Modifying WR after 5 years

[dtbach]

5 years ago I started taking a WR of 3.75% of my then present assets. Fast forward to now and my WR is now at around 3.26%. And in the meantime I've also adjusted my allocation from about 76/21/3 (S/B/C) to around 65/29/6 so it's more conservative now.

In addition, in 5 years the kids will be done with college, the house will be paid off, and military pension plus SS will more than keep the roof over our head and allow us to live a very decent life.

So I'm thinking of jumping the WR by 1% to 4.25% for the next 5 years so we can do a bit more travel and do some home repairs. I could scale back quickly if necessary but I"m starting to think I'm needlessly short changing myself.

Maybe even go to 4.5%?

 

[bingybear]

Without knowing what SS+pension add and if your present WR takes into account your SS and pension as assets... it could be hard to guess.
First I'd say run it thru firecalc or RIP and see what the results are.

If you are taking a % of present value each year, you are not using the method that is used based around the 4% rule of thumb. You are not indexing to inflation.

So if you do what you are suggesting... when SS and pension kick in, what will be your WR be from your assets assuming they stay at the same value as today?

 

[braumeister]

5 years ago I started taking a WR of 3.75% of my then present assets. Fast forward to now and my WR is now at around 3.26%.

The usual routine is to calculate the percentage (nominally 4) of your initial portfolio, then increase that dollar amount (percentage is then irrelevant) by the inflation rate.

Some of us do calculate the WR percentage every year, but that's a variation on the theme.

So most would probably agree that yes, you're shortchanging yourself.

 

[Sunset]

I think you can do the 4.5% for the next 5 years, but if the market tanks 20% or more, then cut it back to 4% until the market has recovered a lot.

Try it in firecalc to see that 4.5% is fine.

 

[flintnational]

With your pension and SS excluded, the new WR rates should be fine (historically speaking ). And, if pension and SS cover your budget, you are in great shape. Take the extra trips. Enjoy.

FN

 

[walkinwood]

If it were me, I'd just do it. This time with your children is precious. (I say that sincerely even though I do not have any of my own)

You are monitoring your financial situation closely and like you said, you can always step it back.

Another way to get to the same result is to carve out a portion of your portfolio to fund the delta for the next five years and continue the same withdrawal rate for the remaining portfolio. Of course, this is just a math game. The end result is the same.

 

[dtbach]

I should have mentioned that I'm 64 and the DW is 60. Just the pension and both of our SS should be about $70,000 which with a paid off house and no other debts I would think would be pretty adequate.

I had written in another post how I need to loosen up the purse strings. Even if the stock market dropped 50% I'd still be able to pull out almost another $70K at 4% WR.

 

[W2R]

With the house paid off and the kids out of college, and SS and pension, my guess is that in five years you are going to be swimming in money, more than you will need at that time.

Between now and then, you can probably spend a little more. I'd suggest cutting back on your WR a bit after the five years are over. I am thinking that by then, you'll still have plenty to spend even with a smaller WR.

 

[audreyh1]

5 years ago I started taking a WR of 3.75% of my then present assets. Fast forward to now and my WR is now at around 3.26%. And in the meantime I've also adjusted my allocation from about 76/21/3 (S/B/C) to around 65/29/6 so it's more conservative now.

In addition, in 5 years the kids will be done with college, the house will be paid off, and military pension plus SS will more than keep the roof over our head and allow us to live a very decent life.

So I'm thinking of jumping the WR by 1% to 4.25% for the next 5 years so we can do a bit more travel and do some home repairs. I could scale back quickly if necessary but I"m starting to think I'm needlessly short changing myself.

Maybe even go to 4.5%?

Are you saying that you set your withdrawal rate to assets 5 years ago, and were following an inflation-adjusted income after that?

And your portfolio has kept up and grown such that you withdrawal rate compared to current assets has dropped?

Personally I use a fixed percent of current assets all the time at the moment, and if the markets drop, and the portfolio shrinks, so does my income. But as long as the markets are happy, I keep getting raises regardless of inflation.

I haven't been brave enough to cross the 4% withdrawal rate line yet, although per my models and my allocation I probably could go up to 4.35% and the portfolio self-sustain over long periods of time.

But it's also a matter of age. The older I am, the more willing I will be to creep up the %. At 60 I certainly would be comfortable with 4%.

If your main expenses are already covered by pension and SS, I would definitely be comfortable drawing more aggressively for a few years. Maybe just not indefinitely.

In a way - it's best to take out healthy chunks while the markets are up! You never know when it is going to evaporate (well, reduce).

 

[pb4uski]

I see nothing wrong with what the OP proposes to do.... another approach would be to reduce your portfolio by the special spending on travel and home repairs and then calculate a 3.75% WR on the remaining balance.

 

[Plantman]

Considering your age, income streams, and asset base I would say definitely go for it! Enjoy it while you're still young enough to.

 

[ERD50]

Keeping it simple... if your pension and SS cover expenses in 5 years, then technically you are fine with ~ a 20% WR. It's simple arithmetic (slightly less simple considering inflation, but close enough for chatting about).

Of course you probably don't want to run your portfolio down to zero, you want some buffer for whatever. But that little exercise outlines the boundary conditions.

Talking about 3.75% versus 4.25% is trivial compared to 20%. Just calculate out, or use FIRECalc on a 5 year period to see what a small difference 3.75% versus 4.25%, or even 8.96% (random number) makes over 5 years.

