Changing budgets as you age

[FlowGirl]

So on another forum Lancelot posted about the problem of perhaps being too conservative with spending during the early years of ER, while still young and healthy enough to enjoy a very active lifestyle.

How do you address this in your ER budgeting? Do you just count on a constant SWR while assuming that money for fun will eventually be replaced by money for medical care as you age? Some other scheme? Just curious to see how many people take this into account and what systems people are using to change their budgets over time, while still making sure they don't run out of money at 90.

 

[Hyperborea]

I'm not there yet but this is definitely a concern of mine.  The "standard" SWR sets the withdrawal rate to account for the worst historical case.  Most of the time you don't hit the worst case.  So, what do you do?

I think the only reasonable choice if you want to get at that extra money rather than fund a building at your alma mater is to take the extra as it occurs.  You can do something simple like re-running FIREcalc and getting a new SWR every couple of years.  

Or you can do something a little more complex and do a variable withdrawal type system such as the one that Prof. Ponzo (gummy) proposes - he calls it "sensible withdrawals".  Essentially you take a semi-fixed base (e.g. $20K + inflation adjust) AND some percentage of the excess gains (e.g. 50%) of the portfolio.  What it does is "front load" the excess to some degree.  The yearly amounts are likely to be kind of lumpy so you would want to buffer it with a fixed income ladder to smooth it out.
http://www.gummy-stuff.org/sensible_withdrawals.htm

 

[Cut-Throat]

I am going to use a 'flexible withdrawal' rate. Taking more after good years in the market, and less after poor years in the market.

I have also budgeted roughly 25% extra until age 80 for travel and such.

 

[Zipper]

Hyper, I think Gummy was a prof at Waterloo? He's retired and has been a regular at The Wealthy Boomer site for years. I seem to recall Waterloo was your alma mater?

A flexible way to take more in good times, and less in lower years is to draw 5% on the December 31 portfolio balance for the next year's income.

Use 4% if you are younger and healthy, 6% or higher if you are older or in poor health.

5%x's$500 000=$25 000

5%x's$450 000=$22 500

5%x's$550 000=$27 500

Hopefully your year end balance increases over 5% and gives you inflation protection.

 

[John Galt]

We don't budget or SWR either. My SS will replace
my wife's salary in 2006. If she retires, our income
will continue flat, with a small built in inflation adjustment. Then, she can collect SS in 2011.
Also, currently plan no drawdown of our "base", strictly living off the income. Remains to be seen how that goes.

JG

 

[John Galt]

And another thing...................I had pretty steady
net worth expansion from my full retirement in 1998
until about 2003. Then, it leveled off but did not decline.
I am going to try real hard to hold it where it is
as long as possible. I do not see further increases,
but there are a couple of scenarios that could accrue
to my benefit. I am figuring that holding
net worth where it is now is doable indefinitely, unless
we have a disaster. We could draw it down for routine living,
but having retired with so little, that would make me nervous.

JG

 

[Hyperborea]

Hyper, I think Gummy was a prof at Waterloo? He's retired and has been a regular at The Wealthy Boomer site for years. I seem to recall Waterloo was your alma mater?

Yup, he was a prof in the applied math dept. I took one course from him in mathematical modeling (I was a physics student taking a lot of extra math) - turning real life into differential equations and then solving them.

A flexible way to take more in good times, and less in lower years is to draw 5% on the December 31 portfolio balance for the next year's income.

This is the technique that another FIREee known as "Galeno" over on the Motley Fool site uses. He takes 5% of the value of his "investment" portfolio (everything but the FIB) every year and then stuffs it into his fixed income buffer (FIB). He then takes 1/6 (IIRC) of his FIB every year to live on. This allows him to vary his withdrawals to account for good or bad times plus it buffers the withdrawals so that they don't bounce around too much.

 

[charlie]

My coffeehouse IRA has a 60% stock 40% bond
split. My plan is to force the stock allocation (in $)
to grow at the CPI rate. We will spend what we
need each year out of the bond portion. We are
currently drawing down the IRA at about 6% per
year. I figure that the port will make about 6% per
year on average (7% for the stock allocation and 4.5%
for the bond). It's a horse race folks! Who knows
how long it will last?

Cheers,

Charlie

P.S. Only 2/3 of our stash is in my IRA. The rest
is compounding merrily away.