When do you determine your withdrawal amount after retiring?

[TrophyHusband]

Due to an injury I've made the decision to retire. However, as I'm getting my financial house in order and checking investments, FireCalc, SWR, etc. I'm unsure as to when to determine what my actual Safe Withdrawal (SW) amount will be.

To be clear, I know what my SW rate is, but I don't know when to actually determine what the SW amount (SWR x retirement/investment account value) is. Is it the day you retire, the day you run out of cash, the day you make your first withdrawal from a retirement/investment account? Especially important considering the volatility of the market over the last several weeks where our retirement/investment accounts moved significantly over a period of 3-weeks. Determining a SW amount on July 17th (DJIA 41,198) would have been significantly different than on Aug 5th (DJIA 38,703).

For example, if my total retirement/investment account assets are;
- Today (Aug 16): $5M
- Retirement date (Aug 31): $4.5M
- Date when cash reserve accounts are zeroed (Nov 1): $4.8M
- Date when first withdrawal from retirement/investment accounts occurs (Dec 1): $5.2M

When would I determine my SW amount?

Note: The numbers above are just examples. I do not expect to actually experience a 10% swing in value between Aug 16 and Aug 31 nor do I know the value of the accounts in Nov or Dec.

 

[Al18]

You could use a percentage of your investable assets on 12/31/23 - this is the way the IRS determines your RMD.

Some take monthly distributions, while others take it quarterly, twice a year or yearly.

I prefer to sell some stocks, some CD’s and withdraw some from my IRA every 6 months, transfer the proceeds to a high yield savings account and monthly, the bank does automatic transfers to my checking account.

I don’t worry too much about sticking to the SWR. Having been retired 5+ years, I’ve found out nothing bad will happen if you SWR drifts slightly. You can define what slightly means.

 

[mrfeh]

Of course, there's no such thing as a "safe" withdrawal rate. You'll need to adjust, depending on how the market does. I don't think anybody actually calculates a number the day they retire and uses that number (adjusted for inflation) for the rest of their life.

To answer your question, I would say the last day you receive a paycheck, but that's completely arbitrary.

 

[TrophyHusband]

You could use a percentage of your investable assets on 12/31/23 - this is the way the IRS determines your RMD.

Why would I want to use the value as of 12/31/23? Since the value of the portfolio has appreciated significantly over the past 8+ months any SWR used for that date would actually be significantly less than the target/desired SWR based on the actual portfolio value on the withdrawal date (whenever that is).

Ex:
SWR = 3.6%
Portfolio Value 12/31/23: $5M
SW amount = $180k

Portfolio value 8/16/24: $5.8M
SW amount of $180k = SWR of only 3.1%

 

[SecondCor521]

I think most people calculate their WR periodically over time, starting from before they retire, to the day they retire, to years afterward. They then use some sort of assessment - with varying degrees of analysis effort - to decide if their current WR is safe.

Personally I keep track of what I spend, what my FIRE stash is, then look at the resulting WR rate to decide if I'm "safe". I think more people do it my way than the opposite way that you're describing: choose a "safe WR" apply that to the FIRE stash, then spend whatever that number is.

I started tracking my "spending / FIRE stash" number for probably 15 years before I FIREd. I noted it for posterity on my actual retirement date. I monitor it somewhat still - 8 years post retirement - but it's getting sort of silly as the portfolio has grown, I've gotten older, spending has been about the same, so I'm around a 1% WR. From those here who have been retired as long as I have or longer, they seem to eventually relax and track things less.

Bottom line: your WR% is going to bounce around as your portfolio demonstrates volatility and you have big expenses (unless you somehow amortize those). You have to decide how to handle that bouncing around somehow. Remember, everyone's crystal balls are broken, so whatever you choose to do, it's probably just some manner of educated guess about the future.

 

[RetiredHappy]

Unless you are really tight with your retirement savings, WR% doesn't really matter. If you are tight, then you are not ready to retire. I don't even look at my withdrawal rate. I know I have enough and withdraw "freely". My WR can be 8 to 10% in some years, especially the early years, and will drop to around 2% 12 years after I retire. We have lots of lumpy expenses too, and we just spent $200K on home renovation a couple of years ago, after trading a home for $200K more than the one we sold. Our car is only 4 years old and my husband wants the 2025 model which we will buy this Nov/Dec. It means another lumpy expense and more withdrawal.

