Should we give ourselves a raise???

[Trawler]

Back Ground
DW 55 and I 52 set a budget prior to RE based on what we believed our expenses would be and confirmed thru Fire Calc and FIDO Income Planner our assets and allocations gave us a very high percentage of success. Fire was 100% and FIDO we used 90% conservative simulation. Both showed a With Draw Rate around 4%. On the Expense side 60% is essential expenses and 40% is descretionary. We run a two bucket system one cash 4 years of expenses or unexpected outlays and asset base.
Over the past 15 months we have enjoyed a great market and kept under budget. We are starting to get comfortable actually deriving income from our asset base vs earned income. With that said we may want to live a little more lavishley so I reran FIDO and Fire Calc this weekend using current assets and came away with we could give ourselves a substansial raise and still be at slightly less than 4% WDR. I figure the calculator does not know if I retired 15 months ago or yesterday thus go ahead and take a raise. I also think that since 40% of last years budget and 50% of proposed budget going forward is descretionary if asset base drops due to market or spending we have a lot of room to decrease spending and still be at or below 4% WDR. We are indifferent to leaving any money behind after we go as we have no kids. Should we give ourself a raise?
Thanks in advance for your thoughts on a Moving Withdraw Rate vs using the good old SWR method.
Thanks

 

[REWahoo]

If you would enjoy the additional money giving yourself a raise sounds like a reasonable plan. But you might give some thought to what it would really be like to have to tighten your belts again should the market take a dive in the near future.

As a reference point, we retired in mid 2005 and found ourselves in a similar nice situation. We gave ourselves a raise in 2007 only to be faced with the Great Recession of 2008-2009, cutting back to our old budget and questioning every penny we spent. Things worked out OK for us but at the time it did have me second guessing our decision to up our spending.

 

[audreyh1]

We get a raise after every good market year , but also a cut after bad market years .

We take a fixed % of the portfolio every Jan, so our income is linked to our portfolio performance (and not inflation). I kind of like this as after good years, you take a bigger chunk off the table. After bad years, your withdrawal is smaller - slightly less stress on a diminished portfolio.

One key tip - don't up your spending by your "raise". Put a good chunk of it aside (in cash or short-term) in case the next year turns out to require a dreaded cut in spending. I think of this as "income smoothing".

 

[Z3Dreamer]

The original OP is looking at a VWR. Others here use a fixed on ending portfolio. Others have a dollar budget but re-evaluate every so often based on available funds. Since lovely DW still w***s, we have not had to decide what we will use.

 

[Trawler]

We get a raise after every good market year , but also a cut after bad market years .

We take a fixed % of the portfolio every Jan, so our income is linked to our portfolio performance (and not inflation). I kind of like this as after good years, you take a bigger chunk off the table. After bad years, your withdrawal is smaller - slightly less stress on a diminished portfolio.

One key tip - don't up your spending by your "raise". Put a good chunk of it aside (in cash or short-term) in case the next year turns out to require a dreaded cut in spending. I think of this as "income smoothing".

Thanks for the TIP. To clarify the four years of cash in bucket one is not used when calculating an annual withdraw or WD rate. Bucket two which I refer two as the asset base is where the annual WD would come from . The cash bucket would to Ride out down market.

 

[Trawler]

If you would enjoy the additional money giving yourself a raise sounds like a reasonable plan. But you might give some thought to what it would really be like to have to tighten your belts again should the market take a dive in the near future.

As a reference point, we retired in mid 2005 and found ourselves in a similar nice situation. We gave ourselves a raise in 2007 only to be faced with the Great Recession of 2008-2009, cutting back to our old budget and questioning every penny we spent. Things worked out OK for us but at the time it did have me second guessing our decision to up our spending.

Great point!! Could we actually that that large of a cut in spending and live the way we planned. No we could not thus the bucket 1 cushion of Cash for riding the storm out is not included in assets when calculating WD.

 

[pb4uski]

I think you'll be fine as long as you're prepared to tighten your belt if the need arises. I do pretty much the same thing but less structured - we just splurge a bit more often when times are good and less so when times are challenging.

 

[ERD50]

How do you get a 4% WR and 100% success in FIRECalc at age 55/52?


-ERD50

 

[NW-Bound]

I don't know about the OP's result, as he might have future SS and/or pension to supplement the 4% WR.

