Withdrawal Strategy and FireCalc

[DJRR]

Question to get some thoughts on withdrawal strategy.

Current Planned Retirement Date: 4/1/2026
Current Portfolio Value: $1,400,000

When I plug in SS and investments until retirement Fire Calc gives me a 95% chance of an income of $104,474 for 30 years

At current non callable interest rates I could pull out a ladder of 4 years of $100k for my first 4 retirement years for ~ $335k. If I put a portfolio of $1,065,000 into Firecalc with 4 annual payments of $100K that gives me a 95% chance of an income of $108,725

This is ~ 4% annual increase, which seems statistically significant.

I guess my question is: Do you think this is real, or noise, or do I not understand the program? Essentially I am giving up the potential upside of my $335k in a bull market, capping the downside somewhat for a bear market, and taking advantage of the current higher fixed income rates vs. unknown future results.

Do you think this makes sense or would you just take out a monthly amount from your standard asset allocation portfolio every month? Or do something else? How do people handle withdrawals and the potential sequence of return risk in early years of retirement?

 

[pb4uski]

I'm not sure that the results that you are getting are surprising. With the ladder, you are reducing sequence of returns risk in the first 4 years and that reduction of sequence of returns risk results in higher safe withdrawals.

That said, your ladder doesn't make sense. $335k for 4 payments of $100k would result in a IRR of 7.5%. Did you mean $355k at 5% IRR?

 

[Exchme]

Something is wrong.

I'm guessing you have included a pension or SS in the analysis that you didn't mention. No way that you can pull an average of $104K out of $1.4M for 30 years with 95% success. I just tested and found a 33% success rate at the default allocation. In general, the 95% success rate occurs when you withdraw about 4% from the portfolio each year, here that would be $56K.

 

[braumeister]

Something is wrong.

I'm guessing you have included a pension or SS in the analysis that you didn't mention.

OP did say SS was included.

 

[DJRR]

That said, your ladder doesn't make sense. $335k for 4 payments of $100k would result in a IRR of 7.5%. Did you mean $355k at 5% IRR?

Maybe not. I am assuming I can use a CD or Strip to reinvest dividends so:

1st payment needed in 2.5 years of $75k at 4.8% = 75,000/1.048^2.5 = $66,704

2nd payment 3 years of $100k at 4.9% = 100,000/1.049^3 = $86,631

Etc.

I think return is overstated because I put in 100k in the first year but am working for 3 months so only invested to have 75k. 1/4 of the 100k comes from working. Otherwise I am off by 1-3 month or so of compounding because I did not find a bond for the exact month each time so that makes a small difference too. Quick IRR by year gives me 3.8% but that is end of period so I can do an actual monthly if the concept seems sound.

 

[DJRR]

Something is wrong.

I'm guessing you have included a pension or SS in the analysis that you didn't mention. No way that you can pull an average of $104K out of $1.4M for 30 years with 95% success. I just tested and found a 33% success rate at the default allocation. In general, the 95% success rate occurs when you withdraw about 4% from the portfolio each year, here that would be $56K.

Correct, I have SS and also 2 years of investments of $45k per year prior to retirement, so the withdrawal is higher.

Holding that equal I was curious to see if the fixing of a large % of the first 4 years is worth it. Seems to think it is worth ~ 4% higher withdrawal.

 

[pb4uski]

^^^ You do realize that nobody slavishly adheres to FIRECalc for a withdrawal plan as you seem to be suggesting, right? [emoji848]

Measure with a micrometer, mark with a crayon, cut it with an axe.

 

[pb4uski]

Maybe not. I am assuming I can use a CD or Strip to reinvest dividends so:



1st payment needed in 2.5 years of $75k at 4.8% = 75,000/1.048^2.5 = $66,704



2nd payment 3 years of $100k at 4.9% = 100,000/1.049^3 = $86,631



Etc.



I think return is overstated because I put in 100k in the first year but am working for 3 months so only invested to have 75k. 1/4 of the 100k comes from working. Otherwise I am off by 1-3 month or so of compounding because I did not find a bond for the exact month each time so that makes a small difference too. Quick IRR by year gives me 3.8% but that is end of period so I can do an actual monthly if the concept seems sound.

I just went by the CD ladder of $100k annually for the first 4 years as stated in the OP.

 

[ERD50]

Something is wrong. ....

Not necessarily. But I don't think you can learn much from FIRECalc in this way.

Remember, FIRECalc is showing you the worst scenarios in history. Those are going to be ones where the market dropped from a peak right at retirement.

