Thoughts and concerns about a high SWR

[DrRoy]

Based on the estimates I'm seeing, the monthly prem would be covered almost completely by the subsidy for the lowest level bronze plan.

Did you plan for the deductible? In 2016 the average for a family was $11,600. Could be higher next year.

 

[ERD50]

Look at it this way. You need two buckets of money. The first bucket needs to last 7 years, so the 4% rule of thumb doesn't apply to that bucket. That bucket should be invested very conservatively. The second bucket contains the remainder of your money, and it needs to last until you pass, and should be invested accordingly. That bucket needs to meet the 4% rule of thumb.

Yes, but something still looks scary.

The OP is talking $1.1M ~ $1.4M now (does the $1.4M include home equity?), and spending around 7-8% WR for the first 7-8 years. Assuming that was ~7% of liquid $1.1M, that's $539K consumed, so in 7 years portfolio is $561K.

4% of $561K is just $22.44K annual. Does SS and pensions bring that up enough? And 4% is aggressive for an ER, IMO.

Also, to simplify the FIRECalc entries, you might want to do a manual 'projection' of where you would be in 2021, similar to what I did above, and make the entries from there forward, so [-]less[/-] fewer changes to try to account for.

-ERD50

 

[RunningBum]

Yes, but something still looks scary.

The OP is talking $1.1M ~ $1.4M now (does the $1.4M include home equity?), and spending around 7-8% WR for the first 7-8 years. Assuming that was ~7% of liquid $1.1M, that's $539K consumed, so in 7 years portfolio is $561K.

4% of $561K is just $22.44K annual. Does SS and pensions bring that up enough? And 4% is aggressive for an ER, IMO.

You've subtracted expenses from the portfolio to get a balance. Presumably that portfolio will make something in those 7 years, so the balance should be higher. With a poor sequence of returns it *could* be that low but at that point you wouldn't expect continued poor returns.

The OP claims 2.5% after 7 years, not 4%. No mention of pension, and it's a bit hard to believe SS will make up that much difference, though the OP also mentioned reduced expenses. We're not seeing all the numbers, so I don't know if the OP's math is right.

I agree that a second bucket for the first 7 years is another way to go. I still claim that putting a value on SS and pensions and including it in the portfolio for SWR calcs is also valid.

I wonder if the OP has accounted for the possibility of reduced SS benefits, or higher taxes on them? Or has included taxes in general, as those are kind of hidden for most people working for a paycheck with taxes already taken out?

 

[FiveDriver]

Just a few thoughts come to mind.....
Are you going to be hit with penalties for withdrawing before 59.5 from the IRAs etc ??

Aren't your expenses a little too high at this time to consider retiring ??

I worked at a megacorp and I watched many of my older colleagues "coast" for their final year or two. Some of them turned it into an Art Form, dodging Meetings and avoiding Action Items like the plague. One guy in particular had so many vacation days that he basically worked a 4-day week for the last year.

Age 62 seems like a magic number.....SocSec can kick in, no early withdrawal penalties, an extra year or two to Make Bank, perhaps a Pension Enhancement Program is offered at work, a chance to see what a new Prez will do with this Economy.

Is it possible for you to stay with megacorp for a few more years ??

 

[ERD50]

You've subtracted expenses from the portfolio to get a balance. Presumably that portfolio will make something in those 7 years, so the balance should be higher. With a poor sequence of returns it *could* be that low but at that point you wouldn't expect continued poor returns. ...

Yes, I simplified (or over-simplified?) that the portfolio only keeps up with inflation. Of course it could go up or down, it's just another 'back of the envelope' way to view it.

The OP claims 2.5% after 7 years, not 4%. No mention of pension, and it's a bit hard to believe SS will make up that much difference, though the OP also mentioned reduced expenses. We're not seeing all the numbers, so I don't know if the OP's math is right.

Yes, 2.5% was mentioned, but it wasn't clear if that 2.5% was based on the original portfolio, or on the (presumably) reduced portfolio after 7-8 years of high withdraws (which would take it up ~ 4%). I also feel we aren't getting all the numbers we need.

-ERD50

 

[liberty53]

A piece-wise approach to the problem is required for analysis. We have incomplete information from OP so we need to fill that in:

Retirement age: 59 (assume no penalties from tIra and 401K withdrawals for analysis)

Investment portfolio $1.1M (assumes no additional contributions until ER)

Rental income of $8K

Social security income at FRA (8 years after retirement) is $25K (estimate)

Initial annual need for first four years is $70K (inclusive of taxes and rental property income)

Initial annual need for next four years is $58K (inclusive of taxes and rental property income)

Initial annual need at FRA is $33K (includes rental property and social security income)


Now need to estimate investment portfolio value at FRA. To simplify we can assume a 4% real growth on portfolio balance after annual withdrawals. We can also ignore inflation adjustments of need. I realize this is just a ballpark and assumes staying invested in a modestly riskier portfolio of stocks/bonds/cash.

