Big differences between FIRECALC and New Retirement

[2HOTinPHX]

And I want to be clear on what I was thinking. Let's say that you had $1,000,000 and a 4% WR ($40,000 in first year) and otherwise your desired AA was 60/40.

At retirement I would have $400,000 in a 10-year bond or CD ladder with $40,000 of par maturing each year for the first 10 years and the spending for the first 10 years would be supported by those maturities. The remaining $600,000 would be 60/40... or $360,000 equities and $240,000 fixed income.

So at retirement my overall AA would be 36/64 and would drift towards 60/40 over the first 10 years of retirement. The 60/40 portfolio, which started at $600,000 would be rebalanced to 60/40 annually. According to Portfolio Visualizer, a $600,000 60/40 portfolio starting Jan 2013 rebalanced annually with no withdrawals would be worth $1,025,423 at Dec 2022... equal to the total retirement date portfolio despite using the 10-year ladder for spending.

Too bad I didn't think of that when I retired 11 years ago! Luckily, no SORR so it all worked out but if I was retiring today that is what I would do (unless I was significantly overfunded).

Oh I really like this idea....I think we would sleep a lot better knowing we had the first tens years spending set aside with very little downside. Now to rethink everything I been thinking about the last year.....our annual spending is just about 45K so this would work out nicely not even factoring in SS. Wondering what others thought on this strategy are.

 

[2HOTinPHX]

^^^Rising equity glide path.

I am listening to this right now....

https://www.google.com/search?rlz=1...#fpstate=ive&vld=cid:db865359,vid:fEFzSjyG1Ro

 

[tulak]

It’s good to create a model to understand the outflows. I’ve done in that in my personal modeling and it’s helpful.

Using pb4uski’s model above, you can also decide on where to invest to the 400k. A popular investment is TIPS, since you’re guaranteed no loss of spending due to inflation.

You can also take into consideration social security if that overlaps with your 10 years safe money. Say if in the last 3 years you qualify for social security of 10k/year (at 62), then you can reduce your 400k by 30k to 370k, since you know if SHTF you can collect social security early.

I believe it’s also important to note the case where you have overfunded your retirement. Using the above example, 40k/year with 1 million at a 4% WR. If you need 40k/year and have 2 million, that’s a 2% WR. You’re likely safe if you keep your 100% equity allocation, since a 50% reduction will leave you with a 4% WR.

Luckily we live in a time where we are getting decent real yields on FI. That wasn’t true until recently.

 

[SecondCor521]

Oh I really like this idea....I think we would sleep a lot better knowing we had the first tens years spending set aside with very little downside. Now to rethink everything I been thinking about the last year.....our annual spending is just about 45K so this would work out nicely not even factoring in SS. Wondering what others thought on this strategy are.

It's a method to avoid downside risk. It also limits upside, of course.

I think it will help people who are any combination of:

1. Risk averse. If you can't afford to lose, or are someone who might panic sell when equities drop, then this approach would probably be comforting. This approach would also probably give a more predictable FIRE date to someone wondering when they'd be able to retire.

2. Older. Being older means you have a shorter planning timeframe, which means the most survivable AA is closer to 60/40 anyway. For younger folks with 40 or 50 year planning horizons where the most survivable AA (*) is more like 80/20, the suggested plan might give away too much upside. Younger people also might be more willing and able to go back to work (at least as a barista) to address SORR.

3. Need to retire on a specific timeframe. For those without a specific time requirement and just want to retire as soon as possible, it might make more sense to just stick with a high equity allocation throughout. The "on average" higher returns in the ~5-10 years before FIRE and the 10 years after FIRE which otherwise would be spent on the rising equity glidepath might offset the lower WR% required to avoid SORR. In other words, 80/20 and 3% might be more achievable than 36/64->60/40 and 4%.

4. Wouldn't have much use for upside. As noted, this approach limits upside.
People who have less of a desire to leave money (for example, to either their kids or specific charities), or who are generally content to spend about the same each year, will like this plan more.

It's certainly a good approach for a large subset of people.

(*) I'm using "most survivable AA" to represent the AA which would have the best historical chance of success assuming a static AA throughout retirement and constant spending adjusted for inflation.

 

[COcheesehead]

I am listening to this right now....

https://www.google.com/search?rlz=1...#fpstate=ive&vld=cid:db865359,vid:fEFzSjyG1Ro

He has good podcasts.

 

[Koolau]

Our withdrawal rate now is a negative, meaning we are adding more than we take out.
There are a few good ways to retire and both of us seem to have found what works for us.

I'm sure you aren't the first one to have a negative withdrawal rate - but I think you may be the first one to indicate that. Heh, heh, I think you need to find a better way to BTD!


So, if you don't mind saying, how are you taking in enough to save during retirement? (Thanks.)

 

[COcheesehead]

I'm sure you aren't the first one to have a negative withdrawal rate - but I think you may be the first one to indicate that. Heh, heh, I think you need to find a better way to BTD!


So, if you don't mind saying, how are you taking in enough to save during retirement? (Thanks.)

I am three years into retirement and went through 2020 and 2022’s bear market. So we never cut back or skimped on anything, but idea of BTD is just becoming clearer. International trips will be in business class. I want a new Ford Bronco. The wine cellar needs restocking. I think I need a fourth bike. We already built our dream retirement home so we can’t improve on that. Our charities will benefit. I am just seriously realizing now that if we don’t spend it - we have no heirs - somebody else will.
So how did we get here? Kitces’ bond tent or a rising equity glide path. I was 100% equites forever up until just before retiring and I started laddering a little over ten years of bonds and by pure luck, the golden age of fixed income hit. Our ladders throw off about 148% of our spending needs. So the rest just gets reinvested. Most of the excess goes into equities, but I have added some bonds along the way that are too good to pass up.
I targeted our spend at $135,000. Our ladders produce $200,000 - a lot of which is tax free because of muni bonds. We are very fortunate for sure.