However, the "optimal" 50/50 portfolio that's value-stock oriented as I described in a recent thread was declared 100% successful by FIRECalc for 4%WR over 40 year periods. Whether you believe that or not is 'nother thing.

Caveat: The effect of the Great Recession is not represented in FIRECalc results.

See: http://www.early-retirement.org/forums/f28/optimal-firecalc-portfolio-69523.html.

 

[galeno]

Give yourself a SMALL raise. I like Bill Bengen's "Safe-Max" idea of using 25% SWR bands.

E.g. your initial (default) AWR = 4%. Max band = 5%. Min band = 3%. If you want to be conservative ride near the min band rate. Moderates can ride at the default rate.

 

[tuixiu]

Caveat: The effect of the Great Recession is not represented in FIRECalc results.

I must be missing something... why not? I could see why it isn't represented as something in the very early stage of possible retirement scenarios, but wouldn't some of the scenarios it runs include the Great Recession near the end? Like if I'm running 30 year scenarios wouldn't Firecalc include 1979-2009, 1980-2010, 1981-2011, 1982-2012 when it is figuring out how many of the runs were successful?

Also, I guess if one could point out Firecalc doesn't include the Great Recession it could noted it doesn't include the great bull market of 2009-2013 either.

 

[audreyh1]

Thanks for the TIP. To clarify the four years of cash in bucket one is not used when calculating an annual withdraw or WD rate. Bucket two which I refer two as the asset base is where the annual WD would come from . The cash bucket would to Ride out down market.

If you have a cash bucket then, you are already there. Although don't you need to top if off a bit to cover the new "raise"?

 

[robnplunder]

My strategy is set aside fixed amount each year for expense based on how things have went in previous years. B/c I will be starting (haven't ER'd yet) with lavish (for lack of better word, not to be confused with boasting of any kind) style WR, I'd have a bit of padding in case stock market retreats that year. If stock market goes up, I will figure out what'd be the next year's expense budget when it comes. That's be the good problem to have.

 

[walkinwood]

Read Guyton's paper on a variable rate that is based on market performance & inflation. It may give you some good guidance on just how much of a raise you should give yourself.

http://cornerstonewealthadvisors.com/files/08-06_WebsiteArticle.pdf

For SWR, I assume you are using the traditional 4% of initial portfolio value (bucket 2) adjusted for inflation.

 

[NW-Bound]

I must be missing something... why not? I could see why it isn't represented as something in the very early stage of possible retirement scenarios, but wouldn't some of the scenarios it runs include the Great Recession near the end? Like if I'm running 30 year scenarios wouldn't Firecalc include 1979-2009, 1980-2010, 1981-2011, 1982-2012 when it is figuring out how many of the runs were successful?

Also, I guess if one could point out Firecalc doesn't include the Great Recession it could noted it doesn't include the great bull market of 2009-2013 either.

I should have said "completely represented".

People generally make 30-yr runs, which mean that the latest period would be 1982-2012. This period includes the bull market of the decades of 1980-2000, and it allows a huge surplus to build up for our retiree to weather the lost decade of 2000-2010.

A more recent retiree starting out in the 2000 to 2007 would not do as well. In fact, a retiree retiring with a 50/50 portfolio and a 4% WR would see his stash drawn down to near 50% in 2009. The recent bull market helps, but our hapless retiree is still shaking in his boots because the future is still unknown, and he is still down badly, being only a bit more than 10 years into his long retirement.

 

[W2R]

I am thinking of giving myself a nice (though sensible) raise, yes.

I may or may not spend it all, but I do plan to give it the "good ol' college try" as the expression goes. By this I mean that I plan to continue attempts to relax about my spending and not be such a tightwad because you only live once.

If we then experience a crash, like what happened to REWahoo, I will do what he did: claim my SS at that time, and tighten my belt. I already have thought of some continuing expenses that I could easily cut, should that happen. But meanwhile, let the good times roll!

Shirley & Lee

 

[ERD50]

...

A more recent retiree starting out in the 2000 to 2007 would not do as well. ...

For a 9 year period, it looks like the mid teens and the early 70's were all worse than an early 2000 range retiree, for a 75% EQ portfolio. The late 30's and early 40's were about as bad.

-ERD50

 

[walkinwood]

.....

