SWR of 4%+COLA or reset clock to 4%?

[CRLLS]

A theoretical strategy question.

Presume that one started retirement a couple of years ago calculating a SWR based on the traditional 4%+ Cola every year and verifying it with FireCalc. Is it OK to just reset the clock and start at the 4% of today's retirement funds, all other things being equal using the same mortality age? I know I can run FireCalc and Iorp and Fidelity RP to see what they think today. I am just wondering if there is a methodology flaw one way or the other.


If that same person under spend the planned withdrawal the first couple of years, considering the last 2 years were above the norm return, is it safe to take out the unused dollars today, BTD and continue on with either the original plan or start the new plan above? IMO, removing the unused portion of the planned withdrawal $$ would be more of a concern if the last couple of years were losing years.

I'm just wondering, or planning.

 

[mickeyd]

Sure you can CRILLS. Remember it's your cash and it's YOUR plan! You can do anything that you want to.

 

[Dtail]

Yeah sure, but you are now not using the 4%WR concept anymore, but effectively a remaining % of portfolio concept depending how many more years you wish to adjust the methodology.
The 4% concept is very rarely used in actual withdrawal practice, but can be good in providing general feedback if one is in decent standing to be able to retire.

 

[ERD50]

Yeah sure, but you are now not using the 4%WR concept anymore, but effectively a remaining % of portfolio concept depending how many more years you wish to adjust the methodology. ....

No, not really. If their twin retired X years later, and both twins had the same portfolio in that year, they could apply the 4% rule and withdraw the same amount for the rest of their lives.

We've discussed this as the "retire again and again" process. If you really think about how FIRECalc works, it becomes clear. FIRECalc says 4% is ~95% success regardless when you start. So you can ratchet it up in good years, because good years are accounted for in history.

The "% of remaining portfolio" would mean you reduce your withdrawal amount when the portfolio drops. The 4% rule says it is low enough to keep taking it out, inflation adjusted, and historically only 5% start periods fail.

-ERD50

 

[rodi]

Resetting to a new 4% feels good when your portfolio is bigger than when you first set it. But you are also resetting your Sequence of Returns Risk (SORR).

Also 4% was for a 30 year retirement... many of us have a longer horizon planned since this is the *early* retirement board.

I'm trying to keep my portfolio withdrawal rate under 3.5% based on starting portfolio value... but spending will increase when a) kids move out and support themselves, and b) my SS comes online.

 

[audreyh1]

We just use a fixed % of portfolio every year (the Dec 31 value) which means our annual withdrawal can go down in $$ as well as up. We’ve experienced both over the years. Works for us.

Theoretically we can take a larger % than we do currently without stressing the retirement portfolio, and we’ll probably increase it as we get older.

 

[pb4uski]

I think that "retire and retire again" is a perfectly valid strategy.

It's hard to argue that if someone with $1.35 million can retire on 4% inflation-adjusted withdrawals of $54k in the current year that his twin that retired 5 years ago with a $1.0 million portfolio on 4% inflation-adjusted withdrawals and is now drawing $44k but the portfolio has grown to $1.35 million can't "retire again" and reset withdrawals at 4% of the $1.35 million like his twin.

As long as he realizes that reseting probably slightly reduces his success factor since he has reset current year withdrawals to 4% ($54k/$1,350k) rather than 3.3% ($44k/$1,350k).

 

[Dtail]

I think that "retire and retire again" is a perfectly valid strategy.

It's hard to argue that if someone with $1.35 million can retire on 4% inflation-adjusted withdrawals of $54k in the current year that his twin that retired 5 years ago with a $1.0 million portfolio on 4% inflation-adjusted withdrawals and is now drawing $44k but the portfolio has grown to $1.35 million can't "retire again" and reset withdrawals at 4% of the $1.35 million like his twin.

As long as he realizes that reseting probably slightly reduces his success factor since he has reset current year withdrawals to 4% ($54k/$1,350k) rather than 3.3% ($44k/$1,350k).

