Withdrawal Strategy: Fixed % of Current Portfolio

[foxfirev5]

LMP here. It takes away all the % w/d details. Personally DW and I use a guardrail approach keeping an eye on the core retirement accounts. Never interested in finances DW has a keen eye on the big picture. If the number sags a little she's on top of it. Perhaps a bit too much. But we'll figure it out. After 43 years I'm confident. Plus she has grasped the fact that upon our demise the only consideration is what grade of Mercedes our DIL will buy (credit to somebody on this forum).

 

[audreyh1]

It's not equivalent, because you are no longer exposing that $20K to the market risks of your long term AA in your retirement portfolio.

That's true if that 20K was in equities.

It is also no longer part of your rebalance calculations, nor used in future withdrawal calculations.

Why not? Do you not include your cash position in your AA? I do. We are currently 65/35/10 and I do rebalance to stay there. A lot of people here have said they keep 2 or 3 or 5 years worth of expenses in cash. I would assume they rebalance to maintain that.

Having separate goals for separate pots of money happens all the time.

I absolutely agree with this. But when I talk about our "portfolio" I mean everything, stocks, bonds, cash, retirement accounts, and non-retirement accounts. It's all one big pot no matter how it is divided up.

I have some cash in my retirement portfolio, I also have cash outside my retirement portfolio. No, I don’t count all my funds as being in my retirement portfolio. I have other funds including checking accounts, current year income, HSA accounts, etc. When I calculate my withdrawal, it is only calculated against my retirement portfolio, and withdrawn from my retirement portfolio which is then rebalanced. It doesn’t affect anything else.

 

[audreyh1]

I found in my notes that I listed the worst nine starting years for my 3.5% case:
1906, 1899, 1902, 1909, 1912, 1911, 1966, 1916, 1937

And it seems most of the other % withdrawal rates had one of the first two as the worst case starting year.

I did most of this work in Dec 2016 and May 2017. So it's been a while.

 

[Dtail]

It's not equivalent, because you are no longer exposing that $20K to the market risks of your long term AA in your retirement portfolio. It is also no longer part of your rebalance calculations, nor used in future withdrawal calculations. You can put in a very safe cash investment and spend it in the near future, give it away, whatever. It's yours to spend whenever you like.

Spending and withdrawal are two different things. It's quite simple to keep the short-term accounts separate from long term investments. People do it all the time when they keep their checking accounts separate from their investment account, or pull out a year's worth of income and put it in checking and saving for spending during the next year.

Having separate goals for separate pots of money happens all the time. Those different goals determine how the different pots of money are invested due to different time horizons. It can be called mental accounting. It's a useful money management tool. A lot of people find budgets useful after all - more mental accounting. As is keeping the money invested for their children's education or for a down payment on a house separate from their retirement investments.

Thanks. I figured you would come along to expand my response.
We use a similar concept as your withdrawal methodology.

 

[Dtail]

That's true if that 20K was in equities.




Why not? Do you not include your cash position in your AA? I do. We are currently 65/35/10 and I do rebalance to stay there. A lot of people here have said they keep 2 or 3 or 5 years worth of expenses in cash. I would assume they rebalance to maintain that.





I absolutely agree with this. But when I talk about our "portfolio" I mean everything, stocks, bonds, cash, retirement accounts, and non-retirement accounts. It's all one big pot no matter how it is divided up.

This concept comes up from time to time on this forum and there are opinions on both sides on what monies gets included in the investment portfolio.
We will need to agree to disagree.

 

[Vincenzo Corleone]

I found in my notes that I listed the worst nine starting years for my 3.5% case:
1906, 1899, 1902, 1909, 1912, 1911, 1966, 1916, 1937

And it seems most of the other % withdrawal rates had one of the first two as the worst case starting year.

I did most of this work in Dec 2016 and May 2017. So it's been a while.

Thank you very much, indeed.

 

[jimbee]

That kind of sounds more like mental mind games. If you "take out" 100K, but you then put 20K of that back into another investment, you didn't actually take out 100K. You took out 80K. That 20K is still part of your investment portfolio even if you moved it from where it was to somewhere else, like a cash account.

Technically correct, but Homo economicus may not actually exist.

 

[disneysteve]

I have some cash in my retirement portfolio, I also have cash outside my retirement portfolio. No, I don’t count all my funds as being in my retirement portfolio. I have other funds including checking accounts, current year income, HSA accounts, etc. When I calculate my withdrawal, it is only calculated against my retirement portfolio, and withdrawn from my retirement portfolio which is then rebalanced. It doesn’t affect anything else.

That makes sense.


In our case, about half of our portfolio is not in retirement accounts, which essentially means that all money is retirement money. It's all treated as one pot. There is one AA that applies to all of it. When we rebalance, we rebalance the whole shebang, not just certain accounts. We don't have a retirement portfolio and a non-retirement portfolio.


Different strokes. Whatever works best.

