What is your withdrawal rate?

[Dtail]

I believe most people would say that it's 4%.

Else, if they had a gain of 300K and spent only 200K, they would have to say that they had a "negative" WR rate, and it does not make sense.

Or during the Great Recession when people's stash shrank by 30 to 40%, they did not say that their WR was that much, plus what they spent.

WR is expenses. Investment growth is like income. One is inflow, and the other is outflow.


PS. The Trinity Study looks at SWR (Safe WR) as a percentage of the original stash, with adjustment for inflation so that the two numbers are compatible. I prefer to look at WR as a percentage of the current stash.

Bolded by me
+1 I believe this is the way most look at it nowadays.

 

[RunningBum]

I believe most people would say that it's 4%.

Else, if they had a gain of 300K and spent only 200K, they would have to say that they had a "negative" WR rate, and it does not make sense.

Or during the Great Recession when people's stash shrank by 30 to 40%, they did not say that their WR was that much, plus what they spent.

WR is expenses. Investment growth is like income. One is inflow, and the other is outflow.


PS. The Trinity Study looks at SWR (Safe WR) as a percentage of the original stash, with adjustment for inflation so that the two numbers are compatible. I prefer to look at WR as a percentage of the current stash.

53 was only talking about interest and dividends though, not portfolio changes.

For me, using VPW, at the start of the year I set my allowed spending target as a % of my investable net worth. Whether I'm spending interest, dividends, or cutting into the principal does not matter. At the end of the year, I set the next year's target as a % of my net worth at that point. So my withdrawal rate includes divs and interest.

Others do it differently. If you have enough dividends, interest, pension, and SS, is there even a need to calculate a WR?

 

[pb4uski]

I am curious how people calculate WDR taking into account earnings from investments.

Say you have investable assets (IA) of $5M.
Say you earn interests and dividends in the year of 200k.
You live off the 200K and thus at the end of the year you still have $5M in IA (assume no change in equity prices).

Is your WDR 200k/5M (4%), or is it zero because your IA did not change.

Just curious thanks.

Technically, my understanding is that it is first year withdrawal divided by asset balance at the time that you retire.... so in your example 4%.

It is unlikely that one would have 4% of income... the dividend rate for equities is ~2%... and bond interest is perhaps 2% to 3.5% at most for a broad, diversified, high quality bond portfolio.

However, when you factor in equities appreciation in most years your portfolio will increase in value despite withdrawals that exceed income.

 

[53anddone]

"Others do it differently. If you have enough dividends, interest, pension, and SS, is there even a need to calculate a WR?"

This is kind of where I have arrived. I am fortunate enough that earnings from investments (dividends, interest, etc.) are very close to what I spend each year. Mostly I focus on this balance to keep it positive and thus avoid drawing down the earning assets.

I think tracking WR closely is suited for a situation where you are actually drawing down your assets reducing your new worth each year.

 

[RunningBum]

"Others do it differently. If you have enough dividends, interest, pension, and SS, is there even a need to calculate a WR?"

This is kind of where I have arrived. I am fortunate enough that earnings from investments (dividends, interest, etc.) are very close to what I spend each year. Mostly I focus on this balance to keep it positive and thus avoid drawing down the earning assets.

I think tracking WR closely is suited for a situation where you are actually drawing down your assets reducing your new worth each year.

Drawing down my assets does not necessarily reduce one's net worth.

Let's say you focus on dividend stocks, bonds, CDs, etc, and they give you a 3% yield, along with 2% growth.

And say I focus on total return, and my stocks increase 7% but pay no dividends, and I sell off 3% for expenses.

At the end of the year, you're net worth is up 2%, and mine is up 4%.

 

[levindb]

That sounds great for the period you've been retired. But the whole point of FIRECALC (and Monte Carlo) is to simulate the SORR. When the market drops, you may not return inflation + 3% on an annual basis.

Sorry, Bill, but I forgot to respond to your first concern. Once I completed my Excel solution to determine maximum amount we will have each year to live on and pay taxes, I did go to FireCalc to look at my chances of success based on that max number. It determined that I only had 74% chance of success to make it to age 105 without running out of money. If, however, I were to reduce spending by just 5%, we have a 90% chance of success. With a 10% reduction, we have 99% success rate.

Since we have about 25% flexibility in our spending based on the first 7 years of freedom, we were fine with the FireCalc results.

 

[street]

.3% WR for 2018.

 

[GenXguy]

I think you'll find there is no consensus on this - people calculate it however they wish.

As for me, I always use the initial amount of my portfolio at retirement as the denominator in calculating my WR. The Trinity Study was based on the initial portfolio amount, adjusted annually for inflation, with no provisions to adjust for portfolio changes.

Yeah, I think that's the most logical way as well and is how most people calculate it from what I have read.


