SWR - I've read many posts but still confused

[bigla]

I thought I knew how to handle the 4% SWR but after reading a few threads and many posts I am confused. I am math dumb so please bear with me.
Here's my hypothetical example. I start retirement with a 60/40 portfolio worth 800k. My first year's withdrawal is 32k.
In year 2, say the portfolio is worth 840k. Do I:
a) take out 4% of 840k, or
b) 32k plus adjusted for inflation.

Now I believe the answer is b) so now my question is:
In year 2, if the CPI is 2.5%, do I take 2.5% of the 32k, or 800K or 840K?
Thank you in advnace for your help.
Larry

 

[REWahoo]

b) 32k plus adjusted for inflation.
In your example, your year two draw would be 32.8K (32k + 2.5% of 32K)

If you haven't read this thread, I think it might help.

http://www.early-retirement.org/forums/f35/explain-4-withdrawal-rate-19234.html

 

[maxer]

I believe the 2nd and subsequent year amounts are adjusted for inflation.

So:
1st Year: $32,000
2nd year: $32,000 + 2.5/100*32000 = $32,800
3rd year: $32800 + 2.5/100*32800 = $33,620

And so on.....

 

[Moemg]

I thought you could also just take 4% from your new amount .Say year one you have I,000,000 so you can take $40,000 .Next year your portfolio has risen to 1,100,000 so you can now take $44,000 ?? Is this correct ?

 

[RedHawk]

I thought you could also just take 4% from your new amount .Say year one you have I,000,000 so you can take $40,000 .Next year your portfolio has risen to 1,100,000 so you can now take $44,000 ?? Is this correct ?

You could do that and be 100% guaranteed of not running out of money. However the problem is when the market drops. For example if the portfolio dropped to 600k, could you live on 24k.

 

[maxer]

The way I am seeing is the 32k figure is your fixed expenses/living allowance which is adjusted for inflation.

If your portfolio does better, I suppose you can take the higher amount but then it works the other way too i.e. what if your portfolio does poorly?

I think staying focused on the Fixed expense/Living allowance adjusted for inflation is probably the wiser choice - but to each his own.

 

[Alan]

I thought you could also just take 4% from your new amount .Say year one you have I,000,000 so you can take $40,000 .Next year your portfolio has risen to 1,100,000 so you can now take $44,000 ?? Is this correct ?

That is not how the SWR rule works. It it as described above.

After year 1 you may end up taking more or less than 4% each year depending on how the portfolio is performing. The idea is that you have a predictable and stable income. Taking 4% every year of the total will give a variable income.

 

[bigla]

I think I"ve got it!
Thanks to all
Larry

 

[2B]

The way I am seeing is the 32k figure is your fixed expenses/living allowance which is adjusted for inflation.

If your portfolio does better, I suppose you can take the higher amount but then it works the other way too i.e. what if your portfolio does poorly?

I think staying focused on the Fixed expense/Living allowance adjusted for inflation is probably the wiser choice - but to each his own.

When you start to vary the withdrawl based on portfolio performance, you venture into Guyton territory. I am personally planning a 4% SWR for my "gotta have" expenses and adjust my travel and extras on Guyton. If the market tanks, my vacation budget tanks; but if things stay strong, I'm living it up. I'm also planning on a shorter time period for this part of my portfolio. I'm pretty sure I won't be very interested in taking extended exotic trips when I'm 85.

 

[Nords]

I'm pretty sure I won't be very interested in taking extended exotic trips when I'm 85.

You might want to check into Elderhostels & cruise ships... especially the Elderhostels on cruise ships.

It's a big business, and I'm sure those organizations have comprehensive detailed plans on what to do when their customers wake up dead on the second morning.