Return more than planned

[Nords]

It's all about marginal utility--the first $5k per year in discretonary spending buys a lot more fun per buck than the $25-$30k increment. Again, I understand your reasoning, but it wouldn't work for us.

That "marginal utility" perfectly expresses our thoughts. Part of it comes from years of working too hard to spend it, and another part comes from learning to live in conditions that even federal prisoners don't have to tolerate. I just can't flip a switch in my psyche and feel good about spending a few hundred extra a month-- on what?

Let's say that we can spend 4%/year. If we bumped our spending up to 5%, what would we spend that extra 1% on!?! Certainly not more possessions or obligations. Upgrading the bathroom-door décor or the landscaping might work for a couple years. Even flying first-class and paying retail prices for cruise tickets might not soak up the excess. Visiting neighbor islands an extra time or two each year? Eating pizza twice a week?

The things we enjoy at this stage of our lives don't seem to cost a lot of money, but it's not a problem. I'd rather have $12M in my pocket the day we check into the full-care facility, complete with a heated lap pool & Thai massages, and leave the leftovers (if any) to charity.

 

[Bikerdude]

youbet, I've imagined how I'd feel if inflatonhit double digits again and if the stock market dropped 25% plus. The newspapers full of stories on the has-been US economy.

I think this is the real issue. How will we all react to a down market cutting our nest egg in half? Now the 4% Firecalc assumption is "stay the course" history is on our side. : I just question how many of us (me included) will not cut back in the face of this. Everything looks good on paper but reality is way different IMHO.

 

[donheff]

Donheff, I agree with this foolproof plan. Excellent job explaning it.

However, I don't think the "someone with a strong stomach" clause is necessary. If your plan is followed, there is no risk introduced into the equation at all.

The reason I mentioned the intestinal fortitude is that, if you spend the extra money and restart very year, the chances are good that you are eventually going to be "starting" retirement in a bad year. Thus you get to test SWR theory with a bad start. Of course, if you save up a pool of "mad money" you should be able to flatten out the downside.

 

[Cut-Throat]

Thanks CT. You are a lot more optimistic about longevity than me. I plan to withdraw SS as soon as possible. I did some calculation, and came to the conclusion that it's not beneficial for me to delay SS. I have absolutely no plan to live beyond 85 On top of that, I believe I would need a lot lot less once I reach 75. Not pessimistic, just realistic, in my opinion.

I used to look at the problem, the way you are looking at it. But the revelation to me was that I get to spend more money in my 60's by delaying S.S. - You are thinking in terms of delayed S.S. = Delayed Spending (this is not true at all). I could care a less if I live to 80. By delaying S.S. you can increase your withdrawal rate in your late 50's and 60's to over 8% or more, without affecting the safety of your portfoilo. Think about the following example a bit. A quote from a post by masterblaster:

The difference in this example for someone retiring at 70 versus 62 is $1188 per month or $14256/year.

Now using the 4 percent safe withdrawal rate I need $25 of nest-egg for each dollar of yearly income. But if I start SS at 70 I need $14k/year less income than if I start at 62. Therefore I can spend out of my nest-egg 25 times that $14k/year increase in my SS payment. My calculations show that I could spend my nest-egg down by around $356k (total) and still be in the same retirement position. Or put another way I could spend my nest-egg down by around $44.5k/year over the period from when I am 62 to when I am 70 and still be in the same position.

Add in the value of not paying the double taxation on that $356k and that's worth maybe another $30-$70k or more.

 

[ladelfina]

Hmm.. but if you have run your Firecalc that says your egg has 100% chance of success at a 4% SWR, then should one not feel "free" to spend the excess?

Looking at donheff's "resetting" scenario, isn't the 'starting in a bad year' factored in to the Firecalc.. (the "s" in "swr")??
..or should we all be thinking about an even "worse" worst-case scenario??

I am struggling with this right now, because, yes, our everyday expenses (pizza included) are relatively low, BUT there are a handful of $$$ fantasy house projects that I would love to throw (let's say) $100+k at. Our portfolio this year has 'made' that extra $100k above and beyond normal expenses. Do I crack open the piggy bank? I'm conflicted...

 

[lazyday]

There is an issue with starting fresh each year, as if retiring on the current portfolio. Like the first post said, excess return is needed for the bad years.

