Safe W/D Rate Adjustment

[Gumby]

That's certainly not me. I'm still "young" (57) I want to spend now as much as possible without breaking the bank 20-30-40 years down the line. That's the goal anyway.

Except for more travel, which is currently constrained by factors other than money, there is nothing else we want or need.

 

[Midpack]

I plan to rerun FIRECALC and other calculators to determine an updated SWR every 5 years and adjust withdrawals then, stole the idea from someone else here (audreyh1 IIRC). Adjusting more often, like annually, could introduce too much variation IMO, spending shouldn’t fluctuate like that - so I wouldn’t do that. That said, we haven’t withdrawn anywhere near our calculated SWRs despite much higher taxes (large Roth conversions from 2019 until 2024-26), and I don’t intend to spend just to spend, we’re perfectly comfortable with lower withdrawals so far. With no kids, we should probably figure out productive ways to spend more, but I’ll at least wait for the next major downturn to reassess.

 

[Animorph]

cat4ever - I use the official SS inflation rate. It's well publicized so I run into it all the time without even trying.

 

[DrRoy]

I go with the current value every year, but I have never needed more than 3% anyway. This coming year around 2%.

 

[athena53]

Someone once mentioned a weight of 70% of (SWR X initial portfolio adjusted for inflation) and 30% of SWR X portfolio value at prior year end. I like that- it allows for some adjustment for very good or bad investment results.

Having said that, I've never needed to withdraw that much. In the 7 years since retirement I've withdrawn about $43,000 less than this formula would allow using a 3.5% SWR, even after replacing my car last year. I loosened the purse strings and gave DS and DDIL $18,000 this year. You can't take it with you.

 

[Exchme]

No one mentioned the actuarial based withdrawal method. You can get a spreadsheet for it at Bogleheads.org, this is the page with links to the basic file and links to historical and Monte Carlo types.

https://www.bogleheads.org/wiki/Amortization_based_withdrawal#ABW_calculator

Unlike historical SWR methods that use an implicit assumption about future rates of returns, in ABW, you have to make an explicit assumption. Also, you give it the number of years to plan for as it is going to use that life expectancy and rate of return assumption to blow all the dough.

On a different tack, Kitces demonstrated that once your portfolio had grown by 50% over the initial value (inflation adjusted), you could safely up your spending by 10% and never have to cut back.

https://www.kitces.com/blog/the-rat...l-rate-a-more-dominant-version-of-the-4-rule/

 

[Koolau]

Mentioned before: I used the so-called 4% rule or FIRECalc ONLY to decide when/if I had enough money to retire (i.e., when I COULD live on about 4% or less - I was probably okay financially to FIRE.) Actually "implementing" the 4% rule (i.e., spending 4% or whatever and adjusting for inflation, etc.) has never been part of my retirement plan. I do a back-of-the-envelope calculation occasionally to see what my WD has been the past year. Other than that, I don't even think about it until I find such a thread as this.

One more time: Measure with a micrometer and cut with an ax. It's a good plan though YMMV.

 

[Midpack]

Mentioned before: I used the so-called 4% rule or FIRECalc ONLY to decide when/if I had enough money to retire (i.e., when I COULD live on about 4% or less - I was probably okay financially to FIRE.) Actually "implementing" the 4% rule (i.e., spending 4% or whatever and adjusting for inflation, etc.) has never been part of my retirement plan. I do a back-of-the-envelope calculation occasionally to see what my WD has been the past year. Other than that, I don't even think about it until I find such a thread as this.

One more time: Measure with a micrometer and cut with an ax. It's a good plan though YMMV.

