Adjusting Withdrawal Rate

[Marc]

I retired in late 2017 at 60. Deferring SS until I turn 70; therefore, withdrawing funds from 403(b) and rollover IRA until then. I have selected withdrawal rate of 5% as safe given the PV of SS.

So, given the drop in market in December of last year I set this years allowed withdrawals as 5% of my liquid assets as of 12/31/18. Looking at 2020, my assets will probably be at least $300K higher on 12/31/2019 (I know I can't foretell the market but this is just an estimate), so I am planning on my 2020 withdrawals to be $15,000 higher. As well over half my spending is fully discretionary, I am not that concerned that some years I may be lowering my spending. This is just the plan until I get to 70 when SS kicks in and then RMD (which is less than 5% anyways at 71).

Does this make any sense?

thanks,

Marc

 

[SevenUp]

It has the advantage that if you always withdraw 5% of the previous year's balance you'll never fully deplete that balance, but your annual spending may be very irregular.

See Withdrawal methods for more on this and other withdrawal strategies.

 

[audreyh1]

I retired in late 2017 at 60. Deferring SS until I turn 70; therefore, withdrawing funds from 403(b) and rollover IRA until then. I have selected withdrawal rate of 5% as safe given the PV of SS.

So, given the drop in market in December of last year I set this years allowed withdrawals as 5% of my liquid assets as of 12/31/18. Looking at 2020, my assets will probably be at least $300K higher on 12/31/2019 (I know I can't foretell the market but this is just an estimate), so I am planning on my 2020 withdrawals to be $15,000 higher. As well over half my spending is fully discretionary, I am not that concerned that some years I may be lowering my spending. This is just the plan until I get to 70 when SS kicks in and then RMD (which is less than 5% anyways at 71).

Does this make any sense?

thanks,

Marc

You are not adjusting your withdrawal rate, you are keeping it fixed. You are using a different withdrawal (spending) method - one called % remaining portfolio by FIRECALC.

I’m pretty sure you can run your model including the SS delay through FIRECALC and see how it behaves historically.

I have run 50/50 total stock market/5 year treasury portfolio with the % remaining portfolio withdrawal method, and above 4.35% there is a gradual shrinking of the portfolio on average. But it still survived, of course, just lower income during later years.

If the higher withdrawal rate is temporary (waiting for SS), that would make a big difference. FIRECALC lets you model SS as a delayed income stream AFAIK.

As the other poster pointed out, the income based on annual portfolio value is highly variable. That’s OK as long as you don’t get used to spending the higher income and then fall short when a sudden income drop occurs due to poor market conditions.

I’m very familiar with the % remaining portfolio withdrawal method as that’s what I use myself. The models I have run are based on my personal asset allocation and don’t cover all scenarios by any means.

So yes, some years you get a really big raise! Nice, but don’t get used to it, as it can disappear in a flash the following year. I simply don’t count on big annual increases and have a budget with lots of discretionary spending built in. So I have the flexibility to deal with the highly variable income. You already stated the same budget/spending approach.

 

[pb4uski]

Trinity Study withdrawals were based on a percentage of the retirement date assets and then increased for inflation in subsequent years.... so in your case 5% of retirement date assets, then assuming 2% inflation, 5.1% of retirement date assets in year 2, 5.2% of retirement date assets in year 3, etc.

What you seem to be doing is a ratcheting strategy with annual ratcheting, which I think is fine... it is as if you retired anew at the beginning of each year. There was probably no need to reduce your withdrawals for 2019.

If you will be in a higher tax bracket once SS starts, I might design withdrawals to the top of your current tax bracket... so for example, if your current withdrawals put you in the 12% tax bracket and once SS is on line you expect to be in the 22% tax bracket, then I would withdraw an amount necessary to take me to the top of the 12% tax bracket.... those extra withdrawals will save 10% in taxes, which is probably not chump change, and also reduce you future RMDs. You don't have to spend those extra withdrawals... you can just put them in a taxable savings or brokerage account. Or you could do Roth conversions with the extra rather than tIRA withdrawals.

 

[Dtail]

We are doing something similar for 8 years before RMD, except one lump sum pension year.
Run it through Firecalc. You should be fine.

What is your projected WR% starting at RMD time? The fact that the first year is ~3.65% doesn't really matter, as you don't have to spend all the monies, just pay tax on it.

