Withdrawal Strategy: Fixed % of Current Portfolio

[Vincenzo Corleone]

I'd be interested in hearing some of the ways people who have chosen the fixed % of current portfolio withdrawal strategy determined their appropriate %. Thanks in advance.

 

[audreyh1]

A few years ago I ran some models using FireCalc selecting the % remaining portfolio withdrawal (spending) method which is the fixed % of portfolio at the start of each year.

I tested the AA 50% Total Stock Market and 50% 5 year treasuries as it somewhat resembled my own AA.

Firecalc outputs average ending portfolio inflation adjusted, as well as lowest and highest for a given time period.

Average ending portfolio was a useful way to compare the different withdrawal rates. I found that a % remaining portfolio method using the above 50/50 AA could probably sustain around a 4.35% withdrawal rate indefinitely. Over 30 years, average ending portfolio was what you started with: ~100% adjusted for inflation. Worst case was ~50% of what you started with. Not bad! I even did some 40 year runs too - and it didn’t get worse.

One thing FIREcalc did not do, was tell you the worst draw down, i.e, the lowest your portfolio might go during the time period. I had to tease that out by finding the worse case starting years and doing individual runs.

This is a critical factor for the % remaining portfolio withdrawal method, because your income is directly affected by the gain or loss in your investment portfolio each year. The higher the withdrawal %, the larger the potential drawdown, but if you were starting with a higher % you might still be better off in absolute income terms. Regardless, there could be wide swings in income over many years.

Stare at this table for a while. It contains a lot of information. $1M starting portfolio, 30 year period, all numbers inflation adjusted (i.e. in today's dollars). So you can do much of the % comparison math in your head such as average ending portfolio, worst case ending portfolio, etc.

% withdrawal remaining portfolio	$1M starting portfolio income	lowest portfolio	lowest income	worst income drop from start in %	average ending portfolio	income from average ending portfolio	lowest ending portfolio	income from lowest ending portfolio	Ending portfolio for lowest income case	income from average ending portfolio	income from lowest ending portfolio
6%	$60,000	$270,798	$16,248	73%	$593,418	$35,605	$298,371	$17,902	$308,050	$35,605	$17,902
5%	$50,000	$345,873	$17,294	65%	$815,142	$40,757	$409,854	$20,493	$698,231	$40,757	$20,493
4.5%	$45,000	$388,214	$17,470	61%	$954,171	$42,938	$479,758	$21,589	$817,320	$42,938	$21,589
4.35%	$43,500	$401,853	$17,481	60%	$1,000,171	$43,507	$512,306	$22,285	$856,722	$43,507	$22,285
4.25%	$42,500	$411,198	$17,476	59%	$1,032,020	$43,861	$518,901	$22,053	$884,004	$43,861	$22,053
4%	$40,000	$435,476	$17,419	56%	$1,115,994	$44,640	$561,123	$22,445	$955,934	$44,640	$22,445
3.5%	$35,000	$474,093	$16,593	53%	$1,304,200	$45,647	$655,754	$22,951	$1,176,616	$45,647	$22,951
3.33%	$33,300	$486,776	$16,210	51%	$1,374,917	$45,785	$691,310	$23,021	$1,240,415	$45,785	$23,021
3.25%	$32,500	$492,854	$16,018	51%	$1,409,464	$45,808	$708,681	$23,032	$1,271,583	$45,808	$23,032
3%	$30,000	$512,306	$15,369	49%	$1,522,919	$45,688	$765,726	$22,972	$1,373,939	$45,688	$22,972

Key issues are worst case income drop from initial income, average and worst case ending portfolios. Clearly even the most conservative withdrawal % modeled had to deal with a potential long period of income dropping in real terms. One thing this table does not show was how long inflation adjusted income might drop in the worst case. In general it was a very long time period - like 15-29 years!!! depending on the starting year. I'm guessing due to those long periods, inflation played a strong role, not just some bear markets.

