#### halo

This is a question for the board, but also one in particular for Dory36.

Supposing one spends, say \$50,000 less than the 100% Safe  Inflation - Adjusted Withdrawal that Firecalc says you can withdraw per year (let's say it's 4% of \$5M).

Is this money that is "saved?"   Can you add that \$50,000 back into your principal and then take 4% of that total the next year?   And then add back any such spending "shortfall" to the principal that the withdrawal is based on for the next year and thus have the ability to safely withdraw even more money that year (but not necessarily do so), and so on and so forth into the future?

For example, you start with, say \$5M.  You spend only \$150K for the past year, for a spending "shortfall" of \$50K .   You add that "shortfall" back into original amount of principal so that in the next year you take 4% of \$5.05M? Or do you add it back into the principal after deducting what you withdrew for that year ( \$5M - \$150K + 50K = 4% of \$4.85M)?

The first example seems like it would result in a withdrawal that is too large, while the second example would result in one that is too small?   Is the answer somewhere in between?

Spending less than the SWR should affect your ability to take out more in subsequent years (if you want), especially if you spend less year after year, shouldn't it?   But how to integrate this into the Firecalc calculator?   How can one keep track of this, especially if it happens year after year?  Can this a "savings plan" of sorts (for infrequent big-ticket items or expenses, etc.)?  I can't get a handle on this.  Is there anything to it?   Any suggestions on how to calculate or monetize this?    Dory?

Thanks!

halo said:
This is a question for the board, but also one in particular for Dory36.

Supposing one spends, say \$50,000 less than the 100% Safe  Inflation - Adjusted Withdrawal that Firecalc says you can withdraw per year (let's say it's 4% of \$5M).

Is this money that is "saved?"   Can you add that \$50,000 back into your principal and then take 4% of that total the next year?   And then add back any such spending "shortfall" to the principal that the withdrawal is based on for the next year and thus have the ability to safely withdraw even more money that year (but not necessarily do so), and so on and so forth into the future?

For example, you start with, say \$5M.  You spend only \$150K for the past year, for a spending "shortfall" of \$50K .   You add that "shortfall" back into original amount of principal so that in the next year you take 4% of \$5.05M? Or do you add it back into the principal after deducting what you withdrew for that year ( \$5M - \$150K + 50K = 4% of \$4.85M)?

The first example seems like it would result in a withdrawal that is too large, while the second example would result in one that is too small?   Is the answer somewhere in between?

Spending less than the SWR should affect your ability to take out more in subsequent years (if you want), especially if you spend less year after year, shouldn't it?   But how to integrate this into the Firecalc calculator?   How can one keep track of this, especially if it happens year after year?  Can this a "savings plan" of sorts (for infrequent big-ticket items or expenses, etc.)?  I can't get a handle on this.  Is there anything to it?   Any suggestions on how to calculate or monetize this?    Dory?

Thanks!

If you "save" part of a "safe" (say 4%) and then add it back to the next
year, the base will indeed increase and you can do this forever.
The same principle applies when you remove "X" % of anything
(less than 100%) on a regular (annual for example) basis. You will never
deplete the original amount. Theory works in both directions
(up or down).

JG

Ignoring questions about SWR being just a rule of thumb, yes, I also agree that you can do this, and consider the withdrawal multiplier to be 5.05M. You can say you withdrew 4% of your initial pot, spent only 3/4 of it, and used the rest to start a second nest egg of 50K. Now you can take your WR from both nest eggs.

Though I wouldn't do my accounting this way, I like this "Add Back" way of seeing things, because it helps explain my arguement for a frugal retirement.

Some people say to wait to ER until you have a big enough pot to fund a nice lifestlye, so that if things go really badly, you can just cut back your spending. They say that this adds a margin of safety, compared to retiring with a bare bones budget which you can't cut.

But I think that if one can be as frugal as reasonably possible, and retire early on a frugal budget, they can still get some degree of safety by waiting to retire until the WR is low, such as 3.5% or even 3% if you're really scared. Hopefully not set so low that you'd retire as late as the person who waited to fund a nice lifestle.

Because your WR is low, there's an excellent chance that you can improve your lifestyle over time.

