When Does True SWR Begin?

[Elbata]

OP here.
The responses so far have been what I'd expect.

I do find it interesting that there is so much discussion, clarification and hand-wringing about the 'traditional SWR rule' (initial X% plus inflation) only to realize that few, if any actually use this method.

Could the overall discussions become as academic as my post?

You make a good point. Honestly, from what I read, most that visit this website don't really need to be here.

But it's still one of my favorite hang-outs. Lots of thoughtful/smart people but with different perspectives.

Even the 4% SWR, I still enjoy reading about it. It just amazes me that if we build up 25 times more than expenses, we'd need never work the rest of our lives. That's pretty crazy stuff that many people just don't realize.

 

[youbet]

Not sure what you are saying as FireCalc allows one to input SS and pensions and the dates at which they start plus whether or not to include COLA with each pension.

I'm saying that if your inputs to FireCalc, including your inputs regarding ss and pensions, are not what you actually wind up doing or vary in some regard from what you input, then FireCalc output does not apply.

Pretty straight forward. Backtesting doesn't work unless reality through time matches the original inputs.

 

[youbet]

It just amazes me that if we build up 25 times more than expenses, we'd need never work the rest of our lives. That's pretty crazy stuff that many people just don't realize.

Only if:

Future investment returns and inflation are within the bounds of the past and your actual investments (your AA and expense ratios) closely reflect what you inputted.

Just saving 25 times expenses doesn't do it without following the rest of the rules. That is, doing during your retirement (in regard to AA and spending) what you said you'd do when you entered the inputs. I suspect lots of folks have some significant variation form what they said they'd be doing and what they actually do. That's the case with DW and I anyway. 12 years into FIRE, our current spending and AA is quite a bit different than our original inputs!

 

[W2R]

I wonder how many people actually stick to that firm "X% plus inflation" from a portfolio calculation made 8 or 9 years ago.

I really did INTEND to, before I retired. But gosh, the "% of the previous 12/31 balance" method is so much easier.

Actually it has turned out that my withdrawals are small enough to satisfy either approach. I also make sure that I never spend more than my dividends because that makes me happy.

And then I blow all that to Hades in a handbasket by buying a house one year, using the excess money I could have spent according to these methods but did not spend in prior years. And then revert to spending even less after that. Guess that's life.

Still, I feel most comfortable with the "% of the previous 12/31 balance" method because it is better suited to my psychology than the "X% plus inflation" method. For example, can you imagine continuing to withdraw at the same or higher level, during a huge stock market crash? I can't! That's just insane for a worrier like me.

As for your questions about partial retirement, spouse still working, and so on, I don't think that any of that matters. What matters is how much you withdraw, for how many years this goes on, and how your portfolio is invested.

 

[OldShooter]

+1 I view it backwards... I calculate our WR based on the spending for our needs and lifestyle in relation to our portfolio and then compare that result to the rate that is viewed as "safe".... if ours is at or lower then all is good.

+1

If I use a 36" measuring stick, that doesn't mean that everything I measure has to be 36." I look back at prior year spending and look forward at current year likely spending and occasionally compare it to a 4%-of-portfolio measuring stick. (Not the official SWD method, I know.)

Sometimes it's bigger, sometimes it's less. When it's bigger I look to see whether I think that's ok.Travel, cars, roofs, etc. can bump it up. A year when Mr. Market has been good to us also makes it easier to be comfortable with something, travel especially, taller than the measuring stick. More likely, our withdrawal rate will be less, allowing me to feel safe and smug. We basically have enough to spend whatever we want, partially because our wants are not extravagant. (No Cessna Citation jets, for example.) There will be money left over under almost any foreseeable scenario. Life is good.

 

[Dtail]

I know a lot of retirees and I don't know any who use any kind of mathematical method to manage their withdrawal. Most of them use either "judgement" or "dividends only + pension/SS if available."


I view the SWR as a curb feeler. This may not be a familiar term to some. Here is an explanation.

I do believe there are folks and some on this site have indicated that they do use a set WR% of their portfolio each year and thus a mathematical methodology. Yes there is also judgement applied with this decision.

 

[pb4uski]

.... We basically have enough to spend whatever we want, partially because our wants are not extravagant. (No Cessna Citation jets, for example.) There will be money left over under almost any foreseeable scenario. Life is good.

+1 No need for more than one Cessna Citation here... you can only fly in one at a time anyway.

 

[OldShooter]

+1 No need for more than one Cessna Citation here... you can only fly in one at a time anyway.

Yeah. And for most of 'em you have to hire a right-seater -- a real extravagance!

 

[pj.mask]

What I haven’t seen so far is this; if you have a 1:20 chance of going broke (5% right?) and you think that is fine so you retire. Then year 1 stocks do well so you redo your SWR... you re-roll the dice. Now theoretically you might have 1:19 chance of going broke. You do this enough and you might run out of money if the market crashes and you follow your strict SWR from that point forward.