 

[Vincenzo Corleone]

I found in my notes that I listed the worst nine starting years for my 3.5% case:
1906, 1899, 1902, 1909, 1912, 1911, 1966, 1916, 1937

And it seems most of the other % withdrawal rates had one of the first two as the worst case starting year.

I did most of this work in Dec 2016 and May 2017. So it's been a while.

So, just so I'm clear and that I don't end up doing unnecessary work:

In order to determine the lowest portfolio value within something like 116 cycles for a particular withdrawal rate, you had to have FireCalc generate a "single-year" spreadsheet for each beginning cycle-year from 1872 to 1986. So that would be ~116 runs of FireCalc to determine which cycle-starting year contained the lowest portfolio value. And that's just for one particular WR. Multiply that by 10 (the number of withdrawal rates you focused on) and we're looking at you having done 1,160 runs of firecalc.

Do I have that right? If so, HOLY SMOKES!

 

[audreyh1]

No, I didn’t do it that way. Somehow I looked at the multi-year graphs generated by Firecalc for a 30 year run and looked at where the low points were which let me hone in on starting years to check. I’m sorry I don’t remember the exact details, I would have to go through my old notes and generated output and that would take hours.

 

[Vincenzo Corleone]

No, I didn’t do it that way. Somehow I looked at the multi-year graphs generated by Firecalc for a 30 year run and looked at where the low points were which let me hone in on starting years to check. I’m sorry I don’t remember the exact details, I would have to go through my old notes and generated output and that would take hours.

Nope. Wouldn't think of asking you to do that. I appreciate all the help you've given. Thanks again.

 

[audreyh1]

You might be able to rediscover my worst years hunting method by looking at the graphs generated.

 

[USGrant1962]

Following up on Audryh1's research and her comments long ago, I've settled on a 1906 start date in my FIRECalc model because it includes the infamous '66 start date, Stagflation, the double-crash of 2000 and 2008, the Great Depression, and some really rough years starting in 1906 (IIRC, the 1906 start date takes 23 years for the S&P500 to recover).

As she said upthread, the Fed (1913) and FDIC (1933) were major paradigm shifts. Considering accounting changes over time and questionable data quality >100 years ago, I don't put much stock in 19th century data.

And knocking 35 stale years off of the FIRECalc dataset makes the graphs a little more manageable and readable. From my trials, dropping 1871-1905 from FIRECalc has no effect on SWR, 100% spending level, or 100% portfolio level for any normal AA.

 

[FANOFJESUS]

Here are 2 different calculators that provide a nice visual layout of the data, which might help you out:

https://calculator.ficalc.app/
(you can click on an individual year below the graph)

https://fiportfoliodoc.com/simulator
(you can select an individual year from the graph)

For me, I'm not FIRED yet but I plan on using a % of remaining portfolio with a floor (ie: greater of $80,000 or 3.75% of remaining portolio), and when my portfolio gets to the value where success is 100% (about 2.25M in this case), then I'm set.

(My personal conundrum is how much "comfort" to build into my floor amount, as withdraws could be stuck at that level for a long time).

Thanks for the links. Very interesting. On the second link run spending 7% of Portfolio each year. As long as you can take the swings in income it works. It looks like that person will die poorer than someone taking the standard 4% on a 60/40. That would be ok for some folks.

 

[Vincenzo Corleone]

Here are 2 different calculators that provide a nice visual layout of the data, which might help you out:

https://calculator.ficalc.app/
(you can click on an individual year below the graph)

https://fiportfoliodoc.com/simulator
(you can select an individual year from the graph)

For me, I'm not FIRED yet but I plan on using a % of remaining portfolio with a floor (ie: greater of $80,000 or 3.75% of remaining portolio), and when my portfolio gets to the value where success is 100% (about 2.25M in this case), then I'm set.

(My personal conundrum is how much "comfort" to build into my floor amount, as withdraws could be stuck at that level for a long time).

The link https://calculator.ficalc.app/ is one I've posted on this message board before, but I never did a deep dive. This site might be better able to give me the datapoints Audrey was speaking of (via the "Download CSV" link). It would appear that for a 70/20/10 AA, a beginning 30-year retirement in 1966 would cause one's portfolio and income to dip the most at year 1982, although I haven't read on the site yet what the bond makeup is.

Thanks for pointing out this tool.

 

[Dtail]

The link https://calculator.ficalc.app/ is one I've posted on this message board before, but I never did a deep dive. This site might be better able to give me the datapoints Audrey was speaking of (via the "Download CSV" link).

Thanks for pointing out this tool.

I played around with the above site and it is effectively similar to Firecalc, just with some different style outputs.

 

[Vincenzo Corleone]

I played around with the above site and it is effectively similar to Firecalc, just with some different style outputs.