So you’ve used SWR exactly as intended. The studies were only meant to provide guidance on how much to accumulate based on past history. None of the different academics associated with the 4% SWR never intended for anyone to “implement” the underlying withdrawal methodology in actual practice. In fact they specifically said otherwise. It was just a basis for the studies, not a withdrawal recommendation. I’m not why SWR is misinterpreted here over and over, year after year…

 

[RunningBum]

So you’ve used SWR exactly as intended. The studies were only meant to provide guidance on how much to accumulate based on past history. None of the different academics associated with the 4% SWR never intended for anyone to “implement” the underlying withdrawal methodology in actual practice. In fact they specifically said otherwise. It was just a basis for the studies, not a withdrawal recommendation. I’m not why SWR is misinterpreted here over and over, year after year…

So let me get this straight. The 4% SWR studies show that you would succeed 9x% of the time with 4%+inflation withdrawals. FIRECALC shows the same thing, and the default is to include inflation. But using 4% plus inflation is not recommended, it's better to wing it with back of the envelope calculations? In fact, mock people who think using this historically proven withdrawal method.

For the record, I don't use 4%+ inflation, I use VPW because it makes immediate but gradual adjustments up or down based on how my investments do and how much I actually spend.

 

[audreyh1]

I think it's that time of year, so thought I'd bump this thread to the top. btw, if I go the route of doing an inflation rate adjustment what do folks usually use, the government annual CPI for December?

I decided before retiring that I wasn’t comfortable adjusting withdrawal amount for inflation. I decided I was much more comfortable basing it on the Dec31 value of my portfolio each year.

 

[corn18]

I just re-retire every day. That is, my spreadsheet automatically updates my stock and bond quotes and that triggers the spreadsheet to recalculate all my models. Doesn't change my spending, just shows me how we are doing. I do like to compare that to my plan when I retired this past Mar. Seems we are doing ok.

 

[big-papa]

I decided before retiring that I wasn’t comfortable adjusting withdrawal amount for inflation. I decided I was much more comfortable basing it on the Dec31 value of my portfolio each year.

Same - I'd rather use a withdrawal method that results in a variable withdrawal that moves around as my portfolio does. Good years, more to spend. Bad years, less to spend. Fixed % (not inflation adjusted), VPW, and ABW all do that to varying degrees with the latter two being able to target a terminal value of the portfolio. I prefer ABW since by using estimates of future returns, the ride historically has been a bit smoother than VPW or fixed % of portfolio - though both of those remain as backups should my wife not be interested in carrying on with ABW should I predecease.

Cheers.

 

[MichaelB]

I decided before retiring that I wasn’t comfortable adjusting withdrawal amount for inflation. I decided I was much more comfortable basing it on the Dec31 value of my portfolio each year.

I agree

So let me get this straight. The 4% SWR studies show that you would succeed 9x% of the time with 4%+inflation withdrawals. FIRECALC shows the same thing, and the default is to include inflation. But using 4% plus inflation is not recommended, it's better to wing it with back of the envelope calculations? In fact, mock people who think using this historically proven withdrawal method.

I didn’t see Midpack’s post as mocking. Just an assertion that the 4% is a test or measure, not an actual withdrawal methodology. It certainly can be, though.

 

[RunningBum]

I didn’t see Midpack’s post as mocking. Just an assertion that the 4% is a test or measure, not an actual withdrawal methodology. It certainly can be, though.

Mocking was the wrong word. Maybe chastising is what I mean. As you say, there's nothing wrong with using 4%+inflation.

 

[big-papa]

I agree

I didn’t see Midpack’s post as mocking. Just an assertion that the 4% is a test or measure, not an actual withdrawal methodology. It certainly can be, though.

Indeed it can be. But with the plethora of withdrawal methods out there, one should know the risks going in for any that are being considered. Much of that is going to depend on one's personal situation and what sorts of risks one cares about the most as well as whether one may want to leave an inheritance or not. And, most importantly, the only thing anybody has to judge this with are past results. One can easily imagine other return sequences that have not yet happened, which are worse than the sequence that began in the late 60's.

For me, personally, an SWR method with inflation adjustments isn't suitable. Historically, most of the time one would have ended up with a surplus, in many cases a large one. My own thoughts are that I would prefer to maximize my withdrawals over a retirement lifetime. A second consideration is that I would like to have a known terminal value to target. Since I don't exactly know the date of my demise, there will always be some variability in the terminal value, but I'd still prefer to have a target. Being that there is no free lunch, what am I willing to give up to achieve those two goals? I'm willing to give up having 100% of my annual withdrawals be as steady as an inflation adjusted paycheck would be. It doesn't mean I can't mitigate that variability somewhat. Social security will definitely play a role here, as well as inflation adjusted bonds. All of this has led me to a form of ABW.

