Variable SWR

[zandrajohn]

Sorry, I posted this a few minutes ago in the wrong area!

First let me thank all those who have posted here on this forum. You collectively encouraged me to retire early 5 years ago, and I have never looked back and never regretted it.
Now that I am into my sixth year of retirement (I am now 66 years old), I see the SWR issue a little differently.
I have pensions that provide for about 85% of a comfortable retirement budget, and other assets which according to Firecalc would provide for the remaining 15% five times over. So perhaps it's time to have more fun, before I am too old to enjoy it!
Rather than setting a fixed withdrawal rate based upon my starting portfolio value, what do you think of resetting the withdrawal rate every year using Firecalc, and my remaining life expectancy?
As I see it, this would enable me to safely enjoy my nest egg, without the worry of it ever being used up.
Thanks
John

 

[donheff]

If you think of that 15% as your uncovered "expenses," why don't you set aside enough of your portfolio to more than cover it (e.g. if you were using a 4% SWR drop it to 2%). Call the rest spendable and do whatever you want with it.

 

[kaudrey]

Hi John,

Congratulations on your ER and glad you have been enjoying it! There is a stream of literature on resetting the SWR each year. For you, re-setting would probably make more sense than for those that don't have pensions to cover most of their expenses, and would likely give you more money to enjoy now. Here's the issue:

Re-setting based on the portfolio value from year to year creates a fluctuating and uncertain income stream. Again, for you, might be OK, but for those without pensions: Let's assume for a minute that you are relying 100% on your portfolio for income. If you have $1M the first year and withdraw 4%, that's $40K. So far so good. The second year of your retirement is 2008. Your portfolio is now only worth $750K. You can only withdraw $30K, instead of the $41.2K you could have withdrawn if you just adjusted the 4% SWR for 3% inflation. Can you live on 25% less than you did the year before? Do you want to?

For you, since you are mostly covered by fixed income, this issue wouldn't be nearly as severe and could certainly work to give you more spending money in good years; especially since it sounds like you have plenty!

Personally, I'd say "go for it". Although I am still working, I am watching my 73 year old parents, after 16 years of retirement, realize that they have plenty left to get them to old age. Every now and then they jokingly say something like "I just spent part of your inheritance on a new set of golf clubs!" And I encourage them to do it!

 

[friar1610]

Sorry, I posted this a few minutes ago in the wrong area!

First let me thank all those who have posted here on this forum. You collectively encouraged me to retire early 5 years ago, and I have never looked back and never regretted it.
Now that I am into my sixth year of retirement (I am now 66 years old), I see the SWR issue a little differently.
I have pensions that provide for about 85% of a comfortable retirement budget, and other assets which according to Firecalc would provide for the remaining 15% five times over. So perhaps it's time to have more fun, before I am too old to enjoy it!
Rather than setting a fixed withdrawal rate based upon my starting portfolio value, what do you think of resetting the withdrawal rate every year using Firecalc, and my remaining life expectancy?
As I see it, this would enable me to safely enjoy my nest egg, without the worry of it ever being used up.
Thanks
John

I'm in approximately the same situation you are. When I want to/need to take something out of the portfolio, I do. But I don't ever feel the need to withdraw funds just because I had based my planning on a certain withdrawal rate. In the 7 years I've been retired I've never even come close to the 4% W/D rate and have never felt like I've deprived myself.

 

[LOL!]

Let me ask you this: Why do you care what FIRECalc is telling you at all? You have just lived through 5 years of retirement. During those 5 years lots of things have happened to your portfolio and assets. You know your expenses pretty well, too.

Point blank: Haven't you got it more figured out than FiRECalc can ever tell you by now?

 

[Rustward]

... Here's the issue:

Re-setting based on the portfolio value from year to year creates a fluctuating and uncertain income stream. Again, for you, might be OK, but for those without pensions: Let's assume for a minute that you are relying 100% on your portfolio for income. If you have $1M the first year and withdraw 4%, that's $40K. So far so good. The second year of your retirement is 2008. Your portfolio is now only worth $750K. You can only withdraw $30K, instead of the $41.2K you could have withdrawn if you just adjusted the 4% SWR for 3% inflation. Can you live on 25% less than you did the year before? Do you want to? ...

I like FireCalc. It is as good as any of the other tools. The one thing I simply cannot get my head around is making a 30 year projection using a snapshot of a portfolio taken on a single day -- especially with the recent swings we've seen.