If you have leftover unspent monies in the good years, where do you put that money? Some of us put it in a separate account to supplement when the bad years take place.

 

[OldShooter]

I always scratch my head when I read these threads about withdrawal formulas. Our expenses are nowhere near level and neither are our withdrawals. We have expensive travel, a car once in a while, semiannual property tax payments, and income tax payments in December. Lumpy expenses = lumpy withdrawals, for us at least.

And, longer term, our ability and interest in traveling will decline, as will our desire/need to replace vehicles. Health care is a wild card, of course, but our expectation is that our spending will decline from where it is now. So, again, a formula that doesn't contemplate future changes doesn't seem to fit.

YMMV of course.

 

[Live And Learn]

I always scratch my head when I read these threads about withdrawal formulas. Our expenses are nowhere near level and neither are our withdrawals. We have expensive travel, a car once in a while, semiannual property tax payments, and income tax payments in December. Lumpy expenses = lumpy withdrawals, for us at least.

And, longer term, our ability and interest in traveling will decline, as will our desire/need to replace vehicles. Health care is a wild card, of course, but our expectation is that our spending will decline from where it is now. So, again, a formula that doesn't contemplate future changes doesn't seem to fit.

YMMV of course.

Yes, we all have lumpy expenses. For budgeting / annual withdrawal / annual rebalancing I use an average of lumpy withdrawals. While my budget may be X for lumpy household expenses (new roof, painting, new appliances, etc), Y for lumpy large purchases (new car, new furniture) my actual spend should fall somewhere around the total of X+Y.

 

[ShokWaveRider]

We really do not have a withdrawal rate as such, we take what we need to cover our expenses and discretionary spending. As long as it is the same or less that our return minus taxes, I really do not monitor it.

Every years I check to see if our monetary (Nest Egg not hard assets) net worth is the same or more or less. So far we have not had to make any adjustments as it has always been more.

 

[audreyh1]

I always scratch my head when I read these threads about withdrawal formulas. Our expenses are nowhere near level and neither are our withdrawals. We have expensive travel, a car once in a while, semiannual property tax payments, and income tax payments in December. Lumpy expenses = lumpy withdrawals, for us at least.

And, longer term, our ability and interest in traveling will decline, as will our desire/need to replace vehicles. Health care is a wild card, of course, but our expectation is that our spending will decline from where it is now. So, again, a formula that doesn't contemplate future changes doesn't seem to fit.

YMMV of course.

What’s causing a head scratch? The withdrawal formulas simply tell you how much you can withdraw/spend without risking running out of money long term (keeping it to some low probability). In other words, the amount of annual spending your investments and AA can reasonably support.

Maybe some people spend what they want, and it happens to come in lower than their portfolio supports, so they are “safe”. Fine.

Other people might want to know the max they can withdraw because that actually drives their spending. They might choose to spend more, or they might realize they need to cut back a bit.

 

[jollystomper]

What’s causing a head scratch? The withdrawal formulas simply tell you how much you can withdraw/spend without risking running out of money long term (keeping it to some low probability). In other words, the amount of annual spending your investments and AA can reasonably support.

Maybe some people spend what they want, and it happens to come in lower than their portfolio supports, so they are “safe”. Fine.

Other people might want to know the max they can withdraw because that actually drives their spending. They might choose to spend more, or they might realize they need to cut back a bit.

Good point. I find it useful as a "worst case" scenario since our "normal spending" is well below the 3%-4% "you'll never run out of money" SWR. It helps me see in, those "lumpy" years to come, what (if any) the potential impact might be.

 

[HI Bill]

I retired in late 2017 at 60. Deferring SS until I turn 70; therefore, withdrawing funds from 403(b) and rollover IRA until then. I have selected withdrawal rate of 5% as safe given the PV of SS.

I don't understand why anyone would use the PV of SS, when you don't have it invested...why not just enter the SS income as projected on the "Other Income/Spending" tab under SS, along with the appropriate years? Firecalc was built to take into account this/these additional income streams, and the years between retirement date and when you start SS. This way, if you have a lot of years in retirement prior to taking SS, you're adequately evaluating the risk of running low/out of $ over that period, which could be more than 20 years. If you enter the present value of SS, and you don't have enough non-SS assets, you could easily run out of non-SS $ many years prior to age 70.