Perfect? Absolutely not. Subject to some future sequence of returns for which future estimates for stock and/or bond returns totally break down? Of course. The key at the end of the day is that you don't have to be a slave to a spreadsheet or calculation of any kind - it's a guide. For example, if I have years where it tells me I can spend a really huge amount of money, I don't actually have to spend it all. Though I have to say, that would be a high class problem to have.

Cheers,
Big-Papa

 

[Midpack]

So let me get this straight. The 4% SWR studies show that you would succeed 9x% of the time with 4%+inflation withdrawals. FIRECALC shows the same thing, and the default is to include inflation. But using 4% plus inflation is not recommended, it's better to wing it with back of the envelope calculations? In fact, mock people who think using this historically proven withdrawal method.

For the record, I don't use 4%+ inflation, I use VPW because it makes immediate but gradual adjustments up or down based on how my investments do and how much I actually spend.

Mocking or chastising? I am quoting the originators, it’s not my opinion. Just one reference quote below, the originators have clarified many times.

Look at the wide range of results in FIRECALC. Are you suggesting a retiree should just withdraw 4% initial and inflation adjusted thereafter (or any fixed starting %WR) and just let that range unfold over 30 years without any course correction? If you think there’s nothing wrong with using 4%+ inflation as a withdrawal method that’s fine, but it’s NOT what SWR originators recommend. That’s the point.

I’m sure you know all this.

The authors of the paper, however, did not mean for their scenarios to be applied rigidly or uncritically. The article makes this very important statement:

The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.

Nisiprius requested clarification from Professor Philip L. Cooley, senior author of the Trinity study:[3]

What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity. I think all the [Trinity] authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while.

Professor Cooley's response:

You have hit the nail on the head! I've tried to explain that thought to journalists but they don't seem to get it. You've got it. Stay flexible my friend!, which is the advice we should give to retirees.[4]

https://www.bogleheads.org/wiki/Safe_withdrawal_rates

 

[ERD50]

Originally Posted by audreyh1 View Post
I decided before retiring that I wasn’t comfortable adjusting withdrawal amount for inflation. I decided I was much more comfortable basing it on the Dec31 value of my portfolio each year.

Same - I'd rather use a withdrawal method that results in a variable withdrawal that moves around as my portfolio does. Good years, more to spend. Bad years, less to spend. Fixed % (not inflation adjusted), VPW, and ABW all do that to varying degrees with the latter two being able to target a terminal value of the portfolio. I prefer ABW since by using estimates of future returns, the ride historically has been a bit smoother than VPW or fixed % of portfolio - though both of those remain as backups should my wife not be interested in carrying on with ABW should I predecease.

Cheers.

To each their own, but I would hate, hate, hate to be tied to adjusting my spending based on how the market did that year. Maybe this is the year to spend extra money on something that I won't get a chance to do later (or really should do now)? I should bypass that, if the market took a dip?

To me, that's the power of a FIRECalc/Trinity-type analysis. A conservative w/d will survive the dips, w/o needing to adjust. Of course, my spending will vary year to year with needs/wants, but I check to make sure that on average, I've got a historically safe WR.

Or just re-evaluate. Like, subtract the extra planned spending from the portfolio, and if my planned future average WR is still conservative (because the portfolio has grown), then I feel I'm good to go.

-ERD50

 

[big-papa]

To each their own, but I would hate, hate, hate to be tied to adjusting my spending based on how the market did that year. Maybe this is the year to spend extra money on something that I won't get a chance to do later (or really should do now)? I should bypass that, if the market took a dip?

