59 planning to retire at 62 with an unconventional? withdrawal strategy

[Hamlet]

Could you quantify how much better your calculations show you to be with this plan and what life expectancy you are using relative to IRS life expectancy tables?

From past discussions here, I'm wondering if you are assuming a life expectancy quite a bit longer than the IRS life expectancy tables. And if so, wondering what the % increase in value of your portfolio would be using your plan. Just curious as eventually I'll need to consider when to take SS.

The big reason delaying SS helps them is that it is very cheap longevity insurance. If your worried about outliving your money, delaying makes a lot of sense, especially if you have a longer life expectancy than average.

I plan to take it at 62 because my life expectancy is lower than average. I hope I live to regret that decision.

 

[conversationalphrase]

Could you quantify how much better your calculations show you to be with this plan and what life expectancy you are using relative to IRS life expectancy tables?

From past discussions here, I'm wondering if you are assuming a life expectancy quite a bit longer than the IRS life expectancy tables. And if so, wondering what the % increase in value of your portfolio would be using your plan. Just curious as eventually I'll need to consider when to take SS.

To answer your question - I've been planning for 90 for myself and 94 for DW.

I've been playing with this some more. I just upgraded to Pralana's 2017 Gold Calculator and it has a SS optimizer function as well as capability to compare what if scenarios. According to the optimizer our optimum ages to start SS are 69 for me and 67 for DW. However, it also shows that we can be within 90% of optimum throughout a span of 67-69 for me although with a fixed 67 for DW.

Conclusion, it isn't best to wait until 70, but rather 69 is optimum and I could start a couple years earlier without measurable difference in overall performance.

 

[FreeBear]

After retirement we could cover all essential expenses with the pensions and social security if I chose to start it. We want to travel extensively for 8-10 years after retirement, meaning high non-essential expenses, and then expect to slow down. Hopefully our health will support this - we are both healthy with no medical conditions now and good family health histories, but since everyone's health declines with age we want to enjoy ourselves sooner rather than later.

If we withdraw heavily, 8-10%+ per year, from our 401k/IRAs and defer social security to age 70 the calculators show we are better off than taking SS earlier and reducing our withdrawal rate. Once SS kicks in, the withdrawal rate would go down to 1-2%. I know that 10% per year for 8 years would leave almost nothing left, unless we get reasonable market returns, but if the market goes south we can always change strategy. The calculators show we'd have about 40-50% of savings left at age 70, assuming balanced investments in a significantly below average market. This seems to make sense, but is much different than the 3-4% safe withdrawal rates many seem to suggest. Again it is a dynamic situation so I can always adjust real time if it doesn't work out.

I played around in Firecalc with 8% and 10% WR for 8 years then down to 2% WR for the balance of 30 or 40 yrs. Looks like it could work (based on past market history) with the 8% fixed WR, but the success rate drops to 50% at the 10% WR. Not surprisingly, the issue is that you can run out of 401K/IRA at fixed 10% burn rate. The system seems very sensitive in this range, so results may vary considerably depending on the software used and slight variation in parameters. Oh, I interpret the Firecalc output graphs (8% WR) as a approx. 40% PROBABILITY of having 50% OR LESS of original savings left by 70. So the risk is defined by both the % loss as well as the ODDS of loss.

I suggest keeping a sharp eye on your portfolio even with "only" an 8% burn. Recommend (somehow!) adjusting spending to maintain at least 30% of your original portfolio intact in all circumstances up to the critical 70 yr mark. Have you considered a Variable Withdrawal Rate for the first 8 years, perhaps set up to preserve 30-50% of your investments? This could work well for you since survival needs can be handled by pension & early(ier) SS, but the variable withdrawal can maximize the burn rate on good years.

As others have mentioned, it would be nice not to be 100% dependent on SS at 70. Having "dry powder" can help to deal with unknown risks like Low Term Health Care.

It looks like you have framed the two extremes, namely survival handled by pension & SS (early if needed) and "luxury" defined by a 8-10%+ WR from portfolio until 70. What would a nominal or middle of the road case look like, say a 4-6% WR until 70 look like? If you would still be happy with this, especially if facing a bad sequence of returns up front, then you would still have a nice fallback that allows significant travel and is still much nicer than just survival. Perhaps, only for example, you'll burn 4-5% in bad market years and burn 10%+ in great ones.

