Calculating withdrawal rate

[David1961]

I have a question mostly for the folks who have been ERd for a few years or more and calculate their withdrawal rates. I know to calculate the WR for a year, you basically divide your withdrawals during the year by your beginning balance. But do you just calculate it once a year, every quarter, or every month? I have been calculating it each month, and the numbers fluctuate too much to be meaningful - a longer time period would smooth it out somewhat. Basically, I'm thinking that after I have several years of data, I can calculate a "composite" WR since ER, but what is formula to do this?. I guess the best way to do this is to take the WR for each year and average it. I could also add up all the withdrawals and divide by the original portfolio value, but the values goes up each month and don't want to keep dividing by a number that may be years old. I love playing around with numbers and maybe I'm looking at the details instead of the big picture. Just curious how often folks calculate their WR .

 

[REWahoo]

I'll wager you would get the same consensus if you ask "how many angels will fit on the head of a pin".

 

[walkinwood]

I use a fixed percentage of my portfolio on Jan 1 as my withdrawal for the year. Traditional SWR studies use a percentage of the initial portfolio value (on the day you retire) and then adjust that annually for inflation.

Which method are you using?
And what are you trying to find out by your calculations?

Using a tip from the Kaderlis, each month I track total expenses for the trailing 12 months. This smooths out one time annual expenses and lets me know that I'm keeping to my budget.

 

[David1961]

Which method are you using?
And what are you trying to find out by your calculations?

I keep a spreadsheet with the portfolio value and total expenses for each month. And it calculates the WR for the proceeding 12 months. So for Feb 2014, it adds up my expenses from Mar 2013 thru Feb 2014 and divides by the portfolio value on Mar 2013. For March, it will do the same calculation moving everything up a month, so expenses will be divided by the April 2013 portfolio value.

What I'm trying to get is that after several years, what has my WR rate been since ER? Kind of like calculating the total return from an investment that you have held for several years. If you just look at the past year, it doesn't tell the whole story.

 

[sengsational]

I'm new at this, and look at it pretty simply. I run i-orp, FIRECalc, and an Excel model to get a feel for what I could afford to safely spend in a year, and then I spend at that level or less. That's a dollar figure, which is what matters from a practial standpoint. It becomes my budget. Maybe after I've been retired for a year (I'm only 2 months in), I'll pull the 12 month spending total and divide that by the average net worth accross the 12 months. It would be easy enough to do the calculations monthly (using a 12 month moving average of expenses), but those would just be "gee whiz" numbers, right? I mean, what are you going to actually DO with them? What action would you take based on them? I think more important is that you start with a good number (comes from your modeling tools), and make that your budget.

 

[mickeyd]

I plan on using RMD as a guide and then annually calculate what the RMD is for that year (based on 12/31 IRA totals). If I want to take the money on a monthly basis I will just divide the annual number by 12.

Keeping it simple for almost 70 years.

 

[Animorph]

We just stick to our budget, which will keep us within our planned spending and withdrawal rate. I review our planning and budget once a year. Our withdrawal rate is calculated as part of that, it's not something I pay much attention to. Instead I calculate the amount of additional spending we can afford over the basic budget. That helps set the new yearly budget. The withdrawal rate is somewhat meaningless for us until all our income sources (2xSS, pension) are online and our remaining short-term expenses (DS, college, extra car) drop off. Currently we're well above 4%, but that will drop over the next 10 years or so.

 

[Alan]

I have a spreadsheet which shows the retirement balance as of Jan 1st of each year of retirement. During the year I will withdraw some lump sums to cover that years spending needs. The WR for each year is the total amount of withdrawals that year divided by the balance at the start of the year.

I don't have a fixed % rate, just draw down as needed and try not to exceed my target max of 4% in any one year.

 

[H2ODude]

Our LBYM expenses are well below our resources; it's a nice place to be but we are looking forward to a lot more travel if we can solve eldercare issues. I bring down a set amount every month from the investments to add to pension in the checking account. It's about 25% more than we could get by on (and do in some months) unless we can do travel or major home improvement. I have a spreadsheet that tracks each month the WR based on that removal from investments vs. total value first of month; been tracking about 2.6%. I also run the FIDO RIP calculator and track what the pension and withdrawals are vs. the 95% safe RIP rate, it runs about 75%. As to the remains at the end of most months in the checking account, it gets moved to credit union savings, where it's been accumulating for a couple of years. Will use for big purchase like travel or car.