Your "Add Back" way of thinking about this helps. Instead of thinking, I'll withdraw 3% of the \$1M initial pot size, and the pot will hopefully grow, I can think of it as: I'll withdraw 4% of the \$1M, and only use 3/4 of the withdrawal because I don't need the whole withdrawal.
The rest will go back into the pot, and next year I'll withdraw 4% of \$1.01M. I could spend the first \$30,000, save \$10,000 again, and can choose to spend or save the excess \$400.

(Adjust above numbers for inflation. Maybe not fair to compare frugal 3% to nice-lifestyle 4% as being of equal safety, but you get the idea. IMO one could always retire earlier with the same safety, by retiring frugal, instead of waiting for nice lifestyle. Doesn't mean one should, if one prefers nice lifestyle to retiring sooner.)

Just adding back the saved money into the pot may disturb Firecalc's program where it accounts for year-to-year market volatility (extreme up years and extreme down years), the effects of inflation and the fixed income component).  The interaction of all these elements over long time periods is what makes the calculator such a powerful tool.

For example, just throwing unspent money back into the pot every year and withdrawing 4% of the original balance + the unspent money may not work in a "down" year, where, say, the stock market lost 10-20% of it's value, would it?   If the market was extremely volatile over many consecutive years, wouldn't such an "addback" program of a series of spending "shortfalls" screw up the Firecalc numbers significantly over time?     Dory?

Maybe it's just best to think of any spending shortfall as "special" money that is saved separately from the principal amount, whether it is commingled with the principal account(s) or put annuall into a separate account (if you like to see it grow separately).    Then, whichever way you choose to keep track of it, you build up a nice savings account on the side for excess spending on special one-time items like major renovations or splurges like an around-the-world trip or something like that.   But in the meantime, you maintain withdrawing an inflation-adjusted 4% based on the ORIGINAL principal, and that way you can be sure you aren't undermining the Firecalc program.

This side savings account could be the best way to go.   For one thing, it provides you with a dramatic ability to spend big in a given future year for special purposes. The other addback method would increase your safe withdrawal by a tiny sliver, like .04%  (not to be sneezed at, to be sure, but you get the idea).     Not only would the "big spending" side savings account be more satisfying a reward for your frugality, but it would not undermine the validity of the Firecalc program over time.

I know that the Firecalc program theoretically provides for re-calculating your withdrawal at any time based on an increased (or decreased, for that matter) principal.    But it seems like it wasn't really set up for annual, year-in and year-out recalculations.   Either you would have to:

(A) re-calculate year-in and year-out without fail so the results aren't disorted  by volatile years in the market; but  such recalculations based on years when there were extreme market moves seem to me to defeat the whole purpose of the Firecalc calculator - to have a constant buying-power, reliable inflation-adjusted income over time regardless of market fluctuations.  Or:

(B) perhaps it's best not to recalculate at all with this spending shortfall program and just to think of the saved money as a side savings account that is available to tap into any amount at any time as a nice bonus reward for your frugality.

Dory, what do you think?   How could you way in on this, does Firecalc have any way to integrate this idea into now?   Is it an improvement you could make later?   Or can you provide one of your customary enlightening opinions about this matter?

Thanks!

halo,

I'm not sure I completely understand your question, but I'll try to respond to what I think I understand. FIRECalc computes the historical survival rate assuming broad index investing, specified fee structure and a spending model that assumes you will spend at a rate that starts as a specific percentage of your portfolio value and is adjusted for inflation each year. If you spend \$50,000 less than you anticipated in year 1, then you spent with an initial withdrawal rate that is lower than you used. If you want to understand the effect this would have, you can look at in more than one way.

1) Go back and run the exact simulation you ran last year (ie. same portfolio amount, same expense ratio, etc. but reduce the initial withdrawal rate to the one you actually experienced. Your survivability and end portfolio amount should both increase.

2) Run FIRECalc with your current numbers which should include the \$50,000 as part of your portfolio and use the initial withdrawal rate that you think is appropriate. But to make the run completely consistent, you should also reduce your time in retirement by one year.

These are simulations you can run to get "consistent" results from FIRECalc, but you should keep in mind that historical simulation does not have any predictive capability. It provides very useful, broad guidance. It can tell you what certain things will do qualitatively. But retirement planning is a probablistic exercise. Don't try to make it derterministic. If you try to look too close at the numbers for a specific case (yours) you are likely to be disappointed.

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