Now we all know past results don’t have anything to do with what happens in the future. You might increase for 20 years and end up with way more money when you die.

I think if you plan on re-rolling your odds every year, you need to pick something closer to 0% historic failure if you don’t plan on cutting spending or anything.

 

[Dtail]

What I haven’t seen so far is this; if you have a 1:20 chance of going broke (5% right?) and you think that is fine so you retire. Then year 1 stocks do well so you redo your SWR... you re-roll the dice. Now theoretically you might have 1:19 chance of going broke. You do this enough and you might run out of money if the market crashes and you follow your strict SWR from that point forward.

Now we all know past results don’t have anything to do with what happens in the future. You might increase for 20 years and end up with way more money when you die.

I think if you plan on re-rolling your odds every year, you need to pick something closer to 0% historic failure if you don’t plan on cutting spending or anything.

Well isn't it the concept of retiring in an upmarket or downmarket?
Theoretically in hindsight, would one rather retire in 2009 or 2018?
But with the % remaining of portfolio choice, your failure rate doesn't change even if your yearly monies does change.

 

[pb4uski]

What I haven’t seen so far is this; if you have a 1:20 chance of going broke (5% right?) and you think that is fine so you retire. Then year 1 stocks do well so you redo your SWR... you re-roll the dice. Now theoretically you might have 1:19 chance of going broke. You do this enough and you might run out of money if the market crashes and you follow your strict SWR from that point forward.

Now we all know past results don’t have anything to do with what happens in the future. You might increase for 20 years and end up with way more money when you die.

I think if you plan on re-rolling your odds every year, you need to pick something closer to 0% historic failure if you don’t plan on cutting spending or anything.

Nah, I don't think so. At 95% success your withdrawal is effectively based on the worst 5% of scenarios... it is an educated guess that all of those worst scenarios that the SWR is based on had a drop in values in the first year.

 

[audreyh1]

Nah, I don't think so. At 95% success your withdrawal is effectively based on the worst 5% of scenarios... it is an educated guess that all of those worst scenarios that the SWR is based on had a drop in values in the first year.

Which post are you replying to?

 

[TwoByFour]

You make a good point. Honestly, from what I read, most that visit this website don't really need to be here.

Yup. And most people don't need to be on FaceBook or Instagram either. It is really a form of entertainment for many of us users, and eyeballs for the owners who make money off of us.

 

[audreyh1]

You make a good point. Honestly, from what I read, most that visit this website don't really need to be here.

But it's still one of my favorite hang-outs. Lots of thoughtful/smart people but with different perspectives.

Even the 4% SWR, I still enjoy reading about it. It just amazes me that if we build up 25 times more than expenses, we'd need never work the rest of our lives. That's pretty crazy stuff that many people just don't realize.

We’re here to learn from each other as we enjoy our early retirement. There is far more to it than Firecalc.

 

[Koolau]

I used the SWR concept in the planning stages - pre-retirement. IOW I figured out about what I would need in the way of average yearly income and then checked whether my stash could support that at the calculated SWR. If so, I was ready to go, financially. Actually spending at that rate only happened by chance. Some years (when purchasing property or rehabbing same) WDR was above the calculated SWR. Other years, WDR was well below the calculated SWR. I DO calculate my WDR yearly but don't plan it according to some SWR from back before I RE'd. I try to keep WDR "reasonable" in comparison to my original SWR but don't slavishly enforce a WDR on my spending. YMMV

 

[TwoByFour]

For example, can you imagine continuing to withdraw at the same or higher level, during a huge stock market crash? I can't! That's just insane for a worrier like me.

It sounds crazy but that is what Bengen and Trinity showed, that you can withdrawal that constant dollar amount (inflation adjusted) and 95% of the time be just fine.

When I retired I had an elaborate formula for how to compute withdrawals. But then the bull market made it look silly because I was (and am) always spending way less than the calculated amount. I may resurrect it when we have a big crash though.

 

[pb4uski]

Which post are you replying to?

PJ's post... Dtail slipped one in between... I guess that I need to pay more attention to detail to keep that from happening again.

 

[audreyh1]

Still, I feel most comfortable with the "% of the previous 12/31 balance" method because it is better suited to my psychology than the "X% plus inflation" method. For example, can you imagine continuing to withdraw at the same or higher level, during a huge stock market crash? I can't! That's just insane for a worrier like me.

That was my initial rejection of the Traditional method. I knew there was no way I would keep drawing ever increasing %s from my portfolio while it was shrinking. I felt more comfortable letting the portfolio growth determine any annual raises, even if that meant I accepted annual cuts.

Another advantage for me was if I retired into a good sequence of returns, my income would rise as the portfolio grew. And if it outpaced inflation I’d get those raises immediately. Of course, I might have to deal with pay cuts down the road.

The traditional method is very conservative, and as such you have a high probability of ending with a portfolio much larger than the original. The %remaining portfolio method tends to have lower remaining portfolios on average without running out of money.