Note that - 3% withdrawal might have a worst case drawdown of portfolio, and thus income drop from start, of 49%. 4.35% was only a little worse at 60% but at a considerably higher starting income! In fact due to the higher income from using 4.35%, even your worst case income is still higher even though it drops enough to get closer to the 3% income. On the other hand, the lower the withdrawal %, the higher the ending portfolios.

At the time I did this research I was using around a 3% of portfolio each year withdrawal rate. I'm still around that rate due to it already providing a high income. My conclusion was that I could certainly go higher if we wanted!!!

 

[icono5]

That's a great question. I'm curious to see answers, as well. The 4% rule seems under steady reconsideration.

 

[Vincenzo Corleone]

That's a great question. I'm curious to see answers, as well. The 4% rule seems under steady reconsideration.

If I'm not mistaken, you're referring to the Trinity study's withdrawal strategy, which is to take 4% of your initial portfolio in year 1, and adjust that amount every year by CPI.

What I'm referring to in my OP is a different method where you'd take out a constant X% of every year's starting portfolio value.

 

[Vincenzo Corleone]

...One thing FIREcalc did not do, was tell you the worst draw down, i.e, the lowest your portfolio might go during the time period. I had to tease that out by finding the worse case starting years and doing individual runs.

Forgive me. I'm not the brightest bulb in this lighting store.

You said you had to tease out the lowest the portfolio got in N number of runs during a 30-year time horizon. I believe you also said you tried it for a 40-year time horizon. I'm assuming you did that by choosing the option under the "Investigate" tab for FireCalc to produce a spreadsheet:

"The success rate of your portfolio and withdrawal plans, and optionally provide data and formulas in a spreadsheet format, using 1960 as the starting retirement year in the spreadsheet..."

And from the spreadsheet you were able to pinpoint the lowest portfolio value. But that spreadsheet option says, "For 30 year terms only". So I'm not sure how you accomplished this for a 40-year time horizon.

Would you set me straight on this, please?

Edit: Nevermind - I see where I misunderstood you. Thanks for your analysis.

 

[disneysteve]

What I'm referring to in my OP is a different method where you'd take out a constant X% of every year's starting portfolio value.

Im not retired yet but my plan is to take out enough to cover our expenses each year. That should be no more than 4% Based on our plan. In the system you’re describing, if our portfolio had a good year we would take out more money. But why? If we only need 80K why would we want to take out more than that?

 

[audreyh1]

Some people like to leave as much as possible in their portfolio to grow long term.

Some people like to take out as much as they can each year to spend now or soon, as long as enough is left to take care of them in later years.

In general different people have different short-term and long-term goals and spending patterns.

But the fixed % spend is probably not a good match for folks who have fairly fixed expenses year to year. It’s a much better match for people with a high degree of discretionary spending. They might have to tighten their belt some years, and be able to splurge others. If income keeps rising for a while, they might decide to loosen their belts a little or save up for something big, or bring forward some dreams they thought they might have to wait for.

If you don’t spend it, who will?

 

[Vincenzo Corleone]

One thing FIREcalc did not do, was tell you the worst draw down, i.e, the lowest your portfolio might go during the time period. I had to tease that out by finding the worse case starting years and doing individual runs.

Would you please walk me through how you went about doing this?

 

[icono5]

If I'm not mistaken, you're referring to the Trinity study's withdrawal strategy, which is to take 4% of your initial portfolio in year 1, and adjust that amount every year by CPI.

What I'm referring to in my OP is a different method where you'd take out a constant X% of every year's starting portfolio value.

Sure: I understand. And yes, my baseline was the Trinity study. Some of the advanced math goes beyond me, but I enjoy seeing more complex alternatives. I'd like to know which method will work best when I start making withdrawals.

 

[Dtail]

Im not retired yet but my plan is to take out enough to cover our expenses each year. That should be no more than 4% Based on our plan. In the system you’re describing, if our portfolio had a good year we would take out more money. But why? If we only need 80K why would we want to take out more than that?

When one uses a fixed % withdrawal methodology and let's say they are able to withdraw 100k, but only need 80k, then the 20k could go into a short term fixed income investment theoretically outside the investment portfolio.
This excess 20k can be used in a down year whereby one can only withdraw 60k, thus smoothing out the process.