4% safe withdrawal is more a guideline than gospel.

 

[audreyh1]

The historical data models all start on Jan 1 FWIW.

Personally I keep it simple and base my annual withdrawal in Jan on the end of year value Dec 31 each year. It varies as some years the portfolio grows, occasionally the portfolio shrinks. I just live with the variability as my spending is flexible. FIREcalc models this as %remaining portfolio method.

 

[Dash man]

I would never let my cash go to zero. By always keeping a few years of spending in cash, market swings don’t concern me as much. I can replenish my cash when the markets are higher.

 

[Al18]

You asked for my comment - and I gave it to you. Do you want a refund on my advice

 

[Midpack]

I don't think anybody actually calculates a number the day they retire and uses that number (adjusted for inflation) for the rest of their life.

+1. OP - Any day/amount is fine, there is no correct day/amount. SWR is an axe, not a scalpel - if you’re worried about what days balance to use to calculate SWR, you’re missing the point. Just use $4.5M or $5M. Your SWR is going to fluctuate daily no matter what you choose. BTW what % success rate are you using? Your SWR at 95% vs 100% varies quite a bit too.

The authors of SWR have repeatedly said a retiree should re-evaluate SWR periodically throughout retirement, and course correct up or down accordingly.

Safe withdrawal rates - Bogleheads

www.bogleheads.org

The authors of the paper, however, did not mean for their scenarios to be applied rigidly or uncritically. The article makes this very important statement:

The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.

Nisiprius requested clarification from Professor Philip L. Cooley, senior author of the Trinity study:[4]

What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity. I think all the [Trinity] authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while.

Professor Cooley's response:[5]

You have hit the nail on the head! I've tried to explain that thought to journalists but they don't seem to get it. You've got it. Stay flexible my friend!, which is the advice we should give to retirees.

 

[Dtail]

I use end of year assets as a guideline as to the next years' withdrawal rate. I am thinking of using some derivation of the Bob Clyatt methodology starting next year which can be modeled in Firecalc under the percentage of portfolio choice.

 

[audreyh1]

For the example of cash reserve accounts going to 0 Nov 1:

I retired in August but I had enough built up in cash to last me until the end of the year and then some. So you’d do want to take the step now to free up what you need to cover current year spending.

Then you could reevaluate your whole situation at the end of the year if you like.

My Jan withdrawal sets me up for the new year. The biggest being replenishing my spending money but I also rebalance the remaining portfolio as needed. Folks here usually come up with what timing they prefer. Someone here says they do it every 6 months, others quarterly, others annually, and yet even more variations. People really do a wide variety of things overall. Very creative forum here!

Managing your cash flow is a new skill to learn once retired and living off your investments. Some folks are lucky and have cash coming in monthly from pension and/or social security covering most of their spending needs. The rest of us have to learn how to manage our cash flow.

P.S. Sorry to hear about your injury.

 

[Surewhitey]

I've looked at my numbers and felt like it depends on how many years pre SS & post SS. We'll need the full 4% of the lowest # for the year (TBD) until SS #1, then 3%. After SS #2, 2%. The little pension is icing on the cake.

You could have a 5 yr CD/treasury ladder set up for the first 5 years to give you a "paycheck" to start & see how it works for you.

As we get to SS#1, 10 years from now, we can adjust as history will have been written.

 

[VanWinkle]

8 years into retirement and I have taken money from my investments as needed. It has never exceeded 2% and I am struggling to spend more.

 

[jebmke]

When my bank balance isn't sufficient to pay the bills next month. I look at the puts and takes at the end of the prior month; that tells me how much I need to withdraw, if any to fund the next month.

 

[big-papa]

Due to an injury I've made the decision to retire. However, as I'm getting my financial house in order and checking investments, FireCalc, SWR, etc. I'm unsure as to when to determine what my actual Safe Withdrawal (SW) amount will be.

