When do you determine your withdrawal amount after retiring?

[ERD50]

Although I cannot see your graph, ....

Here's the graph (but if you go to the ficalc link, enter my two numbers, and scroll down to "Simulations By Start Year", and click "1966", you should see the graph and can hover to get the exact $ values). Though in the chart below, you can see:

Largest $945,380.61
Smallest $445.07
Final Value $445.07

So it does show the inflation adjusted portfolio never exceeded the initial $1M, so therefore, no opportunity for a 'raise', and therefore, no greater risk to the near-failure.

I will review your numbers later, thanks.

 

[ERD50]

.... the following hypothetical comparing traditional method versus retire again after 1 year and then use traditional method for subsequent years:
... It is a mathematical certainty that the retire again method will fail before the traditional from day one method for the exact same starting year.

I believe there are two flaws in your example.

One - maybe not so important here, is that for the RA&A calculation, you need to base it on the inflation adjusted portfolio, compared to the inflation adjusted standard withdrawal method.

Two - and this one is essential, we don't know that your hypothetical path was 100% successful with an initial 4% inflation adjusted WR. Those are the only conditions that RA&A will kick in. And that's because starting with a 100% SWR, we have already eliminated all the scenarios that would have failed.

So while the math does say you have reduced your margin of safety (as I said, no free lunch), it still would not fail under the data set we have.

 

[audreyh1]

Yup. I think ERD50 and I have agreed with you on this point at least several times.



I'm a "safety first" person also. Most people here probably are. And if we're talking about an "unlucky" 1966 retiree, we might be averse to RA&A / POPR.

But let's go to the other end of the spectrum in terms of examples, just as a thought experiment. Suppose instead of that one year of good performance in 1966, we have a number of years of good performance (as we have had over the past decade or so). You wake up one fine January 1st and discover that, after a decade of good performance, your 4%-initial-adjusted-for-inflation amount is now 2% of your current portfolio. This is because that good market performance has outstripped inflation by quite a bit over that decade.

At some point, wouldn't you agree, the "lucky" retiree would maybe decide that they'd still be "safe enough" if they raised their WR%? They could compromise and raise it to 3% of their current portfolio and then resume the inflation adjustments. They'd get to spend 50% more (European river cruise anyone) and still be "very safe".

The problem of course with "safe" is that we're discussing the odds of running out of money in the future. Which gets into one's assumptions about future history being better or worse than the past.

We can also have different opinions about how "safe" is safe "enough". You might be comfortable at 3%, I might be comfortable only at 1%. YMMV as they say.

Some people just don't want to spend money on anything, and therefore wouldn't feel the urge to splurge just because they could. Maybe they've been brainwashed into frugality by their parents, or maybe they Fat FIREd or overshot the mark to begin with and already spend all they want or need to. But there are probably many who have something they want to spend more on (like this thread OP).

I think this goes to show you why people simply don’t blindly follow the original 4% rule of initial portfolio value plus inflation adjustment each year. It’s wildly inefficient in many cases. Everyone here as far as I can tell looks at their current portfolio value and make adjustments if needed.

 

[Al18]

Based on what I’ve read on these forums, most early retirees have 3-5 years of expenses in cash/fixed income while some here have a lot more than 5 years.

 

[Gumby]

I believe there are two flaws in your example.

One - maybe not so important here, is that for the RA&A calculation, you need to base it on the inflation adjusted portfolio, compared to the inflation adjusted standard withdrawal method.

Two - and this one is essential, we don't know that your hypothetical path was 100% successful with an initial 4% inflation adjusted WR. Those are the only conditions that RA&A will kick in. And that's because starting with a 100% SWR, we have already eliminated all the scenarios that would have failed.

So while the math does say you have reduced your margin of safety (as I said, no free lunch), it still would not fail under the data set we have.

Perhaps I am particularly dense today, but I do not understand your first point. Why would you inflation adjust the portfolio to calculate the retire again amount to be taken the second year (i.e. at t1)? You made your first year draw of 4% and now the choice is whether to inflation adjust it for the second year per the traditional method or market adjust per the retire again method.

I also do not understand what you mean in point 2 by "those are the only conditions that RA&A will kick in".

 

[Gumby]

I think this goes to show you why people simply don’t blindly follow the original 4% rule of initial portfolio value plus inflation adjustment each year. It’s wildly inefficient in many cases. Everyone here as far as I can tell looks at their current portfolio value and make adjustments if needed.

