Most conservative, yet sensible, SWR and/or methods

[garyt]

To me, assuming you're not 90 years old, a SWR involves two criteria:
How much is in your portfolio
How much you spend

It really depends on how big your portfolio is.

Exactly.

 

[BreathFree]

The paradigm around here seems to be that one picks an SWR, chisels it into a stone tablet, and that's the end of worrying about it.

I agree that is not sensible, that is why I include "for planning purposes" and not "set in stone" in my original question.

Also, this was just for fun. I meant it as a subjective question based more on what the board "feels" is the lower limit of their conservative estimates of WR rather than an objective analysis with charts and numbers and stuff.

 

[BreathFree]

IMO a very conservative SWR is no greater than the average yield of your portfolio. At that SWR you avoid selling equities so they can help you keep pace with inflation. IIRC when this was polled years ago most people reported an average yield of 2.something%.

If you figure your equities can outpace inflation, which is less conservative but IMO reasonable, your SWR is higher than your average yield. How much higher? Maybe 1%. So that makes a conservative but reasonable SWR 2.x% + 1% = 3.x%.

This is exactly how I arrived at my planned WR.

Also, I like that with a 50/50 AA, a 50% decrease in stocks, with little or no decrease in the other 50% (bonds/CDs/Cash), will simply turn your WR dollar amount from a 3% to a 4% WR.

 

[friar1610]

After having the forum followed for 4+ years now, I still get surprised that the subject gets brought up again and again as discussing it is beneath the average membership level...

Ever considered that there may be new members who haven't yet had the opportunity to accumulate your 4+ years of wisdom?

 

[joylesshusband]

Ever considered that there may be new members who haven't yet had the opportunity to accumulate your 4+ years of wisdom?

The 4 years was not meant as a term to accumulate wisdom.
It was meant to illustrate how dumb I actually am, to still get surprised despite my 4 years of exposure here.

 

[friar1610]

The 4 years was not meant as a term to accumulate wisdom.
It was meant to illustrate how dumb I actually am, to still get surprised despite my 4 years of exposure here.

Aha...I think I understand. You meant "...as if understanding it...." Yes?

 

[cooch96]

The VPW method over at bogleheads says I can Start at 5.6% and go up from there, when I reach my target age and net asset goal at 51 and $2MM. This is assuming I live 10 years longer than average males in my family and DW continues to work enough to fund her Starbucks habit.
So for me, I wouldn’t sweat starting at 6 or 7%, but I’d have to slash my discretionary spending at every bear market. But that isn’t bad, it just means I’d go camping that year in the Rockies instead of New Zealand.

 

[W2R]

I struggled to word my question in a way that would not misconstrue. I failed obviously. I should have said "What is the most conservative WR and/or method that you find is still sensible, for planning purposes that will maintain your standard of living?"

Oh wow, I'm sorry! I just didn't get it. Oops. Now it makes more sense to me, thanks.

Then the answer is just under 1%, in order to spend exactly what I spent last year (which is about the same as previous years).

I am getting a nice raise in SS this summer so I won't need to withdraw as much from my portfolio as I have been withdrawing up to now.

 

[NW-Bound]

When I started retirement 6 years ago, I figured that my expenses could run as high as 5% if need be, because SS would eventually reduce the WR.

Then, my expenses dropped and my stash grew such that the WR is currently about 2.5%, still no SS.

I feel no desire to blow any extra dough, as I have all that I wanted. Maybe something will come up, and makes me drool to have it. Or the market will crash and drive my WR up. Dunno.

 

[friar1610]

A sensible method, IMO, would involve one's ability to adapt to changing circumstances.

One of the very well respected posters on the Boglehead site (and, I believe, a founder of it), Taylor Larimore, has often written that he thinks people spend too much time obsessing over SWRs. He says that in good years (for the performance of his portfolio) he and his wife ate out more, took vacations, etc. In leaner years they just tightened their belts and didn't spend as much. That seemed to work for him. He is in his early 90s, having retired in his late 50s, I believe, so his method has stood the test of time.

 

[Dtail]

One of the very well respected posters on the Boglehead site (and, I believe, a founder of it), Taylor Larimore, has often written that he thinks people spend too much time obsessing over SWRs. He says that in good years (for the performance of his portfolio) he and his wife ate out more, took vacations, etc. In leaner years they just tightened their belts and didn't spend as much. That seemed to work for him. He is in his early 90s, having retired in his late 50s, I believe, so his method has stood the test of time.

It should be noted that Taylor retired at the beginning of the best sequence in history in 1982 with I think the equivalent in today's dollars of 2.5mm.
So he had a good stash and definitely some historic luck too.
I do get your point though.

