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What is this withdrawal strategy called, and what are the downsides?
Old 08-08-2022, 02:03 PM   #1
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What is this withdrawal strategy called, and what are the downsides?

Hi all,

I'm considering a withdrawal strategy where I withdraw a low(ish) percentage up to a certain figure, and a higher percentage for amounts over that.

For example, 3% on savings up to 1 million, and 4% or 5% on any amounts over that. My thinking is that I can live on the reasonably conservative 3% withdrawals indefinitely even if things go bad, but I'd like to be a bit more aggressive with money I can afford to lose. I'm essentially mixing a 99% and 90% strategy.

Is there a term for this type of strategy, and what are the downsides? I thought originally it was a bucket strategy, but that seems to describe a very different approach.
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Old 08-08-2022, 02:13 PM   #2
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In your example, are those percentages going to be based on the starting value of your portfolio (as in standard FireCalc) or on the current value as time goes by?
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Old 08-08-2022, 02:20 PM   #3
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I'm thinking current value.
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Old 08-08-2022, 04:03 PM   #4
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What's the difference between the average withdrawal rate you'd end up with, and what you're proposing? You could use the Variable Percentage Withdrawal method (https://www.bogleheads.org/wiki/Vari...age_withdrawal) instead, and it's perhaps easier to manage, but has a downside risk of having to spend less if SORR hit (which would affect your plan, too).
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Old 08-08-2022, 04:06 PM   #5
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I'd probably use an inflation index on that $1M level. In 20 years, 3% of that won't buy nearly as much as it does today.
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Old 08-08-2022, 05:55 PM   #6
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What are you trying to accomplish?
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Old 08-08-2022, 06:13 PM   #7
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I think it sounds like it would work, 3% draw indexed for inflation should last 30 years, considering Reviews of the 4% rule.

Just a couple things to consider:
do you want to leave a legacy ?
Are there changes in your expenses or budget like 5 years of house payments left or you want to buy a beach house and need to borrow for that, grandkids college ? Anything that would bump up or down budget ?

I think it is a novel approach. Some would suggest an annuity for base expenses and a strategy for remaining assets. This sounds similar to that type of plan. Could provide a more secure peace of mind.
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Old 08-08-2022, 07:21 PM   #8
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Quote:
Originally Posted by HI Bill View Post
What's the difference between the average withdrawal rate you'd end up with, and what you're proposing? You could use the Variable Percentage Withdrawal method (https://www.bogleheads.org/wiki/Vari...age_withdrawal) instead, and it's perhaps easier to manage, but has a downside risk of having to spend less if SORR hit (which would affect your plan, too).
I've never heard of OP's proposed idea and it isn't very well fleshed out yet. There are multiple free parameters (break points, withdrawal rates above and below break points). In this field, when ideas get too complex, they tend to be less useful than simple ones. For instance, if you study historical data and perfectly tune your parameters, you have to realize that there is nothing at all that constrains the future to make your choices remotely close to right next time.

I agree with Hi Bill, Bogleheads VPW is a reasonable approach, another one OP should check out is amortization based withdrawal. https://www.bogleheads.org/wiki/Amor...sed_withdrawal

Amortization intentionally spends down your money by the end date you enter (so make sure it is plenty long enough). Like any variable method, it changes withdrawals as the portfolio moves up and down.

OP should recognize that to be perfect, the method would have to accurately predict the future. Since that's not happening, you have to accept that if returns are particularly unlucky, any method either gives you a chance of running out of money or of needing to make spending cuts. If both those options are unacceptable, the solution is to start with more money and likely leave a large pile to heirs. Waiting to claim SS to maximize the size of inflation protected benefits is a help in minimizing SORR risk as well.

I think if you look at responses to questions around here, you will find that very few really withdraw per some preset plan and then spend it all. Of course real expenses vary with the stage of life, being much larger before claiming SS and while active, going down as you slow down and then back up as you need care late in life. Expenses are also always going up and down due to both discretionary things like travel, buying a boat or remodeling and not so discretionary things like health problems, cars, roofs, air conditioners, etc.
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Old 08-08-2022, 08:40 PM   #9
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Unless there is some difference in the way the first million is invested (say, in something relatively "safe") it would appear, you are just taking an average % of the whole stash.