For me, 3.5% WR of the initial FIRE stash adjusting yearly for inflation but remaining flexible. Dropping that to about 2% WR when SS kicks in more than a decade out.

 

[Bluegrass]

What is the FIRE nomenclature when a retiree is cash flow positive (thus no SWR)?

RSR - retired savings rate?

 

[RobbieB]

The initial port value makes no sense. I mean it gives an idea of how to start and weather you'll have enough but I would certainly look more at what I got now and how much I'm spending.

 

[tb001]

The initial port value makes no sense. I mean it gives an idea of how to start and weather you'll have enough but I would certainly look more at what I got now and how much I'm spending.

But if you're at >3.X%, and still have 30+ years in front of you, doesn't that set you up for greater SORR? (Where X is dependent on how many yrs you're projecting)

I think personally I would re-evaluate and up w/d rate if I were well over 100% in firecalc if modeled starting fresh today, but if your initial calculations were done to solve for 90-95%, I think I'd want to be in good shape in terms of sequencing risk before I'd start to think about w/d rate as a % of current portfolio.

That said, it's my guess most people are using current portfolio w/d rate. It would be interesting to see what the w/d rate was in yr 1 of retirement, given the mkt performance the last 8-10 yrs.

 

[RobbieB]

I think so too. I mean if the value sank 50% I would tighten up a lot and if the market made dough as fast as I could spend it I would.

 

[pb4uski]

The initial port value makes no sense. I mean it gives an idea of how to start and weather you'll have enough but I would certainly look more at what I got now and how much I'm spending.

But the Trinity Study and SWR in general are based on x% of the initial stash increased for inflation each year. So for example, if you start with $1 million and your WR is 4% and inflation is 2.5%, then withdrawals are $40,000 first year, $41,000 in year 2, $42,025 in year 3, et al no matter what the portfolio balance is. Then backtesting suggests that over 95% of the time you will never run out of money.

 

[Dtail]

But if you're at >3.X%, and still have 30+ years in front of you, doesn't that set you up for greater SORR? (Where X is dependent on how many yrs you're projecting)

If you are willing to adjust to % of remaining portfolio, or some version of it, then the potential SORR is effectively absorbed.

I think personally I would re-evaluate and up w/d rate if I were well over 100% in firecalc if modeled starting fresh today, but if your initial calculations were done to solve for 90-95%, I think I'd want to be in good shape in terms of sequencing risk before I'd start to think about w/d rate as a % of current portfolio.

If one's initial calculations are at 90-95% success rate in Firecalc, then effectively using a fixed % type of spending adjustment (i.e. 3%WR of a larger portfolio) effectively should keep one in the same % area of success rate.
Thus one doesn't necessarily need to increase the WR% rate to increase the actual dollars taken out from a larger portfolio.

That said, it's my guess most people are using current portfolio w/d rate. It would be interesting to see what the w/d rate was in yr 1 of retirement, given the mkt performance the last 8-10 yrs.

I would doubt that there are many at all actually using the "Trinity study" as their actual withdrawal strategy.

 

[flintnational]

I agree the method identified in the Trinity study is the standard method and the place to start. As an optional adjustment to the Trinity method, John Greeney at Retire early home page wrote an article in 2000 titled the "Payout Period Reset Method", where you declare a new payout period if your assets have increased and use the new number as your base year.

"If you started your withdrawals in 1997, and your portfolio grew by 20% in 1998, you could decide to use your December 31, 1998 portfolio balance to start a new pay out period. This would result in a higher inflation adjusted annual withdrawal. If your portfolio had lost value during the year, you would base your annual withdrawal on your "all-time high" December 31st portfolio value, plus an inflation adjustment. Adopting this practice greatly reduces the likelihood that you'll have a large net worth at the end of the pay out period"

This method also resolves a conundrum created by the Trinity study. If I retire one year and my friend retires 5 years later but our portfolios are the same in the year he retires (mine has grown significantly and outpaced inflationary increases in the starting wr), why can't we both use the same wr? The portfolio reset method allows me to "reset" to the current portfolio value.

ETA: Like many here, I over analyze. I track wr as a percent of peak, current year and starting year. A low ballpark number is all I am really interested in. For me, the Trinity study sets the ballpark.

 

[RunningBum]

This method also resolves a conundrum created by the Trinity study. If I retire one year and my friend retires 5 years later but our portfolios are the same in the year he retires (mine has grown significantly and outpaced inflationary increases in the starting wr), why can't we both use the same wr? The portfolio reset method allows me to "reset" to the current portfolio value.

You certainly can. I'm assuming you and your friend are about the same age, same life expectancy. The drawback to this is if you started with less than 100% chance of success and you restart, you probably reintroduce some chance of failure. If you stay with your original WR+inflation, with that good start you're almost certainly on one of successful tracks, so you are at ~100% success. It's a bit of Russian Roulette, by restarting you have the chance of getting the loaded failure chamber, except that as every year goes by your success chances should get better. Also, if you do reset, you're probably allowing yourself more fat that you could trim if things do go bad.

