Fixed Withdrawal Rate - 5 or 6%?

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ThankYouJack
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Fixed Withdrawal Rate - 5 or 6%?

Post by ThankYouJack »

I've never seen this discussed so probably not a great idea due to market volatility, but I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year. Maybe you even keep a year or two emergency fund and have human capital to help cover expenses during major bear markets or help against sequence risk. No spreadsheets, no need to calculate in inflation every year, no worrying about running out of money.

Can I backtest this anyplace to see the variance in withdrawals year after year?
Normchad
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Normchad »

ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm I've never seen this discussed so probably not a great idea due to market volatility, but I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year. Maybe you even keep a year or two emergency fund and have human capital to help cover expenses during major bear markets or help against sequence risk. No spreadsheets, no need to calculate in inflation every year, no worrying about running out of money.

Can I backtest this anyplace to see the variance in withdrawals year after year?
People do talk about this frequently, but most people don’t like it. This is a constant % withdrawl, where there are no adjustments for inflation etc. (by contrast, the typical SWR discussion is a constant real-dollar) withdrawl.

The potential downside of what you propose is that your annual withdrawals will fluctuate up and down just like your portfolio does. That’s not necessarily a deal breaker, but for a lot of people, their annual expenses are pretty consistent over time.

I’m pretty sure you can model this with Portfoliovisualizer.com.
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MP123
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by MP123 »

ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm Can I backtest this anyplace to see the variance in withdrawals year after year?
https://cfiresim.com has a number of choices under "Spending Plan", try "Percent of Portfolio".
KlangFool
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by KlangFool »

OP,

"What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year. Maybe you even keep a year or two emergency fund and have human capital to help cover expenses during major bear markets or help against sequence risk. No spreadsheets, no need to calculate in inflation every year, no worrying about running out of money. "

Do you enjoy the volatility of your withdrawal every year?

Or,

You prefer your withdrawal to be about the same even if the stock market drops 50%?

The fixed % withdrawal would expose you to the volatility of the market.

For example, how would you feel if

A) Year 0 = 50K

B) Year 1 = 100K.

Let me counter you with a different system

1) Buffer = 2 years of expense = X

2) Withdraw as per the VPW of your portfolio = Y

3) Spend (X+Y)/3.

Under this system, you would spend roughly the same amount every year even if the stock market drops 50%.

KlangFool
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dbr
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by dbr »

FireCalc include that option. They thought of this decades ago. You can also enter settings that dampen the changes from year to year (See Bob Clyatt's book).

Another option somewhat in the same vein but with a lot more engineering: https://www.bogleheads.org/wiki/Variabl ... withdrawal

It is a question if any formula withdrawal method really matches the spending a retiree would actually want.
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LilyFleur
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by LilyFleur »

Human capital can be a wild card.
  • the ability to earn: availability of jobs, ageism
  • the possibility of illness and higher medical bills as you age
  • lifespan: short, medium, or long, although this can be predicted more accurately with every birthday
KlangFool
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by KlangFool »

ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm
Can I backtest this anyplace to see the variance in withdrawals year after year?
ThankYouJack,

It is very simple.

If the stock market drops 50%, what happened to your annual withdrawal? Can you be happy with that level of withdrawal?

KlangFool
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dadjunk
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by dadjunk »

I use https://www.portfoliovisualizer.com/. Select "Monte Carlo" simulation and fill in the blanks. It has the option for fixed withdrawal plus others that may be of interest...Good Luck
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ThankYouJack
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by ThankYouJack »

Great, thanks all. The options in portfoliovisualizer and especially cfiresim are perfect. Just what I was looking for.
KlangFool wrote: Fri Sep 02, 2022 3:22 pm
ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm
Can I backtest this anyplace to see the variance in withdrawals year after year?
ThankYouJack,

It is very simple.

If the stock market drops 50%, what happened to your annual withdrawal? Can you be happy with that level of withdrawal?

KlangFool
Would depend on my AA but the withdrawal amount would drop by a good chunk. I think I could still be happy with it especially if I had flexibility.
radiowave
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by radiowave »

Here's another retirement calculator from Vanguard: https://retirementplans.vanguard.com/VG ... Calc.jsf
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page
Marseille07
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Marseille07 »

ThankYouJack wrote: Fri Sep 02, 2022 6:19 pm Great, thanks all. The options in portfoliovisualizer and especially cfiresim are perfect. Just what I was looking for.
KlangFool wrote: Fri Sep 02, 2022 3:22 pm
ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm
Can I backtest this anyplace to see the variance in withdrawals year after year?
ThankYouJack,

It is very simple.

If the stock market drops 50%, what happened to your annual withdrawal? Can you be happy with that level of withdrawal?

KlangFool
Would depend on my AA but the withdrawal amount would drop by a good chunk. I think I could still be happy with it especially if I had flexibility.
FWR is my plan, but imo 5% is too high. Basically what happens is your portfolio starts shrinking as equities can't keep up with the withdrawal rate.

If you don't have legacy plans then this is a fine approach though.
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doc4sleep
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by doc4sleep »

I plan to use this simple withdrawal rate because we have oversaved and in a serious down market can easily pull back on our spending.

Spending only 5% and leaving 95% in the market to grow seems very logical and is a plan I can follow even when by faculties are diminished.

It does help to own my house and not carry debt to help control costs in worst case scenarios.

https://www.portfoliovisualizer.com/mon ... sisResults

You have to put your own numbers in to make this work.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by KlangFool »

ThankYouJack wrote: Fri Sep 02, 2022 6:19 pm Great, thanks all. The options in portfoliovisualizer and especially cfiresim are perfect. Just what I was looking for.
KlangFool wrote: Fri Sep 02, 2022 3:22 pm
ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm
Can I backtest this anyplace to see the variance in withdrawals year after year?
ThankYouJack,

It is very simple.

