SWR - High initial rare that is decreased in stages with age

[chinaco]

Wifey and I will FIRE @ 55. I have been crunching numbers using the two popular approaches (dollar-adjusted withdrawals or percentage withdrawals).

Look at these links:

http://www.fpanet.org/journal/articles/2006_Issues/jfp0306-art6.cfm?&
http://www.fpanet.org/journal/articles/2004_Issues/jfp1004-art6.cfm?&

• Fixed Percentage witdrawal of balance portfolio (@ 4%)
• Initial withdrawal % (@ 3.5%) and used that $ amount increased by 3% for inflation each year

I have also run numbers based on a higher withdrawal rate during the early years. The rationale is that we will probably spend less money as we get older... I understand the arguments about increase health care costs, but by the time we age, we will have Medicare. Plus, why hang on to money that might only be used to pay for a nursing home... (although, we need to figure out a strategy to protect the surviving spouse).

For example:

• 55-65 perhaps withdraw 6%
• 65-70 perhaps withdraw 5%
• 70-75 perhaps withdraw 4%
• 75-80 perhaps withdraw 3.5%
• >80 perhaps withdraw 3%

Has anyone seen a detailed study on this type of approach. I suspect that being blessed with good market conditions in the early years would increase the chances of protfolio survival.

 

[jdw_fire]

Have you looked at Bernicke's "Reality Retirement Plan"? Dory programmed it into Advanced FIRECalc to make calculations easy. There is also a link in FIRECalc to a paper describing the study from which the method was developed.

 

[kaudrey]

Hi,

I'm going to have a higher withdrawal rate for the first 5 years, but then my pension kicks in and the percentage goes way below 4%.

As far as Medicare - I read that the average person who is on Medicare will spend about $200K in health care from age 65 until they die (say at 85). That's a lot of money to dismiss by saying "I'll be on Medicare". Just a thought.

 

[kaudrey]

Also, I would be concerned about the "cycle" issue discussed elsewhere - if there is a bear market for your first few years of retirement, I'd be very concerned about the high SWRs.

Karen

 

[Rich_by_the_Bay]

Karen's points are well taken.

Many of us will cheat the SWR a bit early on if you know that a pension or SS is around the corner. But at age 55, to the extent that you start withdrawing much over 4.5% to 5% you are more at risk for an early bear market messing you up big time.

You should be prepared to drop your SWR significantly if the market tumbles for a while. If you can't afford to do that (that is, if that money is necessary to meet fixed expenses) I'd consider either waiting a bit longer or part-time work for an income stream. Just my perspective.

 

[kcowan]

Thanks to 4 great years of market performance, our SWR had declined from 4.8% to 3.8% and is continuing to drop. We count on 5% overall return above inflation but have achieved 10% above inflation with an individual stock portfolio.

My experience with Dad (died in 2000 at 95) and MIL (91 and still going strong) is that SWR drops in stages. After age 85. it is tough for a retiree in good health to spend much. MIL has:
stopped driving
quite smoking
reduced drinking to white wine with ice and a Grand Marnier on ice on special events.
She will not come with us to PV MX either. So travelling has stopped too. We want her to spend her money on enjoyment but her joys come inexpensively now.

 

[chinaco]

All very good points.

The % I illustrated were examples not actual projections.

Also... I am a believer that a bad market during the early years of ER could cause harm to the portfolio if the withdrawal rate was too high.

My goal is to maximize spending while we are still young, and at the same time not jeopardize the later years. I suspect that we will probably travel a bit more in the 55-70 years.

 

[SteveR]

As in everything else...it all depends on your unique needs, potential lifespan, retirement activities, and the amount you have saved and where it is invested.

My dad died at 81; his father at 60, mother is living in Assisted Living at age 84 but isd blind and inactive; her parents both died near age 66. So I have a ton of crummy genes in my pool to contend with. Long term planning might be a joke....but what if I beat the odds? Got to plan for that too.

Life-style and your ability to fund it would seem to be the major expense drivers in early RE. Later on, it might switch to health care or other issues.

My plan is unique and has planned reductions in expenses at approximate intervals over the next 30 years. The plan ends at 90 for me; 93 for DW. If we live longer projects say we will have more than less in investmements even with several down years. That also means we have a high initial SWR to fund our desired life style until it changes (which might be sooner than later with DW's condition).

Our goal is to travel as DW's health permits; RV as we feel like it; finish fixing up the house before we downsize (move to different part of the country?) and get the grandkids 529's a little fatter. After that our exenses will drop to a more or less constant level. Health care insurance is covered and our tiny pensions will cover some expenses so our SWR can drop substantially in our early 70's. But if surprises come we will have the funds to cover them. Again, all unique to our situation.

 

[lazygood4nothinbum]

i'm planning something similar but i can be very flexible as a single person with no dependents & minimal encumbrance who wants to travel and is also considering life without a permanent residence.

i can downsize house or get rid of it, travel throughout western or se asian countries or even move abroard or aboard, all guided by what my health & portfolio allows as i age.

i plan to keep enough aside for about 5 years in a comfortable nursing home towards the end, in case i wind up with alzheimer's. after that my relatives can just throw me into a state institution or out on the street as by then i won't know the difference.

 

[Nords]

comfortable nursing home

Good plan, although I can't help but be stricken by that oxymoron...

 

[lazygood4nothinbum]

Good plan, although I can't help but be stricken by that oxymoron...

ya i know. my poor attempt at being the eternal optimist when by nature i am only, at best, an optimist-in-the-long-run. having just spent 4 years dealing with mom's nursing home, well, at least she had what i wouldn't get living on the streets at end stage, a miniature horse visit...

edit: which was a very long way, yet not so far, from where she came...

 

[Rich_by_the_Bay]

ya i know. my poor attempt at being the eternal optimist when by nature i am only, at best, an optimist-in-the-long-run. having just spent 4 years dealing with mom's nursing home, well, at least she had what i wouldn't get living on the streets at end stage, a miniature horse visit...
edit: which was a very long way, yet not so far, from where she came...

Priceless.

 

[2B]

As a Guyton wannabee, I can sympathize with the desire for a higher withdrawl rate. The key element of Guyton is that you must be willing and able to reduce your withdraw rate should portfolio performance not keep up. Someone did an analysis (check archives) and found that inflation adjusted withdrawls in some scenarios could fall by 50% even though they recovered by the end of the period.

The ultra-conservative SWR is a copout for us cowards. The data show that our normal withdrawls will fall as we age -- Bernicke and our collective observations on this forum.

If you are willing to believe in the approach, I'll encourage you to go for your dream. I have some issues that will keep me close to my current location for a little while longer. There are some benefits I see in working full time this year in the form of international expense account travel -- good scouting opportunities. After this year, I plan some part timing to keep my medical coverage and ease into more travel.