 

[Koolau]

I am three years into retirement and went through 2020 and 2022’s bear market. So we never cut back or skimped on anything, but idea of BTD is just becoming clearer. International trips will be in business class. I want a new Ford Bronco. The wine cellar needs restocking. I think I need a fourth bike. We already built our dream retirement home so we can’t improve on that. Our charities will benefit. I am just seriously realizing now that if we don’t spend it - we have no heirs - somebody else will.
So how did we get here? Kitces’ bond tent or a rising equity glide path. I was 100% equites forever up until just before retiring and I started laddering a little over ten years of bonds and by pure luck, the golden age of fixed income hit. Our ladders throw off about 148% of our spending needs. So the rest just gets reinvested. Most of the excess goes into equities, but I have added some bonds along the way that are too good to pass up.
I targeted our spend at $135,000. Our ladders produce $200,000 - a lot of which is tax free because of muni bonds. We are very fortunate for sure.

Not truly luck, then, but EXCELLENT TIMING!

 

[USGrant1962]

I am three years into retirement and went through 2020 and 2022’s bear market. So we never cut back or skimped on anything, but idea of BTD is just becoming clearer. International trips will be in business class. I want a new Ford Bronco. The wine cellar needs restocking. I think I need a fourth bike. We already built our dream retirement home so we can’t improve on that. Our charities will benefit. I am just seriously realizing now that if we don’t spend it - we have no heirs - somebody else will.
So how did we get here? Kitces’ bond tent or a rising equity glide path. I was 100% equites forever up until just before retiring and I started laddering a little over ten years of bonds and by pure luck, the golden age of fixed income hit. Our ladders throw off about 148% of our spending needs. So the rest just gets reinvested. Most of the excess goes into equities, but I have added some bonds along the way that are too good to pass up.
I targeted our spend at $135,000. Our ladders produce $200,000 - a lot of which is tax free because of muni bonds. We are very fortunate for sure.

So you don't actually have a negative withdrawal rate - you are withdrawing ~$135K of interest payments from your impressive bond portfolio. Divide $135K by the size of our portfolio - that is your withdrawal rate.

 

[pb4uski]

So you don't actually have a negative withdrawal rate - you are withdrawing ~$135K of interest payments from your impressive bond portfolio. Divide $135K by the size of our portfolio - that is your withdrawal rate.

+1. A negative withdrawal rate is where pension income and SS exceed spending, IOW, ignoring interest, dividends and appreciation one is saving.

But that is increasingly rare today given the decay of defined benefit pensions.

The dilemma is how to factor in 401k, IRA, etc that have effectively replaced pension plans. IOW, if one converted their retirement savings to a SPIA and the SPIA and SS exceeds their spending do they have a negative withdrawal rate?

I'm not sure that it matters or even if a negative withdrawal rate is commendable.

 

[COcheesehead]

So you don't actually have a negative withdrawal rate - you are withdrawing ~$135K of interest payments from your impressive bond portfolio. Divide $135K by the size of our portfolio - that is your withdrawal rate.

That’s not how I look at it. If you use the 4% rule as a definition basis, the amount you take out is a percentage of the day 1 value of your portfolio. That’s the withdrawal rate. The portfolio has increased, meaning the money I take out as a percentage is a negative.
To PB’s point. The ladder is my de facto pension.

 

[pb4uski]

No, WADR your interpretation does not make any sense because 4% is based on a few worst case scenarios so there would typically be many years where the earnings from the portfolio exceed the amount withdrawn for spending.

 

[COcheesehead]

No, WADR your interpretation does not make any sense because 4% is based on a few worst case scenarios so there would typically be many years where the earnings from the portfolio exceed the amount withdrawn for spending.

How is that different than my situation?

 

[COcheesehead]

For the need to be precise crowd, my earnings exceed my expenses. Enough on that topic.

 

[pb4uski]

How is that different than my situation?

You are withdrawing from your portfolio and not adding to your portfolio... so your withdrawal rate is positive... in your case $135k divided by your portfolio value at the beginning of the year.

Now let's take an example of where someone's pension and SS exceed what they spend so they are adding $x to the portfolio each year. Their withdrawals are negative since they are adding to their portfolio. Their WR would be -$x divided by their portfolio value at the beginning of the year.

Enough on that topic... glad we got that cleared up.

ETA: What you have is a very overfunded retirement plan, not negative withdrawals.

 

[COcheesehead]

You are withdrawing from your portfolio and not adding to your portfolio... so your withdrawal rate is positive... in your case $135k divided by your portfolio value at the beginning of the year.

Now let's take an example of where someone's pension and SS exceed what they spend so they are adding $x to the portfolio each year. Their withdrawals are negative since they are adding to their portfolio. Their WR would be -$x divided by their portfolio value at the beginning of the year.

Enough on that topic... glad we got that cleared up.

ETA: What you have is a very overfunded retirement plan, not negative withdrawals.

Poe tay toe. Poe ta toe.

 

[Koolau]

You are withdrawing from your portfolio and not adding to your portfolio... so your withdrawal rate is positive... in your case $135k divided by your portfolio value at the beginning of the year.

Now let's take an example of where someone's pension and SS exceed what they spend so they are adding $x to the portfolio each year. Their withdrawals are negative since they are adding to their portfolio. Their WR would be -$x divided by their portfolio value at the beginning of the year.

Enough on that topic... glad we got that cleared up.

ETA: What you have is a very overfunded retirement plan, not negative withdrawals.

What you have is too few BTD purchases.

 

[COcheesehead]

What you have is too few BTD purchases.

Working on it….