It's good that you have pension and SS enough for survival. I appreciate that you want to live it up while you are healthy and have the $$ to enjoy. We considered something similar, but much more conservative (4-5% initial burn, down to 3% in 5 years), but have been too cheap and lazy to do all the travel. Plus DW and I could never agree on where to go and what to do. Well, maybe next year. Until then, we're drinking better wine...

FB

 

[conversationalphrase]

I played around in Firecalc with 8% and 10% WR for 8 years then down to 2% WR for the balance of 30 or 40 yrs. Looks like it could work (based on past market history) with the 8% fixed WR, but the success rate drops to 50% at the 10% WR. Not surprisingly, the issue is that you can run out of 401K/IRA at fixed 10% burn rate. The system seems very sensitive in this range, so results may vary considerably depending on the software used and slight variation in parameters. Oh, I interpret the Firecalc output graphs (8% WR) as a approx. 40% PROBABILITY of having 50% OR LESS of original savings left by 70. So the risk is defined by both the % loss as well as the ODDS of loss.

I suggest keeping a sharp eye on your portfolio even with "only" an 8% burn. Recommend (somehow!) adjusting spending to maintain at least 30% of your original portfolio intact in all circumstances up to the critical 70 yr mark. Have you considered a Variable Withdrawal Rate for the first 8 years, perhaps set up to preserve 30-50% of your investments? This could work well for you since survival needs can be handled by pension & early(ier) SS, but the variable withdrawal can maximize the burn rate on good years.

As others have mentioned, it would be nice not to be 100% dependent on SS at 70. Having "dry powder" can help to deal with unknown risks like Low Term Health Care.

It looks like you have framed the two extremes, namely survival handled by pension & SS (early if needed) and "luxury" defined by a 8-10%+ WR from portfolio until 70. What would a nominal or middle of the road case look like, say a 4-6% WR until 70 look like? If you would still be happy with this, especially if facing a bad sequence of returns up front, then you would still have a nice fallback that allows significant travel and is still much nicer than just survival. Perhaps, only for example, you'll burn 4-5% in bad market years and burn 10%+ in great ones.

It's good that you have pension and SS enough for survival. I appreciate that you want to live it up while you are healthy and have the $$ to enjoy. We considered something similar, but much more conservative (4-5% initial burn, down to 3% in 5 years), but have been too cheap and lazy to do all the travel. Plus DW and I could never agree on where to go and what to do. Well, maybe next year. Until then, we're drinking better wine...

FB

FB - Thanks for the comments and good advice. Since I've originally posted I've been playing with other options and the good news is there are a lot of different ones. I've learned about taking a HELOC before retirement as a reserve to reduce withdrawals in down market years and have always had in the back of my mind a reverse mortgage if we ever really get in a bind. I don't know that we'll be as aggressive as I threw out at first but I have time to figure that out - and can adjust as we see what happens. We have another buffer in that the youngest child graduates from college this year so that significant expense goes away and can be used for additional savings between now and retirement that I haven't accounted for. There are so many variables it's impossible to pick a plan and stick to it - it seems I will be always adjusting and adapting.

 

[pb4uski]

Your plan is similar to mine (we are about 5 years in) but more extreme. Our original plan was for 4-7% withdrawals from 56 to 65, then 3% from 66 to 70 and less than 1% after I started my SS at age 70.

I think of SS as an option... if investment returns lag and my investments decline to a point where I am uncomfortable with what I have left, then I can either adjust my spending/withdrawals or start SS. As long as investment returns are good then I'll keep riding them.

So far the ride has been great...we have supported our lifestyle, built a garage, bought two cars and a winter condo and still have 20% more than when we retired... pinch me.

It seems to me that between the discretionary spending in your plan and an ability to start SS if you need to that you are in good shape.

