Withdrawal rate with option to go back to work

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Topic Author
ThankYouJack
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Joined: Wed Oct 08, 2014 7:27 pm

Withdrawal rate with option to go back to work

Post by ThankYouJack »

What do you think would be a good withdrawal rate for this scenario?

- $1 million portfolio
- withdrawals for 40+ years
- option to, at any time, go back to work and stop withdrawals if things drop below say $650k

I think a SWR would be ~3% but I used the term good withdrawal rate and not safe. This is because the option to go back to work would provide the safety net.
sport
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Location: Cleveland, OH

Re: Withdrawal rate with option to go back to work

Post by sport »

When thinking about a 40 year time frame, I would not want to depend upon being able to go back to work at any time. Health issues can arise that could prevent working.
MotoTrojan
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Re: Withdrawal rate with option to go back to work

Post by MotoTrojan »

3% pre-tax would make most comfortable for 40+ years without any option to go back to work, if care (and/or margin) was put into the expense calculations, including things like health-care.
Topic Author
ThankYouJack
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Re: Withdrawal rate with option to go back to work

Post by ThankYouJack »

sport wrote: Mon Aug 06, 2018 5:40 pm When thinking about a 40 year time frame, I would not want to depend upon being able to go back to work at any time. Health issues can arise that could prevent working.
How about a 20 year time frame? And two people who have always had more than enough work and often opted to reduce work? Health issues is a big one, but they could arise while working or not
hafjell
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Re: Withdrawal rate with option to go back to work

Post by hafjell »

ThankYouJack wrote: Mon Aug 06, 2018 6:37 pmHow about a 20 year time frame? And two people who have always had more than enough work and often opted to reduce work? Health issues is a big one, but they could arise while working or not
Fair, but, if working, presumably there would be long-term disability insurance through the employer that would preserve ~66% of annual income.
LeisureLee
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Re: Withdrawal rate with option to go back to work

Post by LeisureLee »

I would guess you could take 5-6% if you could really return to work anytime. Basically, instead of a ~100% safe rate, you could aim for, say, a 75% safe rate, expecting a 25% chance of returning to work at some point. If you can choose to work exactly during market crashes, you'd avoid draws when they hurt the most and invest any savings at the best moments. Several papers and books that document safe draw rates have the chart of rate by starting year or the numbers for various success percentages, for you to calibrate it.

The real question, though, is if you really could return to work anytime and if you'd really be willing to do so after 10 or 15 years of not working. =)
qwertyjazz
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Re: Withdrawal rate with option to go back to work

Post by qwertyjazz »

I think you need to start with what do you mean by a SWR and what do you mean by an option to return to work. That is, what percent chance of having trouble are you willing to accept and how much income could you reasonably reproduce and for how long? Check out ERN article and you might find it could be a decade or so if work.
You need actual numbers or scenarios to analyze the problem IMO
Or a 3% number is likely a true SWR
A 6-7 % number might be an aggressive number with the results of a formal analysis plus wiggle room somewhere in between. YMWV
G.E. Box "All models are wrong, but some are useful."
Topic Author
ThankYouJack
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Re: Withdrawal rate with option to go back to work

Post by ThankYouJack »

Good points. It’s more of a hypothetical question but can see I need to clarify / determine some things before doing more of an analysis. I think I’d feel fine at 4% maybe even 5% depending on the amount of human capital
Charon
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Re: Withdrawal rate with option to go back to work

Post by Charon »

Count me as a skeptic that you'll be able to return to work at any point, particularly after, say, 30 years out of the job market. Ease of finding a job drops rapidly with length of unemployment (https://www.weforum.org/agenda/2016/08/ ... -a-job-why), and even skilled people in currently in-demand fields might not be employable at all after a 10- or 20-year hiatus. I would talk to parents who gave up careers to raise children and then tried to rejoin the workforce when the children were grown to get a realistic picture of your prospects.
randomguy
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Re: Withdrawal rate with option to go back to work

Post by randomguy »

ThankYouJack wrote: Wed Aug 08, 2018 5:24 pm Good points. It’s more of a hypothetical question but can see I need to clarify / determine some things before doing more of an analysis. I think I’d feel fine at 4% maybe even 5% depending on the amount of human capital
It is all about how willing you are to go back to work. Firecalc numbers (feel free to sub in your own portfolio)
3% =100% chance of not going back to work
4% = 85%
5% = 57%
6% = 38%
7% = 20%

I not sure I could justify 7% but I think I could make arguments about the rest being reasonable choices to make. Granted we can debate the assumption of going back to work (pretty easy for burger flipper, not so much for a doctor who hasn't practiced in 20 years) and when the risk shows up (i.e. in the failure cases, is it pretty obvious in year 5 or 10 that you need to go back or does the risk only show up in year 25?) if you wanted to refine the number.

The ability to go back to work (or drastically cut expenses) allows you to be far more aggressive than the traditional retiree. You are basically making a bet where half the time you get another say 2-5 years of retirement when you win and when you lose you end up working another 4-10 years.
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