I would argue more useful/detailed outputs. Unless I'm mistaken (and that's entirely possible), you cannot drill down to the details of a particular cycle in FireCalc whereas you can on FI Calc. In FI Calc, I found the lowest my portfolio would ever have gone, and the particular cycle and year in which it occurred - within a few minutes. I don't think I'd be able to do that easily with FireCalc.

 

[Out-to-Lunch]

The link https://calculator.ficalc.app/ is one I've posted on this message board before, but I never did a deep dive. This site might be better able to give me the datapoints Audrey was speaking of (via the "Download CSV" link). It would appear that for a 70/20/10 AA, a beginning 30-year retirement in 1966 would cause one's portfolio and income to dip the most at year 1982, although I haven't read on the site yet what the bond makeup is.

Thanks for pointing out this tool.

I learned of this tool from you when you posted it a few months ago. I agree it has some nice functionality missing elsewhere.

Your comment on bond makeup and returns got me curious. I found the following on the ficalc site:

Bonds ¶

Shiller's data set includes the 10 year yields on US Treasury bonds. To determine year-over-year returns, we assume that you purchase the bonds, hold them for one year, and then sell them.

The formula for this is complicated. Documentation will be added soon.

This is the same formula used by ********. In fact, Bo, the creator of ********, deserves credit for this for creating this conversation on Bogleheads.

edit: the asterisks refer to a well-known firecalc look-alike. I never knew until now its name was verboten here!

 

[wildsun]

You would do that to even out your tax liabilities (more or less) over the years, and you would do that because you can turn around an invest any surplus into a taxable account. Or if you like the idea of Roth Conversions, you can take money out at a level rate but handle the portion of your withdrawal that you don't need as a Roth Conversion, thereby permanently eliminating any taxes on the growth of your reinvestment.

At least that's the way I think it would work for me when I retire, hopefully later this year.

 

[Major Tom]

Apologies in advance if someone else has already said what I am about to say, but I'm being a bit lazy this evening, and not reading the entire thread before commenting. I doubt that anyone does use a truly fixed withdrawal method, as in deciding on a withdrawal percentage at the beginning of their retirement, and sticking with it until, ahem, the end of their retirement.

I used Firecalc to determine my 100% success rate, and then made sure to stay comfortably below that level. I've been withdrawing for around 10 years now, and my WR has remained within the 1.9 - 3% range, not counting SS. Most of the time, it's at 2.5% or below. That's good enough for me. I know a lot of folk enjoy performing detailed analyses on their personal finances, but I prefer broad brushstrokes. Even if my WR gets up to 3.3%, I still have headroom, in the form of future SS income.

 

[NW-Bound]

My WR for 2020 was less than 1%, because that was all I needed.

If I had withdrawn 3% or 4%, where would I put it? In a slush fund? All of my accounts are considered slush fund, because I could pay for basic necessities with SS, which I have not claimed yet.

 

[DrRoy]

We really only need 1.5-2% for regular needs and plenty of travel. We have been taking more to remodel the house, still under 3%. Going to start flying first class for overnight flights for better sleep, and with remodels done, will replace the car next year.

 

[audreyh1]

Apologies in advance if someone else has already said what I am about to say, but I'm being a bit lazy this evening, and not reading the entire thread before commenting. I doubt that anyone does use a truly fixed withdrawal method, as in deciding on a withdrawal percentage at the beginning of their retirement, and sticking with it until, ahem, the end of their retirement.

I used Firecalc to determine my 100% success rate, and then made sure to stay comfortably below that level. I've been withdrawing for around 10 years now, and my WR has remained within the 1.9 - 3% range, not counting SS. Most of the time, it's at 2.5% or below. That's good enough for me. I know a lot of folk enjoy performing detailed analyses on their personal finances, but I prefer broad brushstrokes. Even if my WR gets up to 3.3%, I still have headroom, in the form of future SS income.

This thread is not about a fixed withdrawal percentage of the initial retirement portfolio and adjusting for inflation thereafter. It’s about taking a fixed percent of the retirement portfolio each year.

And I actually have stuck with that approach. Each early Jan I withdraw the same percentage of the portfolio based on the prior Dec 31 value of that portfolio.

 

[pb4uski]

You would do that to even out your tax liabilities (more or less) over the years, and you would do that because you can turn around an invest any surplus into a taxable account. Or if you like the idea of Roth Conversions, you can take money out at a level rate but handle the portion of your withdrawal that you don't need as a Roth Conversion, thereby permanently eliminating any taxes on the growth of your reinvestment.

At least that's the way I think it would work for me when I retire, hopefully later this year.

Keep in mind that with Roth conversions the only withdrawal is the tax... the rest is moving money from one pocket to the other. So for example, in 2021 I expect to convert ~$80k and pay ~$9k in tax... so I'll move $80k from tIRA to Roth and then pay $9k in tax from taxable money... so my withdrawal is only $9k.

So in my mind, Roth conversions are a separate decision from withdrawals, but the tax on Roth conversions has a second order effect on withdrawals.