True, but wouldn't he also have less years of retirement left?

 

[RunningBum]

I'm not a fan of resetting the clock. It feels like playing Russian Roulette to me, or as Rodi says, SORR. If a 4% plan has a 95% chance of working, a nice 2 year run at the start of your retirement almost certainly puts you in a success path. Starting over brings back that 5% chance of failure.

It does help that you have cut your retirement time, but if you are still in good shape, you may still have 30 years or more.

As far as the twin argument goes, I don't think every starting point has an equal chance of failure, even though Firecalc does. It would seem logical to me that after a couple of good years of returns, there's a better chance of a correction or downturn coming. I haven't verified this with any research.

The reset will probably work. I wouldn't do it though. I gave my reasons why, and others can decide for themselves.

An alternative would be a fixed % of remaining assets, or a VPW plan (which I use). It will raise what you can take out in good times. But it will also cut your withdrawal in bad times, and it does it gradually, rather than a more abrupt reset, and having to make a decision on whether a reset is really safe to do.

 

[Retch The Grate]

I'm planning on doing 3% so that my time horizon for failures is beyond any data we have, and then reset any year that my net worth has increased to the point where a reset is a higher withdrawal rate. That will bring me closer to the max spendings curve, but still require a worse than history sequence of returns to cause a failure.

 

[Exchme]

The fact that you really desire to spend more after only two years, hints that you underestimated your real spending needs and are feeling the pinch a bit. I know in our house, half the (non-tax) spending goes to "rare" events that crop up now and then, so it is easy to underestimate the average need. If you take the "excess" now, you may be forced to make really uncomfortable cut backs if the market doesn't behave nicely.

So I think I would give myself permission to do a capital improvement that was just about due anyway (roof, car, medical procedure you've been putting off, etc.), where it will at least somewhat reduce future spending. But I'd wait until your nest egg is comfortable enough that you don't have doubts before spending for the sake of spending.

 

[CRLLS]

All of these ideas have been rattling around in my head for a while. Thanks for reminding me of the retire and retire again terminology. I couldn't remember that. Part of my dilemma is, not counting Roth Conversions, we have only withdrawn ~ 2.9% in 2019 and probably will w/d ~ 1.5% this year. The decrease is not solely due to Covid. 2 years from now, I will increase SS benefits by claiming on my benefits instead of on DW's spousal. At that time, if our expenses run about the same, we may not need to w/d any at all. It sure seems that we could BTD, but really there is very little that we want or need. I guess we are just boring or can't be imaginative. Even though we spend below what all the calculators say we can, it is comforting to know we can spend "X" if desired. I guess is if we spend under the "allowable" regardless of the calculator we choose, we won't be too bad off.

P.S. Is there really much of a SORR if we don't need much and use the 4% of the previous year's assets as a maximum (not every year) ?

 

[Dtail]

P.S. Is there really much of a SORR if we don't need much and use the 4% of the previous year's assets as a maximum (not every year) ?

Well on a related note, if your accounts decreases a bunch, then their is the risk of 4% not being enough monies for the current year.

 

[pb4uski]

True, but wouldn't he also have less years of retirement left?

Perhaps. He might have less compared to when he originally retired, but he may have retired at 60 and then his twin retires at 65... so the first twin to retire originally had a 35 year time horizon and now the twins each have a 30 year time horizon.

 

[Dtail]

Perhaps. He might have less compared to when he originally retired, but he may have retired at 60 and then his twin retires at 65... so the first twin to retire originally had a 35 year time horizon and now the twins each have a 30 year time horizon.

Fair potential comparison.

 

[CRLLS]

Well on a related note, if your accounts decreases a bunch, then their is the risk of 4% not being enough monies for the current year.

I have considered that risk. For us, It is so small that it is not worth considering. I think we would be aware before that would come to fruition. we have room to tighten our belts. If the market drops that far, we will be in good company.

YMMV for sure.