 

[audreyh1]

I am planning a withdrawal or 3% of remaining portfolio, but I also see a withdrawal rate as low as 2.5% as sensible, and may drop to that if I need to preserve my principal in down markets, but I couldn’t imagine using any percentage rates below that.

I know others will have their own ideas of what overly conservative looks like, and I look forward to what that might be.

You do realize that if your portfolio has already fallen 20%, and on top of that you reduce your withdrawal another 16.7% because you dropped from 3% to 2.5%, your total income drop is seriously magnified.

Personally I’m just going to ride the income rollercoaster. By my calcs I could go as high as 4.35% withdrawal of remaining portfolio, and on average end with the same portfolio I started, as long as I am willing to suffer a real income drop of ~55% under the worst case historical scenario in the interim. I still would survive with half my stash in real terms after 30 years. This is for 50/50 TSM/5yr Treasury. Those numbers are off the top of my head, I can refine them later.

 

[BreathFree]

You do realize that if your portfolio has already fallen 20%, and on top of that you reduce your withdrawal another 16.7% because you dropped from 3% to 2.5%, your total income drop is seriously magnified.

Personally I’m just going to ride the income rollercoaster. By my calcs I could go as high as 4.35% withdrawal of remaining portfolio, and on average end with the same portfolio I started, as long as I am willing to suffer a real income drop of ~55% under the worst case historical scenario in the interim. I still would survive with half my stash in real terms after 30 years. This is for 50/50 TSM/5yr Treasury. Those numbers are off the top of my head, I can refine them later.

Yes, and I agree.

A prodigious poster on this forum, and it may be you, I can't remember their name, mentioned that their plan was to withdraw a fixed percentage of remaining portfolio and keep any unused amount that year in a separate savings account to draw from when the portfolio is down or they just needed additional income.

I liked this idea, and that is my plan. I understand money is fungible, so if your using a reduced withdrawal from your investment accounts for the current year (2.5%) and making up the difference from a separate savings you built from previous year's excess withdraws, your actual current withdrawal is higher than the 2.5 and previous year's withdrawal is actually lower since the entire withdraw wasn't spent.

But I like this idea of keeping some powder dry, if nothing else it builds some variability into your WR.

I don't honestly know what I would do in a prolonged down market. I know I would feel uncomfortable if I was drawing on a dwindling balance, so I would either have to drastically cut spending along with a reduced WR or maybe even throw in the towel and look for supplemental income.

 

[Lawrence of Suburbia]

I'm going with 4%, so as to have some enjoyment in retirement. But if my portfolio drops 20% in a really rotten market, I'll still take 4% of my then-current portfolio (i.e., cut back on travel, daily coffee outings, restaurant visits, Formula One racing, etc. until the portfolio recovers). Never run out of money, hopefully.

 

[Cayman]

Those with pension funds and/or approaching FRA for SS may use a higher WR than younger retirees who do not have pensions nor access to SS benefits for many years.

My target WR is <2.7%. (I'm 50). We may increase our WR as we approach 60. We enjoy ourselves now, so no need to spend more. For a big down turn, we'll spend less and 10 years of living expenses in cash will help soften the blow.

 

[jollystomper]

So, my question is a little different. What is the least safe withdrawal rate and/or method that you find is still sensible, for planning purposes that will maintain your standard of living?

Our situation is impacted by having a pension (non-COLA), which gives us the ability to have relatively lower SWR.

Our plan is simple, and will be re-evaluated yearly. Our initial SWR will be based on the difference between my pension and our budgeted expense level, which will be 2.3%. We will review yearly adjust based on our (a) our actual spending, and (b) our portfolio gains/losses. In the best case, if we come in under budget and we have portfolio gains, we can consider to increase our spending and go for a larger SWR. In the worst case, we will keep our SWR as a percent of our remaining portfolio and, if necessary, adjust our budget (the pension will cover the majority of our "need" expenses, so any impact will be on "wants" and thus not as severe).

When I reach 63 we will begin evaluating taking SS - that will reduce our SWR somewhat, but we not we have to account for inflation with my non-COLA person. But in "normal' estimates, whenever we choose to take SS our SWR would be under 2%, so that gives us some margin for error.

 

[LARS]

I don't know what my annual withdraw rate is because I don't know how much I spend.

I know how much I've got and that's enough for me.

Intuitively that is basically my approach as well...

 

[Dtail]

Our situation is impacted by having a pension (non-COLA), which gives us the ability to have relatively lower SWR.