Portfolio value at 4 years is about $996,000
Portfolio value at FRA is about $920,000


At FRA your portfolio need is 25 x $33K = $825K

You should be good to go, although I would caveat this with the following assumptions:


Your FRA portfolio could be reduced with a worse than expected market return
You must keep your 8K in rental income
Your social security benefit is not much lower than $25K/year


This analysis seems to correlate with the firecalc and fido calculator results of > 95% success rate.

 

[FiveDriver]

IMO, a 4% real growth rate is a little too much for this thumbnail analysis. How do those numbers look at 2% real growth ?? Maybe even 1% if we don't ignore Inflation ??

Would also like to verify that there is no early penalty on IRAs.

 

[euro]

You've subtracted expenses from the portfolio to get a balance. With a poor sequence of returns it *could* be that low but at that point you wouldn't expect continued poor returns.

Not to be the Debbie downer here but it also "could" be A LOT lower if things tank early on. I guess its all about risk tolerance (and backup plans. really good backup plans!), but I myself would have significant anxiety around those numbers

 

[liberty53]

IMO, a 4% real growth rate is a little too much for this thumbnail analysis. How do those numbers look at 2% real growth ?? Maybe even 1% if we don't ignore Inflation ??

Would also like to verify that there is no early penalty on IRAs.

At 2% real the terminal portfolio value goes to about $740K - below the need at FRA.

The OP wants to retire sometime in 2017 which presumably makes him 59 in 2017. Penalties on tax advantaged account withdrawals go away at age 59 1/2, so it's possible there may be some penalty on withdrawals in the first few months of ER. We also don't know the mix of tax advantaged accounts between the the OP and spouse, nor the spouses age.

 

[Carpediem]

Responding to liberty53's reply (thank you!) :

Retirement age: 59 (assume no penalties from tIra and 401K withdrawals for analysis) -

Reply: Correct, no penalties due to the "age 55 rule".

Investment portfolio $1.1M (assumes no additional contributions until ER) -

Reply: There will be an additional small contribution - approx. $10k - at the end of this year. The portfolio is invested at Vanguard 50/50 allocation (Wellesley & Wellington) except for a smaller portion still at mega corp 401k.

Rental income of $8K

Reply: Yes

Social security income at FRA (8 years after retirement) is $25K (estimate)

Reply: SS at FRA = approx $40k (including DW).

Initial annual need for first four years is $70K (inclusive of taxes and rental property income)

Reply: Yes

Initial annual need for next four years is $58K (inclusive of taxes and rental property income)

Reply: Yes

Initial annual need at FRA is $33K (includes rental property and social security income)

Reply: Should be less due to revised SS income amount.

------------------------

Sorry I didn't provide all the needed info initially. I'm new here so still feeling my way around. Here are a few more details:

- $10k cash in a mutual fund

- $80k available via a HELOC (balance = $0) Currently have a small mortgage.

- Pensions are pretty insignificant - $3600/yr.

- As mentioned above, SS at FRA is approx $40,000. Closer to $50k if I delay to age 70.

- The 2.5% WR mentioned previously is based on the remaining value of the portfolio. This number came from the results of the FRP tool.


Thanks again.

 

[haha]

A piece-wise approach to the problem is required for analysis. We have incomplete information from OP so we need to fill that in:

Or pause until OP shows up with enough information?

 

[Big_Hitter]

Or pause until OP shows up with enough information?

doing nothing is always an option

 

[liberty53]

Responding to liberty53's reply (thank you!) :

Retirement age: 59 (assume no penalties from tIra and 401K withdrawals for analysis) -

Reply: Correct, no penalties due to the "age 55 rule".

Investment portfolio $1.1M (assumes no additional contributions until ER) -

Reply: There will be an additional small contribution - approx. $10k - at the end of this year. The portfolio is invested at Vanguard 50/50 allocation (Wellesley & Wellington) except for a smaller portion still at mega corp 401k.

Rental income of $8K

Reply: Yes

Social security income at FRA (8 years after retirement) is $25K (estimate)

Reply: SS at FRA = approx $40k (including DW).

Initial annual need for first four years is $70K (inclusive of taxes and rental property income)

Reply: Yes

Initial annual need for next four years is $58K (inclusive of taxes and rental property income)

Reply: Yes

Initial annual need at FRA is $33K (includes rental property and social security income)

Reply: Should be less due to revised SS income amount.

------------------------

Sorry I didn't provide all the needed info initially. I'm new here so still feeling my way around. Here are a few more details:

- $10k cash in a mutual fund

- $80k available via a HELOC (balance = $0) Currently have a small mortgage.

- Pensions are pretty insignificant - $3600/yr.

- As mentioned above, SS at FRA is approx $40,000. Closer to $50k if I delay to age 70.

- The 2.5% WR mentioned previously is based on the remaining value of the portfolio. This number came from the results of the FRP tool.


Thanks again.

With your reduced need due to the higher social security and pension income you should be good even at a 2% real return from 2017 until FRA.

 

[Teacher Terry]

You can't take a reverse mortgage until age 62. The younger you take it the less you get. Also if both people end up out of the home for more then 3 months at the same time they can force the sale of the home. Say both end up breaking a hip at same time and are in rehab, etc. Fees are also quite high.

