Constant 5.7% Safe Withdrawal rate

[Dtail]

I have looked at the Clyatt strategy for some of the worst case historical scenarios as a comparison and I can tell you that they are very close in terms of drawdown and recovery. Clyatt may lag but just by a tiny bit. Overall I don’t think there is enough difference to matter. I’m not sure about the 4.35% as a sustainable withdrawal rate. Also, I only modeled 50% total stock market and 50% 5-year treasuries. If you are using a different AA that will have an impact.

Thank you for your response. I value your opinion and just wanted to hear your thoughts.
My AA is actually 50/50, although not those specific products.

 

[audreyh1]

Thank you for your response. I value your opinion and just wanted to hear your thoughts.
My AA is actually 50/50, although not those specific products.

Well I’m 50-55% equity funds and a mix of cash and short to intermediate fixed income of high credit quality (slightly under 5 years duration), but those were the models I ran back then as it was the closest I could easily get. Also we are currently using a 3.33% withdrawal rate.

 

[HI Bill]

VPW can easily hit a 6% WR. This year, at age 60, I'm at 6.3% [assuming SS at 70], and it goes up every year. But the caveat is that if the portfolio takes a 45% hit, the WR drops to a meager 3.9%. Since 3.9% more than takes care of my basic living expenses, I'm taking the risk of potentially lower future withdrawals to maximize spending ability when I'm younger, healthier, and not dead (Rich, Broke or Dead Calculator). In reality, I'm not waiting for a 45% drop in the markets to adjust spending. I just rerun VPW every year using the December 31 year end investment balance. Then, to ensure that level of spending throughout the year, I typically sell half of the investments+ needed to fund the year on the first trading day of the year to protect against potential losses and spending reductions should the markets tank.

 

[Dtail]

Well I’m 50-55% equity funds and a mix of cash and short to intermediate fixed income of high credit quality (slightly under 5 years duration), but those were the models I ran back then as it was the closest I could easily get. Also we are currently using a 3.33% withdrawal rate.

I am using the 4% this year and will evaluate on a yearly basis going forward to see if I am willing to raise it.

 

[Dtail]

VPW can easily hit a 6% WR. This year, at age 60, I'm at 6.3% [assuming SS at 70], and it goes up every year. But the caveat is that if the portfolio takes a 45% hit, the WR drops to a meager 3.9%. Since 3.9% more than takes care of my basic living expenses, I'm taking the risk of potentially lower future withdrawals to maximize spending ability when I'm younger, healthier, and not dead (Rich, Broke or Dead Calculator). In reality, I'm not waiting for a 45% drop in the markets to adjust spending. I just rerun VPW every year using the December 31 year end investment balance. Then, to ensure that level of spending throughout the year, I typically sell half of the investments+ needed to fund the year on the first trading day of the year to protect against potential losses and spending reductions should the markets tank.

I haven't read the VPW instructions closely, but where does it say that a 45% hit drops the 6.3% WR to 3.9%?

 

[audreyh1]

VPW can easily hit a 6% WR. This year, at age 60, I'm at 6.3% [assuming SS at 70], and it goes up every year. But the caveat is that if the portfolio takes a 45% hit, the WR drops to a meager 3.9%. Since 3.9% more than takes care of my basic living expenses, I'm taking the risk of potentially lower future withdrawals to maximize spending ability when I'm younger, healthier, and not dead (Rich, Broke or Dead Calculator). In reality, I'm not waiting for a 45% drop in the markets to adjust spending. I just rerun VPW every year using the December 31 year end investment balance. Then, to ensure that level of spending throughout the year, I typically sell half of the investments+ needed to fund the year on the first trading day of the year to protect against potential losses and spending reductions should the markets tank.

So you get a double whammy of a big drop in the portfolio plus having to reduce your withdrawal rate?

My simple constant % method is not as efficient at maximizing withdrawals as VPW is, but I also don’t mind having some buildup for long term care expenses or whatever. Also, as we age I have and do plan to gradually increase the % some, just not every year.

 

[Al18]

It’s interesting to note that Vanguard Dynamic Spending model, with a starting 5.1% withdrawal rate end up with nearly identical spending and ending portfolio value after 30 years compared to the constant 5.7% spending model - as shown in post #21.

 

[OK EE]

According to everything I've been reading and studying the last couple years, the current hot trend is to use guardrails to manage your withdrawal rate. (really) short version: Market down years you adjust your spending down some, up years you adjust it up. You do this by managing the spend rate with the discretionary portion of your budget.