The move of what is more than necessary from investments is part of strategy to encourage us to ramp up spending. Our problem is that after years of enjoying a nice but conservative lifestyle we simply don't see much to spend our money on that represents what we think is the value of a buck. So we've sort of hit what I'd call critical mass of investments; it outruns our ability to enjoy spending it.

 

[CaliforniaMan]

I am just starting this too, but for us, we need to know how much we can spend each month in order to keep to our budget, planning for normal expenses, and extra travel or things we want to do. I don't want to worry about this each month, in fact I don't even want to think about my balance for a year, want to relax, have fun, do things I want, not keep worrying about WR. So I will do it once a year. Set aside the money for that 12 month period in a MMF and draw monthly as planned. Trying to calculate this every month would I think spoil retirement for me. And after 12 months I will setup for the following year again, if it is more, great, if it is less, we will deal with it. But for this full 12 month period, I will not have to think about it at all. Getting into retirement means the opportunity for less stress, not trying to find ways to increase it.

 

[braumeister]

We just stick to our budget, which will keep us within our planned spending and withdrawal rate. I review our planning and budget once a year.

I have a spreadsheet which shows the retirement balance as of Jan 1st of each year of retirement. During the year I will withdraw some lump sums to cover that years spending needs. I don't have a fixed % rate, just draw down as needed and try not to exceed my target max

Put together, that's my system. The budget is an annual spending plan; I couldn't bear to deal with anything on a monthly basis. As long as total spending is within 10% of where it should be at any given time, I'm happy -- it will even out more and more as the year goes by. For example, I see that as of today, 24% of the year has passed, and we have spent 22% of our annual budget. Golden.

 

[Eagle43]

I plan on using RMD as a guide and then annually calculate what the RMD is for that year (based on 12/31 IRA totals). If I want to take the money on a monthly basis I will just divide the annual number by 12.

Keeping it simple for almost 70 years.

Me too. Vanguard has already told me what the RMD is this year. So I don't need to calculate.

 

[W2R]

I have a question mostly for the folks who have been ERd for a few years or more and calculate their withdrawal rates. I know to calculate the WR for a year, you basically divide your withdrawals during the year by your beginning balance. But do you just calculate it once a year, every quarter, or every month? I have been calculating it each month, and the numbers fluctuate too much to be meaningful - a longer time period would smooth it out somewhat.

I had the same question when I retired, so I set up a two step system that I felt was least likely to confuse me.

Step 1) During the first week in January I figure out what to withdraw (based on my portfolio's value after market closing on 12/31).

Step 2) Then I withdraw that much from Vanguard as soon as I can (usually January 2nd) and move it to my brick and mortar bank to be spent throughout the year. There, done! Quick and easy.

I might lose a few dollars here and there this way by keeping that cash at hand instead of invested in mutual funds for those few months, but I have eliminated the potential for confusion, wishful thinking, and possibly bigger losses later on.

 

[youbet]

I have a spreadsheet which shows the retirement balance as of Jan 1st of each year of retirement. During the year I will withdraw some lump sums to cover that years spending needs. The WR for each year is the total amount of withdrawals that year divided by the balance at the start of the year.

I don't have a fixed % rate, just draw down as needed and try not to exceed my target max of 4% in any one year.

+1 I like the way you keep it simple.

I get the total by simply looking at the Schwab web site and my ex-employer's 401k web site and adding the two numbers in my head (after mentally rounding). Withdrawals are 2 or 3 entries in the MM checkbook which are also quickly rounded and added mentally. Then, if I've had my coffee already that morning, I divide and get the WR in my head. (Are you picking up on the fact I've decided that spreadsheets are overkill for this activity?)

Multiple tools, models and endless calculations to the nth decimal point are meaningless, even harmful, in these calculations. Sometimes measuring with a micrometer and cutting with an axe is actually a bad thing....... If you had the resources you needed/wanted to enjoy life over the previous year does it really matter if your WR was 3.1% or 2.9%?

WR = Total of FIRE portfolio withdrawals / Beginning of year FIRE portfolio value

More important questions than concern over the last decimal in the WR calculation might be: Is that a reasonable number vs my own withdrawal guidelines? Any one time or special situations or circumstances to consider? Any new information about the future to factor in? Have there been changes in the world since my 8 year old plans were made that might render significant changes necessary? (I RE'd into the 2008 Recession so you know the answer to that question for me!)

And, most importantly, is my WR and overall financial plan maximizing my enjoyment of life in a balanced way?

 

[Alan]

And, most importantly, is my WR and overall financial plan maximizing my enjoyment of life in a balanced way?

Perfect

 

[MichaelB]

Just curious how often folks calculate their WR .

