Need Help With Withdrawal Strategy

[Mr._johngalt]

Hi GDER. A couple of quick points. A lot of us (most?)
ERs have SS as our eventual base and not the ER
"gravy". Also, re. your formula and comment about
when ER is "possible", it's possible for most people
(read Terhorst again) when they make up their minds to do it. Remember, I started (ER) with practically nothing
and never really saved/invested until AFTER I decided
to go at age 49. Okay, I had some luck, but I'm still
retired 10 years later. Motivation is a lot more important
than any formula. IMHO this is true for just about any endeavor in life.

 

[proud_texan]

I've been using FIRECalc to run various withdrawal scenarios.
It allows you to determine what you can withdraw with various percentages of safety and shows you what your mean balance might be in 35-40 years. I don't want a balance!

How do I calculate what we can withdraw and make it last for 35 years with no balance at the end. We don't need or want to leave behind hundreds and thousands of dollars to our heirs. They're getting our real estate properties as it is.

My wife and I want to spend while we're alive.

Any suggestions?

 

[Mr._johngalt]

Hi proud Texan! I do not have a suggestion on how anyone could spend down to -0- by their demise.
It is mathematically impossible. I am now compelled
to repeat one of my favorite movie lines (Al Pacino
in 'Heat'). "You can get killed walkin' your doggie!"
John Ritter had plans for his future. Not much use now.

 

[proud_texan]

My wife and I both work for the DOD, so we have excellent benefits. Like you, our combined pensions are much more than our monthly expenses. In fact, we're taking a penalty by retiring early, but we are still getting a raise in our take home pay because we lived on so little and saved so much for so long.

Our medical is also paid for life. We have long-term care insurance for later, but I might like to have a little bit of reserve in case we need to go into assisted living. I have rental income though, so that won't be a major concern. I can also pawn my kids' inheritance if it becomes necessary.

My investment money is only needed for travel and dire emergencies. I just never want to miss out on something that I really wanted to do in life because I had to die with money in the bank.

 

[Telly]

How do I calculate what we can withdraw and make it last for 35 years with no balance at the end.  

I don't see how this CAN EVER be calculated. FIRECalc uses historical data, and creates multiple passes. Looking at the graph shows all the possible outcomes using the historical data with the parameters you have input. Solving for 100% certainty (within the bounds of historical data, of course) will give end values from just greater than zero, to many millions of $ left over. All because of the possible variability year to year compounded by the years of run.

If I remember correctly, I-Orp has you put in your own fixed values of return for the different assets. Except for the tax planning effects, I guess I don't see how I-ORP is any better than just making your own spread sheet, and coming up with your own return values. In fact, if you make your own spread sheet, you could at least vary the return year to year. But unless you are going to use many many passes of historical data, where will these return % come from for each year?

I have made a spreadsheet with quite a bit of detail, but I still have to guess what the returns will be. And that's all they are, guesses.

I can probably pull returns out of my rear just as well as anybody else, but I know I am totally incapable of predicting down to zero dollars from 35 years off!

As johng said, it is mathematically impossible to do so. However, for a hefty up front fee, I'll be glad to try for anyone!

 

[proud_texan]

New exit strategy: spend all my money then die being shot by a jealous husband when I'm 95.

 

[sgeeeee]

. . .I don't want a balance!

How do I calculate what we can withdraw and make it last for 35 years with no balance at the end.  . .

I think you're thinking too narrowly. I not only want to leave 0 balance, I'd like the last check I write to bounce.

Who needs good credit when they're dead.

 

[Ted]

Well I like www.i-orp.com.  Projected pension + SS is more than our projected annual expenses, so unless some fool demon-rat 'means-tests' future SS, I have a nice built-in cushion.

In a sense, social security benefits are "means-tested," in that they become subject to income tax when a person's total taxable income exceeds a certain amount. I'm not complaining about this, because people who have that much income can live comfortably on it.

 

[Mr._johngalt]

Yes Ted, I agree that the taxability after a point on SS
benefits is "means testing". Guess that's another
government rule that makes some sense, even to me.

 

[WoolyBully]

Somewhat OT, but I generally don't agree with any means testing. I think that everyone should get equal benefits. I call it the double Robin Hood effect. Take from the rich, give to the poor, but the rich get nothing back. If I pay twice as much as someone else, shouldn't I get something in return?

The overnment should provide equal services to all. It does that in the form of the Military and Police services, transportation, and regulatory agencies like commerce, communications, environmental, etc. It's not until one gets to the social programs that the means test arise. It's usually done to hide mismanagement or some sort of pyramid scheme.

I thiink that the progressive tax systems and the various means testing that goes on generates a sense of futility in trying make ones self better off, since proportionally, the harder I work and the more I make, the less I get back in return.

 

[Telly]

There is a land mine in the tax law with regards to SS.