To me, that's the power of a FIRECalc/Trinity-type analysis. A conservative w/d will survive the dips, w/o needing to adjust. Of course, my spending will vary year to year with needs/wants, but I check to make sure that on average, I've got a historically safe WR.

Or just re-evaluate. Like, subtract the extra planned spending from the portfolio, and if my planned future average WR is still conservative (because the portfolio has grown), then I feel I'm good to go.

-ERD50

Yep - as I noted in a second post above, all of this is extremely personal and tied to what's sorts of risks one is willing to live with.

Cheers
Big-Papa

 

[corn18]

These are all the inputs I can vary to do what if scenarios. I like to take a look at a lot of what ifs, especially before I retired. Now I just play around with them to make sure we can always survive. If I stack too many bad things on top of each other, I scare myself (50% equity drop followed by the worst 35 years, SS goes away). But this also helps us look at what we can spend next year. Helps us manage risk. I like the max frugal input. Set that to 1 (drops us to a reasonable annual budget) and set the SORR to 100% (all equities go to zero) and we still survive. I'm good with that.

 

[Gumby]

I just want to note that withdrawal rate does not and need not equal spending. Rather, supposing you were using FIRECalc as a guide, it is technically the percentage you could "uninvest" from your portfolio every year and still have the same portfolio survival probability, given the asset allocation and inflation parameters you set. Just because you "uninvest" it, however, doesn't mean you must spend it. You could put any you don't spend into cash. To my mind, that can only be safer.

When I have asked the question in the past, however, most here have advocated withdrawing only what you spend. And that's what I have done the for the past two years. In fact, as I noted earlier, in 2021 we did not withdraw a dime (in 2020 it was < 0.8%) It has worked out well so far, but I can imagine a year when I would regret it.

 

[tmm99]

I decided before retiring that I wasn’t comfortable adjusting withdrawal amount for inflation. I decided I was much more comfortable basing it on the Dec31 value of my portfolio each year.

I'm starting to do that as well. I thought, at the beginning of my retirement (2016) that VPW might be risky, but now, having had a 40%+ increase in my stash despite all my withdrawals over the years, plus SS starting in just a few years, I'm changing to VPW, although I still don't withdraw 4% or even 3.5% at this point, but I'm trying to withdraw at least 3.5% (even if I don't spend it all.)

 

[RunningBum]

My highlighting of your quote from the originator:

Nisiprius requested clarification from Professor Philip L. Cooley, senior author of the Trinity study:[3]

What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity. I think all the [Trinity] authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while.

Professor Cooley's response:

You have hit the nail on the head! I've tried to explain that thought to journalists but they don't seem to get it. You've got it. Stay flexible my friend!, which is the advice we should give to retirees.[4]

So yeah, they actually are saying you can follow their model. And as you highlighted, they also say you may have to or want to make adjustments.

Seems hard to know what the originators really recommend with such conflicting advice. So I took exception to your statement that someone was "using SWR exactly as intended" by doing back of the envelope calculation. You don't even know what those calculations might be.

The discussion is academic to me since I use VPW. I don't like using the Trinity study since there's no real guidance on when to make adjustments.

 

[walkinwood]

Google Guyton-Klinger withdrawal rules. There are threads on it over at bogleheads too.
They are a series of rules to adjust withdrawal rates based on changes to portfolio values and inflation. The rules were tested against historically bad periods and iirc, one paper used monte carlo. The rules allow you to start with a higher SWR since you're willing to ratchet it down if things (markets & inflation) go bad and up if things go well.

 

[SecondCor521]

You could put any you don't spend into cash. To my mind, that can only be safer.

Safer in terms of investment risk. Less safe in terms of inflation risk, which is, of course, in the news lately but has always been and always will be a risk.

 

[Gumby]

Safer in terms of investment risk. Less safe in terms of inflation risk, which is, of course, in the news lately but has always been and always will be a risk.

But FIRECalc assumes that that money goes away completely, so even in the face of inflation and even if you held that excess cash at 0% return*, you would still be safer than the case for which FIRECalc solved.



* Although I assume you would have that excess cash earning at least some return that would offset some inflation.