If the stock market drops 50%, what happened to your annual withdrawal? Can you be happy with that level of withdrawal?

KlangFool
Would depend on my AA but the withdrawal amount would drop by a good chunk. I think I could still be happy with it especially if I had flexibility.
ThankYouJack,

" I think I could still be happy with it especially if I had flexibility."

But, why would you want to do that when you can do something else?

Aka, have a system where even if the market is volatile, your withdrawal would hardly change.

Think about this.

A) 50K, 100K, 50K, 100K withdrawal.

B) 75K, 75K, 75K, 75K withdrawal.

Would you be happier with (A) or (B) if you have the choice?

KlangFool
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heyyou
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by heyyou »

OP, I salute your quest for a fixed percentage, annual withdrawal rate. At Big ERN's or McClung's websites, one of them has likely researched what is the ideal historical % number, for 30 years of the same % portfolio withdrawals. If you want to probably leave a large amount to your heirs, the 4% Safe Withdrawal Rate will likely do that.

What follows is not precisely your request, but does have some attributes it:
The RMD portfolio spending method applies your slowly rising, age-based, RMD % to each recent annual portfolio value, plus spending annual interest and dividends. Yes, it is not one fixed percentage, but you can see every (rising) future annual % number now, before retiring. During each year, you can watch for what next year's spending amount might be, as your portfolio value fluctuates.

I like that the RMD method was developed by academics at Boston College's Center for Retirement Research. When they stated that the RMD method compared well to the standard one, that begs the question of "then why not use that standard one?" Well, their standard for comparison was history based, hypothetically knowing all of your next 30 annual portfolio values, before your retirement day!

Due to RMD spending requirements for the heirs who have inherited traditional IRAs, there are RMD withdrawal % numbers for people of all ages, not just for the original IRA owner.

I like that my spending from the RMD method is annually adjusted, slightly higher or lower, to what my portfolio will support for the long run, since I did retire early.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by 9-5 Suited »

ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm I've never seen this discussed so probably not a great idea due to market volatility, but I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year. Maybe you even keep a year or two emergency fund and have human capital to help cover expenses during major bear markets or help against sequence risk. No spreadsheets, no need to calculate in inflation every year, no worrying about running out of money.

Can I backtest this anyplace to see the variance in withdrawals year after year?
Constant % withdrawal is almost certainly a method unlikely to withstand contact with reality. People just don’t live their lives matching their annual spending to market performance fluctuations. $80k this year, oh no $60k next year, oh sweet $95k the following year! There has to be some type of reasonable banding placed around the dollar amounts to make that practical and account for unanticipated spending needs.

People often say “you’ll never run out of money with constant % withdrawal” which of course is nonsense because eventually you’ll reach a point in a bad enough market environment where your real spending needs are simply more than the constant % would allow.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Marseille07 »

9-5 Suited wrote: Fri Sep 02, 2022 10:37 pm Constant % withdrawal is almost certainly a method unlikely to withstand contact with reality. People just don’t live their lives matching their annual spending to market performance fluctuations. $80k this year, oh no $60k next year, oh sweet $95k the following year! There has to be some type of reasonable banding placed around the dollar amounts to make that practical and account for unanticipated spending needs.

People often say “you’ll never run out of money with constant % withdrawal” which of course is nonsense because eventually you’ll reach a point in a bad enough market environment where your real spending needs are simply more than the constant % would allow.
You would have to have lots of flexibility. IOW if you need 80K at the point of retirement, you can't just walk on 1.6M@5%; you probably need 2.5M@125K/year so that you have some wiggle room to slash spending to 80K/year during a downturn.
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HomerJ
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by HomerJ »

Pull 90% a year, and you also will never go broke.

You may not EAT... but you will never spend all your money.
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HomerJ
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by HomerJ »

ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year.
Why is this more simple than just taking the same amount every year? You actually have to do a calculation with your method.

Ah, I see.. you are comparing it to taking 4% and increasing by inflation. Yeah, I doubt ANYONE does that.

I'll retire with $2 million, take 4% the first year ($80,000), and continue to take $80,000 for the first 5 years or so. I'm not going to look up CPI each year and actually do math. I'll be retired! I'll be on vacation!! No math for me... I'm not going to look up inflation, find out it was 2.8% and then start pulling $82,488.

$80,000 a year for 5 years sounds much easier. And if 4% of starting portfolio with inflation is conservative, then 4% without inflation is even more conservative.

After 5 years, I'll see where I'm at. If the portfolio has grown any, maybe I'll just re-retire, and start over with 4% again. Or maybe just start pulling $85,000 or $90,000 if those are close approximations.

If the portfolio is down, I'll stick with $80,000 and cut back a bit on vacations. Maybe Yellowstone instead of Europe.

Your 5% of the portfolio will actually probably work...

But me, I'll just retire pulling that $80,000 a year and adjust every 5 years or so. I don't want to pull $80,000 one year, and $72,000 another year, and $81,000 the next year...

I'll just pull $80,000 a year for 5 years and then see how things are going.
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Marseille07
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Marseille07 »

HomerJ wrote: Fri Sep 02, 2022 11:02 pm
ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year.
Why is this more simple than just taking the same amount every year? You actually have to do a calculation with your method.

Ah, I see.. you are comparing it to taking 4% and increasing by inflation. Yeah, I doubt ANYONE does that.