For a married couple filing jointly:

a)  Take your annual SS Benefit, and divide it by 2.

b)  Then sum your Taxable AND None-Taxable Income (that includes Pension Payments, you aren't escaping this!).

c)  Add (a) + (b).

d)  Subtract $32,000 from the result.

e)  If the result is < or = 0, none of the SS Benefit will be taxed.  If > than 0, then the benefit starts to be taxed (but don't worry, no more than 85% of your SS Benefit will be taxed  ).

f)  Now play with the simple form of the tax-elegibility equation above.  The 32k is fixed, it is NOT inflation indexed.  So as your income needs increase with inflation, you get taxed more on SS Bennys.  
And even if you kept your income requirement from your investments or pension constant, the increasing SS Benny due to COLA will boost the taxable amount.
Now, try a more realistic scenario... boost BOTH of those amounts due to inflation... tax tax tax!

Now, if you are well below age 62, don't be thinking about this using TODAY'S dollar amounts.  You need to inflate and adjust them for the future.  And remember, that 32k trigger STAYS at 32k!

Inflation To Taxation... sounds like some sort of punk band.  

First there is the SS Payroll Tax.
Then get taxed on the use of SS.
Can we come up with another layer of tax on it?  That's a rhetorical question  

 

[Mr._johngalt]

Telly, you are good. I'm going to answer your
"rhetorical" question. Yes, we can come up with another layer of tax, and in time we will. Excellent point though about the fixed nature of the 32K and possible
effects of inflation. This will eventually amount to additonal taxes even if the tax code is untouched.

 

[Mr._johngalt]

Hi GDER! Whether the taxability of SS at a higher
income level is "means testing" or not is just playing with semantics. I hope you are right and that you get all
that is coming to you, rather than have it siphoned off
for distribution to someone more "needy". Unfortunately
that is exactly the sort of scheme our "leaders" are apt
to cook up. Wealth redistribution from the better off to
the less fortunate is high on their list of PC/feel good/
vote buying tricks. I can easily envision them installing
the one you suggested. Hope I'm wrong, but that
happens so seldom .

 

[Cut-Throat]

First there is the SS Payroll Tax.
Then get taxed on the use of SS.
Can we come up with another layer of tax on it? That's a rhetorical question

Yup, they've got to pay for those tax cuts and the War somehow! - And we still have a 500 Billion Deficeit!!

 

[Cut-Throat]

but a tax cut is one thing that does NOT have to be paid for

Really !! - If the overall budget of the government is in the red and the govenment (Bush) decides to not collect as much (mostly from the very wealthy), it will have to borrow even more somewhere else to make up the difference or cut spending to pay for it!

I'm all in favor of a tax cut, as long as the government makes spending cuts to compensate for them. The last tax cut was not tied to a spending cut, but a spending increase!

All you guys do is complain about taxes. Well, the GOP is in charge of the Legislature and the Presidency - when are they gonna start cutting the programs, so they can lower your taxes!

I have no polital agenda other than explaining the truth. And as Jack says "You can't handle the truth".

Listen buddy! - I'm a Social Liberal and a fiscal conservative. The only president that fit this bill was Clinton. Reagan was the all time spending leader until 'W' showed up.

You have no idea what you're talking about!

 

[Mr._johngalt]

Wow GDER! You out-ranted the expert (that would be me. I too think cut-throat is pretty much out to lunch on how government and taxes work, and your explanation was really excellent. Short and to the point.
Alas, I find myself surrounded by cut--throat clones.
I do a fair job of avoiding them though. One last thought. I will gladly take any money coming from the
government, i.e. tax refunds, tax cuts, or they can just
print it up. I don't care. I have full confidence in my abilities to
manage it, and little in theirs. That goes for my life also.

 

[Cut-Throat]

GDER,

This is just increasing the amount of welfare.  If it's welfare, call it welfare not a 'tax cut', 'child credit' or 'earned income credit' etc.  

I spent 4 years in the Navy, and when I was in, we had a name for people like you ---------------------------------------    L-I-F-E-R.  

Lazy - Ineffective - Fatasses - Expecting - Retirement

Your whole existence comes from the government! - The defense dept. is the most bloated area of government that we have. You are the reason our taxes are too high!

At least I made it on my own in the private sector. I pay your salary and your retirement benefits. I see little difference in  Lifers and Welfare collectors.

 

[unclemick]

All this is great stuff, reminds of 35 years past when I would tell my fellow engineers what a liberal democrat I was to simulate debate. Luckily it didn't prevent them from helping to provide the bulk of my early investment education.

My question is this - have you altered your asset allocation, bond duration, or withdrawal rate in lieu of your view of the future.

Now that I've hit the big 60, FIREcalc says I can take a lot more than SEC average yield mainly due to SS in six years - more than we are spending. So the future is bright?, uncertain? or grim? - ie let it ride tax sheltered, take it out or invent new ways to party now while we're young.

