USA Today article on SWR

[daylatedollarshort]

I'd like to hear how other are accounting for this in their plans.

I mainly have been using the Fidelity Retirement Planner and my own spreadsheets.

Inflation plus non-COLA pensions and fixed rate mortgages change the income and expense numbers every year, without even adding in the more dramatic changes like RMDs and college expenses.

Plus I leave in some margin for error and potential LTC costs. I'm not counting on spending down to zero at any age.

 

[rayvt]

I think the thing is, you only need the calc if you are right at the cusp of go/nogo, so there's not really much need to see it done with all that detail. If you have lots of money, then you are okay even with 5%. If you don't have a lot of money, then even a safe 3.5% is not enough income.

I'd say the cusp is in the range of $1M to $1.5M. If you have $2M, then 4% is $80k/yr, and that's a lot higher than the median income (about $55K). You won't get much sympathy from people if you complain that you only get $80K a year.

And what difference does it make if you retire with $500K and depend on some other income stream kicking in to keep you off the street? So you figure out that you'll just be barely okay in that case -- a string of bad years in the market and you crash & burn no matter what Firecalc shows.

Something I saw once, for retirement planning:
Investments, IRAs, and 401(k) to live on;
Company pension for trips to Europe or Bahamas;
Social Security for lap dances.

 

[siamond]

I plan to use a variable withdrawal rate versus a fixed one because it seems to fit my situation best, and that's what I'd like to see some discussion on because I expect my situation is not uncommon.

All of this discussion on WD methodology ignores other income sources (pensions, SS or even annuities), which will make a substantial difference. While not everyone has a pension, most (maybe all) will receive SS. When these other income streams kick in, the required WD, whether fixed or variable, will/can go down. I know we can model this with FC, Fido RIP or other tools, and I do. But, the 4% fixed SWR and G-K WD rules don't take into account those other income sources, which will ameliorate the drops in any variable WD approach. This is one of the key factors in my decision to use a variable WD methodology because, the planned timing of my retirement and these other income sources make 'the worst case' not so bad for us.

I'd like to hear how other are accounting for this in their plans.

I asked myself plenty of questions in this respect, and I ended settling on a simple principle in my Excel sheets. Any extra cash (small job, lump sum, pension, SS), recurring or not, goes in my portfolio balance when received. Any dividend is automatically re-invested (DRIP). And the withdrawal method has to be an adaptive one, which accounts for variations of the portfolio, whether it comes from market upticks or new income.

Of course, I don't mean it literally, you don't want to add $25K of SS to your portfolio, and withdraw $60k the day after. You would of course just keep the $25k and withdraw $35k. But your model (Excel, whatever) will be set up as I explained, to figure out that $60k is the withdrawal of the year, and take in account the portfolio value change.

With a 4% fixed WR, modified to account for 4% of each new cash deposit, the outcome isn't quite satisfying, as you get more and more incremental money as you get older (that is, when the SS/Pension start), which is usually not a goal. But you could plan around it by taking more than 4% for your early retirement, then change your WR in a much more conservative manner when SS kicks in. Anyhoo, this fixed approach is just a really bad model...

With a modified version of G-K (accounting for the portfolio increments), this works fine. Other adaptive methods (notably the VPW recently discussed at length in the Bogleheads forum) play beautifully well with such approach.

The beauty of doing so is three-fold:
1. it eliminates the discontinuities of lump sums & SS/Pension kicking in, as the adaptive algorithms typically adjust in a more progressive manner than a big bundle of cash suddenly showing up
2. it unifies everything, lump sums, recurring income, occasional jobs, etc
3. if your portfolio balance is at real low point, a good adaptive algorithm will NOT increase your withdrawal, while your additional income will help the portfolio recover. This saves many methods from failing in real bad years like 1965/66.

 

[explanade]

One of the calculators I came across lets you enter SS amounts and other one time or recurring income streams that come in at some point later down the line.

It was the Financial Mentor one.

 

[TuborgP]

First, I want to say that this is a great thread; worthy of being placed in the "Best Of" for easy reference.

I've read Clyatt's book and tested his method with FireCalc, and read the G-K papers which include data on the number of 'cuts' and 'freezes' that various WD rates would required; that data seems very consistent with the modeling results from Rayvt and Siamond.

I plan to use a variable withdrawal rate versus a fixed one because it seems to fit my situation best, and that's what I'd like to see some discussion on because I expect my situation is not uncommon.

All of this discussion on WD methodology ignores other income sources (pensions, SS or even annuities), which will make a substantial difference. While not everyone has a pension, most (maybe all) will receive SS. When these other income streams kick in, the required WD, whether fixed or variable, will/can go down. I know we can model this with FC, Fido RIP or other tools, and I do. But, the 4% fixed SWR and G-K WD rules don't take into account those other income sources, which will ameliorate the drops in any variable WD approach. This is one of the key factors in my decision to use a variable WD methodology because, the planned timing of my retirement and these other income sources make 'the worst case' not so bad for us.

I'd like to hear how other are accounting for this in their plans.

We are in a Golden situation similar to what you are talking about. We retired a little over five years ago with combined pensions in the 80's which are now in the 90's. My wife took SS a little over three years ago her benefit is just over 20, I will get spousal next year and close to max at 70. MRD's will also kick in shortly there after. If you base your retirement budget on your base income( for u s pensions) everything else is inflation protection and increased investing. Perhaps your question might be centered on safe nest egg investment rate. That's how we are handling it. Continuing to build and sure enhance your lifestyle and spend more but make sure the nest egg is still growing.

 

[TuborgP]

We are in a Golden situation similar to what you are talking about. We retired a little over five years ago with combined pensions in the 80's which are now in the 90's. My wife took SS a little over three years ago her benefit is just over 20, I will get spousal next year and close to max at 70. MRD's will also kick in shortly there after. If you base your retirement budget on your base income( for u s pensions) everything else is inflation protection and increased investing. Perhaps your question might be centered on safe nest egg investment rate. That's how we are handling it. Continuing to build and sure enhance your lifestyle and spend more but make sure the nest egg is still growing. I know the dollar amounts are high but the principle is to wait for retirement until you can live on your fixed income streams or enough have kicked in. If it s only a couple of years have that amount in cash independent of your long term nest egg. We retired at the end of 07 and the crash didn't really hurt us because we had any bridge money needed to my wife's SS secured.