I'll retire with $2 million, take 4% the first year ($80,000), and continue to take $80,000 for the first 5 years or so. I'm not going to look up CPI each year and actually do math. I'll be retired! I'll be on vacation!! No math for me...

After 5 years, I'll see where I'm at. If the portfolio has grown any, maybe I'll just re-retire, and start over with 4% again. Or maybe just start pulling $85,000 or $90,000 if those are close approximations.

If the portfolio is down, I'll stick with $80,000 and go to Europe every other year instead of every year.

Your 5% of the portfolio will actually probably work...

But me, I'll just retire pulling that $80,000 a year and adjust every so often based on actual results. I don't want to pull $80,000 one year, and $72,000 another year, and $81,000 the next year...

I'll just pull $80,000 a year for 5 years and then see how things are going.
That sounds like ratcheting (minus CPI) where you do FWR 4% after portfolio appreciation but you don't slash it after portfolio depreciation.

It's not a bad method, but you slightly increase the chance of running out of money than doing 4% SWR the whole time.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Wanderingwheelz »

9-5 Suited wrote: Fri Sep 02, 2022 10:37 pm
ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm I've never seen this discussed so probably not a great idea due to market volatility, but I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year. Maybe you even keep a year or two emergency fund and have human capital to help cover expenses during major bear markets or help against sequence risk. No spreadsheets, no need to calculate in inflation every year, no worrying about running out of money.

Can I backtest this anyplace to see the variance in withdrawals year after year?
Constant % withdrawal is almost certainly a method unlikely to withstand contact with reality. People just don’t live their lives matching their annual spending to market performance fluctuations. $80k this year, oh no $60k next year, oh sweet $95k the following year! There has to be some type of reasonable banding placed around the dollar amounts to make that practical and account for unanticipated spending needs.

People often say “you’ll never run out of money with constant % withdrawal” which of course is nonsense because eventually you’ll reach a point in a bad enough market environment where your real spending needs are simply more than the constant % would allow.
That’s not true for a retiree who is very well funded, beyond the 25x that is mentioned so much here.

I read Wade Pfau’s comments in the Wall Street Journal recently, and his suggestion would be in down years not giving yourself an inflation adjustment. He also went on to say that a 1966 retiree would have done just fine with a 3.8% withdrawal rate instead of a “standard” 4%. The original nest egg would have survived the 30 years.

I only bring these points up to reinforce that the likelihood of anyone “running out” who has paid attention during their retirement and also arrived at retirement with good odds, will not have any problems.
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ThankYouJack
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by ThankYouJack »

9-5 Suited wrote: Fri Sep 02, 2022 10:37 pm
ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm I've never seen this discussed so probably not a great idea due to market volatility, but I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year. Maybe you even keep a year or two emergency fund and have human capital to help cover expenses during major bear markets or help against sequence risk. No spreadsheets, no need to calculate in inflation every year, no worrying about running out of money.

Can I backtest this anyplace to see the variance in withdrawals year after year?
Constant % withdrawal is almost certainly a method unlikely to withstand contact with reality. People just don’t live their lives matching their annual spending to market performance fluctuations. $80k this year, oh no $60k next year, oh sweet $95k the following year! There has to be some type of reasonable banding placed around the dollar amounts to make that practical and account for unanticipated spending needs.

People often say “you’ll never run out of money with constant % withdrawal” which of course is nonsense because eventually you’ll reach a point in a bad enough market environment where your real spending needs are simply more than the constant % would allow.
This seems like a big assumption unless you know how long I'm going to live and that the market is going to tank to unprecedented levels within my lifetime and I don't have any flexibility or other income streams.
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ThankYouJack
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by ThankYouJack »

heyyou wrote: Fri Sep 02, 2022 9:36 pm I like that my spending from the RMD method is annually adjusted, slightly higher or lower, to what my portfolio will support for the long run, since I did retire early.
Thanks. I took a quick look. My initial thought is that it that the withdrawal rate seems quite low for early retirees but maybe I'm missing something.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Mr. Rumples »

There are a number of tables on Paul Merriman's site which go back with what I assume are accurate figures. By way of examples:

https://paulmerriman.com/wp-content/upl ... 0-2022.pdf

https://paulmerriman.com/2021-fixed-distributions/

https://paulmerriman.com/lifetime-inves ... alculator/

Personally, I relied on this at first, with the others to fine tune things. Flexibility is key for me to cut spending if needed.

https://www.mycalculators.com/ca/retcalc2m.html
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by JoeRetire »

ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm I've never seen this discussed so probably not a great idea due to market volatility, but I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year. Maybe you even keep a year or two emergency fund and have human capital to help cover expenses during major bear markets or help against sequence risk. No spreadsheets, no need to calculate in inflation every year, no worrying about running out of money.

Can I backtest this anyplace to see the variance in withdrawals year after year?
There's no need to back test anything. If you withdraw a fixed percent of the available balance every year, you can never run out of money. You could withdraw 50 percent every year and still never get to $0. Pretty simple, if that's your goal.

The only thing you need to consider is if you can live on whatever 5 or 6 percent of the available balance provides. That amount could get very, very small.

A tool like CFireSim could help you visualize what could have happened with this approach in years past. https://cfiresim.com/
- Take all the defaults, but set the Spending Plan to Percent of Portfolio.
- Then set the Yearly Spending to be 5% of Portfolio.
- You will see that the resulting yearly spending ranges from $15,934 to $163,233.

It seems doubtful to me that most folks would want that kind of variability. But your mileage may vary.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by 9-5 Suited »

ThankYouJack wrote: Sat Sep 03, 2022 5:50 am
9-5 Suited wrote: Fri Sep 02, 2022 10:37 pm
ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm I've never seen this discussed so probably not a great idea due to market volatility, but I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year. Maybe you even keep a year or two emergency fund and have human capital to help cover expenses during major bear markets or help against sequence risk. No spreadsheets, no need to calculate in inflation every year, no worrying about running out of money.