So you are sort of going back and changing history, by injecting 5 years of 5% guaranteed growth with a portion of your portfolio. So it 'works', sort of.

But what if you retired into a booming market, followed by a collapse? You would not have fully shared in that boom, and the following crash would be worse for you, and maybe that scenario becomes one of the 5%?

I suppose 5% guaranteed for 5 years wasn't available in all points in history, so it just doesn't work in an overall analysis - you'd need to use whatever the current rates were.

I think you can model that with a tool that allows you to change your portfolio over time, but if you want historical analysis, it needs to be with the rates you could get at the time.

I'm not saying it's a bad idea, I just don't think FIRECalc really is telling you what you think it is.

-ERD50

 

[Al18]

For planning purposes, your reasoning is sound. In practical use, I would initiate two 200K 4 year CD ladders spaced 6 months apart. On an average stock market bull market year, you can sell 50K of stock and 50K CD for your yearly expenses. You will only need to sell 100K of CD’s if stocks are down significantly.

 

[DJRR]

^^^ You do realize that nobody slavishly adheres to FIRECalc for a withdrawal plan as you seem to be suggesting, right? [emoji848]

I guess that is the frustration. I turn 59 next month:

$2M portfolio - slam dunk and I leave next month.
$1.4M portfolio - I am right on the edge. If I get fired I leave, but work is fine. Good money, good benefits work from home, and low stress. It's just interfering with what I would like to do.

In between - waiting, waiting, waiting, trying to control expenses a little more or earn a little more return but nothing materially changes the basic fact. It is tempting to gamble with growth stocks or crypto or sports betting, etc. but I know that is a bad bet.

Will the next move be 20% up or down? If I knew that the answer is easy

 

[DJRR]

Not necessarily. But I don't think you can learn much from FIRECalc in this way.

I'm not saying it's a bad idea, I just don't think FIRECalc really is telling you what you think it is.

-ERD50

Thank you. That is the feedback I am looking for.

I guess it is like the mortgage payoff question or the 100% stock allocation question: It is always best to keep your money invested in the historical returns of the market, until it isn't

Probably best to follow current plan of slowly reducing my stock allocation over the next few years, but waiting for the market to decide where it is going sucks.

 

[pb4uski]

...It's just interfering with what I would like to do.
...

I get it. Can you downshift to part time with your current employer or quit an find some part time work to fill any gap?

Are you darn tootin sure that you got your spending nailed down and it isn't overstated?

 

[COcheesehead]

Try using an alternative tool, FICalc. https://ficalc.app/

I find it’s more robust for adding extra income for defined periods, has multiple withdrawal strategies with an explanation of what they are, allows you to change/rebalance your allocation over time with inflation added and accounts for cola on income streams like pensions or social security.

It’s a little more granular than FireCalc.

 

[pacergal]

Don't plan retirement based on "waiting for the stock market to decide which way it is going".
It goes up and down all the time.
Know your budget/spending, plan and base your savings/SS on that budget, with a reasonable estimated rate of return on your savings.

 

[Gumby]

I've mentioned this before - my strategy for winning the retirement war is to fight it with overwhelming firepower. I waited until FIRECalc said we could spend twice the amount we actually spend and still get 100%. That way, I didn't have to worry about the precise assumptions or the exact state of the market when we retired. Of course, if your job really and truly sucks, it will be more difficult to wait. Mine didn't.

 

[qwerty3656]

It has some similarities to the "reverse glidepath"

 

[pb4uski]

I've mentioned this before - my strategy for winning the retirement war is to fight it with overwhelming firepower. I waited until FIRECalc said we could spend twice the amount we actually spend and still get 100%. That way, I didn't have to worry about the precise assumptions or the exact state of the market when we retired. Of course, if your job really and truly sucks, it will be more difficult to wait. Mine didn't.

+1

 

[DJRR]

I get it. Can you downshift to part time with your current employer or quit an find some part time work to fill any gap?

Are you darn tootin sure that you got your spending nailed down and it isn't overstated?

Yes, as I said, if I got fired tomorrow no one would cry for me that I have to live on greater than the median US household income. I could make it happen.

However, I live in a HCOL area, both my kids get free healthcare from my job for 2/4 more years, my wife has medical problems and hits Medicare in 2 years, etc. I would quit if my job was toxic but at the peak of my career the benefits to effort ratio is highly skewed to benefits so it looks like OMY for me for 2 more years unless the bull market takes off.