly, you can do just that and take 3.4% at any starting point (yes, that is redundant, I don't know how else to state what is mathematically obvious, if not obvious otherwise).

So if you started with $1,000,000 portfolio and $34,000 withdraw amount (3.4%), and next year the market is good and you are at $1,200,000 you can then draw 0.034 ⋅ 1200000
= $40,800 (and inflation adjust that in subsequent years) instead of an inflation adjusted $34,000. Because that is exactly what someone starting that year with $1,200,000 could do. The data can't tell the difference, there is no difference.

Raising your W/D amount is no more risky than the retiree a year after you. Of course, taking more out makes you more vulnerable to a "worse than the worst in history" future sequence than you would have been, but that should be expected. There's only so much money there, and no magic.

Another way to think of it is, unless you had historically retired in the very worst year, you have a buffer. You can raise your spending. I've done some detailed analysis if this, and as you'd expect, that worst year retiree *never* gets to raise their W/D above the 'normal' inflation adjusted amount. It is the absolute best way to maximize your lifetime withdrawals without dropping the portfolio negative (with that historical data set!).

It probably won't work quite as well in real life, as the data will be different. But raising a conservative WR% anytime your portfolio has grown should still have a lot of safety built i.

-ERD50

Excellent comments.

Intercst wrote a blog post in 2000 which said much the same and has some data on the subject:

https://retireearlyhomepage.com/popr.html

(For you youngin's, Intercst (John Greaney) was one of the early pioneers in RE research and maintains his website with 1990's cutting edge web design.)

 

[Koolau]

Excellent comments.

Intercst wrote a blog post in 2000 which said much the same and has some data on the subject:

https://retireearlyhomepage.com/popr.html

(For you youngin's, Intercst (John Greaney) was one of the early pioneers in RE research and maintains his website with 1990's cutting edge web design.)

Yeah, reading Greaney's site is what eventually brought me here - back in the days of "the one we shall not mention" (back when I only lurked.) Greaney was very analytical, had tons of data, talked my language and yet was quite entertaining. I suppose his work is still out there.

I recall one of my subordinates making fun of me as he left (way early - and good for him) that his broker could get him 8% of his current stash to live on. Of course, the guy crashed and burned - ending up repositioning cars for a living. At the time, I wondered "Well, what COULD one reasonably expect to withdraw from a stash and still never go broke." My search found Greaney and the rest is history as they say.

A story I like to tell is that the first summer of my retirement, my subordinate asked me if I'd help him do some repositioning. I agreed on a limited basis 'cause it gave DW and I a "new thang" to try. We got to drive some really cool cars - though the auction run was almost all crappy cars that might not make it. We did just that one summer - maybe a couple dozen runs over 2 months and we "retired" again. AFAIK, subordinate is STILL digging himself out of his 8% - trust-your-broker hole. YMMV

 

[SecondCor521]

"the one we shall not mention"

Pretty sure his name is still translated to asterisks here.

Quick check: *****.

Yup.

 

[Koolau]

Pretty sure his name is still translated to asterisks here.

Quick check: *****.

Yup.

Heh, heh, checked it myself. I didn't realize that. Brings back, well, memories. Sorry I mentioned it for those still in PTSD from those days. For the young whippersappers who enjoy our (very) occasional food fights THESE days, you have NO idea how bad it can be.

If I ever had an evil thought about our moderators, I hope they forgive me. They do a wonderful job.

YMMV

 

[Hubcity]

As someone who retired in late 2016 my numbers aren't quite as good as those posted above (I hold some international index funds and more bonds), the numbers are still pretty stunning. If I were spending at the same rate as my most expensive retirement year, it would be 3.7% of my initial savings but only 2.4% of my current savings. The percentages for my average spending year and lowest spending year are, of course, even lower.

At this point my BTD allowance would cover anything that is even remotely reasonable.

"How should I spend my extra money?" is not a question I expected to have after taking a break between jobs to see if I could retire early.

 

[Koolau]

As someone who retired in late 2016 my numbers aren't quite as good as those posted above (I hold some international index funds and more bonds), the numbers are still pretty stunning. If I were spending at the same rate as my most expensive retirement year, it would be 3.7% of my initial savings but only 2.4% of my current savings. The percentages for my average spending year and lowest spending year are, of course, even lower.

At this point my BTD allowance would cover anything that is even remotely reasonable.

"How should I spend my extra money?" is not a question I expected to have after taking a break between jobs to see if I could retire early.

Yet another "First World Problem." YMMV