Our plan is simple, and will be re-evaluated yearly. Our initial SWR will be based on the difference between my pension and our budgeted expense level, which will be 2.3%. We will review yearly adjust based on our (a) our actual spending, and (b) our portfolio gains/losses. In the best case, if we come in under budget and we have portfolio gains, we can consider to increase our spending and go for a larger SWR. In the worst case, we will keep our SWR as a percent of our remaining portfolio and, if necessary, adjust our budget (the pension will cover the majority of our "need" expenses, so any impact will be on "wants" and thus not as severe).

When I reach 63 we will begin evaluating taking SS - that will reduce our SWR somewhat, but we not we have to account for inflation with my non-COLA person. But in "normal' estimates, whenever we choose to take SS our SWR would be under 2%, so that gives us some margin for error.

It appears that many people in this forum who do use some form of WR% versus a more generic budgeting/spending, are gravitating towards some form of % of remaining portfolio.
I do like this concept, as IMO it does effectively subtract out the inflation portion of the equation.

 

[W2R]

It appears that many people in this forum who do use some form of WR% versus a more generic budgeting/spending, are gravitating towards some form of % of remaining portfolio.
I do like this concept, as IMO it does effectively subtract out the inflation portion of the equation.

I like the "% of the prior 12/31 portfolio balance" method because so far it seems easier and more foolproof.

However, every year I figure out what I spent, and record three percentages:

(1) what percentage of the prior 12/31 value of my portfolio that was;
(2) what percentage it would have been if I was following the traditional CPI increased method based on my initial portfolio value; and
(3) what percentage it would have been based on my lowest portfolio value at the depths of the Great Recession (on 3/9/2009).

That way I know I am not hiding my head in the sand.

 

[Dtail]

I like the "% of the prior 12/31 portfolio balance" method because so far it seems easier and more foolproof.

However, every year I figure out what I spent, and record three percentages:

(1) what percentage of the prior 12/31 value of my portfolio that was;
(2) what percentage it would have been if I was following the traditional CPI increased method based on my initial portfolio value; and
(3) what percentage it would have been based on my lowest portfolio value at the depths of the Great Recession (on 3/9/2009).

That way I know I am not hiding my head in the sand.

Do you use one of the 3 methodologies mentioned above or just use as a "am I doing okay" reference?
Interesting that you still use number 2 as a reference point.

 

[W2R]

Do you use one of the 3 methodologies mentioned above or just use as a "am I doing okay" reference?
Interesting that you still use number 2 as a reference point.

I regard number 1 as my main methodology, but I don't actually spend the full 3.5% that I feel would be OK because I am used to a certain lifestyle and only spend that much. So, I have been under 3.5% both by #1 and #2 each year since I retired in 2010.

My relatives (and probably many on the forum) think I am cuckoo for not spending more and living the high life. But, I am happy with things like they are now and I have no desire for any more possessions or experiences than what I have been paying for. Now if I could pay for an extra 20 years of expected lifespan, I would, but unfortunately everyone has to deal with the Grim Reaper at some point.

Aside from the dream home, my average spending percentages so far have been 1.98% and 2.17% by the #1 and #2 methods. So, I have had a lot of wiggle room.

If I *did* withdraw 3.5% and then bank the excess over what I spent, like Audreyh1 does, that would have been more than enough to cover the cost of my dream home in 2015 and related costs, as well as the rest of my living expenses.

As for method #3 (percent of my 3/9/2009 portfolio value), I spent 3.68% in 2013 but otherwise have been below 3.5%. I calculate that mostly out of curiousity and to reassure myself that I would be OK in the event of another Great Recession of that magnitude.

So in answer to your question, a lot of this is used as "am I doing OK?" information. But #1 is my main method and what I rely upon. If I ever decide to spend more, #1 will be my limit.

 

[Dtail]

I regard number 1 as my main methodology, but I don't actually spend the full 3.5% that I feel would be OK because I am used to a certain lifestyle and only spend that much. So, I have been under 3.5% both by #1 and #2 each year since I retired in 2010.

My relatives (and probably many on the forum) think I am cuckoo for not spending more and living the high life. But, I am happy with things like they are now and I have no desire for any more possessions or experiences than what I have been paying for. Now if I could pay for an extra 20 years of expected lifespan, I would, but unfortunately everyone has to deal with the Grim Reaper at some point.

Aside from the dream home, my average spending percentages so far have been 1.98% and 2.17% by the #1 and #2 methods. So, I have had a lot of wiggle room.

If I *did* withdraw 3.5% and then bank the excess over what I spent, like Audreyh1 does, that would have been more than enough to cover the cost of my dream home in 2015 and related costs, as well as the rest of my living expenses.

As for method #3 (percent of my 3/9/2009 portfolio value), I spent 3.68% in 2013 but otherwise have been below 3.5%. I calculate that mostly out of curiousity and to reassure myself that I would be OK in the event of another Great Recession of that magnitude.