 

[rodi]

Firecalc has a feature on the Spending Models tab that lets you enter in specific spending year by year. You have to be a supporter and logged in to get this feature. I used it when I first started planning - and I'm pretty sure Katsmeow used it as well.

For me it was useful because I have kids under the roof now, they will be going to college, then they will (hopefully) be off my payroll and someone else's problem. I needed to model for higher spending now, and lower spending later.

I left the income side of things on the "other income" tab where you enter SS and pensions... I didn't want to conflate things.

It's a useful feature of the firecalc tool.

 

[Carpediem]

Firecalc has a feature on the Spending Models tab that lets you enter in specific spending year by year. You have to be a supporter and logged in to get this feature. I used it when I first started planning - and I'm pretty sure Katsmeow used it as well.

Thanks, rodi. I was not aware that feature was there. Looking at it now.

 

[daylatedollarshort]

You can have variable spending in the Fidelity planner. I use that and my own spreadsheet as our spending really varies year by year due to college costs, SS down the line, pensions not COLA adjusted, Medicare costs different than our ACA plans, etc.

We also utilize some of the suggestions similar to what brucethebroker suggested - hobby income, optimized expenses, making the house water and energy efficient, more time for comparison shopping, etc. It has been kind of wild how much that saved off our withdrawal rates without changing our basic lifestyle.

 

[RetireAge50]

Seems normal to have higher withdrawals early on before other sources of income come along. As long as you are flexible in you spending as the market moves you should be fine. Here is a picture of how my plan looks:

 

[Big_Hitter]

^ that's called a "shark-fin" analysis - very typical

 

[Senator]

Hello...

I am 58 (married - DW retired) and still working at mega corp. Our retirement savings are a bit over $1.1MM and are currently in a couple of traditional IRAs and an employer 401k. I am looking at the possibility of hanging it up in 2017. However, if I do, my WR for the first 7-8 years will be fairly high - 7-8%. But after SS kicks in, it will drop to around 2.5% for the remainder of our lives. I've run lots of scenarios and calculations using both Firecalc and Flexible Retirement Planner and results are in the 95-100% success range.

What are your thoughts/concerns about this scenario? Would you be comfortable calling it a career if you were in my shoes?

I know all about the '4% rule of thumb' but I'd have to keep working for 7-8 more years before I could reach that level.

Thank you in advance for the feedback.

I would be concerned about lifestyle creep, or forgotten and unforseen expenses. And when you have a CPI adjustment to a 7.5% withdrawal rate, it takes even more dollars out.

You could be thinking 8% is enough, and run over to 9-10%. When SS kicks in, you may need all of that too.

Do not let your life savings become like a credit card. You cannot pay it off or default. This is the rest of your life. But think of it this way. Worse case, you run out of money. You can always go back to work. Someone has to be a Walmart greeter.

 

[Carpediem]

Seems normal to have higher withdrawals early on before other sources of income come along. As long as you are flexible in you spending as the market moves you should be fine. Here is a picture of how my plan looks:

Thanks for that! Your graph is exactly what I assumed it would look like for a lot of early retirees.

 

[willing2try]

I'm in a situation very similar to OP.
With discretionary $ to play with baked in I'm looking at:
6.5% - first 5 years
6.0% - next 5 years
4.0% - rest of life

Taking out the discretionary $ it results in 97% success rate and looks like this:
5.5% - first 5
4.7% - next 5
2.6% - rest of life

I figure that I'll adjust my discretionary spending depending on market returns.

 

[Carpediem]

I'm in a situation very similar to OP.
With discretionary $ to play with baked in I'm looking at:
6.5% - first 5 years
6.0% - next 5 years
4.0% - rest of life

Taking out the discretionary $ it results in 97% success rate and looks like this:
5.5% - first 5
4.7% - next 5
2.6% - rest of life

I figure that I'll adjust my discretionary spending depending on market returns.

Do you have a date picked out yet?

I plan on seeing what the 'financial landscape' looks like in the spring and make a decision whether to pull the trigger in the summer or ......OMY?

Thanks.

 

[willing2try]

I'm 55 now. Want to retire in 4 or 5 years. Like you, I plan to evaluate the financial landscape at the time. I also plan to have 5 years worth of $ in "safe" investments to hedge against a bad sequence of events.

 

[Mdlerth]

I figure that I'll adjust my discretionary spending depending on market returns.

Perhaps I do not understand SWR.

I had thought that it represented a fixed-but-inflation-adjusted Withdrawal Rate over an anticipated length of retirement. Also, that the S stands for "safe", with the condition that a Withdrawal Rate was only Safe if it could be expected to withstand bear markets as well as bull.

However, since bear markets are statistically certain to appear from time to time, when market returns happen to be good it is NOT a signal to depart from the original path and take a more expensive one. If you get lucky early into the journey, rejoice and be glad, but stick to the same spending plan.

I wonder if one of the learned FIREees could educate me. To paraphrase Charlie Brown, "Isn't there anyone who knows what SWR is all about?"