If you're trying to preserve that first million, then it needs to be separate in some fashion IMHO.
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Old 08-08-2022, 09:22 PM   #10
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If you're trying to preserve that first million, then it needs to be separate in some fashion IMHO.
+1. If the first million is in the same account as the rest of your stash, how are you going to determine, in the future, which part of the investment is part of the first million, and which part is not? Or is the plan to always withdraw 3% of the first million, even if the portfolio doubles or triples in value?
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Old 08-09-2022, 03:12 AM   #11
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I'm relatively risk averse, so if I chose a consistent percentage across my full capital I'd be picking 3%. However, that runs the "risk" of under-spending if my investments do reasonably well. There's a floor I don't want to fall under, but if I'm above that floor then I'm happier to take on more risk.

For example, if I retire with 1.2 million, I will take out 40,000 (1 million @3%, 200k @5%). I probably won't go that high, but just to keep things simple. If my assets fell to 800k, I would be taking 24k (800k@3%). If my assets rose to 1.5 million, I'd be taking 55,000 (1 million @3%, 500k @5%). Using a VPW of 3% as an alternative strategy, I'd be withdrawing 36k, 24k, 45k respectively. I understand the variability of income in this scenario would be an issue, but that applies to all variable withdrawals.


Alternatively with a fixed withdrawal strategy, if I start with 1.2 million I would base my withdrawals on 1 million @3%, and 200k @5% and increase by inflation over time. I run a higher risk of my 200k going to zero, but I'm still well covered by my lower risk million.


With what I'm proposing, I would have the psychological safety of knowing that I have a low risk tranche (let's say always the first million at 3%) which would be a 99%, and a second (or even third tranche) where I could take on that extra risk. Worst case I end up living off my low-risk tranche, best case I have more to spend.

This could be a terrible idea, but I'm doing my research and happy to look at what others have said about similar strategies.


Quote:
Originally Posted by RetireBy90 View Post
Some would suggest an annuity for base expenses and a strategy for remaining assets. This sounds similar to that type of plan. Could provide a more secure peace of mind.
You know, I think this could be it. Or very close.
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Old 08-09-2022, 05:48 AM   #12
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It seems to be a mathematical algorithm to approximate being flexible, i.e. tightening your belt in bad times, and blow that dough in good times.
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Old 08-09-2022, 06:27 AM   #13
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It seems to be a mathmatical algorith to approximate being flexible, i.e. tightening your belt in bad times, and blow that dough in good times.
Variation on VPW (judgement); practically speaking this is probably what most people do. I don't know a single person who uses SWR and I know a lot of retirees. It would be difficult for me to control my spending to match the SWR numbers. Life just isn't that constant.
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Old 08-09-2022, 07:01 AM   #14
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It seems to be a mathmatical algorith to approximate being flexible, i.e. tightening your belt in bad times, and blow that dough in good times.
Yep, this is my method. I've been "cutting with a chain saw" for a long time now. The micrometer measuring phase was pre-retirement. YMMV
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Old 08-09-2022, 08:25 AM   #15
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I'm relatively risk averse, so if I chose a consistent percentage across my full capital I'd be picking 3%. However, that runs the "risk" of under-spending if my investments do reasonably well. ....
And what if your portfolio drops by 50%? Sounds like you are taking 3% of the portfolio? Can you (would you want to?) get by on half as much to spend for a few years?

Historically, 3% initial WR indexed for inflation is very conservative with an ~ 75/25 AA. No need to lower spending in a dip.

If you want to protect against under-spending, follow the "retire-again-and-again" approach. In the future, if things have gone well, and 3% would be higher than your inflation adjusted withdrawal, you can now bump your withdrawal up to that new number (or just closer to it, to be a bit more conservative), and you have the same historic performance and safety-margin.

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Old 08-09-2022, 08:34 AM   #16
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It seems to be a mathmatical algorith to approximate being flexible, i.e. tightening your belt in bad times, and blow that dough in good times.
I'm curious if you and others using this variable spending strategy or similar are tighting your spending THIS year.
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Old 08-09-2022, 10:04 AM   #17
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I'm curious if you and others using this variable spending strategy or similar are tighting your spending THIS year.
I use VPW. My spending this year is based on my balance at the end of last year, so it's still high. Unless we have a rally this fall, this year's market drop will affect next year's spending.

The reality is that I have a lot of cushion, and I won't come to close to that spending allowance this year anyway. If I didn't have the cushion, I wouldn't be splurging too much this year.
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Old 08-09-2022, 10:15 AM   #18
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I use VPW. My spending this year is based on my balance at the end of last year, so it's still high. Unless we have a rally this fall, this year's market drop will affect next year's spending.

Iím similar except that I have additional income streams so withdrawals add to available cash.
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