 

[pb4uski]

I'd be interested in hearing some of the ways people who have chosen the fixed % of current portfolio withdrawal strategy determined their appropriate %. Thanks in advance.

The one good thing about that approach is that you are mathematically guaranteed to never run out of money!

Seriously though, I can see using that approach from ER to a certain age (say, age 70 for example) and then shifting to an RMD type approach as being pretty foolproof if you can live with the variation of withdrawals.

 

[audreyh1]

Would you please walk me through how you went about doing this?

Hoo boy, it was very slow and laborious.

Can I just tell you the years I uncovered?

For the 3% to 3.5% draw cases worst starting year was 1906, for higher rates it was 1899 except for 6% where it was 1892.

For all those starting years worst drawdown year = lowest income year was 1920.

% withdrawal remaining portfolio	average ending portfolio real	lowest ending portfolio real	highest ending portfolio real	Worst case real income (1906, 1899 or 1892 run)	starting year for worst case run	Lowest income year	Number of years to worst
6%	59%	30%	130%	27%	1892	1920	29
5%	82%	41%	178%	35%	1899	1920	22
4.5%	95%	48%	208%	39%	1899	1920	22
4.35%	100%	51%	219%	40%	1899	1920	22
4.25%	103%	52%	225%	41%	1899	1920	22
4%	112%	56%	244%	44%	1899	1920	22
3.5%	130%	66%	287%	47%	1906	1920	15
3.33%	137%	69%	300%	49%	1906	1920	15
3.25%	141%	71%	308%	49%	1906	1920	15
3%	152%	77%	333%	51%	1906	1920	15

At first I thought 1966 was going to be the worst starting year. But it turned out that there were much earlier periods that were 5% worse and 1966 didn’t even make the top 6, neither did 1929. I think they were all before 1929.

 

[audreyh1]

The one good thing about that approach is that you are mathematically guaranteed to never run out of money!

Seriously though, I can see using that approach from ER to a certain age (say, age 70 for example) and then shifting to an RMD type approach as being pretty foolproof if you can live with the variation of withdrawals.

VPW is also an option. It’s quite similar with the advantage of gradually rising % withdrawal due to fewer years left. It has similar max drawdown characteristics - that is potential for a gradual large drop in income in the worst cases. The VPW spreadsheet calculates max historical drawdown for you.

 

[disneysteve]

When one uses a fixed % withdrawal methodology and let's say they are able to withdraw 100k, but only need 80k, then the 20k could go into a short term fixed income investment theoretically outside the investment portfolio.
This excess 20k can be used in a down year whereby one can only withdraw 60k, thus smoothing out the process.

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.

 

[audreyh1]

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.

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.

 

[Ole Red 29]

we "back into" a withdrawal rate. We have closely monitored our expenses over the last 2 years of being retired. We divide that by our savings and come up with a withdrawal rate. We then run that % withdrawal through the models (with inflation) to see how long we could sustain this level of spending. Fortunately for us, we should be good for life.

 

[Midpack]

Seriously though, I can see using that approach from ER to a certain age (say, age 70 for example) and then shifting to an RMD type approach as being pretty foolproof if you can live with the variation of withdrawals.

That's what we'll probably do. We just withdraw what we need now, it's (much) less than 4%, and we'll go to RMD from all accounts (taxable, TIRA, Roth) at 72. We don't want to leave a huge residual, or run out, RMD seems like as good an approach as any. Of course, we'll course correct if the world turns upside down.

I'm not sure why there are so many threads on 4% SWR (vs % remaining) as if anyone would just blindly withdraw 4% initial then inflation adjusted for 30+ years. I've yet to hear of anyone who plans to do so, and the original authors never intended it. SWR is a planning tool, not a withdrawal strategy.

 

[audreyh1]

RMDs do some correction as they are based on each Dec 31 value, so you automatically pull less out after a bad year.