 

[FreeBear]

FB - Thanks for the comments and good advice. Since I've originally posted I've been playing with other options and the good news is there are a lot of different ones. I've learned about taking a HELOC before retirement as a reserve to reduce withdrawals in down market years and have always had in the back of my mind a reverse mortgage if we ever really get in a bind. I don't know that we'll be as aggressive as I threw out at first but I have time to figure that out - and can adjust as we see what happens. We have another buffer in that the youngest child graduates from college this year so that significant expense goes away and can be used for additional savings between now and retirement that I haven't accounted for. There are so many variables it's impossible to pick a plan and stick to it - it seems I will be always adjusting and adapting.

You've got the right attitude: curious, flexible, and adaptable. I bet you'll be just fine!

 

[Huston55]

FB - Thanks for the comments and good advice. Since I've originally posted I've been playing with other options and the good news is there are a lot of different ones. I've learned about taking a HELOC before retirement as a reserve to reduce withdrawals in down market years and have always had in the back of my mind a reverse mortgage if we ever really get in a bind. I don't know that we'll be as aggressive as I threw out at first but I have time to figure that out - and can adjust as we see what happens. We have another buffer in that the youngest child graduates from college this year so that significant expense goes away and can be used for additional savings between now and retirement that I haven't accounted for. There are so many variables it's impossible to pick a plan and stick to it - it seems I will be always adjusting and adapting.

If you get down into the 6% +/- range, you should check out Guyton-Klinger, VPW and, other variable withdrawal strategies; many of which are designed to enable higher w/d early in retirement. There is quite a bit of research behind them, and the 'variable withdrawal' approach would likely give you a higher success rate and more peace of mind.

 

[garyt]

What a great board - I found it a few days ago and have been doing lots of reading and have learned a lot. There are clearly many intelligent and well spoken people here. I'm mainly checking in and saying hi but I would appreciate any comments on what to me seems like an obvious but perhaps uncommon planning scenario.

Background: married, both are 59, planning to retire at 62. Will have two pensions, a lot of 401k and IRA money and virtually zero non retirement savings. We are debt free. I've spent a lot of time with Fidelity's retirement planner, and also recently the Pralana retirement calculator.

After retirement we could cover all essential expenses with the pensions and social security if I chose to start it. We want to travel extensively for 8-10 years after retirement, meaning high non-essential expenses, and then expect to slow down. Hopefully our health will support this - we are both healthy with no medical conditions now and good family health histories, but since everyone's health declines with age we want to enjoy ourselves sooner rather than later.

If we withdraw heavily, 8-10%+ per year, from our 401k/IRAs and defer social security to age 70 the calculators show we are better off than taking SS earlier and reducing our withdrawal rate. Once SS kicks in, the withdrawal rate would go down to 1-2%. I know that 10% per year for 8 years would leave almost nothing left, unless we get reasonable market returns, but if the market goes south we can always change strategy. The calculators show we'd have about 40-50% of savings left at age 70, assuming balanced investments in a significantly below average market. This seems to make sense, but is much different than the 3-4% safe withdrawal rates many seem to suggest. Again it is a dynamic situation so I can always adjust real time if it doesn't work out.

A side benefit is getting the IRA/401k balances spent down by age 70 the MRD isn't more than needed. Also I may do some Roth Conversion between 62 and 70 to optimize taxes.

Comments?

I'll be interested to hear the comments, I plan on doing something similar in the sense of doing things while we're capable. Plan on retiring between 60-62.

 

[bmcgonig]

One way to demystify the withdrawal rate before SS is to fake it that you are already getting the SS as if you are 70. Then you can actually put that money aside and then figure out your lifetime SWR.

E.g., let's say you are 60 and will take SS at 70. And that you will get 40k at 70. Also let's assume your portfolio is 1m.

Now multiply 40k by the number of years before 70 and put it aside. 600k left. This is now the portfolio with which you can figure out your lifetime SWR without worrying about different SWRs before and after. You can actually set this money aside in a CD ladder or bond fund etc. or just pretend that you're doing it depending on how comfortable you feel with it. Originally I saw it on bogleheads where the person doing it was actually setting it aside and using VPW on the rest.

You can play all kinds of mind games like this but I find it useful.