So in answer to your question, a lot of this is used as "am I doing OK?" information. But #1 is my main method and what I rely upon.

Thanks W2R.
Seems to be opinions on both sides on whether to use the Audreyh1 methodology for the excess or to just take out one's actual usage (or reimburse at year end) for the year.
I know money is fungible in the end.

 

[SecondCor521]

Thanks W2R.
Seems to be opinions on both sides on whether to use the Audreyh1 methodology for the excess or to just take out one's actual usage (or reimburse at year end) for the year.
I know money is fungible in the end.

Emphasis added.

It is fungible except for (at least) three things:

1. What it is invested in. If the excess amount left in the portfolio would have been in stocks but being withdrawn is held in cash, obviously that increases the percentage of the total portfolio allocated to cash and decreases the percentage off the total portfolio allocated to stocks. This may or may not be what someone wants, but it obviously can result in a different AA which results in different responses to inflation and risk and rate of return.

2. Taxes. I think often but not always, withdrawing money from the portfolio and putting it into a reserve account of some kind has an effect on one's taxes. Roth conversions and traditional IRA disbursements both create taxable ordinary income. Distributions from taxable accounts if not done in-kind are likely to create capital gains and the associated taxes.

3. Reversability. In some situations (like mine) putting any money back into a tax-sheltered account after it has been withdrawn is difficult to impossible. 72(t)'s preclude contributions to the IRAs being used for it. Contributions to a 401(k) are typically not allowed if one has left service. Contributions to a traditional IRA or Roth IRA if one is using Roth conversions are limited to taxable earned income, which some people, including me, don't currently have.

The above is intended as food for thought, not as any sort of criticism of audreyh1's or anyone else's methods. Everyone has to do what works for them and their situation and is something that they understand and feel comfortable with.

 

[NW-Bound]

Regarding WR using a percentage of the current portfolio, I will not fool myself that I can maintain the current 2.5% in a future recession.

I may be frugal, but I have a certain living standard I like to keep. Besides, I cannot take it with me. At the bottom of the market in March 2009, I had 63% of what I had in October 2007. My current 2.5% would have to be 4% to get the same dollar amount.

Ah, but that will also be when I seriously think about starting SS.

 

[audreyh1]

Yes, and I agree.

A prodigious poster on this forum, and it may be you, I can't remember their name, mentioned that their plan was to withdraw a fixed percentage of remaining portfolio and keep any unused amount that year in a separate savings account to draw from when the portfolio is down or they just needed additional income.

I liked this idea, and that is my plan. I understand money is fungible, so if your using a reduced withdrawal from your investment accounts for the current year (2.5%) and making up the difference from a separate savings you built from previous year's excess withdraws, your actual current withdrawal is higher than the 2.5 and previous year's withdrawal is actually lower since the entire withdraw wasn't spent.

But I like this idea of keeping some powder dry, if nothing else it builds some variability into your WR.

I don't honestly know what I would do in a prolonged down market. I know I would feel uncomfortable if I was drawing on a dwindling balance, so I would either have to drastically cut spending along with a reduced WR or maybe even throw in the towel and look for supplemental income.

Maybe it was me . Since the markets have done well for the past several years our portfolio has grown such that our annual withdrawal well exceeds our spending. So we have been letting unspent funds accumulate in short term investments as I prefer not to expose them to long-term market risks. One day our retirement portfolio could shrink and we might find ourselves with a much smaller withdrawal.

No, your current withdrawal rate is not necessarily going up if you spend some of your excess savings - it depends on how you manage your assets. For me those funds were already withdrawn in prior years. They no longer count as part of any withdrawal. It really does not matter when you spend them. If you withdrew the funds in year 1 but don’t spend some of them until year 3, it makes no difference.

Some people like to consider their entire investable assets when they calculate their AA and withdrawal rate. Or sometimes they reinvest unspent funds which means they actually lowered their withdrawal rate, or they reduce their withdrawal the next year since they don’t need as much. It depends on your long-term goals. If you want more to pass on to heirs then it may make sense to reduce your withdrawal rate. It’s no longer about portfolio survival if you have already picked a conservative withdrawal rate.

I only withdraw annually from my retirement portfolio, and maintain an AA and rebalance that portfolio. What I do with funds outside of that portfolio has no bearing on the AA or rebalancing. For me this keeps things clean and simple.

The “money is fungible” motto does not quite apply, as it makes a huge difference what that money is invested in. You have to be very clear in terms of what you are withdrawing from, what you apply an AA to, what you calculate your portfolio survival on. I always approached it from the point of view that as long as I had a big enough chunk invested long term to meet my retirement income goals, it didn’t matter what I did with the rest of it.