A more recent retiree starting out in the 2000 to 2007 would not do as well. In fact, a retiree retiring with a 50/50 portfolio and a 4% WR would see his stash drawn down to near 50% in 2009.

Wade Pfau did a study on the plight of a year 1929, 1966 and 2000 retiree after 10 years. See page 21 & 22 for a snapshot of the year 2000 retiree
http://mpra.ub.uni-muenchen.de/27107/1/MPRA_paper_27107.pdf

 

[marko]

My view is that the idea behind a SWR is that there will be good years, bad years and a few horrific ones.

The gravy from the good years are supposed to be banked in order to smooth a few bad years...and lengthen the time to an inflation hit, not to give yourself an increase in WR.
A 'one time' raise?--- sure, but to build upon that and maintain the new WR, I'm not so sure.

IMHO, YMMV

 

[NW-Bound]

Wade Pfau did a study on the plight of a year 1929, 1966 and 2000 retiree after 10 years. See page 21 & 22 for a snapshot of the year 2000 retiree
http://mpra.ub.uni-muenchen.de/27107/1/MPRA_paper_27107.pdf

Following is the abstract of that article. The author said that our hapless retiree was not out of the wood yet as future returns were likely to be subpar. Note that the paper was written in 2010.

Abstract​

We find evidence that retirees in 2000, in particular, are on course to potentially experience the worst retirement outcomes of any retiree since 1926. This holds for a wide variety of asset allocations and withdrawal rate strategies. Wealth depletion is taking place more rapidly for 2000-era retirees than for retirees who even endured the Great Depression or the stagflation of the 1970s. Though moderate inflation during the past decade has resulted in current withdrawal rates that are a bit less for the 2000 retiree than for some retirees in the 1960s, this is hardly reassuring with further analysis based on the required future asset returns needed for sustainability. Our findings cast doubt as to whether the 4 percent withdrawal rate rule will be sustainable for turn-of-the-century retirees.
​

 

[NanoSour]

My plan is for a smooth living standard ala ESPlanner. Hence, I'll increase my spending budget to last years * 1.2% (YOY as of end of Nov). I'm early in my ER journey so this is subject to change as time goes on.

 

[tuixiu]

It would be interesting to see an update on that paper. Since it was published in 2010 when Dow was floating around 11k and change, how the fortunes of the hapless year 2000 retiree would have looked 3 years and Dow 16k later.

 

[NW-Bound]

I am one of those Y2K retiree who should be growing broke if I took a 4% SWR.
According Raddr's calculation, a $1 million portfolio would have started 2013 worth $493,000 (358,000 Y2K dollars and my inflation adjusted withdrawal would be about $56,000. This year the portfolio would actually make money for the first time in a long time.

I avoid many of the worse problems of the Y2K portfolio (primarily by withdrawing only between 2.5-3% most years.). However, my portfolio didn't get back to its nominal level until 2007 and then again the end of 2010. In real terms I start 2013 about 10% behind what retired with in 99/2000 and am comfortably ahead of it in real dollars today.

Still having two ugly bear markets at the first 8 years of your retirement is not recommended.

I have cross-linked to a post by clifp in another thread to answer your question.

According to the calculation by Raddr as shown on the link, a Y2K retiree with a 75/25 portfolio worth $1M and drawing 4% would be down to $493K in nominal dollars at the end of 2012. His initial $40K would be $54K in 2012 dollars to keep up with inflation. Hence, his WR is now $54K over $493K or 11%WR.

He's in big trouble now, and needs more future years like 2013 to get out of the deep hole.

 

[foxfirev5]

I am beginning to wonder if the old sages that pronounced - never touch the principal, were right. With worst case data like this I fear I will never really become a total return investor.

 

[audreyh1]

I am thinking of giving myself a nice (though sensible) raise, yes.

I may or may not spend it all, but I do plan to give it the "good ol' college try" as the expression goes. By this I mean that I plan to continue attempts to relax about my spending and not be such a tightwad because you only live once.

If we then experience a crash, like what happened to REWahoo, I will do what he did: claim my SS at that time, and tighten my belt. I already have thought of some continuing expenses that I could easily cut, should that happen. But meanwhile, let the good times roll!

Good for you W2R - Happy New Year!

Think about it this way - do you really want to reinvest the excess now? Or have it available to spend over the next few years?