No doubt about that. I think most people intuitively reduce spending in a down market, whether they calculate it or not. Probably the simplest way to enjoy market gains while not running out of money is to calculate your allowed withdrawal as 4% of Dec 31st balance. Of course this also requires that you be willing to cut back in down years. I would be uncomfortable telling people they could always ratchet up spending when the market gods smile and never have to cut back when they don't, but that's what the retire again proponents seem to be saying.

 

[ERD50]

Perhaps I am particularly dense today, but I do not understand your first point. Why would you inflation adjust the portfolio to calculate the retire again amount to be taken the second year (i.e. at t1)? ...

I also do not understand what you mean in point 2 by "those are the only conditions that RA&A will kick in".

I may be mixed up on that 1st point, and maybe I'm double counting inflation between the WD and the portfolio? I'll need to revisit that later, I've got to get onto other things yet today.

On the 2nd point, yes, if the portfolio hasn't grown, there is no upward RA&A adjustment.

I started looking through the graphs to find a good example of a sequence that rises, and then fall near failing. But I do need to move on for now, will also revisit that, but...

While enjoying my lunch, I realized that maybe these words are better at conveying the point:

We agree, any increase in WD must be reducing your margin of safety, no free lunch, it must be so. But...

I believe the data is showing us that you have not increased your risk any more than when you first started. Taking IA (Inflation Adjusted) $36,830 from a $1M portfolio will leave you with a small margin of safety in the very worst years (1966 being one of them). If/when your portfolio grows, your margin of safety has increased. So when you take an equivalent 'raise', you've just 'used' up that margin, but you are at no more risk than your earlier basis as the start.

Now, in practice, I would expect that most of us would look at that and say: "Hey, I've been lucky, I've avoided the dreaded SORR, my portfolio has outpaced inflation, even with my annual WDs. That RA&A view says I can increase my WD from (say), $40,000 to $50,000, and IA that for the rest of my life, and I'm at the same risk level I was at when I started. But, I'm going to take the best of both worlds, do a little BTD and increase my spending to $45,000. That way, I get to have some fun, and still *increase* my margin of safety from where I started".

The very conservative might prefer all the safety they can get, or have nothing they care to spend extra on, and would rather leave it to heirs/charity.

The 'wild & crazy' might decide to spend it all, figuring that was the risk they signed up for in the beginning, why change now?

Does that help?

 

[SecondCor521]

I believe the data is showing us that you have not increased your risk any more than when you first started. Taking IA (Inflation Adjusted) $36,830 from a $1M portfolio will leave you with a small margin of safety in the very worst years (1966 being one of them). If/when your portfolio grows, your margin of safety has increased. So when you take an equivalent 'raise', you've just 'used' up that margin, but you are at no more risk than your earlier basis as the start.

The previous paragraph assumes that the future will be no worse than the past. I agree with that assumption but @Gumby might not.

Now, in practice, I would expect that most of us would look at that and say: "Hey, I've been lucky, I've avoided the dreaded SORR, my portfolio has outpaced inflation, even with my annual WDs. That RA&A view says I can increase my WD from (say), $40,000 to $50,000, and IA that for the rest of my life, and I'm at the same risk level I was at when I started. But, I'm going to take the best of both worlds, do a little BTD and increase my spending to $45,000. That way, I get to have some fun, and still *increase* my margin of safety from where I started".

I agree that in practice there are a lot of people who would do as you describe.

The very conservative might prefer all the safety they can get, or have nothing they care to spend extra on, and would rather leave it to heirs/charity.

The ultra ultra conservative (like me) might even try to reduce spending even further!

It seems to me that @Gumby is also very conservative, which I understand and respect.

The 'wild & crazy' might decide to spend it all, figuring that was the risk they signed up for in the beginning, why change now?

And some folks don't even do that much math at all.

 

[Dtail]

No doubt about that. I think most people intuitively reduce spending in a down market, whether they calculate it or not. Probably the simplest way to enjoy market gains while not running out of money is to calculate your allowed withdrawal as 4% of Dec 31st balance. Of course this also requires that you be willing to cut back in down years. I would be uncomfortable telling people they could always ratchet up spending when the market gods smile and never have to cut back when they don't, but that's what the retire again proponents seem to be saying.

Thus the Clyatt 4/95 concept addresses this potential issue to some degree.

 

[Time2]

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.