Just assuming FireCalc would have given a 4% rate to make the math easy, using the numbers above, RetireeA starts a 30 year retirement in 2007 on $40K/year, and RetireeB (whose portfolio was precisely the same as RetireeA's in 2007, but now it is 2008 and both portfolios are worth less) starts a 29 year retirement in 2008 on $30K. Their portfolios were the same! Call me what you want, I can't understand this.

 

[MasterBlaster]

I had the exact same question...

http://www.early-retirement.org/forums/f28/explain-the-4-withdrawal-rate-19234-3.html#post355267

read my question and then read Dory's (The FIRECalc guy) response

 

[Rustward]

I had the exact same question...

http://www.early-retirement.org/forums/f28/explain-the-4-withdrawal-rate-19234-3.html#post355267

read my question and then read Dory's (The FIRECalc guy) response

Thanks. That does make sense. It seems there was a recent thread where somebody suggested looking back and the thread kinda had the tone that looking back is not valid. Personally I use the average end-of-quarter values over the last six quarters to smooth the peaks and valleys. Maybe it should be eight or ten quarters - I dunno.

Perhaps the OP here is suggesting using FireCalc every year to determine a spending level that he should not exceed, and that does seem valid to me. I think of it as each year you are starting another retirement and you have what you have at that time.

Edit to add:
Here is the thread that mentions no looking back in post #16:
http://www.early-retirement.org/forums/f28/whats-your-swr-strategy-48647.html

 

[rgarling]

...
I have pensions that provide for about 85% of a comfortable retirement budget, and other assets which according to Firecalc would provide for the remaining 15% five times over. So perhaps it's time to have more fun, before I am too old to enjoy it!
...

If your health is good, at some point you might want to lock in that comfortable retirement budget by buying an SPIA.

I like your idea of spending the surplus while you can. Just take out something like 10% (of the surplus) each year and blow it (or give it away). When it runs out, you're back to the 'comfortable retirement budget'. No problem.

 

[Katsmeow]

I had the exact same question...

http://www.early-retirement.org/forums/f28/explain-the-4-withdrawal-rate-19234-3.html#post355267

read my question and then read Dory's (The FIRECalc guy) response

That is a great thread. I thought the most important comment was:

It is not that the starting portfolio is magic -- using the current portfolio is certainly easier and more practical in future years.

But these calculators are trying to answer a pre-retirement question, not a year-to-year spending question.

I think it is easy to start thinking that the SWR determined pre-retirement to see if you have enough money is also your spending plan when in retirement. As I move into retirement that always troubled me because it seems logical you wouldn't just mechanically apply a SWR but would actually look at where you portfolio actually was and what your situation was, etc. in deciding the withdrawal rate for a particular year.

 

[audreyh1]

I think it is easy to start thinking that the SWR determined pre-retirement to see if you have enough money is also your spending plan when in retirement. As I move into retirement that always troubled me because it seems logical you wouldn't just mechanically apply a SWR but would actually look at where you portfolio actually was and what your situation was, etc. in deciding the withdrawal rate for a particular year.

Yes, I think many of us retired look at it that way - not blindly withdrawing and ignoring the portfolio value, but rather making decisions each year based on current value.

Audrey

 

[IndependentlyPoor]

Yes, I think many of us retired look at it that way - not blindly withdrawing and ignoring the portfolio value, but rather making decisions each year based on current value.

Audrey

Certainly true for us. We planned our retirement based on the 4% rule, but when the crash came we just couldn't bring ourselves to stick to the plan and slammed on the spending brakes.

Emotion trumped all. We slept well, but may have missed out on some great real estate deals. Oy vey.

 

[REWahoo]

We planned our retirement based on the 4% rule, but when the crash came we just couldn't bring ourselves to stick to the plan and slammed on the spending brakes..

Or as Dory would phrase it "Measure with a micrometer (FIRECalc runs and spreadsheets out the wazoo, calculating what we can safely withdraw out to three decimal places) and cut it with an axe (market volatility and emotions take hold, realizing if our portfolio tanks we're in deep kimchi)."

 

[audreyh1]

Certainly true for us. We planned our retirement based on the 4% rule, but when the crash came we just couldn't bring ourselves to stick to the plan and slammed on the spending brakes.

Emotion trumped all. We slept well, but may have missed out on some great real estate deals. Oy vey.

And how important was any "great real estate deal" in the bigger picture for your life anyway? If it is important, there are still plenty of good deals. Otherwise - who cares?

Audrey

 

[Independent]

I agree with this:

If you think of that 15% as your uncovered "expenses," why don't you set aside enough of your portfolio to more than cover it (e.g. if you were using a 4% SWR drop it to 2%). Call the rest spendable and do whatever you want with it.

