Varying Withdrawal Rates
 12-05-2009, 08:03 PM #1 Thinks s/he gets paid by the post   Join Date: Jul 2009 Location: DFW Area (Tx) Posts: 4,865 Varying Withdrawal Rates Has anyone calculated or thought about varying withdrawal rates based upon how long you need a certain amount of money. The obvious example is someone who retires before social security and plans to have a steady income of \$X before and after SS. This necessarily means that there is a higher withdrawal rate before SS. I know that on my firecalc and financial engines calculations I put in a steady income but don't show my own SS starting for 6 years after retirement. They both come out as being 100% on firecalc and above 95% on financial engines. I do wonder if this can be finetuned somewhat and if anyone has done that. Looking at my own situation. Let's say I want \$90,000 income in retirement, and DH will have \$21,000 SS from the time of retirement but I won't have SS for 6 years (assume mine is \$22,000). Also assume that say, \$25,000 of the \$90,000 is discretionary spending. You are willing to vary that quite a bit based upon overall conditions. I could give other slices of the pie, such as college expenses for X number of years but for simplicity will ignore those for now. So \$90,000 less \$21,000 = \$69,000 needed from withdrawals. Now with a 4% SWR that requires 1.725 million. Of course after my SS comes then it is \$90,000 less 43,000 = \$47,000 and only requires \$1.175 million. So the person who retires with \$21k in SS but expecting \$22k 6 years later clearly needs something between those 2 numbers? But how much? Can you back into it? That is \$90,000-\$25,000 = \$65,000 base amount Ultimately that is \$65,000 less \$43,000 or \$22,000. It seems that \$22,000 needs to be rock solid. That would be the part I might put at a 3% withdrawal rate. Then there is \$22,000 for the six years between retiring and my SS. It seems you need way less than \$550k for this and can have a withdrawal rate for this way above 4%. The money to generate the \$22,000 only has to last for 6 years. Would it be reasonable to calculate what the safe withdrawal rate is for a 6 year period for this amount? Then there is \$25k in discretionary spending. Do you really need \$625k for this? If that money is really discretionary so you are perfectly fine with withdrawing say \$10k in down years can't you come up with a SWR for this that doesn't require \$625k? Any thoughts?
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 12-05-2009, 09:19 PM #2 Thinks s/he gets paid by the post   Join Date: Jul 2006 Location: Denver Posts: 3,251 I think you can do most of this in FireCalc. Use the "Investigate" tab to determine what your initial portfolio needs to be to meet your withdrawal. You can include SS, pensions, change spending, add/remove lump-sums from your portfolio. I don't think it can help with the discretionary spending question. But at some point, models start becoming academic, and you just have to be flexible and hope for the best.
 12-05-2009, 09:34 PM #3 Thinks s/he gets paid by the post   Join Date: Jul 2009 Location: DFW Area (Tx) Posts: 4,865 It does some of it but not all of it. If you figure these things using Firecalc as separate items and then add up the required portfolio for each item it comes up as a smaller number than if you do it in one calculation adjusting for each of them.
 12-05-2009, 09:47 PM #4 Thinks s/he gets paid by the post   Join Date: Feb 2007 Posts: 2,231 Or, you can use ORP to do the same thing. It will take your pension, investment, and SS data and will suggest a pattern of withdrawals to cover the situation you've described (Optimal Retirement Calculator and Retirement Decision Support System), including suggested Roth conversions and estimated taxes. -- Rita __________________ Only got A dimple, would have preferred 2!