To be clear, I know what my SW rate is, but I don't know when to actually determine what the SW amount (SWR x retirement/investment account value) is. Is it the day you retire, the day you run out of cash, the day you make your first withdrawal from a retirement/investment account? Especially important considering the volatility of the market over the last several weeks where our retirement/investment accounts moved significantly over a period of 3-weeks. Determining a SW amount on July 17th (DJIA 41,198) would have been significantly different than on Aug 5th (DJIA 38,703).

For example, if my total retirement/investment account assets are;
- Today (Aug 16): $5M
- Retirement date (Aug 31): $4.5M
- Date when cash reserve accounts are zeroed (Nov 1): $4.8M
- Date when first withdrawal from retirement/investment accounts occurs (Dec 1): $5.2M

When would I determine my SW amount?

Note: The numbers above are just examples. I do not expect to actually experience a 10% swing in value between Aug 16 and Aug 31 nor do I know the value of the accounts in Nov or Dec.

I started by not using SWR to calculate how much I was going to withdraw. So that means no FireCalc or SWR to determine how much to withdraw.

I use an amortization based method which takes some rough estimates for future stock returns and current TIPS yields to calculate my withdrawals. In fact, that calculation done every year for several years leading up to retirement is how I determined when I was ready. Not a "number" and not a multiple of living expenses. It was what I could withdraw, along with tax estimates. Once the after-tax number was big enough that I felt I had enough margin to take care of the wide error bars associated with predicting future stock returns, I retired.

VPW is one example of an amortization based withdrawal method, but it doesn't use updated stock or bond return estimates and is available over on bogleheads.

I retired in the middle of 2023. I had sufficient cash that I just decided to live off of that till the end of the year and then started withdrawing from my investment accounts starting on January 1st (or close to it) based on the value of each asset I held at that time. I could just as easily have started at the point I actually retired, calculated an annual withdrawal at that point and then scale it appropriately to cover the remainder of the year.

Cheers.

 

[teej1985]

Why would I want to use the value as of 12/31/23? Since the value of the portfolio has appreciated significantly over the past 8+ months any SWR used for that date would actually be significantly less than the target/desired SWR based on the actual portfolio value on the withdrawal date (whenever that is).

Ex:
SWR = 3.6%
Portfolio Value 12/31/23: $5M
SW amount = $180k

Portfolio value 8/16/24: $5.8M
SW amount of $180k = SWR of only 3.1%

Because using a larger bubbly number might increase the odds of experiencing failure ?

 

[djsander]

My wife talked about the 4% SWR before retiring and having been part of this group and Bogleheads was already knowledgeable. When we retired it shifted to this is how much we have to spend every year. We usually go over that, but it’s not an issue. We are still frugal, do what we want, don’t go without, and don’t just spend because we can. Our withdrawal rate isn’t relative as we don’t spend anywhere near what 4% would be. It’s much lower and isn’t a necessary factor. I know there are a lot of people that want to spend close to 4%, but we don’t have a lot of needs or wants. I do occasional check it and chuckle as it’s pretty low. Unless it all goes to the nursing home the kids will probably receive 7 figures. That’s ok with us as we are still enjoying retirement!

 

[braumeister]

Our withdrawal rate isn’t relative as we don’t spend anywhere near what 4% would be. It’s much lower and isn’t a necessary factor. I know there are a lot of people that want to spend close to 4%, but we don’t have a lot of needs or wants.

Many of us are in the same situation. We know we could spend a lot more than we do, but there is no desire to do so. Anything left at the end will find a good home, so there's nothing to worry about.

 

[big-papa]

Many of us are in the same situation. We know we could spend a lot more than we do, but there is no desire to do so. Anything left at the end will find a good home, so there's nothing to worry about.

Yes indeed. Even though I use amortization to calculate our withdrawals, so far the max we could spend far exceeds the max we actually do spend. Nothing wrong with having some margin, either for an inevitable rainy day or for a legacy.

Cheers.