Can I backtest this anyplace to see the variance in withdrawals year after year?
Constant % withdrawal is almost certainly a method unlikely to withstand contact with reality. People just don’t live their lives matching their annual spending to market performance fluctuations. $80k this year, oh no $60k next year, oh sweet $95k the following year! There has to be some type of reasonable banding placed around the dollar amounts to make that practical and account for unanticipated spending needs.

People often say “you’ll never run out of money with constant % withdrawal” which of course is nonsense because eventually you’ll reach a point in a bad enough market environment where your real spending needs are simply more than the constant % would allow.
This seems like a big assumption unless you know how long I'm going to live and that the market is going to tank to unprecedented levels within my lifetime and I don't have any flexibility or other income streams.
It is neither a big assumption nor an assumption at all. That “you” was a generalized you, not referring to a prediction about your situation. Constant percent withdrawal can lead to running out of money despite the often claimed point that it cannot because reality applies constraints a spreadsheet does not. And it’s unlikely most people will want their annual spend to have as much variance as their portfolio performance.

Any plan to withdraw money in retirement is 90% guideline and 10% strict rule. As a guideline, what you plan to do is perfectly fine.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by 9-5 Suited »

Marseille07 wrote: Fri Sep 02, 2022 10:47 pm
9-5 Suited wrote: Fri Sep 02, 2022 10:37 pm Constant % withdrawal is almost certainly a method unlikely to withstand contact with reality. People just don’t live their lives matching their annual spending to market performance fluctuations. $80k this year, oh no $60k next year, oh sweet $95k the following year! There has to be some type of reasonable banding placed around the dollar amounts to make that practical and account for unanticipated spending needs.

People often say “you’ll never run out of money with constant % withdrawal” which of course is nonsense because eventually you’ll reach a point in a bad enough market environment where your real spending needs are simply more than the constant % would allow.
You would have to have lots of flexibility. IOW if you need 80K at the point of retirement, you can't just walk on 1.6M@5%; you probably need 2.5M@125K/year so that you have some wiggle room to slash spending to 80K/year during a downturn.
Basically any withdrawal plan will work perfectly under the assumption that you oversave your first year spending need by +50% :) Adding in that variable makes the whole discussion kind of moot because you’ve guaranteed success at the expense of potentially overworking by many years which is just trading one risk for another.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by grok87 »

heyyou wrote: Fri Sep 02, 2022 9:36 pm OP, I salute your quest for a fixed percentage, annual withdrawal rate. At Big ERN's or McClung's websites, one of them has likely researched what is the ideal historical % number, for 30 years of the same % portfolio withdrawals. If you want to probably leave a large amount to your heirs, the 4% Safe Withdrawal Rate will likely do that.

What follows is not precisely your request, but does have some attributes it:
The RMD portfolio spending method applies your slowly rising, age-based, RMD % to each recent annual portfolio value, plus spending annual interest and dividends. Yes, it is not one fixed percentage, but you can see every (rising) future annual % number now, before retiring. During each year, you can watch for what next year's spending amount might be, as your portfolio value fluctuates.

I like that the RMD method was developed by academics at Boston College's Center for Retirement Research. When they stated that the RMD method compared well to the standard one, that begs the question of "then why not use that standard one?" Well, their standard for comparison was history based, hypothetically knowing all of your next 30 annual portfolio values, before your retirement day!

Due to RMD spending requirements for the heirs who have inherited traditional IRAs, there are RMD withdrawal % numbers for people of all ages, not just for the original IRA owner.

I like that my spending from the RMD method is annually adjusted, slightly higher or lower, to what my portfolio will support for the long run, since I did retire early.
thanks. i'm planning to use the RMD method for my risk portfolio (I also have a liability matching portfolio in long dated TIPs).
do you have a link to the Boston College research?
thanks
grok
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by iamblessed »

The cons are big swings in income. What is nice about it is in a bear you take less.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by nigel_ht »

ThankYouJack wrote: Fri Sep 02, 2022 6:19 pm Great, thanks all. The options in portfoliovisualizer and especially cfiresim are perfect. Just what I was looking for.
KlangFool wrote: Fri Sep 02, 2022 3:22 pm
ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm
Can I backtest this anyplace to see the variance in withdrawals year after year?
ThankYouJack,

It is very simple.

If the stock market drops 50%, what happened to your annual withdrawal? Can you be happy with that level of withdrawal?

KlangFool
Would depend on my AA but the withdrawal amount would drop by a good chunk. I think I could still be happy with it especially if I had flexibility.
If you have enough flexibility to survive a 50% drop in income you arguably can do almost anything reasonable and be okay…it’s saying that you would be fine at living off 2.5% of your original portfolio without any COLA adjustments over reasonably long periods of time.

My guess is even if you used constant dollar your expenses would be near perpetual withdrawal rate levels anyway…
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Florida Orange »

HomerJ wrote: Fri Sep 02, 2022 11:02 pm
ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year.
Why is this more simple than just taking the same amount every year? You actually have to do a calculation with your method.

Ah, I see.. you are comparing it to taking 4% and increasing by inflation. Yeah, I doubt ANYONE does that.

I'll retire with $2 million, take 4% the first year ($80,000), and continue to take $80,000 for the first 5 years or so. I'm not going to look up CPI each year and actually do math. I'll be retired! I'll be on vacation!! No math for me... I'm not going to look up inflation, find out it was 2.8% and then start pulling $82,488.