If Trinity/Firecalc/your spreadsheet says that 4% would have worked 95% of the time for you, but then every year you start over, then you keep trying to find the 5% failure rate.

Even if you see a 100% chance of success, don't forget that the future might be different from the past. Maybe we got lucky in past hard times like 196x-198x, and the next one will be worse. Perhaps in 2017, the true SWR will be 3.4%. If you increase withdrawal to 4% again, you'd be set up for failure, along with the 2017 retirees who start at 4%. But the 2010 retirees who didn't adjust upwards (or didn't adjust too much) would be fine.

If the spending increases are luxuries, and you would be fine cutting back spending to 2-3% of current portfolio, then I suppose that should work out fine. Unless markets were in a superbubble, or risk premiums had permanently dropped to a very low level.

 

[youbet]

youbet,
I understand and appreciate why you've taken this position, and I'm NOT trying to argue against it. Still, it wouldn't work for DW and me. I've imagined how I'd feel if inflatonhit double digits again and if the stock market dropped 25% plus. The newspapers full of stories on the has-been US economy. Other countries beating us in the economic arena. US currency devaluing. Given al this, I know I would not continue wioth the same spending rate and take comfort in the fact that, if history is a guide, the markets would rebound in time to save us. If we DID take that trip to Europe as doom gripped the economy and our portolio plummeted, we wouldn't enjoy it much ("Hey, 10 Euros for a crepe? Forget it! I'll need that to buy 10 cans of beans in two more years."). Our pension covers the essentals, and our withdrawals from savings will be 4% of year-end totals. Even at that, I suspect we'll tighten our belts if things go south fro more than a year or two. It's all about marginal utility--the first $5k per year in discretonary spending buys a lot more fun per buck than the $25-$30k increment.
Again, I understand your reasoning, but it wouldn't work for us.

Well stated samclem.

Let me emphasize that it's our PLANS that call for a more or less constant WR, despite market conditions and time frame. But we assume a "rational man" approach to all this and reserve the right to modify things as we go if appropriate.

We waited until our late 50's to retire and postponed some activities that we're busy enjoying now. Our financial plans are quite conservative. Therefore, especially in the first few years while we still have health and vigor, it would take quite a setback in financial conditions for us to bail out of our desired spending.

But I can hypothesize possible future situations where we might change that outlook. We'd never withdraw money just to flush it because there were no worthwhile spending opportunities. The "rational man" says that if the portfolio is staggering under the load of high inflation and diminishing equity values AND spending opportunies (for the things in our plans such as travel) are poor, we're not going to take the money out and toss it to the winds.

But, at this stage - six months into ER, we're doing our planned WR and just enjoying the hell out of life! It is great!

 

[audreyh1]

There is an issue with starting fresh each year, as if retiring on the current portfolio. Like the first post said, excess return is needed for the bad years.

If Trinity/Firecalc/your spreadsheet says that 4% would have worked 95% of the time for you, but then every year you start over, then you keep trying to find the 5% failure rate.

No this isn't true. If you "start fresh" each year, then you do the same thing when your portfolio shrinks. You can take 4% every year and never run out. While your portfolio is shrinking, you'll be taking out less and less.

Audrey

 

[ladelfina]

right, Audrey..!

and lazyday, I get what you are saying, too, but I'm not at 95%, I'm just right around 100%, so in theory spending the excess isn't, for me, "trying to find the failure rate". What I'd be risking spending the excess right now (as you point out correctly) is what would happen if the future holds a period worse than any other in history, which is certainly possible. In which case I'd be trying to find a failure rate not yet conceived by Firecalc.


But that goes for everyone else, too. The "safe" withdrawal rate is either safe, or... it isn't.. depending on what you think the future holds, I guess. It certainly doesn't look all that rosy, but I'm sure people felt worse during the Depression and during the inflationary '70s. The underlying assumption (return of 7% minus inflation of 3% = WR of 4%) is from within the universe of the past so there's still a chance that that will not continue to hold true.

Is there a way to come up with a "SSWR" (a super-safe withdrawal rate)? :
Maybe that has already been addressed.. I will poke around and see.

 

[donheff]

No this isn't true. If you "start fresh" each year, then you do the same thing when your portfolio shrinks. You can take 4% every year and never run out. While your portfolio is shrinking, you'll be taking out less and less.