 12-06-2009, 12:24 AM #5 Thinks s/he gets paid by the post   Join Date: Jul 2009 Location: DFW Area (Tx) Posts: 4,865 That is interesting, hadn't seen that one before. I'm not really looking for a calculator though. All the calculators say it is fine. I'm really sort of looking under the hood at the calculations I guess to see how the SWR is affected by the fact that some of the slices of income pie don't have to last 30 or 40 years. How is the total safety of the plan affected by the fact that, for example, some withdrawals only have to last for 6 years versus some that have to potentially last for 40 years. What about college expenses that are for a very short period of time (relatively speaking). And, then what about the expenses that are discretionary so really don't have to be withdrawn at a strict 4% (or whatever) rate every year. it seems that if you take these things into account that you should be able to start with a smaller nest egg than if you don't. Ah, OK....I went and searched and found a post that sort of addresses the concept of what I'm talking about: http://www.early-retirement.org/foru...tml#post260237
 12-06-2009, 10:11 AM #6 Give me a museum and I'll fill it. (Picasso)Give me a forum ...   Join Date: May 2006 Location: west coast, hi there! Posts: 7,559 Hi Katsmeow, I've struggled with the problem of temporarily high SWR's for awhile now. We also have some college expenses that won't decline for about 2.5 years. Also DW is planning to take her Social Security at 62 and I'm planning on waiting until 66. If I took SS at 62 we'd get down to 4% withdrawals much faster. FIRECalc also seems to say we're OK. My latest effort to come to terms with this is to create a spreadsheet that goes out 10 years. It has columns like the following: spending on us, spending on son for college (and then excess spending on us), % SWR, taxable savings, IRA equity, IRA bonds, Roth equity, Roth bonds, SS for wife, SS for me, total savings, % equities to total savings. Variables that feed into this are: annual spending for us, inflation, stock returns (each year), when wife takes SS, when I take SS, IRA withdrawals (after taxable funds run out). It took quite a while to develop this table but the end result is that it shows a graph of withdrawal rates going out 10 years. It shows how much we can spend additional once DS gets out of college. By varying the stock market rises/declines I can get a sense of how the scenario might change short term. Basically this just helps me with decision making like, for instance, how much to convert from IRA -> Roth over the next 2 years. It also helps me to not be too stingy with our current spending as DW loves to go out to eat once in awhile and take some weeks of vacation from our hectic ER life in paradise .
 12-06-2009, 12:45 PM #7 Thinks s/he gets paid by the post   Join Date: Jul 2006 Location: Denver Posts: 3,251 Isbcal, I do a similar thing though my situation is less complex. I have a mortgage that has 9 years to go, so I use a 'virtual' bucket or account to keep that money. It has the NPV of the principal+int stream out to 10 years, and a guess at what my portfolio will return over that period. Each year, I adjust that bucket value to the NPV for the remaining years. The SWR is calculated on the portfolio value after subtracting the mortgage bucket. You can extend this to other categories of expenses too. I don't know of a way to avoid re-calculating every year unless you invest those buckets into treasury bonds with the same duration. It allows a larger SWR for everday expenses that are expected to last a lifetime.
 12-06-2009, 04:25 PM #8 Thinks s/he gets paid by the post   Join Date: Oct 2006 Posts: 4,628 I vote for setting aside an explicit amount for the initial "SS Gap". In your case, that looks like \$132,000. Then you have level needs from the rest of your assets. That's a simple analysis. We had an actual CD ladder because the money was outside my 401k. But you can do the same thing inside a 401k. I did a poll on this. Here's a link: http://www.early-retirement.org/foru...gap-44449.html
12-06-2009, 04:39 PM   #9
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Quote:
 Originally Posted by Katsmeow ...I'm really sort of looking under the hood at the calculations I guess to see how the SWR is affected by the fact that some of the slices of income pie don't have to last 30 or 40 years. How is the total safety of the plan affected by the fact that, for example, some withdrawals only have to last for 6 years versus some that have to potentially last for 40 years. What about college expenses that are for a very short period of time (relatively speaking). And, then what about the expenses that are discretionary so really don't have to be withdrawn at a strict 4% (or whatever) rate every year. it seems that if you take these things into account that you should be able to start with a smaller nest egg than if you don't.
You're exactly right.