$80,000 a year for 5 years sounds much easier. And if 4% of starting portfolio with inflation is conservative, then 4% without inflation is even more conservative.

After 5 years, I'll see where I'm at. If the portfolio has grown any, maybe I'll just re-retire, and start over with 4% again. Or maybe just start pulling $85,000 or $90,000 if those are close approximations.

If the portfolio is down, I'll stick with $80,000 and cut back a bit on vacations. Maybe Yellowstone instead of Europe.

Your 5% of the portfolio will actually probably work...

But me, I'll just retire pulling that $80,000 a year and adjust every 5 years or so. I don't want to pull $80,000 one year, and $72,000 another year, and $81,000 the next year...

I'll just pull $80,000 a year for 5 years and then see how things are going.
Very sensible. In practice, I think that's what a lot of people do.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by dbr »

Florida Orange wrote: Sat Sep 03, 2022 8:29 am
HomerJ wrote: Fri Sep 02, 2022 11:02 pm
ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year.
Why is this more simple than just taking the same amount every year? You actually have to do a calculation with your method.

Ah, I see.. you are comparing it to taking 4% and increasing by inflation. Yeah, I doubt ANYONE does that.

I'll retire with $2 million, take 4% the first year ($80,000), and continue to take $80,000 for the first 5 years or so. I'm not going to look up CPI each year and actually do math. I'll be retired! I'll be on vacation!! No math for me... I'm not going to look up inflation, find out it was 2.8% and then start pulling $82,488.

$80,000 a year for 5 years sounds much easier. And if 4% of starting portfolio with inflation is conservative, then 4% without inflation is even more conservative.

After 5 years, I'll see where I'm at. If the portfolio has grown any, maybe I'll just re-retire, and start over with 4% again. Or maybe just start pulling $85,000 or $90,000 if those are close approximations.

If the portfolio is down, I'll stick with $80,000 and cut back a bit on vacations. Maybe Yellowstone instead of Europe.

Your 5% of the portfolio will actually probably work...

But me, I'll just retire pulling that $80,000 a year and adjust every 5 years or so. I don't want to pull $80,000 one year, and $72,000 another year, and $81,000 the next year...

I'll just pull $80,000 a year for 5 years and then see how things are going.
Very sensible. In practice, I think that's what a lot of people do.
My experience in retirement is that needs and wants to spend are variable and it would not be helpful to be chained to an income stream from the portfolio that has to be fixed by any particular rule. Also, the more one does have some fixed income streams, such as SS, pensions, etc. the more of that flexibility has to be absorbed at the margin in portfolio withdrawals.

It is valid to keep that under control on average and see how it goes. People should not be afraid to not be following a withdrawal rule as long as they keep their eyes open.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Florida Orange »

dbr wrote: Sat Sep 03, 2022 8:42 am
Florida Orange wrote: Sat Sep 03, 2022 8:29 am
HomerJ wrote: Fri Sep 02, 2022 11:02 pm
ThankYouJack wrote: Fri Sep 02, 2022 3:08 pm I like the simplicity. What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year.
Why is this more simple than just taking the same amount every year? You actually have to do a calculation with your method.

Ah, I see.. you are comparing it to taking 4% and increasing by inflation. Yeah, I doubt ANYONE does that.

I'll retire with $2 million, take 4% the first year ($80,000), and continue to take $80,000 for the first 5 years or so. I'm not going to look up CPI each year and actually do math. I'll be retired! I'll be on vacation!! No math for me... I'm not going to look up inflation, find out it was 2.8% and then start pulling $82,488.

$80,000 a year for 5 years sounds much easier. And if 4% of starting portfolio with inflation is conservative, then 4% without inflation is even more conservative.

After 5 years, I'll see where I'm at. If the portfolio has grown any, maybe I'll just re-retire, and start over with 4% again. Or maybe just start pulling $85,000 or $90,000 if those are close approximations.

If the portfolio is down, I'll stick with $80,000 and cut back a bit on vacations. Maybe Yellowstone instead of Europe.

Your 5% of the portfolio will actually probably work...

But me, I'll just retire pulling that $80,000 a year and adjust every 5 years or so. I don't want to pull $80,000 one year, and $72,000 another year, and $81,000 the next year...

I'll just pull $80,000 a year for 5 years and then see how things are going.
Very sensible. In practice, I think that's what a lot of people do.
My experience in retirement is that needs and wants to spend are variable and it would not be helpful to be chained to an income stream from the portfolio that has to be fixed by any particular rule. Also, the more one does have some fixed income streams, such as SS, pensions, etc. the more of that flexibility has to be absorbed at the margin in portfolio withdrawals.

It is valid to keep that under control on average and see how it goes. People should not be afraid to not be following a withdrawal rule as long as they keep their eyes open.
dbr - In general I agree with you but it all comes down to the margin of safety between the income stream and the actual expenses. Presumably one wants to have a bit of a buffer built in.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by HootingSloth »

I think a 5% constant percentage method from a risk portfolio can be a reasonable choice if you: (i) have a preference for a formulaic, rather than ad hoc, approach to withdrawals; (ii) have a baseline of income and consumption from other sources like a paid-off house, Social Security, a pension, a TIPS ladder, a SPIA, etc., so that a significant depletion of your risk portfolio will not put you in dire straights; (iii) do not have a strong preference for low volatility in your withdrawals because a relatively large portion of your expenses will be discretionary expenses (especially things like travel, gifts, charity, etc. that are easy to scale up and down from year to year); (iv) have a preference for using your assets for productive use during your lifetime rather than at your death; and (v) have a preference for something simpler than the VPW or ABW methods.

