Constant % Of Y/E Portfolio Balance

[Vincenzo Corleone]

I'm trying to get a handle on what WR I should use given the constant % of Y/E portfolio balance withdrawal strategy. I'm 53 and my wife is 55. I'm retired, my wife will be retiring in two years. I'm planning for a 40 year time horizon. We will have no heirs, so no desire to leave a legacy.

We have approximately 50X current expenses. My wife will get a pension when she retires that covers about 25% of our current expenses. My wife will also become eligible for retiree healthcare next year for both her and me. Per opensocialsecurity.com's recommendation, I'll be taking SS at 62 and my wife at 70. I got our benefit amounts from the SSA. Given the pension and both SS amounts, our current expenses would be completely covered - although I admit that I'm not even sure that's a valid observation given it's 9 years until I take my SS and 15 years until my wife takes SS. Although our AA is conservative at the moment, in general I plan on maintaining a 70/30 AA. Given the following options, which WR do you advise we use and why:

1. A constant WR of 3% + pension (but not counting SS) which will allow approximately 60% of our income to be allocated to discretionary spending. If the market tanks 70% the day before we're both retired (given the 70/30 AA and assuming our fixed income allocation remains the same), our total income would still cover our current standard of living.
   
2. A constant WR of 3.5% + pension (but not counting SS) which will allow approximately 63% of our income to be allocated to discretionary spending. If the market tanks 80% the day before we're both retired (given the 70/30 AA and assuming our fixed income allocation remains the same), our total income would still cover our current standard of living.
   
3. A constant WR of 4% + pension (but not counting SS) which will allow approximately 64% of our income to be allocated to discretionary spending. If the market tanks 90% the day before we're both retired (given the 70/30 AA and assuming our fixed income allocation remains the same), our total income would still cover our current standard of living.
   
4. A constant WR of 4.5% + pension (but not counting SS) which will allow approximately 66% of our income to be allocated to discretionary spending. If the market tanks 90% the day before we're both retired (given the 70/30 AA and assuming our fixed income allocation remains the same), our total income would still cover our current standard of living.
   
5. Some other constant WR.
   
6. This is a silly question.

 

[pb4uski]

....We have approximately 50X current expenses. My wife will get a pension when she retires that covers about 25% of our current expenses.....

[*]This is a silly question.
[/LIST]

Why are you agonizing over this if you have saved 50x current expenses? That's a 2% WR. Even if you increase your spending by 50% in retirement that is only a 3% WR and you have the pension and SS as cherries on top.

We spend about what we did before I retired... perhaps a bit more with hobbies and travel (pre-covid).

 

[Vincenzo Corleone]

Why are you agonizing over this if you have saved 50x current expenses?

[-]I suspected I shouldn't agonize over it, and that it was silly to even ask. But it's one of those things that I needed validated by others. Retiring early is a leap of faith.

Now that you've validated what I thought might be true (that I shouldn't worry too much), I thank you.[/-]

See next message for answer.

 

[Vincenzo Corleone]

I want to maximize how much we can spend annually without going overboard. Unlike some others, my wife and I have no problem finding ways to spend money. Travel is our passion and we plan to take lots of overseas trips while our health still allows it. So, in that regard, I'm not sure how much "going overboard" would be. I guess that's what I'm asking.

 

[pb4uski]

Firecalc is your friend. Plug in you situation and on the Investigate tab select

Given a success rate, determine spending level for a set portfolio, or portfolio for a set spending level...Search for settings that will get a success rate of as close to __% as possible (usually within 1%) by changing... [] Spending Level

 

[Vincenzo Corleone]

Firecalc is your friend. Plug in you situation and on the Investigate tab select

I've used that to see what our WR would be given the "initial WR rate adjusted annually for inflation" withdrawal method. I didn't find it quite as helpful given the "constant % of Y/E portfolio balance" withdrawal method. I'll take another look.

 

[Dtail]

In Firecalc in the "Spending Model" tab, you can select the "% of remaining portfolio" choice and the set the spending to be no less than 100% of the previous year spending.
This methodology will provide you with what % of the time your ending portfolio will equal your starting portfolio in inflation adjusted terms.
You can also combine this concept with the Investigate tab, which PB4USKI mentioned in post #5 for another metric.

 

[DrRoy]

Given that you are in such good shape, pick the WR that makes you feel the most comfortable. It is not really a financial question at this point. You do not have to keep the WR constant either.