Most sources say 5.2-5.6% is where you want to start first year, and adjust from there. Monte Carlo analysis for my retirement plan using standard WR is around 80%, with guardrails it's 99%. That makes sense since you're adjusting based on market conditions instead of just blindly withdrawing a percentage.

 

[Koolau]

According to everything I've been reading and studying the last couple years, the current hot trend is to use guardrails to manage your withdrawal rate. (really) short version: Market down years you adjust your spending down some, up years you adjust it up. You do this by managing the spend rate with the discretionary portion of your budget.

Most sources say 5.2-5.6% is where you want to start first year, and adjust from there. Monte Carlo analysis for my retirement plan using standard WR is around 80%, with guardrails it's 99%. That makes sense since you're adjusting based on market conditions instead of just blindly withdrawing a percentage.

Are there any parameters defining the guardrails?

 

[Al18]

Guardrails are explained in the link in post #1

 

[Koolau]

Guardrails are explained in the link in post #1

Looks complicated. I would just "wing it."

 

[Al18]

Guardrails does look complicated.

 

[Dalton]

More complicated than some of the other withdrawal methods, sure. Since it's a once a year calculation, most would probably need to spend an hour or two each year, reviewing the criteria and an example or two. That's 2 hours out of 5,840 awake hours in a year (assuming 8 hours of sleep per day). If you were in the position to need more than "the usual" 4% withdrawal rate, it would probably be worth the time and effort.

 

[Major Tom]

If you were in the position to need more than "the usual" 4% withdrawal rate, it would probably be worth the time and effort.

And that's the crux of it for me; the more you are trying to squeeze out of your portfolio, the greater the complexity of the various rules, calculations, and guidelines you will be creating and following. With a draw that is now standing at around 1.85% of the current portfolio value, I'm not really following any rule or guideline at all. When I decide to take SS, my WR will either fall further or, more likely, my spend will increase (or if the economy truly goes to hell in a handbasket, I should at least be able to get by). A few more pastries at the coffee shop, bigger tips, maybe even a trip or two. I am very happy with the thought of what's left over going to friends, family, and local charities.

But hey - we all have different perspectives and approaches, so please don't interpret this as critique. I just prefer simple. It saves me from having to think

 

[Al18]

There's been considerable inflation since I retired, now entering my 8th year. 7 years of COLA increases have pushed an initial 4.0% withdrawal rate to 5.15%. Assets are currently 50% higher than when I retired.

 

[audreyh1]

There's been considerable inflation since I retired, now entering my 8th year. 7 years of COLA increases have pushed an initial 4.0% withdrawal rate to 5.15%. Assets are currently 50% higher than when I retired.

So you are using the traditional method of inflation adjusting from the starting portfolio 4% amount?

 

[Al18]

Yes, that’s what the 4% guideline suggests. I likely won’t spend that much, but I might.

 

[Koolau]

There's been considerable inflation since I retired, now entering my 8th year. 7 years of COLA increases have pushed an initial 4.0% withdrawal rate to 5.15%. Assets are currently 50% higher than when I retired.

Heh, heh, "Good bye guardrails! - for now."

Congratulations.

 

[audreyh1]

Yes, that’s what the 4% guideline suggests. I likely won’t spend that much, but I might.

Well you are one of the very few if not the only one.

 

[njFrank]

The trick is to calculate/estimate how much you're actually going to need to spend in retirement and go from there

 

[Dtail]

Yes, that’s what the 4% guideline suggests. I likely won’t spend that much, but I might.

Likely? Aren't you retired already?
With an asset increase of 50%, you have so far avoided any SORR.

 

[audreyh1]

The trick is to calculate/estimate how much you're actually going to need to spend in retirement and go from there

Right so that you build up a healthy nest egg that is big enough. If that means you’ll be working too long then figure out how to spend less.

 

[audreyh1]

Likely? Aren't you retired already?
With an asset increase of 50%, you have so far avoided any SORR.

Yeah, I’m a little confused,

 

[Al18]

Haven't decided if this is the year for a new car

 

[audreyh1]

There's been considerable inflation since I retired, now entering my 8th year. 7 years of COLA increases have pushed an initial 4.0% withdrawal rate to 5.15%. Assets are currently 50% higher than when I retired.

Is that 5.15% of the current portfolio value? Because if your portfolio has grown 50% still after 7 years of withdrawals, I don’t see how that could be the case.