I have considered using this method for withdrawals from my risk portfolio, with VPW and ad hoc methods being the other main contenders.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Marseille07 »

9-5 Suited wrote: Sat Sep 03, 2022 6:46 am Basically any withdrawal plan will work perfectly under the assumption that you oversave your first year spending need by +50% :) Adding in that variable makes the whole discussion kind of moot because you’ve guaranteed success at the expense of potentially overworking by many years which is just trading one risk for another.
With SWR, if you need 80K/year, you *can* retire on 2M@4% SWR, without any buffer. With FWR, you can't retire on 2M@4% FWR, let alone a lower number on higher FWR%.

The point I'm getting at is that different methods require different "flexibility," not that accumulating 50% would guarantee success (which it does, but that wasn't the point).
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by aristotelian »

I would suggest Google searching research (and Bogleheads threads) on endowment spending policies. Most endowed institutions use a variation of this approach. You nailed the typically range which is 5-6% and these have very good survival rates *assuming aggressive investment allocation*. The upside is ability to start at much higher percentage than 4% (higher than SWR or VPW) and confidence you will have a nest egg to pass on.

Downside is volatility in year to year budget. This can be countered with various smoothing mechanisms (my institution uses three year average of year end balance to determine the next year withdrawal) but that means locking in losses for longer (we had frozen budget for a long time after 2008).

Can be used in combination with a liability matching strategy or SWR for guaranteed expenses while letting constant % cover discretionary expenses.
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ThankYouJack
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by ThankYouJack »

aristotelian wrote: Sat Sep 03, 2022 10:00 am I would suggest Google searching research (and Bogleheads threads) on endowment spending policies. Most endowed institutions use a variation of this approach. You nailed the typically range which is 5-6% and these have very good survival rates *assuming aggressive investment allocation*. The upside is ability to start at much higher percentage than 4% (higher than SWR or VPW) and confidence you will have a nest egg to pass on.

Downside is volatility in year to year budget. This can be countered with various smoothing mechanisms (my institution uses three year average of year end balance to determine the next year withdrawal) but that means locking in losses for longer (we had frozen budget for a long time after 2008).

Can be used in combination with a liability matching strategy or SWR for guaranteed expenses while letting constant % cover discretionary expenses.
Thanks for the info. 3 year average could help. Having flexibility with working more, collecting social security or tapping into a possible emergency fund gives me comfort incase things get really ugly and I don't want expenses to drop below a certain level.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by TN_Boy »

grok87 wrote: Sat Sep 03, 2022 6:53 am
heyyou wrote: Fri Sep 02, 2022 9:36 pm OP, I salute your quest for a fixed percentage, annual withdrawal rate. At Big ERN's or McClung's websites, one of them has likely researched what is the ideal historical % number, for 30 years of the same % portfolio withdrawals. If you want to probably leave a large amount to your heirs, the 4% Safe Withdrawal Rate will likely do that.

What follows is not precisely your request, but does have some attributes it:
The RMD portfolio spending method applies your slowly rising, age-based, RMD % to each recent annual portfolio value, plus spending annual interest and dividends. Yes, it is not one fixed percentage, but you can see every (rising) future annual % number now, before retiring. During each year, you can watch for what next year's spending amount might be, as your portfolio value fluctuates.

I like that the RMD method was developed by academics at Boston College's Center for Retirement Research. When they stated that the RMD method compared well to the standard one, that begs the question of "then why not use that standard one?" Well, their standard for comparison was history based, hypothetically knowing all of your next 30 annual portfolio values, before your retirement day!

Due to RMD spending requirements for the heirs who have inherited traditional IRAs, there are RMD withdrawal % numbers for people of all ages, not just for the original IRA owner.

I like that my spending from the RMD method is annually adjusted, slightly higher or lower, to what my portfolio will support for the long run, since I did retire early.
thanks. i'm planning to use the RMD method for my risk portfolio (I also have a liability matching portfolio in long dated TIPs).
do you have a link to the Boston College research?
thanks
grok
grok,

Here is one link: https://crr.bc.edu/wp-content/uploads/2 ... 19-508.pdf

They added the dividends to the IRS computed RMD amount to handle the problem that the IRS method means you don't get to spend much money until you are pretty old.

There may be more data on this method somewhere. Something I didn't like was the rationale for the extra money (over the RMD calculation) to be dividends and interest. Or rather, the lack of a rationale in the paper I linked. It was like, let's try this! And it introduces obvious anomalies.

Investor 1 has their equity in a dividend focused index fund, Investor 2 has their equity in a total market index fund. Despite (let us not get into the debate here ...) the fact that both investors should expect the same total return from their equity investments, Investor 1 will pull more money than investor 2.

For example, the Schwab SCHD dividend focused fund currently has an SEC yield twice that of Vanguard's VTI total market fund, per morningstar.

Hmm.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by grok87 »

TN_Boy wrote: Sat Sep 03, 2022 12:34 pm
grok87 wrote: Sat Sep 03, 2022 6:53 am
heyyou wrote: Fri Sep 02, 2022 9:36 pm OP, I salute your quest for a fixed percentage, annual withdrawal rate. At Big ERN's or McClung's websites, one of them has likely researched what is the ideal historical % number, for 30 years of the same % portfolio withdrawals. If you want to probably leave a large amount to your heirs, the 4% Safe Withdrawal Rate will likely do that.

What follows is not precisely your request, but does have some attributes it:
The RMD portfolio spending method applies your slowly rising, age-based, RMD % to each recent annual portfolio value, plus spending annual interest and dividends. Yes, it is not one fixed percentage, but you can see every (rising) future annual % number now, before retiring. During each year, you can watch for what next year's spending amount might be, as your portfolio value fluctuates.