 

[Exchme]

Oh heavens, you have taken 2.9% and 1.5% and SS kicks up in 2 years? Relax, you are fine!

 

[RunningBum]

Yes, my concern would be with someone who is spending the full 4%+cola, and wants to spend more because the market (and thus their portfolio) has gone up ahead of inflation the last two years.

 

[Chuckanut]

You may wish to employ a variable withdrawal rate that takes into account inflation and the ups and downs of the market. It gradually adjusts the rate depending on each year’s financial conditions and attempts to smooth out big ups and downs while keeping your head above water at all times.

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

“Variable percentage withdrawal (VPW) is a method which adapts portfolio withdrawal amounts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

The VPW method uses a variable (increasing) percentage to determine withdrawals from a portfolio during retirement. Each year, the withdrawal is determined by multiplying that year's percentage by the current portfolio balance at the time of withdrawal.

The VPW method and spreadsheets were collaboratively developed and improved by a group of Bogleheads[emoji768].[1]”

 

[Perryinva]

Kitces had a well thought out paper that he called “Ratcheting Withdrawals” with some realistic formulas. The idea is to not continuously grow your portfolio to far larger than it was (inflation adjusted). It works both ways, of course, and was, IMHO, a good solution as long as you don’t have to have your entire income from a steadily rising COLA from your portfolio. For those fortunate enough that the portfolio only provides discretionary income, that works great, you get to spend more when you make more and less if you lose money. As pb4uski mentioned, there is of course a larger chance of failure because you are spending more (duh), but since the chances are greater that you will increase your portfolio bs lose it all, it really depends on your risk tolerance.

 

[SecondCor521]

The idea is at least 20 years old, and was called the Pay Out Period Reset or POPR model by the first person who I know of who had the idea back on the Motley Fool discussion boards. Intercst has a writeup on it here:

https://retireearlyhomepage.com/popr.html

Note that it does reduce the average ending portfolio value, which is probably sort of what you want, but may be a consideration for people with legacy goals.

As far as 4% being less safe because of the Russian roulette thing, I think that's true if you use a WR that is less than 100% historically safe. My net WR is about 0.77% today, so I think of it as playing Russian roulette without any bullets in the chamber and feel free to use the POPR model.

"Retire again and again" is probably a snappier phrase, though.

 

[NW-Bound]

I don't need to justify spending more money, but would be interested in the "retire again and again" process if I could have the whole 30 years again.

I have already spent 8 of those.

 

[mrfeh]

Resetting to a new 4% feels good when your portfolio is bigger than when you first set it. But you are also resetting your Sequence of Returns Risk (SORR).

+1

 

[teejayevans]

Resetting to a new 4% feels good when your portfolio is bigger than when you first set it. But you are also resetting your Sequence of Returns Risk (SORR).

I'm trying to keep my portfolio withdrawal rate under 3.5% based on starting portfolio value....

But if your withdrawal rate is so conservative (3.5%), then effectively you have no risk, so you might as well reset it.
If things get so bad that those with ridiculously conservative withdrawal rates fail, then civilization as we know it will collapse. And it won’t matter if your WR was 3.5, 2.5 or 1.5...money will be useless. Better to invest in bullets, MREs, and a bomb shelter.

 

[donheff]

It seems to me that resetting leaves you exactly where anyone else with the same portfolio and current retirement horizon is. So, if it's perfectly fine for them it is perfectly fine for you.

On the other hand, you are restarting your sequence of return risks. If you believe (as I do) that initial valuations make a difference (i.e., if you start your retirement at a very high PE/10, you are more likely to be living out a scenario with a lesser return) then you are increasing your chances of being on one of the lower returning possible paths if today's valuations are significantly higher than when you started. Of course, so is everybody else retiring at the same time - they just don't see it.

Another way of looking it is, of course if you raise your withdrawal rate you are less "safe" than you would be if you left it lower. So do you want to be safer than safe or do you want to get the most cash out that you can? Pick your poison.