The pure 4% rule is for people who can't adjust spending. The rest of us can spend more when we have the money.

I've always liked the idea of funding our "basic" expenses with something like 99% certainty, then saying the rest of our is available to be spent at any time on any thing. If we really want to do an around the world cruise in the first year we're retired, and the cruise doesn't dig into the assets that will fund the basic expenses, then we should take the cruise.

 

[mickeyd]

Point blank: Haven't you got it more figured out than FiRECalc can ever tell you by now?

Well said LOL. There are numerous planning tools (Firecalc, fin engines, M* etc) as well as financial papers and theories (MPT, 4% rule), but the best thing that any of us can use most accurately is our own experience and gut feeling. In reality, that's what I use, but have never really thought much about it.

 

[jacob]

First of MC calculations are garbage in garbage out calculations. The data that goes in are historical rates which are not future rates. If the withdrawal rate is reset every year you have to be careful to not suddenly have failing cycles appear. This could happen if you, say, have a 30 year horizon where all cycle work and then, resetting, it becomes a 31 year cycle some of which would fail.

I prefer to rely on dividends rather than total return, so firecalc is not directly applicable to my strategy.

 

[MasterBlaster]

The data that goes in are historical rates which are not future rates.

FIRECALC uses a model... Past is Prolog. Of course they aren't future rates - for that model you need to see the swami.

If the withdrawal rate is reset every year you have to be careful to not suddenly have failing cycles appear.

If you pick a failure rate of say 5%. It isn't cumulative everytime you reset. So if I reset 10 times I won't fail 50 % of the time (5% X 10). In other words the cycles are not independent of each other.

I prefer to rely on dividends rather than total return

Who wouldn't ! However, with this strategy though you will need a nest egg twice as big to generate the same income as using total return. You get much less bang for the buck.

 

[zandrajohn]

Surely, if you re-set every year it is impossible to "fail"

 

[jacob]

If you pick a failure rate of say 5%. It isn't cumulative everytime you reset. So if I reset 10 times I won't fail 50 % of the time (5% X 10). In other words the cycles are not independent of each other.

I agree it's not cumulative. A reset is not the same as starting over either though.
If you do the calculations for 30 years initially and then reset and then do the calc for 30 years again, it would be similar to having done 31 years initially. If the second calc is done for 29 year sit should be okay.

Of course trying to game this to the max is going to backfire.

Anyway, why not download the SP500 or DJIA data and just run a spreadsheet given an adjusting strategy. It's not that tricky.

 

[jacob]

Surely, if you re-set every year it is impossible to "fail"

In this case a failure would be needing $600 but only being able to withdraw $500.

 

[MasterBlaster]

I agree it's not cumulative. A reset is not the same as starting over either though.
If you do the calculations for 30 years initially and then reset and then do the calc for 30 years again, it would be similar to having done 31 years initially. If the second calc is done for 29 year sit should be okay.

Of course trying to game this to the max is going to backfire.

The idea here is that you have a certain lifespan left maybe 30 years. So if you reset some number of years out the new span should be the adjusted lifespan. In that case after 1 year the 29 year span you refer to would be appropriate.

Anyway, why not download the SP500 or DJIA data and just run a spreadsheet given an adjusting strategy. It's not that tricky.

You can do that. There are many many variations on variable withdrwal rates.

Keep in mind though that you just may have some fixed expenses that must be paid every year. If the markets really drop then a variable rate scheme may not provide enough income. You just may be burning through the nestegg if the markets work against you. Imagine being old, poor, and desparate.

here's some thought provoking analysis:

http://www.early-retirement.org/for...ment-calculator-from-hell-articles-32828.html

 

[MasterBlaster]

In this case a failure would be needing $600 but only being able to withdraw $500.

Usually failure means going broke before you die.

 

[RonBoyd]

First of MC calculations are garbage in garbage out calculations. The data that goes in are historical rates which are not future rates.

FIRECALC uses a model... Past is Prolog. Of course they aren't future rates - for that model you need to see the swami.

Not all MC programs (nevertheless, your hesitancy is valid):

Monte Carlo Planning FAQ

Quantext's Monte Carlo uses historical data on every stock or fund in a portfolio to derive statistical parameters that describe each asset. This is quite different from Style Analysis. Our simulation models calculate forward-looking risk and return measures for each portfolio component and account for both market risk and non-market risks and correlation effects explicitly.

For indepth explanation read this:

http://www.quantext.com/TrueDiversification.pdf

 

[REWahoo]

You are all aware that FIRECalc uses actual history, not Monte Carlo simulations, right?

FIRECalc: How it Works