I like that the RMD method was developed by academics at Boston College's Center for Retirement Research. When they stated that the RMD method compared well to the standard one, that begs the question of "then why not use that standard one?" Well, their standard for comparison was history based, hypothetically knowing all of your next 30 annual portfolio values, before your retirement day!

Due to RMD spending requirements for the heirs who have inherited traditional IRAs, there are RMD withdrawal % numbers for people of all ages, not just for the original IRA owner.

I like that my spending from the RMD method is annually adjusted, slightly higher or lower, to what my portfolio will support for the long run, since I did retire early.
thanks. i'm planning to use the RMD method for my risk portfolio (I also have a liability matching portfolio in long dated TIPs).
do you have a link to the Boston College research?
thanks
grok
grok,

Here is one link: https://crr.bc.edu/wp-content/uploads/2 ... 19-508.pdf

They added the dividends to the IRS computed RMD amount to handle the problem that the IRS method means you don't get to spend much money until you are pretty old.

There may be more data on this method somewhere. Something I didn't like was the rationale for the extra money (over the RMD calculation) to be dividends and interest. Or rather, the lack of a rationale in the paper I linked. It was like, let's try this! And it introduces obvious anomalies.

Investor 1 has their equity in a dividend focused index fund, Investor 2 has their equity in a total market index fund. Despite (let us not get into the debate here ...) the fact that both investors should expect the same total return from their equity investments, Investor 1 will pull more money than investor 2.

For example, the Schwab SCHD dividend focused fund currently has an SEC yield twice that of Vanguard's VTI total market fund, per morningstar.

Hmm.
thanks.
I agree with your point about investor 1 and investor 2. It feels like if one used Total World Stock index for equities and treasuries for bonds that maybe the modified RMD strategy might be ok
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by snackdog »

3-4% is probably safer.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by ThankYouJack »

snackdog wrote: Sat Sep 03, 2022 7:02 pm 3-4% is probably safer.
It's interesting that based on historical data, the lowest annual withdrawal for 3% is smaller than 5%.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by smitcat »

KlangFool wrote: Fri Sep 02, 2022 3:20 pm OP,

"What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year. Maybe you even keep a year or two emergency fund and have human capital to help cover expenses during major bear markets or help against sequence risk. No spreadsheets, no need to calculate in inflation every year, no worrying about running out of money. "

Do you enjoy the volatility of your withdrawal every year?

Or,

You prefer your withdrawal to be about the same even if the stock market drops 50%?

The fixed % withdrawal would expose you to the volatility of the market.

For example, how would you feel if

A) Year 0 = 50K

B) Year 1 = 100K.

Let me counter you with a different system

1) Buffer = 2 years of expense = X

2) Withdraw as per the VPW of your portfolio = Y

3) Spend (X+Y)/3.

Under this system, you would spend roughly the same amount every year even if the stock market drops 50%.

KlangFool
"3) Spend (X+Y)/3."
Are you really saying that you are going to spend this total amount each year and every year in addition to SS?
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by KlangFool »

smitcat wrote: Sun Sep 04, 2022 9:17 am
KlangFool wrote: Fri Sep 02, 2022 3:20 pm OP,

"What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year. Maybe you even keep a year or two emergency fund and have human capital to help cover expenses during major bear markets or help against sequence risk. No spreadsheets, no need to calculate in inflation every year, no worrying about running out of money. "

Do you enjoy the volatility of your withdrawal every year?

Or,

You prefer your withdrawal to be about the same even if the stock market drops 50%?

The fixed % withdrawal would expose you to the volatility of the market.

For example, how would you feel if

A) Year 0 = 50K

B) Year 1 = 100K.

Let me counter you with a different system

1) Buffer = 2 years of expense = X

2) Withdraw as per the VPW of your portfolio = Y

3) Spend (X+Y)/3.

Under this system, you would spend roughly the same amount every year even if the stock market drops 50%.

KlangFool
"3) Spend (X+Y)/3."
Are you really saying that you are going to spend this total amount each year and every year in addition to SS?
This is the maximum amount that I can spend. Whether I choose to spend it or not is a different matter.

KlangFool
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by TN_Boy »

grok87 wrote: Sat Sep 03, 2022 6:44 pm
TN_Boy wrote: Sat Sep 03, 2022 12:34 pm
stuff deleted

There may be more data on this method somewhere. Something I didn't like was the rationale for the extra money (over the RMD calculation) to be dividends and interest. Or rather, the lack of a rationale in the paper I linked. It was like, let's try this! And it introduces obvious anomalies.

Investor 1 has their equity in a dividend focused index fund, Investor 2 has their equity in a total market index fund. Despite (let us not get into the debate here ...) the fact that both investors should expect the same total return from their equity investments, Investor 1 will pull more money than investor 2.

For example, the Schwab SCHD dividend focused fund currently has an SEC yield twice that of Vanguard's VTI total market fund, per morningstar.

Hmm.
thanks.
I agree with your point about investor 1 and investor 2. It feels like if one used Total World Stock index for equities and treasuries for bonds that maybe the modified RMD strategy might be ok
Without checking, I'd certainly think they tested this approach with S&P 500 for the equity, and maybe short to intermediate US treasuries. But a method that varies in the withdrawal amount due to changes in equity type, or fixed income type (what if I was big into junk bonds?) makes me a little suspicious.

Then again, the base "4% adjusted for inflation" method is basically ad-hoc -- it worked in back-testing (and monte carlo simulations), most of which was done with ... the S&P 500 and intermediate treasuries or corporate bonds.