 

[donheff]

Using the standard approach of initial % coupled with annual inflation almost everyone agrees 2.5 - 3% is pretty darn safe for your situation. Since you are choosing the fixed EOY approach whatever % you choose is “safe,” if you can stick with it. Just pick a number between 3 and 4 to start. You probably won’t be able to spend it all given the current travel restrictions. Put the excess in a MMF earmarked for filling in the gaps if we get a huge crash rendering your SWR low. In the event that we get a good sequence of returns you can start really splurging after a decade if you feel like it.

 

[sengsational]

Level spending is probably a conservative assumption, especially with a big discretionary fraction. The reason is it takes a bit of effort to spend, and as we age, the effort tends to dwindle. This isn't from personal experience, it's from research. Read about non-level spend options here: https://i-orp.com/EmptyRow/help/ORPHelp.html#rrplan

 

[Whisper66]

I've used that to see what our WR would be given the "initial WR rate adjusted annually for inflation" withdrawal method. I didn't find it quite as helpful given the "constant % of Y/E portfolio balance" withdrawal method. I'll take another look.

Here's how I looked at your numbers.

$100,000 = Assumed current yrly expenses (needed a starting point, rest of data you provided based as a % of expenses)

$5,000,000 = Calculated Savings = 50x current spending
70% Equities = per your note

40 yrs = time frame funds need to support (no heirs to support in future)

$25,000 = Calculated Wife Pension in 2 years = 25% x current expenses (assumed no inflation adjustment)

$75,000 = Calculated total (both of you) Social security = SS + pension = 100% of expenses. Assumed your's is $25,000 starting in 2029 and her's is $50,000 starting in 2033

Put the above in Firecalc and check the Investigate tab for Spending Level for 95% historical success rate.
Results = $235,500 is an acceptable spending rate for a 95.5% success rate
% = 4.7% spend rate ~ 235,500/5,000,000 (I used Constant Spending Power model)



If it were me, I'd be confident spending 4.7% the first year with the expectation that would be ok longer term. As a backcheck, I'd rerun the analysis yearly and adjust my budget if I felt it was needed.

 

[walkinwood]

I'm curious - what categories of spending are you including in your non-discretionary spend?


Bob Clyatt, in Work Less Live More 4/95 method uses 4% of annual portfolio value and shows that there is a very good chance (90+%) that this would preserve your real portfolio value over 40 years. In down years, he limits the reduction of your annual budget to 95% of the previous year. This could lead to pretty severe reduction with a string of bad years, but you have so much discretionary spending that it shouldn't be an issue. IIRC, his portfolio allocation was 50/50 equity/bond. If you haven't read his book, it is well written and covers a lot of ER ground.

 

[audreyh1]

I've used that to see what our WR would be given the "initial WR rate adjusted annually for inflation" withdrawal method. I didn't find it quite as helpful given the "constant % of Y/E portfolio balance" withdrawal method. I'll take another look.

You can model your situation using the %remaining portfolio method in Firecalc under spending models.

I use this withdrawal method myself.

My modeling has shown that a 50/50 portfolio of total stock and 5 year treasuries can handle up to around 4.3% of portfolio annual withdrawal, without shrinking too much on average. On average the portfolio maintains after 30 or even 40 years, and worst case you end up with 1/2 portfolio after 30 years in real terms.

However, under worst case historical scenarios, your real income can drop as much as 55% before recovering. So it’s good to realize that you can have a rollercoaster in income. Having a high degree of discretionary spending certainly helps. I also handle this by not ramping up my spending as fast as my portfolio grows and banking any excess withdrawal in anticipation of some lean years.

 

[Vincenzo Corleone]

You can model your situation using the %remaining portfolio method in Firecalc under spending models.

I use this withdrawal method myself.

My modeling has shown that a 50/50 portfolio of total stock and 5 year treasuries can handle up to around 4.3% of portfolio annual withdrawal, without shrinking too much on average. On average the portfolio maintains after 30 or even 40 years, and worst case you end up with 1/2 portfolio after 30 years in real terms.

However, under worst case historical scenarios, your real income can drop as much as 55% before recovering. So it’s good to realize that you can have a rollercoaster in income. Having a high degree of discretionary spending certainly helps. I also handle this by not ramping up my spending as fast as my portfolio grows and banking any excess withdrawal in anticipation of some lean years.

This is great information. Thanks.