Audrey

That is not what I was getting at. My "start fresh each year" scenario does not involve cutting back from the initial 4% + inflation start -- ever. You start out at 4% SWR (with inflation increases) at a time in life when your portfolio is such that you estimate that you have enough for a "good" retirement. Just like in a standard SWR scenario, you assume you will never drop below the calculated rate. AFTER the 1st year you evaluate the situation. Only if the return is enough to fund the 3% increase in the portfolio and the the 4% spend and still have returns left over (a la Ladelfina's $100K this year) do you consider putting the excess in a "mad money" pot and starting afresh as a new ERer in year 2. The following year starts with no preconceptions. You are just a regular ERer starting out with your slightly larger portfolio at your slightly larger 4%. Firecalc will always give you the same or better survival rate in this scenario (better, because as the happy years go by you have a shorter life span to fund). In a bad year, you still pull out your inflation adjusted 4%. If the year after that is good, YOU DO NOT pull out extra earnings because you need to build your portfolio back to where it should be. If the market stays bad you get to test SWR theory. If the market turns very good again, you may get to a point where you can reevaluate and start fresh again.

I am simply pointing out that if your portfolio is doing great, you can always apply the FIRE principle of "what would the people on the Board recommend as an SWR to someone else retiring this year with this portfolio?" If it is good for everyone else, it has to be good for you. I am also not proposing that people aggressively pursue this strategy. You would certainly want to be cautious in evaluating the strength of your portfolio after a huge run-up year like 1999. But I assume the Board would caution a new retiree to be careful about the SWR in that scenario as well.

All this is to say that, if I was Ladelfina, I would consider a few house projects but I wouldn't spend the entire $100K -- I might put half in another account labeled "vacations." Then I would start my new ER over again with my regular portfolio and a 1 year shorter life expectancy in FIRECALC

 

[donheff]

Ladelfini - despite my spendthrift proposals you might consider taking a less aggressive approach. How about spending $25K on some "to die for" projects. Return the other $75K to your portfolio and calculate a new ER starting with a 3.9% SWR (or whatever rate matches your pre-planned adjusted withdrawal for next year). A few years of that and you will get the SWR success level up to five 9s.

 

[Sam]

The reason I mentioned the intestinal fortitude is that, if you spend the extra money and restart very year, the chances are good that you are eventually going to be "starting" retirement in a bad year. Thus you get to test SWR theory with a bad start. Of course, if you save up a pool of "mad money" you should be able to flatten out the downside.

There is a first time for everything. I disagree with you on this

It does not matter at all if you eventually hit that bad year. The success rate given by any calculator is based on the worst possible year(s). As long as your method is followed you always start with the same constant amount of money. So whatever risk you took last year remains constant as well. No additional risk is introduced by resetting.

 

[youbet]

There is a first time for everything. I disagree with you on this

The success rate given by any calculator is based on the worst possible year(s).

I have a different view on that Sam, for the original FIRECALC anyway. The success rate there is defined by the worst performing historical time period, definitely not the worst possible time period. We haven't seen the worst possible time period yet.

I always remind myself that until RE types suffered through the drop of equity values and high inflation of the late 60's and 70's, they thought the Great Depression years were the worst possible years! Of course, they were wrong!

Could we have a period worst than the late 60's and 70's in the near future? You bet we can! My own amateur projection is that we will see more variability in the upcoming decades with higher highs and lower lows and we're going to have an interesting time managing through it.

 

[Sam]

definitely not the worst possible time period. We haven't seen the worst possible time period yet.

I am fully aware of that. That's why I bold faced the word additional. Glad you brought it up though. I have the feeling that certain members think it's foolproof when their SWR achieves 100% success rate. Nothing is 100% in life.

 

[audreyh1]

Well, for me the inflation adjustment is just too complicated, so I decided to blow that off. I'm truly comfortable with a varying annual income, so I don't try to emulate a fixed+inflation annual salary.

Just a straight % annual withdrawal works for me. It's easier!

And just because I withdraw the money doesn't mean I have to spend it that year. I still tend to LBYM even today, so I let excess funds accumulate for that rainy day or that special project or that bad year, or whatever.