Go for it, or more.

-ERD50

 

[youbet]

Go for it! Don’t regret later not doing things today that are appropriate for today and be sitting on unneeded funds later. Your military pension and SS are an adequate backup if the economy goes in the crapper.

 

[gauss]

My understanding is that Financial Engines, at least the version offered by DW's employer for free, bases it's numbers on a 5% WR.

-gauss

 

[MarieIG]

I don't see the calculations if one spouse passes. In other words, if you spend down and the spouse earning the pension passes and one social security income is lost, how is the remaining spouse situated?

 

[dtbach]

I don't see the calculations if one spouse passes. In other words, if you spend down and the spouse earning the pension passes and one social security income is lost, how is the remaining spouse situated?

Good point. If I pass, the DW will get roughly 60% of my pension plus my SS which would be about $45K/yr. The portfolio would produce another $70K even if the market tanked almost 50%. So she should be in reasonably good shape.

 

[dtbach]

Are you saying that you set your withdrawal rate to assets 5 years ago, and were following an inflation-adjusted income after that?

And your portfolio has kept up and grown such that you withdrawal rate compared to current assets has dropped?

Personally I use a fixed percent of current assets all the time at the moment, and if the markets drop, and the portfolio shrinks, so does my income. But as long as the markets are happy, I keep getting raises regardless of inflation.

I haven't been brave enough to cross the 4% withdrawal rate line yet, although per my models and my allocation I probably could go up to 4.35% and the portfolio self-sustain over long periods of time.

But it's also a matter of age. The older I am, the more willing I will be to creep up the %. At 60 I certainly would be comfortable with 4%.

If your main expenses are already covered by pension and SS, I would definitely be comfortable drawing more aggressively for a few years. Maybe just not indefinitely.

In a way - it's best to take out healthy chunks while the markets are up! You never know when it is going to evaporate (well, reduce).

5 years ago I calculated a WR of 3.75% (seemed to be plenty then) and have never changed it, so no I didn't give myself a raise because of inflation. That is why my WR is so much lower now.

 

[audreyh1]

5 years ago I calculated a WR of 3.75% (seemed to be plenty then) and have never changed it, so no I didn't give myself a raise because of inflation. That is why my WR is so much lower now.

So you were withdrawing the same $ amount each year for the first five years?

 

[RobLJ]

I would test with FireCalc, but your plan sounds good.
DW will probably stop working next year, but I'm working online about 1/2 time for 1/2 of former salary, which will last for at least 2 and perhaps 3 more years. At that point, until full SS withdrawal age (3.5 years), I plan to pull 4.5-5.5% until my SS kicks in. At that point, I'll pull 4-4.5% for 4 years until DW SS age, then probably move to 4% withdrawals and use the excess to fund the grandbaby's college fund and pay for vacations with the sons and their families. FireCalc had no problems.

 

[GravitySucks]

Maybe even go to 4.5%?

Maybe even 6%
You only have 5 years to cover. Run Fidos planner. I'll bet it'll say you're way underspending what you can and that's a very conservative tool.
Spend some while you can enjoy it and share the time with the kids.

 

[Perryinva]

IMHO, once your income is covering your expenses and then some comfortably, then increases in SWR becomes a meaningless percentage (or even SWR when everything and then some is covered by pensions, SS, rental income etc) without understanding what your objectives are for the savings. Someone that desires a huge legacy for heirs vs someone with no heirs and wants to die with minimum savings have totally different SWRs with identical financial situations.

In your case, I would think your SWR will change based on expenses now vs empty nest retirement. Is your SWR funding the collge expenses or is that funded separately ? Do you want to maintain your present inflation adjusted svaings level now all the way through retirement? Personally I would spend what you want now while you have the family objectives in mind. Your own naturally tendencies towards FI and savings will automatically prevent you from overspending.

 

[JustCurious]

So I'm thinking of jumping the WR by 1% to 4.25% for the next 5 years so we can do a bit more travel and do some home repairs. I could scale back quickly if necessary but I"m starting to think I'm needlessly short changing myself.

Maybe even go to 4.5%?

Oh the horror! I say go for it.

 

[MarieIG]

Good point. If I pass, the DW will get roughly 60% of my pension plus my SS which would be about $45K/yr. The portfolio would produce another $70K even if the market tanked almost 50%. So she should be in reasonably good shape.

If DW is fine with it, I think you're fine with a bump up to 4.25. In the event of a market crash however, I would probably pull back a bit. Enjoy!

 

[Scuba]

Keeping it simple... if your pension and SS cover expenses in 5 years, then technically you are fine with ~ a 20% WR. It's simple arithmetic (slightly less simple considering inflation, but close enough for chatting about).



Of course you probably don't want to run your portfolio down to zero, you want some buffer for whatever. But that little exercise outlines the boundary conditions.



Talking about 3.75% versus 4.25% is trivial compared to 20%. Just calculate out, or use FIRECalc on a 5 year period to see what a small difference 3.75% versus 4.25%, or even 8.96% (random number) makes over 5 years.



Go for it, or more.



-ERD50

+1

 

[dtbach]

Thanks for all the comments. I kept the same "payment plan" from my IRA accounts since that was the "easy" way. So will just have more taken out to the tune of around 4.5% on average.