 

[Markola]

Look into dynamic spending models, too. We have had most of our portfolio AUM at Vanguard for 6 years now, where they have never once referred to any blunt tool SWR or amount. Rather, their software absorbs our constantly changing life and the markets and adjusts our sustainable spending levels modestly and manageably as we go.

 

[TrophyHusband]

+1. OP - Any day/amount is fine, there is no correct day/amount. SWR is an axe, not a scalpel - if you’re worried about what days balance to use to calculate SWR, you’re missing the point. Just use $4.5M or $5M. Your SWR is going to fluctuate daily no matter what you choose. BTW what % success rate are you using? Your SWR at 95% vs 100% varies quite a bit too.

I'm not sure I understand this philosophy. Even with the injury, once I'm better, I plan to travel..... a lot. If I can, I will spend every penny not allocated to living expenses (food, shelter, healthcare, etc..) on travel and experiences. That is "the point".

For me, a SW amount, and hence a travel budget, calculated on July 17th, 2024 would have varied significantly from one calculated on Aug 5th, 2024. Using the 'it makes no difference when you calculate your SW amount' or 'we don't spend nearly as much as we could' philosophy potentially means dozens of trips over a lifetime that were missed out on and not enjoyed because of a 3-week difference on when the SW amount was calculated.

I don't mind being conservative (SWR of 3.6%) but I want to squeeze as much juice out of this orange as I can and if I'm not spending the SW amount (3.6% x portfolio value on .... when/what date/what event??) every year I'm doing something wrong. The thought of missing out on dozens of fulfilling experiences because of a difference of a couple weeks irks me to no end.

 

[mrfeh]

I don't mind being conservative (SWR of 3.6%) but I want to squeeze as much juice out of this orange as I can and if I'm not spending the SW amount (3.6% x portfolio value on .... when/what date??) every year I'm doing something wrong. The thought of missing out on dozens of fulfilling experiences because of a difference of a couple weeks irks me to no end.

Nobody knows what the future will hold. There's no way to say you can spend $X per year and everything will be fine.

Determine, to the best of your abilities, what your expenses will be. Plug everything into firecalc (or similar) and get a withdrawal rate that has a high rate of past success.

And then be prepared to cut back on spending if necessary.

You might want to read this: Variable percentage withdrawal - Bogleheads

You also may want to go over to the bogleheads forum and search for "SORR".

 

[audreyh1]

I'm not sure I understand this philosophy. Even with the injury, once I'm better, I plan to travel..... a lot. If I can, I will spend every penny not allocated to living expenses (food, shelter, healthcare, etc..) on travel and experiences. That is "the point".

For me, a SW amount, and hence a travel budget, calculated on July 17th, 2024 would have varied significantly from one calculated on Aug 5th, 2024. Using the 'it makes no difference when you calculate your SW amount' or 'we don't spend nearly as much as we could' philosophy potentially means dozens of trips over a lifetime that were missed out on and not enjoyed because of a 3-week difference on when the SW amount was calculated.

I don't mind being conservative (SWR of 3.6%) but I want to squeeze as much juice out of this orange as I can and if I'm not spending the SW amount (3.6% x portfolio value on .... when/what date/what event??) every year I'm doing something wrong. The thought of missing out on dozens of fulfilling experiences because of a difference of a couple weeks irks me to no end.

I think you just have to relax and pick something. Investments vary throughout the year. If you want to pick from a high point during this year I expect it will still be perfectly safe. Your selected % rate is already conservative.

 

[RunningBum]

I like reevaluating spending each year, because it allows me to spend a little more when the market is good, or my previous spending was low, and has me cutting back immediately if the reverse happens. But the increase or decrease is spread out over my remaining years, and reevaluated each year to see if the market returns to the norm. Otherwise, in a prolonged downturn you're going to have to cut back at some point, and the longer you wait, the more severe the cutback has to be. VPW is what I use but there are other methods.

I know many people here have enough buffer, and the previous years have been pretty strong, that they don't have to worry about it. I don't think it's good advice for a new retiree who may not have such a buffer.

To answer your question directly, I would base this year on the retirement date, and use a method that reevaluates each year. If the date you picked was a local high or dip, you'd only have to live with it another few months.