There was a poster on the Motley Fool board a long time ago that came to exactly the same conclusion with an identical approach. Sorry I don't have a cite for you, but IIRC she was able to cut her required nest egg by about 1/3 and cut several years off her working life. She was further away from retirement than you are and also made much less than you do.

What you can do is divide your expenses into buckets and calculate what nest egg is required to take care of each bucket depending on the duration of the expense and the amount of risk you're able to take. You then can add up those nest egg parts and get a total nest egg. As you rightly point out, the resulting total nest egg will likely be much smaller than if you just lumped everything together and assumed 100% safe withdrawal amounts extending forever.

A couple of thoughts:

1. FIREcalc already allows you to do part of this -- look for the ability to add Social Security receipts in at two different amounts and starting dates.
2. If you're going to retire based on this kind of analysis, make sure you understand the analysis itself and any underlying assumptions are valid and acceptable to you.

2Cor521
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12-06-2009, 07:10 PM   #10
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Quote:
 Originally Posted by Katsmeow It does some of it but not all of it. If you figure these things using Firecalc as separate items and then add up the required portfolio for each item it comes up as a smaller number than if you do it in one calculation adjusting for each of them.
I've looked at all the scenarios you've described with FireCalc.

If you're having trouble, why not supply us with sufficient details of how you did the testing and I'm sure we can offer some guidance for you.
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12-06-2009, 08:41 PM   #11
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Quote:
 Originally Posted by Independent I vote for setting aside an explicit amount for the initial "SS Gap". In your case, that looks like \$132,000. Then you have level needs from the rest of your assets. That's a simple analysis. We had an actual CD ladder because the money was outside my 401k. But you can do the same thing inside a 401k. I did a poll on this. Here's a link: http://www.early-retirement.org/foru...gap-44449.html

To do that I would put aside about \$132k (6 years of \$22k SS). This money could be set aside in DH's retirement account (since I am under 59 1/2 on mine) in the money market option. The advantage of this is that the money is safe, we only have to carve away \$132k from our other assets, leaving the rest for the normal SWR. The negative is that at the end of the 6 years this money is fully depleted

The other way to do it is that I went to Firecalc and figured that you have a 100% chance of \$22k spending over 6 years with a 60% equities allocation would require setting aside \$192k. The negatives are the increased risk and you have \$60k less for your normal SWR stream of spending. On the other hand because this money was subject to your normal allocation there is a really good chance that more than \$60k of the \$192k will still be there at the end of the 6 years. Average portfolio balance is \$103k. (I don't see a way to determine what the median portfolio balance at the end of the 6 years would be).

 12-06-2009, 09:34 PM #12 Give me a museum and I'll fill it. (Picasso)Give me a forum ...   Join Date: May 2006 Location: west coast, hi there! Posts: 7,559 Another way to look at this is that it is really only a rough cut. There have been other threads on this site addressing the rough cut idea. Just look at the way the investment world changes and the investment options you now have that are not modeled by FIRECalc (like international funds). One should not fool oneself into thinking all this is very precise.
 12-07-2009, 07:18 AM #13 gone traveling   Join Date: Apr 2009 Location: Eastern PA Posts: 3,851 (From a previous post from another forum): The oft quoted 4% rule is for the "perfect storm" - that is a person that retires at SS age (early, FRA, or age 70) and has all available income sources on-line. It doesn’t work for many who retire earlier than their personal SS age (either forced, health related, or planning) and other income available. Example? For me/wife our current withdrawal against our current retirement assets is forecasted roughly 4.55% in 2010, rising to just under 6% at age 70 (in eight years). However at age 70 (when I draw SS), along with other income sources (wife's SS at age 62, and her two small pensions at age 65), our joint portfolio draw drops to just over 2% and does not exceed the "magic number of 4% till we're past age 90 (if we're still breathing ). These general "guidance" numbers are nice, but often do not work in the real world. However, for some they are probably better than nothing where they may not have a clue on where they should be...
 12-07-2009, 07:33 AM #14 Give me a museum and I'll fill it. (Picasso)Give me a forum ...   Join Date: Mar 2003 Posts: 18,085 The suggestion to set asode a specific pile of assets for a specific (known) future obligation is known as defeasance. Classically done with maturity matched bonds. A good way to cut thru the fog. __________________ "All animals are equal, but some animals are more equal than others." - George Orwell Ezekiel 23:20
 12-07-2009, 08:56 AM #15 Recycles dryer sheets   Join Date: Feb 2008 Posts: 106 I've been noodling the same sorts of questions for myself. I'm looking to get through at 57, five years before I could collect SS. How best to bridge that gap, as Kats has asked? My understanding is that if I stop working before 62, I will get less than the amount shown in the SS annual they send me every year. Is there some rule of thumb for figuring how much I will get starting at age 62 if I stop working at 57? Some % per year of ER to subtract from the age 62 amount?
12-07-2009, 09:24 AM   #16
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Quote:
 Originally Posted by hguyw My understanding is that if I stop working before 62, I will get less than the amount shown in the SS annual they send me every year. Is there some rule of thumb for figuring how much I will get starting at age 57? Some % per year of ER to subtract from the age 62 amount?
This may help...