Audrey

 

[Bourne]

Nothing is 100% in life.

Death and taxes.....

 

[Sam]

Just a straight % annual withdrawal works for me. It's easier!

It would work for me too.

For me, the SWR is more useful in bad years. Backed up by historical data, I can confidently (to a certain level) withdraw a little more than the normal "straight %" in bad years.

 

[ladelfina]

don, I kinda get what you are saying here:

Firecalc will always give you the same or better survival rate in this scenario (better, because as the happy years go by you have a shorter life span to fund).

but on the other hand, as Firecalc totes up more "good" years in its database, then don't its assumptions get incrementally more rosy for all concerned? Add more years of double-digit returns and the 'canonical' return of 7% could creep up to 8%, tempting us with a higher SWR, which in turn might make a bad patch seem that much worse.

---
People's advice about the projects and "mad money" are sound. Unfortunately the projects have some overlapping electrical and plumbing issues that might be easier and more cost-effective if dealt with in one fell (and scary) swoop.

[For those interested, we bought a house with a big yard and an empty, non-functioning "swimming pool" that is about 36" deep, currently lined with painted blue concrete in a state of decay. The theory was that the runoff from the gutters would be caught in this holding pool, but no water currently arrives. Underneath is ROCK. Very hard travertine. The rest of the yard itself is trucked-in fill on top of this rock. I would love to turn the hole in the ground painted blue pool into a "natural swimming pool" which would need to have a minimum depth of 9 feet. A scenario for a high-end install of this type here is something like €50-75k. You can do something cheaper, but I have seen a cheaper version and it is not worth doing if not done right. This is average and not counting extra difficulty that might be posed by excavation in our particular case.

The kitchen needs re-doing. That could be a smaller chunk on its own, but re-doing the kitchen means (to me) ideally also re-doing the root-clogged drains and septic (if I wash more than three pots at a time, the water starts backing up; we're at the point where we call the high-pressure hose guy 2x a year) which means digging up the yard. If I'm digging up the yard, then while I'm at it, I should take a look into the separate gutter/water recovery system that isn't working and get the water to go either into the pool or into an underground tank (that we would have to install and wire a pump for) so that we can use it for watering the garden. And if I'm digging up all that, then I might as well get someone to get the pool, gutters and septic all coordinated at once. At least that's what I'd do if I were in the US, but here I worry about finding someone I trust to even undertake all this. Meanwhile the yard is filled with medium-size oak trees so I'm not sure if they will survive extensive yard digging. We also have some major yard electrical issues that would tie into this, and we'd like to bring some faucets to other points in the yard from where they currently are, run new electrical to the front gate/intercom/light, to the greenhouse, new circuits.. (circuits for pool, too, if we do that..) yada yada yada. Not to even START on where the overflow actually goes for the hole in the ground painted blue current pool and if it is legal or not.. not looking forward to opening up that can of worms. Plus the existing pool wall is exactly on the property line (corner, with 3 different non-residential properties abutting) so negotiating with the neighbors will be interesting. Who knows if something that excavates rock will even be able to operate with such close tolerances.. Well, it would make our lives interesting, add a s***-load to the prop. value if it came out right.. and, I know that in 10 years I'm not going to have the energy for it. IF it gets done, I'd like to start sooner rather than later so we have more time to enjoy it.]

Or we could just move.

 

[CCdaCE]

The difference in this example for someone retiring at 70 versus 62 is $1188 per month or $14256/year.

Now using the 4 percent safe withdrawal rate I need $25 of nest-egg for each dollar of yearly income. But if I start SS at 70 I need $14k/year less income than if I start at 62. Therefore I can spend out of my nest-egg 25 times that $14k/year increase in my SS payment. My calculations show that I could spend my nest-egg down by around $356k (total) and still be in the same retirement position. Or put another way I could spend my nest-egg down by around $44.5k/year over the period from when I am 62 to when I am 70 and still be in the same position.

Add in the value of not paying the double taxation on that $356k and that's worth maybe another $30-$70k or more.

In regards to delaying SS, maybe you'll have to reference the original conversation... and I missed this part but...

What about the $125K you gave up based on NOT getting roughly $1300/month or $15.6K for the 8 years between 62 and 70. The $15.6K income times 25 would require a portfolio of $390K.