And sometimes the US Govt even decides you don’t have to pull out anything after a bad year!

 

[Vincenzo Corleone]

Please note: I made a number of edits to this since I first posted it, the last edit occurring at around 12:20pm Eastern Time.

Hoo boy, it was very slow and laborious.

Can I just tell you the years I uncovered?

Absolutely! I didn't mean for you to get into any huge amount of detail.

I looked closely at the original spreadsheet you provided (thank you). I assume the way you came up with, for example, the values in the "lowest portfolio" column was to run FireCalc using the option for FireCalc to provide a (non-inflation-adjusted) spreadsheet that shows one cycle per row. Is that right?

When trying to mimic your results, I ran FireCalc using a $1M starting portfolio value, $60K in expenses (6% as the withdrawal %), for a 30-year timeframe and a 50/50 AA. I grabbed the spreadsheet FireCalc provided and looked for the min portfolio value from the entire dataset (120 cycles) and I got $513,705 at year 13 from the 1929 cycle, whereas, for the same inputs, you got $270,798 as the minimum portfolio value (I'm assuming data like this is what you meant when you said that you "teased out" "the lowest your portfolio might go during the time period") . This makes me think you did something to adjust for inflation. Is that right? If so, what index did you use?

On another point, something you said confused me: "I had to tease [the worst draw down] out by finding the worse case starting years and doing individual runs."

What confuses me is that FireCalc provides the spreadsheet with all 120 cycles. Isn't determining the lowest your portfolio might go simply a matter of doing a min() function on the entire dataset? What do you mean by "doing individual runs"? Doesn't the spreadsheet FireCalc already provide show you all the individual runs (i.e., cycles)?

 

[audreyh1]

I needed the number adjusted for inflation (real). And to get the lowest value during a given 30 year run, I needed to use the inflation adjusted spreadsheets resulting from a specific starting year. Firecalc gives you the option of specifying a starting year and getting this second spreadsheet.

So I had to determine the worst starting years to generate this second spreadsheet.

That’s what I remember.

The non-inflation-adjusted data did not help.

 

[Vincenzo Corleone]

I needed the number adjusted for inflation (real). And to get the lowest value during a given 30 year run, I needed to use the inflation adjusted spreadsheets resulting from a specific starting year. Firecalc gives you the option of specifying a starting year and getting this second spreadsheet.

So I had to determine the worst starting years to generate this second spreadsheet.

That’s what I remember.

The non-inflation-adjusted data did not help.

Understood. Wow, that is a slow and laborious task. Yet I'm compelled to do the same for my AA. Thanks for the explanation.

 

[naggz]

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).

 

[audreyh1]

Understood. Wow, that is a slow and laborious task. Yet I'm compelled to do the same for my AA. Thanks for the explanation.

I can post a few of the worst case years I teased out. You can at least try those.

Before the Fed Reserve was created (1913) and FDIC (1933), the US economy was quite volatile and went through some severe boom and bust cycles plus swings in inflation and deflation, so it didn’t surprise me that the early pre-1929 starting dates were the worst case.

 

[disneysteve]

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.

 

[kevink]

A very useful tool for looking into this (and for portfolio overviews altogether) is this page on the Portfolio Charts site:

https://portfoliocharts.com/portfolios/

You can look at both SWR's and PWR's (Perpetual Withdrawal Rates - i.e. leaving the initial portfolio amount intact) over ever time frame since 1970 for a whole slew of popular portfolios, along with equally key numbers like maximum drawdowns and years to recover, etc.

As for the 4% rule, I've yet to find anything better than Bob Clyatt's (author of "Work Less, Live More" and one of the pioneer posters on these boards decades ago) 95% rule tweak of it:

"Each year, withdraw up to 4% of your portfolio's value for living expenses. “You can increase the amount to 4.5% with slightly diminished safety,” he writes.

After a bad year for the stock market, use what he calls the 95% rule: Reduce your spending to 95% of the previous year. So, if you withdrew $40,000 for living expenses last year but the stock market has crashed, then take $38,000 this year (95% of $40,000)."