 

[Cut-Throat]

Unclemick,

My question is this - have you altered your asset allocation, bond duration, or withdrawal rate in lieu of your view of the future.

I have altered my asset allocation greatly since the run-up of the stock market this year. I did this in Mid- August. I'm 50% Stock (Mostly large Cap) and 50% Cash. If the market continues to rally, I'll pull out another 10% for each rise of 500 points on the Dow.

My personal reasoning is this. The S&P 500 PE sits at about 22 right now - Very over valued - and is predicting a booming economy for its value. However if this economy does not start producing great jobs (not the $8 a hour jobs that are everywhere) by next year, there is no way that the economy can grow to justify the valuations of the current PE. We could then see another major sell off that we saw in 2002. I'll start buying stocks again, if this selloff occurs.

That's why I'm not into bonds right now. I want the cash for purchasing stocks, in case the sell off occurs. Also, with interest rates at historic lows, it looks like there is only one place for interest rates to go. And then you know what happens to bonds.

As far as my withdrawal rate - I'm not withdrawing. My wife is still working - This covers Health care and were still stashing 30 G's a year.

I agree with you on spending more up front and enjoying life. I set my withdrawal rate at about 3%, which will do very nicely. But then I end up with all kinds of dough at age 95. So I factored in another 30 Grand a year for Travel and Entertainment until age 83. and then go back to the 3%. This is all with 3% return.

If you have not ever used Quicken, I would suggest it. They have a retirement planner that you can schedule an unlimited number of events over time and you can play 'what if' scenarios very easily. great for budgeting and any other personal finance need! Prints out some nifty graphs too. I highly recommend it.

 

[Mr._johngalt]

Thanks cut=throat. I am almost completely switched into bonds, bond funds and bond like entities. Am I worried about interest rates rising? You bet! With no common stock I have to get my protection (inflation and
otherwise) elsewhere, like real estate. As far as
pulling more out now so you can improve your SOL,
I suggest you find ways to live better without spending more money. It's not that hard. Whoever said "The
best things in life are free!" knew what they were
talking about.

 

[Cut-Throat]

johngalt,

As far as
pulling more out now so you can improve your SOL,
I suggest you find ways to live better without spending more money. It's not that hard.

As I said in my post, Currently I am not withdrawing any money right now. In fact I'm still saving over 30 Grand a year. I won't start my withdrawal until my wife retires in about 8 years.

When I do start withdrawals, I recognize that life is finite and I would rather spend it than die with it. As the old saying - "you can't take it with you"

There are a few things that my wife and I want to do when she retires that are not cheap. One is a 2 month wildlife Safari in Africa.

 

[Mr._johngalt]

I think Cut-Throat's planned ER lifestyle is a bit different
than most of us. I can understand the appeal of an
African safari. Personally, I would rather be boiled in my own juices, but I think it's neat for others if that's what
they like to do.

 

[Bob Smith]

Cut-Throat, I pulled out my Quicken Retirement Planner as you suggested and entered in my financial assets. I entered an assumed inflation rate of 3% and an assumed total return of 5.5%. I thought a 2.5% real return would be pretty conservative, and I figure that I can do at least that well with a mix of TIPS plus roughly a fourth to a third in Vanguard's Total Stock fund. Quicken gives me a green light, and says my money will last for 45 years, with $300,000 to spare. The plan assumes I spend 3.8% of the portfolio in the first year, and keep pace with inflation thereafter.

When I go into Quicken and revise both the inflation rate and the anticipated returns up-wards (17.5% and 20% respectively), it gives me a red light and tells me my money will last only 37 years. This is despite the fact that both scenarios assume a 2.5% real return. I'm having a hard time understanding why this is so. Shouldn't the money last the same length of time as long as the return beats inflation by 2.5%? Is it because I'm spending more than 2.5%? I want to be sure I understand what would happen if we were to encounter inflation that's out of control (or deflation, for that matter). Can someone explain that? Thanks.

 

[Ted]

Shouldn't the money last the same length of time as long as the return beats inflation by 2.5%?

With inflation at 3% and your total return at 5.5%, the actual real rate of return is given by:
1 - (1.055/1.03) = 1 - 1.02427 = 0.02427, or 2.427%

With inflation at 17.5% and your total return at 20% (hopefully not a realistic scenario) your actual real rate of return would be:
1 - (1.20/1.175) = 1 - 1.02128 = 0.02128, or 2.128%.

In other words, simply subtracting the inflation rate from the total return gives an approximation of the real rate of return that becomes less accurate with higher inflation (which would also probably cause a person's tax rate to increase, although there is no way of predicting how tax brackets would change). I'd say that you are pretty secure if a portfolio of mostly TIPs will sustain your spending needs for more than 35 years.

 

[Bob Smith]

Thanks Ted. That formula is exactly what I need. By the way, I have one follow-up question: Do TIPS work the same way? In other words, will my money last longer with TIPS if inflation is low, or do they protect my purchasing power regardless of inflation?