Poll: what's your burn rate?

[wabmester]

I don't track expenses very closely, but I know our baseline, and I do track expenses on things like property improvements. Those big ticket items put us at around 5% last year. This year, it'll be closer to 3%.

 

[Newell]

I think you need another category: Retired but don't need/want withdrawals

 

[poyet]

Which is negative and retired. My case. Still adding to the stash.
Patrice.

 

[unclemick]

Hmmm

As high as 17% - 'honey I sold the duplex' to negative numbers - reinvesting the divs - age 55 pension - I ain't never gonna try to put this crap on a spreadsheet.

All over the map - eh!, heh, heh.

"You cheap bastard - you can't take it with you." And now, and now - "62 is NOT young."

 

[sgeeeee]

Consider a dividend or pension/annuity benefit that is spent (rather than re-invested) to be a withdrawal. Or interpret "withdrawal" to mean annual expenses.

So everyone with a positive net worth should be able to come up with a positive "withdrawal rate". It simply doesn't mean the same thing to a retiree that it means to someone in th accumulation phase.

 

[poyet]

((^+^)) SG,

My understanding of the question is in terms of total net worth TNW (assets - liabilities). If at the end of the year your TNW has increased, you've had a negative withdrawal rate (you're still adding to the heap), if it has decreased, you've had a positive withdrawal rate (hopefully < SWR whatever SWR is for you

This in unrelated to whether you're retired or not. Then, you can be a retiree (with limited annual expenses), and still have a TNW increasing year over year.

Patrice.

 

[Mr._johngalt]

I think you need another category: Retired but don't need/want withdrawals

Yes, for sure. I would be in that category. BTW, I kind of manage
by this (-0- burn rate) now. IOW, I work to keep TNW level.
It appears I/we can do this indefinitely, assuming no major
disasters, health problems being the main worry.

JG

 

[maddythebeagle]

Consider a dividend or pension/annuity benefit that is spent (rather than re-invested) to be a withdrawal.

- that is interesting, when I run my spreadsheets, I consider dividend reinvestment during my accumulation phase and at FIRE taking dividends as income doesnt draw down my investment, it just slows the compounding.

 

[sgeeeee]

((^+^)) SG,

My understanding of the question is in terms of total net worth TNW (assets - liabilities).  If at the end of the year your TNW has increased, you've had a negative withdrawal rate (you're still adding to the heap), if it has decreased, you've had a positive withdrawal rate (hopefully < SWR whatever SWR is for you

This in unrelated to whether you're retired or not. Then, you can be a retiree (with limited annual expenses), and still have a TNW increasing year over year.

Patrice.

You can consider or understand things however you want. There may be reasons to define withdrawal rates as you have, but if you are trying to understand if the spending of folks in retirement is consistent with or below the 4% SWR from historical simulators then you need to interpret withdrawal as I have indicated. If you look at the results from historical simulators, safe withdrawal rates often do result in increasing nest egg amount -- often throughout the entire retirement period. (ie. for many simulated retirement sequences, net value of the portfolio increases and is a far greater value at the end of the retirement than at the beginning). This does not translate into a negative "withdrawal rate" as defined by the simulator. The "withdrawal rate", as defined by the simulator, is the ratio of the beginning annual expenses to the beginning nest egg. It does not matter whether those expenses come from dividends or sales of equities or bonds.

The reason that "withdrawal rate" of someone in the accumulation phase does not have the same meaning as it does for someone in retirement is because the nest egg is not expected to be at least 40x spending rate at that phase in a person's life. You can still define the withdrawal rate of someone in accumulation, but you should not expect to examine it with the same yardstick.

 

[Newell]

Consider a dividend or pension/annuity benefit that is spent (rather than re-invested) to be a withdrawal.  Or interpret "withdrawal" to mean annual expenses. 

So everyone with a positive net worth should be able to come up with a positive "withdrawal rate".  It simply doesn't mean the same thing to a retiree that it means to someone in th accumulation phase.   

Your point about dividends is a good one but I don't agree about including pensions in "withdrawal rate"  or defining "withdrawal" as annual expenses unless the cash value of those pensions (or any other annuity such as Social Security) have been included in Net Worth.

Is my understanding incorrect?

 

[sgeeeee]

Your point about dividends is a good one but I don't agree about including pensions in "withdrawal rate"  or defining "withdrawal" as annual expenses unless the cash value of those pensions (or any other annuity such as Social Security) have been included in Net Worth.

Is my understanding incorrect?