This is why I use VPW, it makes some slow adjustments upward in good times, and downward in bad times. I'm not stuck on an old conservative withdrawal rate if things take off, and it things go bad, I've already started adjusting down early, rather than holding on to the original model hoping things will recover and having to take drastic steps when I finally accept I'm on a failure path.

SORR has the same conundrum. Let's say this first 5 years for you were just average. After 5 years, supposedly your SORR risk is now over, but for your friend it is just starting. How does that make any sense? You're in the same position, so don't you have the same risk?

 

[Dtail]

You certainly can. I'm assuming you and your friend are about the same age, same life expectancy. The drawback to this is if you started with less than 100% chance of success and you restart, you probably reintroduce some chance of failure. If you stay with your original WR+inflation, with that good start you're almost certainly on one of successful tracks, so you are at ~100% success. It's a bit of Russian Roulette, by restarting you have the chance of getting the loaded failure chamber, except that as every year goes by your success chances should get better. Also, if you do reset, you're probably allowing yourself more fat that you could trim if things do go bad.

This is why I use VPW, it makes some slow adjustments upward in good times, and downward in bad times. I'm not stuck on an old conservative withdrawal rate if things take off, and it things go bad, I've already started adjusting down early, rather than holding on to the original model hoping things will recover and having to take drastic steps when I finally accept I'm on a failure path.

SORR has the same conundrum. Let's say this first 5 years for you were just average. After 5 years, supposedly your SORR risk is now over, but for your friend it is just starting. How does that make any sense? You're in the same position, so don't you have the same risk?

Just a comment on the VPW methodology.
IIRC, the concept is that the expectation is that the portfolio will be spent down close to zero upon reaching age 100?

Not that this is a bad thing, but it appears many folks try to maintain their inflation adjusted start of retirement balances as one of their objectives.

Thus the VPW WR% are typically higher than 4% and go higher from there.

 

[flintnational]

You certainly can. I'm assuming you and your friend are about the same age, same life expectancy. The drawback to this is if you started with less than 100% chance of success and you restart, you probably reintroduce some chance of failure. If you stay with your original WR+inflation, with that good start you're almost certainly on one of successful tracks, so you are at ~100% success. It's a bit of Russian Roulette, by restarting you have the chance of getting the loaded failure chamber, except that as every year goes by your success chances should get better. Also, if you do reset, you're probably allowing yourself more fat that you could trim if things do go bad.

I agree and started to include the same thoughts but my post was getting long. Greaney also shows that ending values get depleted using this method. But, to me that also means you are using up any cushion you have built up from a successful first few years of retirement. Assuming you had a 100% historical success wr and the future is no wore than the past, it should still work. But it depletes terminal values and takes away the cushion in case the future is worse than the past.

 

[RunningBum]

Just a comment on the VPW methodology.
IIRC, the concept is that the expectation is that the portfolio will be spent down close to zero upon reaching age 100?

Not that this is a bad thing, but it appears many folks try to maintain their inflation adjusted start of retirement balances as one of their objectives.

Thus the VPW WR% are typically higher than 4% and go higher from there.

That's correct. I wasn't comfortable with that, so I started with a lower WR rate, and also projected it past 100. It might be unfair to tout this method over another. I have enough buffer that any reasonable method should be 100%.

 

[Dtail]

That's correct. I wasn't comfortable with that, so I started with a lower WR rate, and also projected it past 100. It might be unfair to tout this method over another. I have enough buffer that any reasonable method should be 100%.

That works. lol
I do agree however with the general concept of some form of using "% of remaining portfolio" whether the standard concept, Clyatt, VPW, etc.

 

[homestead]

What is the FIRE nomenclature when a retiree is cash flow positive (thus no SWR)?

RSR - retired savings rate?

I was thinking about that too. I came up a negative SWR.

-2% SWR

 

[flintnational]

I was thinking about that too. I came up a negative SWR.

-2% SWR

Are you calculating a negative wr because of work income and or pensions and or SS?

 

[RobbieB]

I think it's about all the time you spend less than your portfolio makes and your net worth continues to rise. I have had this many years. You spend a hundred grand and yet your net worth goes up 2 hundred grand.

It's one of the reasons I came up with "Blow That Dough" -

 

[homestead]

Are you calculating a negative wr because of work income and or pensions and or SS?

Not work, retired. SS + small pension is more than we currently spend so ended
up putting a big chunk back into nestegg.

 

[flintnational]

Not work, retired. SS + small pension is more than we currently spend so ended
up putting a big chunk back into nestegg.

Okay, thanks. I understand.