 

[W2R]

I really did INTEND to, before I retired. But gosh, the "% of the previous 12/31 balance" method is so much easier.

Actually it has turned out that my withdrawals are small enough to satisfy either approach. I also make sure that I never spend more than my dividends because that makes me happy. […]
Still, I feel most comfortable with the "% of the previous 12/31 balance" method because it is better suited to my psychology than the "X% plus inflation" method. For example, can you imagine continuing to withdraw at the same or higher level, during a huge stock market crash? I can't! That's just insane for a worrier like me. […]

It sounds crazy but that is what Bengen and Trinity showed, that you can withdrawal that constant dollar amount (inflation adjusted) and 95% of the time be just fine.

Yes, that is why I was comparing the traditional SWR method to the method of withdrawing a percentage of the previous 12/31 portfolio size, and saying that IMO the first was not suited to most people's state of mind. In other words, it seems to me that being mathematically correct is not all that is required for a reasonable, usable withdrawal strategy. The seminal papers showed that you can but didn't address whether or not the average sane person would ever want to do that.

 

[clifp]

It seems to me that more interesting question is how many folks last year had an actual WR higher than 4%+inflation from their initial portfolio. If last year was out of the ordinary, e.g house or yacht purchase, then use the most recent normal year.

I retired in 99/2000, inflation has been 49% since I retired so I should be withdrawing 40% more than I actually did. On the other hand, a class of 2000 retiree last I checked, (a couple of years ago) portfolio had lost nearly lost 40% of it's real value, where mine is up over 20%.

 

[Offgrid Organic Farmer]

I have a military pension, it is enough to support my family. I am not eligible for SS yet. When I do start taking SS, it will boost our bank account a lot, but I have no idea what we will do to spend that much money.

Our big investment is showing a small profit, so far we have been rolling the profits back into it. Instead of pocketing the profit. Our primary motive for not taking the profit has been that we just do not want to pay taxes on it.

Do not know if we will ever begin withdrawing from our investments.

 

[rayvt]

So when do you put that stake in the ground and say: "Ok, now we start our real X% SWR from THIS portfolio balance?

This discussion has drifted far away from the OP's question (above).

The answer to the question is: SWR has nothing to do with retiring. The SWR has to do with the portfolio and what it does in the subsequent 30 years.

So: The SWR begins on the date you start withdrawals.

If you recompute back to 4% SWR on an annual basis (based on the Dec 31 portfolio balance) then you re-start a new 30 year period, for that portfolio.

BTW, the people who do the Trinity-type calculations do not care about you or how you spend your money or how much money you withdraw. All they say is "IF you want your portfolio to have a 95% chance of surviving for 30 years with a constant purchasing power annual withdrawal adjusted for inflation, THEN you cannot withdraw more than 4% SWR adjusted for annual inflation."

 

[clifp]

This discussion has drifted far away from the OP's question (above).

The answer to the question is: SWR has nothing to do with retiring. The SWR has to do with the portfolio and what it does in the subsequent 30 years.

So: The SWR begins on the date you start withdrawals.

If you recompute back to 4% SWR on an annual basis (based on the Dec 31 portfolio balance) then you re-start a new 30 year period, for that portfolio.

BTW, the people who do the Trinity-type calculations do not care about you or how you spend your money or how much money you withdraw. All they say is "IF you want your portfolio to have a 95% chance of surviving for 30 years with a constant purchasing power annual withdrawal adjusted for inflation, THEN you cannot withdraw more than 4% SWR adjusted for annual inflation."

Yes it does. If you want to reframe the question to be about withdrawal you can but the same basic question that Marko ask remain.

Does withdrawal start when the first spouse retires or both?
What if you get a great consulting gig 9 months after you retire for a year or two?
If you live off dividends and interest and reinvesting capital gains are you ever really withdrawing money?

I'm not sure if these are answerable questions, or even particularly important. I do find it interesting that for virtually everyone the value of the initial portfolio is not important in how much we withdraw.

A corollary is that if you withdraw X% of your portfolio balance as of 12/31/xxxx, that all withdrawal rates are safe. The same thing is true for only spending interest and dividend, any rate is a safe one.

I

 

[audreyh1]

If you live off interest and dividends only - yes, you are indeed withdrawing money. You are withdrawing whatever % of the portfolio is paid out in interest and dividends.

It would even be possible to be invested in something risky that had a super high yield such that living off those dividends exceeds a safe withdrawal rate.

Or we could go through a high interest rate environment where stocks and bonds combined are yielding amounts that exceed a safe withdrawal rate.

 

[rayvt]

A corollary is that if you withdraw X% of your portfolio balance as of 12/31/xxxx, that all withdrawal rates are safe.

Safe in this context means "not run out of money".

The oft-unstated secondary condition is "...while maintaining a relatively steady income from the portfolio."

Nobody cares if the portfolio doesn't run out of money, but the income from it is $1.98.

The problem with taking an annual X% of the portfolio is that your income will vary wildly from year to year. People don't like that. People prefer to have a steady, predictable income.