I suspect the modified RMD is okay, I don't know that it is any better than other variable withdrawal methods. Even with it, the "suggested" withdrawal amounts will be skewed toward later retirement years, which I don't particularly like. You can always spend less later though I guess.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by smitcat »

KlangFool wrote: Sun Sep 04, 2022 9:36 am
smitcat wrote: Sun Sep 04, 2022 9:17 am
KlangFool wrote: Fri Sep 02, 2022 3:20 pm OP,

"What if you simply take say X% (5% maybe 6%?) of your current portfolio balance and withdrawal that every year. Maybe you even keep a year or two emergency fund and have human capital to help cover expenses during major bear markets or help against sequence risk. No spreadsheets, no need to calculate in inflation every year, no worrying about running out of money. "

Do you enjoy the volatility of your withdrawal every year?

Or,

You prefer your withdrawal to be about the same even if the stock market drops 50%?

The fixed % withdrawal would expose you to the volatility of the market.

For example, how would you feel if

A) Year 0 = 50K

B) Year 1 = 100K.

Let me counter you with a different system

1) Buffer = 2 years of expense = X

2) Withdraw as per the VPW of your portfolio = Y

3) Spend (X+Y)/3.

Under this system, you would spend roughly the same amount every year even if the stock market drops 50%.

KlangFool
"3) Spend (X+Y)/3."
Are you really saying that you are going to spend this total amount each year and every year in addition to SS?
This is the maximum amount that I can spend. Whether I choose to spend it or not is a different matter.

KlangFool
If you do not spend the designated amounts, you will still need a plan for overall withdrawal destinations, taxes over the long haul, and what will eventually happen to the funds.
Not looking out at future possibilities is where most of these plans have problems.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by aristotelian »

snackdog wrote: Sat Sep 03, 2022 7:02 pm 3-4% is probably safer.
Depends on your definition of safety. With fixed withdrawal rate, you are never going to run out of money. Private foundations are required to spend 5% and many responsibly spend more than that while generally growing their endowments. Harvard spends "about 5%" and Yale targets 5.25%. Ford Foundation targets 5.3%. My employer is 100% funded by endowment and our withdrawal rate is closer to 6% than 5%. The biggest question is not running out of money but whether you can tolerate year to year fluctuation.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by snackdog »

aristotelian wrote: Sun Sep 04, 2022 10:36 am
snackdog wrote: Sat Sep 03, 2022 7:02 pm 3-4% is probably safer.
Depends on your definition of safety. With fixed withdrawal rate, you are never going to run out of money….
That is a popular view. However, the percentage matters. If if you withdraw 99.99% every year I’m not sure you will enjoy your retirement much after the first wonderful year.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by Normchad »

snackdog wrote: Sun Sep 04, 2022 10:44 am
aristotelian wrote: Sun Sep 04, 2022 10:36 am
snackdog wrote: Sat Sep 03, 2022 7:02 pm 3-4% is probably safer.
Depends on your definition of safety. With fixed withdrawal rate, you are never going to run out of money….
That is a popular view. However, the percentage matters. If if you withdraw 99.99% every year I’m not sure you will enjoy your retirement much after the first wonderful year.
I wish people would stop saying “you know, if you take a fixed % every year, you will never run out of money”. It’s about as helpful as saying “you know, a tomato is actually a fruit”. It’s true, but not helpful.

But if people want to use 3% constant % withdrawl, that’s even less than the “perpetual withdrawl rate adjusted for inflation”, isn’t it? So that would be quite safe.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by dbr »

It might be useful to read through how FireCalc treates the fixed withdrawal rate option in a way that deals with some of the conundrums involved with a method that can't fail in the sense of running completely out of money. Run FireCalc having selected the percent of remaining portfolio on the spending tab and then read the discussion on the results page.

This thought goes back to the very beginning of withdrawal rate studies and is addressed in various discussion. The specific reference in FireCalc is to Work Less, Live More by Bob Clyatt, published originally in 2005.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by aristotelian »

snackdog wrote: Sun Sep 04, 2022 10:44 am
aristotelian wrote: Sun Sep 04, 2022 10:36 am
snackdog wrote: Sat Sep 03, 2022 7:02 pm 3-4% is probably safer.
Depends on your definition of safety. With fixed withdrawal rate, you are never going to run out of money….
That is a popular view. However, the percentage matters. If if you withdraw 99.99% every year I’m not sure you will enjoy your retirement much after the first wonderful year.
Of course, obviously withdrawing less will leave you with more money. The question is whether there is any reason to do that. If you can tolerate flexibility in your budget, fixed % withdrawal is inherently safer than SWR in terms of risking running completely out of money. I would agree 3-4% is needed if using constant dollar inflation adjusted withdrawal but in a crash scenario a fixed 5% will result in a lower withdrawal than 4% constant dollar. I do not have the research in front of me backtesting 5% fixed percentage, but you can rest assured some very conservative institutions have used that and grown their endowments over time using 5% as a minimum. If you have research showing why 3% is needed, please share it.
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Re: Fixed Withdrawal Rate - 5 or 6%?

Post by goodenyou »

Not running out of money and not freaking out when you get down to a balance that is so low that you don’t feel comforted by probability-based folks that try to assuage your panic with “don’t worry, history tells us that you should be fine” are completely different concepts.

I think your strategy would best be served by guaranteeing your minimum dignity floor of expenses with guaranteed income (SPIA or similar). Then you can withdraw with a strategy that puts eating dog or cat food out of realm of possibility.

Relying on human capital is risky too. It’s volatility is measured by age and sickness.
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