I suspect the frugal spenders here and there are many, will calculate the 4% withdrawal rate and then live on less than that so never pay attention to their spending, the just know it is below the safe 4%. The may occasionally retest it just to be sure.

 

[Gumby]

.....

I believe the data is showing us that you have not increased your risk any more than when you first started. Taking IA (Inflation Adjusted) $36,830 from a $1M portfolio will leave you with a small margin of safety in the very worst years (1966 being one of them). If/when your portfolio grows, your margin of safety has increased. So when you take an equivalent 'raise', you've just 'used' up that margin, but you are at no more risk than your earlier basis as the start.
.....

After having tinkered with FIRECalc for several hours, running multiple scenarios, I have concluded that you are indeed correct about this within the boundaries of the FIRECalc data. Although I note that the safe spending level for 100% varies with the composition of your portfolio. If you specify 0% equities, it goes down to $25,469. And if you specify 100% equities, it drops to $34,160.

Edit to add: I got the numbers for the last two sentences by going into the Portfolio tab and changing the allocation. But when I look at the results graph for spending levels, the little pop ups don't match the allocation.

 

[Dtail]

After having tinkered with FIRECalc for several hours, running multiple scenarios, I have concluded that you are indeed correct about this within the boundaries of the FIRECalc data. Although I note that the safe spending level for 100% varies with the composition of your portfolio. If you specify 0% equities, it goes down to $25,469. And if you specify 100% equities, it drops to $34,160.

Edit to add: I got the numbers for the last two sentences by going into the Portfolio tab and changing the allocation. But when I look at the results graph for spending levels, the little pop ups don't match the allocation.

IIRC, the SWR was closer to 3.60% if one reduces the ER fees down from 18 bps to a much lower percentage.

 

[RobLJ]

Really interesting thread. I've pretty much done what Erd suggests on recalculating the SWR. I semi-retired in 2015 at 57 and fully retired in 2020, with the intention that my DW would work longer than I, but since she didn't like her new job in Reno, I told her to fully retire at the end of 2018 and was withdrawing for expenses from my portfolio alone beginning in 2017 until she was eligible to withdraw in 2021.
We started with a 5.5% withdrawal rate, assuming we would tamp it down once SS began (next year for me).
I started out with a 4.5% WR "goal" in 2015 which I of course violated in 2017 and knew I would.
However, I recalculated it in 2020 and it was 40% higher. I just recalculated it again and it is 75% higher than 2015. Part of it is that we didn't spend all of what we withdrew, so the taxable brokerage has gotten higher and higher. We spent close to the earlier limit this year, due to installing a heat pump and flying 1st class to Scotland for the Scotland hike. I told her from now on we fly business overseas (not on domestic flights), damn the torpedoes.
DW doesn't want to leave too much to the kids, so I think recalculating every 4-5 years is a good way to avoid that issue and also fund go-go spending in the early years of retirement.
As gumby (or maybe someone else noted), recalculating increases the risk you will croak with a lot less in the portfolio, perhaps almost nothing. C'est la vie!

 

[levindb]

Rather than calculating an actual SWR, I take more of a Die With Zero approach to the situation...with some cushions built in.

I calculate in Today's dollars how much we could spend each year to deplete all of our nest egg by my age 105. We assume our investment ROI to be 3% above inflation. That becomes our MAX annual withdrawal...but we normally only withdraw/spend 60-70% of that, so we consider that a SAFE amount and our SSA benefits are covering about 70% of our normal spend. If we do not make it to age 105, then the grandkids will get a gift. We have a 50/50 asset allocation to help reduce risk and we are mid-70's...and sleep well at night.

 

[ERD50]

... I believe the data is showing us that you have not increased your risk any more than when you first started. Taking IA (Inflation Adjusted) $36,830 from a $1M portfolio will leave you with a small margin of safety in the very worst years (1966 being one of them). If/when your portfolio grows, your margin of safety has increased. So when you take an equivalent 'raise', you've just 'used' up that margin, but you are at no more risk than your earlier basis as the start....

After having tinkered with FIRECalc for several hours, running multiple scenarios, I have concluded that you are indeed correct about this within the boundaries of the FIRECalc data. ...

Thanks for that feedback. One of the reasons I put in as much effort as I do for some these discussions, is to find out if my thinking is correct. And the best way to do that, is to allow myself to be challenged, and to see if I can communicate my position to someone else. I was pretty confident going in, but this helps me - I really don't think there is an "ooops" in my thinking, but it sure wouldn't be the first time!