You are correct. You should not consider pensions in withdrawal rate unless you have included the current value of those pension benefits in your initial net worth.

You could choose to neglect pensions from current net worth calculations and also neglect them in future withdrawal rates. This can be difficult to do, however, since most pensions are not COL adjusted. So the pension today may represent 50% of your total annual expenses, but in a couple of decades it will only represent 25% of your inflation adjusted expenses. If your pension is COL adjusted, then neglecting it both in terms of current net worth and withdrawal rate makes sense. You just need to be consistent.

 

[wabmester]

BTW, I kind of manage by this (-0- burn rate) now.  IOW, I work to keep TNW level.

Hmm, I declare this poll an unmitigated disaster.   It's clear that I botched the wording, but I'm not sure how I could easily clarify it.   Even old-timers like JG misinterpreted the question.

Just because your net worth is constant or increasing doesn't mean that your withdrawal rate is 0 or negative.    If you're in retirement and have no earned income (or pension), then you are "burning" some percentage of your net worth each year even if investment gains are compensating for that burn.

I guess a better way to phrase the question would have been "if your annual expenses were X, your earned income + SSI + pension was Y, and your net worth was W, what was 100*(X-Y)/W last year?"

Thanks to SG for trying to clarify. 

And just to make matters even more confusing, the SWR that FIREcalc refers to is calculated as a percentage of your initial net worth, not your current net worth, so this wasn't really a poll about your SWR, although that would be interesting to know as well....

 

[unclemick]

Hmmm

I posted and then deleted. I know it's a negative number and it shouldn't be after 12 yrs into ER. I'll putz some more with the numbers tonight.

- heh,

 

[poyet]

Yes, kind of a mess. I thought, well I'm not going to post any longer in this thread. Then after reading the last post stating that even JG mis-interpreted the question I'm back.

First, I would not like anyone of you to take offense or think I'm rude in any way. I'm just going to be blunt to let you grasp that at least there are other ways to look at things.

I'm not interested in the way things are defined in a simulator, to get a simulated projection of a possible outcome based either on historical (unfavorable) or monte-carlo (more favorable) runs with whatever likelihood..

I'm interest in real life. My net worth is (assets - liabilities). DOT.

Then I'm not necessarily deriving income from work, but most comes from commercial rental real estate. Even though I would burn it all, as the RE investment in itself follows inflation, I'm not sure one can consider that I've withdrawn anything from my capital base (my RE cap base remains constant as it is inflation indexed thanks to the rents indexed on CPI or kind of INSEE index). Not only that, but I do not burn it all and more than 40% goes into ADDING (not withdrawing) to my retirement portfolio from which I expect big capital gains and no income. This is to give a small snapshot (simplifying a lot as I trade aside, etc.)

Therefore, in my real life, at year end, I look at my net worth (assets - liabilities) and either it has increased or decreased (whatever I make a living with). I have withdrawn 0% from my investment portfolio (as I do not consider this class of asset as capable of generating income - look @ the paper "Make retirement income last a life-time" and even 1% of portfolio going broke @ 30 yrs is unsatisfactory so 30% @ WR 4,5% broke @ 30 yrs based on historical data is alarming), I live on RE, keep adding to the retirement portfolio (looking for big cap gains @ 20 yrs) and keep trading (looking for cap gains @ shorter time scales).

That's REAL life not the simulator. My net worth (NW) increases year after year and therefore (working or not) I think that my withdrawal rate is negative.

Again not being rude. I understand perfectly that even my NW having increased one might consider simply that I have withdrawn less than the return of the assets. But mixing classes of assets, putting RE in the picture, taxes, etc.. gives a more complex picture and I'm back to basics (assets - liabilities).

Not claiming to have any thruth. Just stating that I have a different perspective on the subject.

Kind regards to all contributors of goodwill (as I am)

)
Patrice.

 

[poyet]

Just to add to my previous post that NW is inflation adjusted every year, to compare to (NWn-1 * (1+rate of inflation)) of course.
Patrice

 

[haha]

As a practical matter, if one has low volatility assets and net worth is increasing yearly above the rate of inflation, "burn rate" is not too important.

Where things get more difficult is when end- of-year assets minus liabilities go down. Then, if you plan to make use of historical simulators or even just informally make a probability matrix, one had better know what their "life maintenance nut" is. Because that is the burn rate, and no one but God who lives off assets has every year be an up year.

Ha

 

[Martha]

Ha, do you have a feel for how frequently in your fairly long ER that your networth dropped for the year? When the market was going down, did that substantially effect how you spent money? Did you feel like looking for a job?