There must be a breakeven analysis in here somewhere...
-CC

 

[Sam]

There must be a breakeven analysis in here somewhere...

There is, and it's different for everyone based on expectation. I did mine a few months ago, using my specific numbers, 9% ROI, 3% inflation. My break even point happens at around age 80. I decided then to take SS at 62. I don't have that spreadsheet anymore, but the calculation was relatively straight forward.

 

[audreyh1]

Ladelfina

IMO it is fine to "raid" one's retirement fund to buy a house, for example. You can figure that doing the lump sum to buy a house, you remove the monthly expense of renting from your annual income needs so you can manage the resulting lower annual withdrawal.

Or you can outright say - well if I make this big lump sum payment, it means my yearly funds available are now $X lower. If that's OK, then go ahead and spend the money. It's a simple tradeoff.

I also know that CFB would amortize certain maintenance issues over 10 to 20 years. You could figure it that way too. Like - it will cost $Y to do the project this year, but that will cover say 10 years of maintenance so the actual impact to the budget is $Y/10. I guess the trick is not to keep starting a new remodeling project every year, otherwise you are just kidding yourself!

Lots of ways to figure it!

Audrey

 

[Nords]

[For those interested, we bought a house with a big yard and an empty, non-functioning "swimming pool" that is about 36" deep, currently lined with painted blue concrete in a state of decay. The theory was that the runoff from the gutters would be caught in this holding pool, but no water currently arrives. Underneath is ROCK. Very hard travertine. The rest of the yard itself is trucked-in fill on top of this rock. I would love to turn the hole in the ground painted blue pool into a "natural swimming pool" which would need to have a minimum depth of 9 feet. A scenario for a high-end install of this type here is something like €50-75k. You can do something cheaper, but I have seen a cheaper version and it is not worth doing if not done right. This is average and not counting extra difficulty that might be posed by excavation in our particular case.

This is why we end up doing so many of our own projects. If you find a good contractor, when you're done with them then ask them if they'd like a few all-expense-paid weeks in Hawaii...

 

[jeff2006]

What about the $125K you gave up based on NOT getting roughly $1300/month or $15.6K for the 8 years between 62 and 70. The $15.6K income times 25 would require a portfolio of $390K.

This analysis is not correct, as the replacement is only for eight years, not for the 30-35 years that the 25x multiplier accounts for. To replace the 15.6K you would need only the 124.8K invested at zero percent real return, drawn down over eight years.

 

[lazyday]

Instead of saying "starting fresh each year" I should have said something like "starting fresh each year that the portfolio increases".

But that goes for everyone else, too. The "safe" withdrawal rate is either safe, or... it isn't.. depending on what you think the future holds, I guess.

I don't think there is a totally safe rate, and don't think 4% is extremely safe, unless you're certain you'll die in a couple decades.

Say that you plug in numbers and see 100% success for a 4% WR. But, the future is worse than the past, and the true 100% SWR for anyone retiring in the next 100 years is 3.8%, while 4% is only 94% successful. Then, when you increase your spending to 4%, you are hunting for the 6% failures.

If 4% shows 99% success using historical data, then it's even worse.

I'm just right around 100%

My personal choice right now is to not increase spending, but let the portfolio grow to reduce risk and allow a better lifestyle in the future. If my portfolio grows enough that spending drops below 2.5%, I'd consider increasing spending. But if at that time, I think stock markets are priced so high that their expected long run return will be under 3% real, then I probably wouldn't increase spending, and instead increase holdings of assets other than stocks.


On the other hand, at some point, one may go overboard trying to be safe, and spend too little. I wouldn't go so far as this quote, but he does have a point:

http://www.efficientfrontier.com/ef/901/hell3.htm

But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for political, economic, and military reasons relative to the failure of banal financial planning.

But the same author, in a discussion on Morningstar, indicated that for an early retiree, even a very low WR might not be low enough.

 

[kcowan]

This analysis is not correct, as the replacement is only for eight years, not for the 30-35 years that the 25x multiplier accounts for. To replace the 15.6K you would need only the 124.8K invested at zero percent real return, drawn down over eight years.

To purchase an 8 year annuity earning 4.5% would cost $103,000 at age 62 so this is exactly what you are foregoing to get the higher payments starting at age 70