New Withdrawal Rate Study

[SteveR]

So, SteveR and bosco, how are you estimating the amount of $$$ you want in your portfolio at the time you RE? 

Anyway, I'm curious, what rules of thumb or guidelines are you using to estimate the size of retirement portfolio you'll need in order to RE given your other sources of retirement income?  Do those rules of thumb include an SWR assumption such as 4% or another number?
 

Bosco beat me to it...but here is my 2 cents on the topic.

Rule of Thumb...?

I did my calculations the hard way....brute spredsheet calculations and projections of conservative expected returns on a mixed portfolio based on real data from actual expenses and projections of future spending needs.  Throw in a debt reduction plan that has been active for 15 years and you have a pretty good idea of what you need to live on for the expected duration of your life.  My number was determined several years ago and we passed it a few times....going both ways.  :  

SWR is only meaningful for us beyond year 20 of retirement.  Before that income needs are based on pretty solid expense expectations.  We have padded the nest egg enough to ER now but fully paid health insurance coverage is only 14 months away.  With our health issues we decided it was the most intellegent thing to do.  Since the major factors in an ER plan are covered our nest egg just allow us to have a much higher standard of living.  We have a fall back level that is still very comfortable so given our current assets and spending needs we feel pretty safe in our estimates.  The worse thing that can happen is that we die before we spend it all.  I'll take that risk.  

The number we calculated years back has changed some since then...mostly up due to the 2000-2001 beating we got in the markets at the time.  I did read the early Trinity studies in the mid 1990's so I did have an idea of "possible" withdraw rates based on some general portfolio mixes so I was not totally flying blind.  As I said, my number is mine alone...it is unique to me and my situation.  It won't work for you.  Your situation will be unique to you and your assets and income sources will be different.  If you have no penson and no paid health insurance and all your income will come from your nest egg then SWR will be much more important to you.  I agree with ESRBob and his 4%/95% rule.  Also, working part time is always an option if things go south.  Preservation of principal is a key factor in this since you might out live your nest egg if you calculate depleting it at age 92.  

Safe is relative to your ability to save, invest and spend to a flexible budget.  If you can balance your expenses to meet your income stream minus a safety factor you will be fine using whatever noteworthy SWR you choose.  How much is too much?  It depends!    

Using FIRECalc my number is 100% safe even with a 50:50 mix of stocks and bonds and taking SS late and living to 100.  

 

[youbet]

 If you have no penson and no paid health insurance and all your income will come from your nest egg then SWR will be much more important to you.

Thanks SteveR and bosco......very interesting.

You're right, every situation is different.  And thanks to your thorough explanation, I understand your rational now.  Of course, with pensions predominantly covering your retirement budgets, SWR from your portfolio is less critcal and indeed icing on the cake. 

In my case, while I'll have partially subsidized medical coverage and a small non-cola pension, my primary income source will be from my portfolio.  Since (WR) (Portfolio $) = income, I had to make some assumption regarding WR to solve for the amount I needed in my portfolio to generate my required income.  I used the commonly accepted figure of 4% and therefore waited until I had accumulated 25X desired income.  My small non-COLA pension is my safety net.

Given all the chatter on the board lately that 4% is very conservative (perhaps too conservative), I'm feeling pretty comfortable pulling the plug four weeks from tomorrow.  In fact, perhaps I hung around a year or two too long.  Although, since my job has been relatively enjoyable, no regrets.

Thanks for your info and the interesting discussion.

 

[Yipee-Ki-O]

While this Scott Burn's column doesn't specifically address withdrawal rates, it does have an interesting take on its corolary, How much is enough?

Indeed, if you start thinking about either retirement or being "rich" in terms of dollars, it's very likely you'll never get there, because the dollar target is constantly moving.

The experience target gives you power that you'll never have if you wait on the stock and bond markets. Those who really want to retire can figure out ways to live that will cut their expenses while enhancing their experience of life.



At some point retiring early becomes a leap of faith that you'll be flexible enough and savvy enough to overcome challenges that happen along the way. And if you retire sans COLA pension and/or medical coverage, you just have to be willing to be especially nimble. yko

 

[dory36]

His starting quote is a good one...

"You know you are rich when more money won't change where you live, what you eat, what you drive or who you sleep with."

 

[obryanjf]

Maybe it would help me if you could give an example. 

The minimum I'd need in retirement is $40K/yr. Absolutely can't go below that, so a variable withdrawal plan must have this amount as a fixed minimum, anything less would be a problem. 

With the traditional 4% guideline, I'd need a $1,000,000 portfolio before retiring and I'd take $40K/yr inflation adjusted.  (Of course, as the years go by, I'd reevaluate my situation based on actual results.  But, I'd feel confident I could continue the 4% based on the fact that, historically, 4% has always survived.)

What portfolio value would I need to retire with the system you're suggesting to support a minimum $40K/yr withdrawal?

This was good run, previousily the floor was set at 80% of initial draw, but this made me think of setting at an absolute inflation adjusted value for all sims.  I still have a small error in the minimum methodology when the inflation adjsutment takes place, but I think this will amount to a couple 100 bucks one way or the other.  Now all the runs have a 40k inflation adjusted minimum built in. This has no extras, No Ty and No part time work built in.

job

 

[Nords]

His starting quote is a good one...
"You know you are rich when more money won't change where you live, what you eat, what you drive or who you sleep with."

Ya know, I think Scott Burns' unknown reader may have just entered the Quotation Hall of Fame with that one...

 

[cute fuzzy bunny]

However, according to the quote, Ken Lay and Bernie Ebbers are "rich"

 

[Nords]

Ken Lay and Bernie Ebbers are "rich"

... in experience!

 

[cute fuzzy bunny]

NO amount of money is going to change where they live, what they eat, what they drive, or who is having sex with them...

 

[IBWino]

NO amount of money is going to change where they live, what they eat, what they drive, or who is having sex with them...

 

[cute fuzzy bunny]

...and dont forget to tip your waitress! I'll be here all week!!!