If you don't mind the questions.

 

[sgeeeee]

. . . I'm interest in real life. My net worth is (assets - liabilities). DOT.

. . .

Similarly, I don't want to be rude, Patrice. I think most (if not all) posters here are interested in real life. It is certainly legitimate for you to define your own withdrawal rate however you want to suit your needs. And it certainly seems reasonable that you would want to look at your net worth from year to year. I look at my net worth from year to year too.

But my interest in real life extends beyond what happened last year and beyond my recent trends in personal net worth. I'm also interested in my expenses and trends in my spending, for example. As fraught with peril as it is, I would like to get some sort of estimate about what both my spending and portfolio might do in the decades to come. So . . . as imperfect as the process is, I use historical simulators and Monte Carlo simulators and any other tool I can to examine future possibilities. The people who developed and published studies using such tools have developed a set of terms and definitions that allow them to discuss the results. The terms aren't perfect. In fact they are sometimes misleading. For example, "safe withdrawal rate" has a very specific meaning in most of the historical simulator literature, but the meaning is at least somewhat misleading and is often the subject of heated debate.

When I was pointing out how to compute "withdrawal rate" in this thread, it was not because I believe that is the only acceptable definition of that term, but because I was pretty sure I knew the intent of the original poster. If you don't like that meaning, you certainly don't have to use it. But it does screw up wab's poll if everyone uses a different definition of the terms.

 

[haha]

Ha, do you have a feel for how frequently in your  fairly long ER that your networth dropped for the year?  When the market was going down, did that substantially effect how you spent money?  Did you feel like looking for a job?

If you don't mind the questions.

Martha, I don't mind the questions at all. Most of my early retirement was during a strong bull market. My net worth went down in 1987 and 1991. May have gone down a bit in 1994, but I do not remember. In each of these times, I felt that investment values were good, so I was happy to put whatever reserves I had into equity ideas.

I was never heavily invested in dot.com or even good tech stocks, so my results actually improved on an absolute as well as relative basis after the break of the millennial bubble.

The last 4 years or so have been quite strong for me, as I was heavily invested in energy.

I did consider going back to work several times; and I think that if I had lived in the city where that would have been easier I would have done so.

At this point I think any job I could realistically get would not be good enough that I can't better spend my time looking for anomalies and investment ideas.

I hate bosses, so for me at this point work would be sales.

Although I am already eligible for SS, I am waiting till I either need it, or it appears to me to be a good deal. I know most people here plan on early SS, but I want larger fallback worst case than what I would get with early SS.

I take at least moderate risks in my investing, so that SS is something that a misjudgment of mine couldn't mess up.

Ha

 

[poyet]

I did not want to screw up the poll, just pointed indirectly to the fact that trying to generate income ONLY from a portfolio of securities might be a strategy to think of twice as the simple notion of S(unsafe)WR leads to so many debates...

But back to Martha's question and informative HaHa's answers with respect to negative years. From an exceprt of a study made by de Laulanié (Les placements de l'épargne à long terme) which I find often of value, here are the data for two reference portfolios A et B. Portfolio A is made of 25% of european securities, 25% US securities, 50% real estate (non commercial invested in Paris) and Portfolio B is 40% european stocks, 35% US stocks, 15% french bonds, 10% money market. Study starts in 1900 and results are inflation adjusted.

Port A had a real (inflation adjusted) performance of 4,5% with sigma 3% (somewhere in the elbow of the efficient frontier). Port B had a real performance of 4,2%, sigma 2,1%.

BUT, in terms of YEARS DOWN the two porfolios have a slightly different response: P1 (with real estate) had only three years down over 100 years (1930, 1974, 1994) and only once slightly > 10% in 30, whereas the "financial only" portfolio had eight years of loses over the century with two years of loses greater than 20%, in 1930 and 1974 showing a greater volatility.

I think Real Estate is two often dismissed on the board (though I'm not selling any ) in its various forms (real properties, REITS, ETFs e.g. ICF) as both a means to generate "real" income (not tapping into the nest egg) and to reduce volatility as exposed above.

My two (euro) cents.

Patrice.

 

[Martha]

Thanks Ha. I like your SS strategy. Having no pension of any sort, it is nice to have at least one thing that DH and I can't screw up.

Poyet, the study is interesting. We have always had a fair amount of our assets in rental real estate and as UncleMick says, it is the "horse we road in on" to financial independence. Given high valuations, over the past several years DH has exited us from many of the real estate investments.