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12-07-2009, 09:48 AM   #17
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Quote:
 Originally Posted by hguyw I've been noodling the same sorts of questions for myself. I'm looking to get through at 57, five years before I could collect SS. How best to bridge that gap, as Kats has asked? My understanding is that if I stop working before 62, I will get less than the amount shown in the SS annual they send me every year. Is there some rule of thumb for figuring how much I will get starting at age 57? Some % per year of ER to subtract from the age 62 amount?
I retired at age 59, but do not plan on taking SS till age 70 (for the benefit of my DW). We're doing the "split SS"; that is she will take it at age 62, I'll file for spousal benefits (we're the same age) when she is 66, and file for mine at age 70. That will max out my benefit (8% plus COLA from ages 67-70) plus allow her to have a benefit of close to three times her age 62 benefit, assuming I live till age 70, and I pass first.

The goal is to allow her to age in place, and stay in our current home (along with necessary support).

While working through the different scenerios (using Benefits Calculators: About the Social Security Retirement Estimator ) and checking the results, I found very little change in actual monthly forecast, based upon my pre-retirement statements that I received - often less than a few \$\$\$ a month.

There have been a lot of discussion on this, and other forums. The reality is that depending on your income level along the way (in my case, I maxed out more often in my "early years") the calculation (based upon income adjusted to current inflation, from many years ago) impacted very little. I would think that the goal of having 35 years of credit (e.g. no \$0 years) would be more important to the calculation, rather than age.

It's not something that I personally would say that would affect my decision to ER .... (and it didn't).

12-07-2009, 10:54 AM   #18
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Quote:
 Originally Posted by Katsmeow Thanks for the link. That was an interesting thread. I hadn't really thought about doing it the way you are suggesting. To do that I would put aside about \$132k (6 years of \$22k SS). This money could be set aside in DH's retirement account (since I am under 59 1/2 on mine) in the money market option. The advantage of this is that the money is safe, we only have to carve away \$132k from our other assets, leaving the rest for the normal SWR. The negative is that at the end of the 6 years this money is fully depleted The other way to do it is that I went to Firecalc and figured that you have a 100% chance of \$22k spending over 6 years with a 60% equities allocation would require setting aside \$192k. The negatives are the increased risk and you have \$60k less for your normal SWR stream of spending. On the other hand because this money was subject to your normal allocation there is a really good chance that more than \$60k of the \$192k will still be there at the end of the 6 years. Average portfolio balance is \$103k. (I don't see a way to determine what the median portfolio balance at the end of the 6 years would be).
I think you've got it.
To get the median, try checking the "provide data and formulas ..." box in the "Investigate" tab. It actually provides two spreadsheets. One is detail for one start year. The other is summaries for all years.

12-07-2009, 11:06 AM   #19
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Quote:
 Originally Posted by hguyw I've been noodling the same sorts of questions for myself. I'm looking to get through at 57, five years before I could collect SS. How best to bridge that gap, as Kats has asked? My understanding is that if I stop working before 62, I will get less than the amount shown in the SS annual they send me every year. Is there some rule of thumb for figuring how much I will get starting at age 62 if I stop working at 57? Some % per year of ER to subtract from the age 62 amount?

Basically, to get your monthly benefit at your normal retirement age, you:
Multiply each year's wages by an "index factor"
Select the top 35 years of indexed wages
Calculate the average of those top 35 years
Convert the annual average to a monthly average
Calculate your benefit as 90% of the first X dollars, plus 32% of the next Y dollars, plus 15% of the excess.

If you want a benefit at 62, it is 75% of your benefit at 66 (assuming your NRA is 66).

There's an example at: https://www.socialsecurity.gov/OACT/...iaformula.html

So the big "rule of thumb" issues are:
Are you currently in the 32% marginal benefit band? or are you in the 15% band?

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