I focus on the budget. Once that is set and the funds withdrawn I might calculate the WR, but it isn't a number I check regularly.

 

[mathjak107]

If expenses have risen how do you know your budget isn't in a range outside what might be resonable for the times or your allocations?
I think of that hypothetical y2k retiree who just continued on his merry way by budget and really should not have.

 

[MichaelB]

If expenses have risen how do you know your budget isn't in a range outside what might be resonable for the times or your allocations?
I think of that hypothetical y2k retiree who just continued on his merry way by budget and really should not have.

Not sure if that question was directed at me, but coincidentally, I retired around the same time as the hapless Y2K guy. Our budget does not increase when times are better, the savings are reinvested. Nor does the spending fall when times are hard, the drawdown % increases. We have lived through two periods of very high volatility and are still in good shape despite my limited investment skills. The FIRECalc projection of our portfolio shows a higher probability of success now than 14 years ago. Budget stability and predictability adds to our quality of life.

 

[mathjak107]

well the hapless y2k retiree would only apply to one single year effecting only those who retired in 2000. everyone else's starting point dodged the bullet and beginning swr's would be based on lower balances...

well you do track where you stand in firecalc so you know how your doing.

i was questioning the fact where you said you rarely look at your swr rate and work off expenses . i was wondering how you knew where you stood . but you are monitoring that so that answers my question.

 

[Hopeful]

I am surprised to hear so many talking of recalculating their withdrawal rate based on the first of the year balance. I thought the idea of SWR was based on the portfolio balance at retirement with COLA increases? In an early and long retirement wouldn't a fixed percent of each year's balance be detrimental?

I am hoping to retire at 45 years old, thus planning on 45-50 year withdrawal period. I was thinking a 3% SWR. Is that reasonable? If I withdrew a fixed percent of the portfolio value each year, I would have to reduce that to 2%.

 

[Alan]

I am surprised to hear so many talking of recalculating their withdrawal rate based on the first of the year balance. I thought the idea of SWR was based on the portfolio balance at retirement with COLA increases? In an early and long retirement wouldn't a fixed percent of each year's balance be detrimental?

I am hoping to retire at 45 years old, thus planning on 45-50 year withdrawal period. I was thinking a 3% SWR. Is that reasonable? If I withdrew a fixed percent of the portfolio value each year, I would have to reduce that to 2%.

That's why I called mine a WR not an SWR as I don't follow the Trinity Study SWR model of an SWR at the time of retirement and monitoring the annual WR against that original balance.

I think you would do fine with your proposed 3% SWR at age 45 and sticking to the traditional SWR model, as long as you didn't spend more during the up years and were able to trim back a little during the down years.

 

[Hopeful]

That's why I called mine a WR not an SWR as I don't follow the Trinity Study SWR model of an SWR at the time of retirement and monitoring the annual WR against that original balance.

I think you would do fine with your proposed 3% SWR at age 45 and sticking to the traditional SWR model, as long as you didn't spend more during the up years and were able to trim back a little during the down years.

Makes sense. Thanks for clarifying, and clearing up my confusion.

 

[mathjak107]

I am surprised to hear so many talking of recalculating their withdrawal rate based on the first of the year balance. I thought the idea of SWR was based on the portfolio balance at retirement with COLA increases? In an early and long retirement wouldn't a fixed percent of each year's balance be detrimental?

I am hoping to retire at 45 years old, thus planning on 45-50 year withdrawal period. I was thinking a 3% SWR. Is that reasonable? If I withdrew a fixed percent of the portfolio value each year, I would have to reduce that to 2%.

an swr is really not a fixed amount especially if it is a method based on worst case scenerios. it can really be far to low over time. the fact is a swr and not just an wr has it changing as the years go by.

why in my opinion?

except for the inclusion of 2 very very bad time frames the historical safe swr would be around 6.5%..

it is when we include the 2 worst time frames that things get pulled that low.

now throw in the fact studies show the first 5 years are the most critical and the first 15 years determine your entire swr for a 30 year plus time frame and you may just want to keep adjusting things upward as you clear the critical hurdles.

as these major milestones are passed and all is well an swr can start to rise and still be an swr. if you are well above the 2% real return kices calculates we need as an average per year return over the first 15 years to keep 4% from failing then there is no reason by year 16 swr can't be brought up more in line with historical averages of 5-6%

 

[martyb]

That's why I come here....I learn something new all the time! Thanks mathjak107.

 

[mathjak107]

don't thank me , i only steal from the minds of those a lot smarter than i can ever hope to be.