Firecalc Examples:
1) If you have $2M in invested assets and a PV of SS of $2M, and input $4M into the Portfolio Tab. FC says you can spend up to $126,523 over 50 years, without changing any of the other inputs, at 100% success rate (using the Investigate tab).

2) If you have $2M in invested assets, and input SS at $44K annually, starting in 2036, assuming a WR of $126,523, your success rate is only 39.4%. The first potential failure comes at only 12 years after starting distributions. To get back to 100%, you'd have to lower the WR to only $79,746, which is surprisingly close to 4% of your $2M.

I believe that entering the PV of SS does not yield an accurate picture of SORR, and should not be done.

 

[RunningBum]

Firecalc Examples:
1) If you have $2M in invested assets and a PV of SS of $2M, and input $4M into the Portfolio Tab. FC says you can spend up to $126,523 over 50 years, without changing any of the other inputs, at 100% success rate (using the Investigate tab).

2) If you have $2M in invested assets, and input SS at $44K annually, starting in 2036, assuming a WR of $126,523, your success rate is only 39.4%. The first potential failure comes at only 12 years after starting distributions. To get back to 100%, you'd have to lower the WR to only $79,746, which is surprisingly close to 4% of your $2M.

I believe that entering the PV of SS does not yield an accurate picture of SORR, and should not be done.

How did you come up with a $2M PV of SS at $44K starting in 2036? Extrapolating from my own numbers, I don't think that's anywhere close, so it's not surprising they give different results.

Not everyone relies on Firecalc. I don't, so I choose to assign a PV to SS in my calculations. Pretty sure I've justified it in previous posts, and don't feel like doing it again. It works for me. You certainly don't have to use it. I've offered it as an alternative to people struggling with how to account for SS when they haven't started collecting yet, but I don't think I've never gone so far as to recommend it.

 

[RunningBum]

I'm trying to find the question in the OP. "Does this make sense?" There's a lack of detail in the numbers that make it hard to know if the plan works, and I'm not even sure what "this" means. Certainly if you have SS and IRA distributions coming, you can take more from your taxable in the interim. How much more depends on your numbers, which you didn't give.

 

[HI Bill]

How did you come up with a $2M PV of SS at $44K starting in 2036? Extrapolating from my own numbers, I don't think that's anywhere close, so it's not surprising they give different results.

Not everyone relies on Firecalc. I don't, so I choose to assign a PV to SS in my calculations. Pretty sure I've justified it in previous posts, and don't feel like doing it again. It works for me. You certainly don't have to use it. I've offered it as an alternative to people struggling with how to account for SS when they haven't started collecting yet, but I don't think I've never gone so far as to recommend it.

$2M PV of SS is what I've calculated that my wife and I will take home in today's dollars, if each of us live to 100, take SS starting at age 70, and there is no future reduction in benefits. Sorry, I had an error in the calculation...the annual amount is closer to $59K.

I just ran some Monte Carlo simulations with the same parameters, but usign an AA of 74% large cap, 8% international, 8% bonds, and 8% short-term treasuries. Assuming a $2M start gives you potential 10% failure rate starting at year 17. If this were your starting point, and you have less than 15 years to taking SS, you'd likely weather the storm. If you have much more than 15 to 17 years to SS, you're not going to have 100% confidence that you won't run out of $, and SORR will have bitten you. YMMV, depending on your variables.

Since the OP only has 8 years to SS, using PV of SS is probably going to be fine. But for younger folks, with 20+ year-horizons, IMHO, this is a hazardous and misleading way of thinking. Taking 5% for 20+ years gives you a real possibility of running out of $, even based on historic SORs.

 

[Marc]

Not everyone relies on Firecalc. I don't, so I choose to assign a PV to SS in my calculations. Pretty sure I've justified it in previous posts, and don't feel like doing it again. It works for me. You certainly don't have to use it. I've offered it as an alternative to people struggling with how to account for SS when they haven't started collecting yet, but I don't think I've never gone so far as to recommend it.

+1, I don't use Firecalc. As for PV of SS, opensocialsecurity.com provides a PV of SS. For my wife and me it came to almost exactly $1M. 5% of $3.7M equals $185K which is 3.94% of $4.7M.

Thanks for all the help.

Marc