What do people mean when they say their SWR is X% or they have X times expenses?

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TheTimeLord
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What do people mean when they say their SWR is X% or they have X times expenses?

Post by TheTimeLord » Fri Nov 10, 2017 11:10 pm

When people say their savings are enough that they can live on a 2% or 3% SWR or that they have 25, 30 or 40 times expenses are they talking about at once they start to draw SS and pension or before. It would seem to me the before and after calculations of WR and multiple of expenses will be quite different. So to which are early retirees referring?
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by KlangFool » Fri Nov 10, 2017 11:14 pm

OP,

In my case, I am referring to my current annual expense.

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by TheTimeLord » Fri Nov 10, 2017 11:18 pm

KlangFool wrote:
Fri Nov 10, 2017 11:14 pm
OP,

In my case, I am referring to my current annual expense.

KlangFool
Would those numbers change dramatically if you calculated them for after you started collecting SS and a pension if you have one?
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by KlangFool » Fri Nov 10, 2017 11:25 pm

TheTimeLord wrote:
Fri Nov 10, 2017 11:18 pm
KlangFool wrote:
Fri Nov 10, 2017 11:14 pm
OP,

In my case, I am referring to my current annual expense.

KlangFool
Would those numbers change dramatically if you calculated them for after you started collecting SS and a pension if you have one?
TheTimeLord,

1) Yes. Social Security income would cover about 50% of my annual expense.

2) But, it is unlikely I will be fully-employed until 62 years old. I would either be voluntary or involuntary retire way before that age.

KlangFool

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by flyingaway » Fri Nov 10, 2017 11:36 pm

I think they mean the estimated living expenses in retirement, minus any other incomes, such as pension and social security.

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by marcopolo » Fri Nov 10, 2017 11:43 pm

There is probably not one answer to this.

Some people count SS, other discount it, other disregard it all together. Size of pensions vary and some have COLA, others don't, further complicating a simple % calculation.

I use multiple of anticipated (not current) expense, as i expect my healthcare and Travel & Entertainment (T&E) expense to be higher in retirement.
For a age 52 retirement target, I am shooting for 30x-35x, and i disregard SS and our very small pensions, not necessarily because i don't think i will receive them, but more as another margin of safety for a long retirement.
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by CaliJim » Fri Nov 10, 2017 11:46 pm

They are just a general rule of thumb looking at the expenses not met by SS and pensions.

You can read the Trinity Study here: http://www.retailinvestor.org/pdf/Bengen1.pdf and see what assumptions are made.

But specifically, each case is a bit different, and retirement spending typically is not as smooth a spending glide path as you see in the various academic studies.

If one retires before being eligible for SS, or starting a pension, then one might take more than the SWR for a few years, and then once you start drawing SS and pensions, drop below the SWR. And lumpy things happen like unexpected health expenses, replacement cars, new roofs, travel...

The retirement calculators like FireCalc and cFIREsim allow you to analyze the situations in detail by entering different dates for Retirement Date and SS Start Date, Pension Start Date, etc.
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by FiveK » Fri Nov 10, 2017 11:48 pm

TheTimeLord wrote:
Fri Nov 10, 2017 11:10 pm
When people say their savings are enough that they can live on a 2% or 3% SWR or that they have 25, 30 or 40 times expenses are they talking about at once they start to draw SS and pension or before. It would seem to me the before and after calculations of WR and multiple of expenses will be quite different. So to which are early retirees referring?
A plain Withdrawal Rate (WR) is simply the amount withdrawn from investment accounts during the year divided by the investment balance at the beginning of the year. It is unaffected by SS or pensions.

A Safe Withdrawal Rate (SWR) is a more elusive number. It is a guess at what WR one could use in retirement without running out of invested money before death. It is very much influenced by SS and pensions.

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by aristotelian » Fri Nov 10, 2017 11:52 pm

People who are going for extreme early retirement, as in the so-called "FIRE community", generally mean all expenses. They are not even thinking about social security because it is so far off that they are not counting on it, and they are retiring so young that they haven't paid much into it. So their annual withdrawal covers all expenses and they plan to live that way indefinitely with social security an added "bonus" if it still exists.

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by The Wizard » Sat Nov 11, 2017 4:43 am

The answer to the OP's question varies considerably person to person, which is why an individualized cash flow plan is needed.

I retired at 63 with decent annuity income to cover my expenses.
I started Divorced Spouse SS benefits at 66 which covers all Healthcare expense with some leftover.

I've been withdrawing around 4% of my tax deferred portfolio these past several years as a sort of bridge to full SS at age 70.
But much of that amount is actually an ongoing monthly Roth conversion; it's not really spent.

When I get to age 70 in 28 months, my SS will increase from current $1000/month to around $3500/month and I will have won the game, so to speak.
By this I mean that zero portfolio withdrawals will be needed to maintain lifestyle going forward.
Of course there will be RMDs which will be largely reinvested.
And I'll withdraw accumulated cash from my taxable account to buy a new car every so often.
But I expect my portfolio to be increasing in size after age 70, subject to Mr Market's vagaries, of course.

Bottom line: SWR concepts are a rough guideline with less utility for retirees having large enough cashflow from outside their portfolio...
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by Snowjob » Sat Nov 11, 2017 6:22 am

I've come to conceptualize my retirement portfolio using a bit of mental accounting (yes I know, frowned upon).

If you have certain periods of your life that will be covered by Soc Sec, pension or a deferred annuity and you know the value of those, I think it can be beneficial separate your portfolio into buckets that will cover the periods NOT covered by the above, and then have look at the remainder as the retirement portfolio. For the buckets I plan to run those to 0 so a fairly (so high w/d rate but allocation on the more conservative end), and for the "remainder portfolio" that's where I've been kicking around withdrawal rates that should be in effect over the reminder of my life -- the sort of rate discussion we typically have here. To me this makes sense from a consistency stand point, matching the theory with the practice. I don't make gobs of money so the boost from social security and the planned purchase of a deferred annuity will have such a big impact on cash flows, looking at the the entire portfolio as one mass and judging safety on some single SWR or multiple of expenses just seemed wrong, and in many cases I was coming up with required portfolio sizes that were larger than the really need to be.

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by tadamsmar » Sat Nov 11, 2017 6:26 am

TheTimeLord wrote:
Fri Nov 10, 2017 11:10 pm
When people say their savings are enough that they can live on a 2% or 3% SWR or that they have 25, 30 or 40 times expenses are they talking about at once they start to draw SS and pension or before. It would seem to me the before and after calculations of WR and multiple of expenses will be quite different. So to which are early retirees referring?
It is a bit tricky when you retire and delay SS. It's not just an issue for early retirement, some of us delay SS till 70. I think the most useful is the SWR after you start drawing SS because the thing of interest is the long-term adequacy of your nest egg. I have had to project forward to the point where my spouse and I are both age 70 and drawing full SS to determine my long-term SWR.

In the most useful Trinity Study analysis, SWR was a percentage of the nest-egg at the starting point and inflation-adjusted in future years. So, after the first year it is an inflation-adjusted amount in dollars. It is no longer a percentage of your current nest-egg.

Also, the "safe" in SWR is a bit dubious. At 4% SWR there is a bit of risk indicated in the backtest. And, the Trinity Study used one of the best performing national stock markets of the 20th century, a lot of cherry-picking bias there perhaps.
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by bertilak » Sat Nov 11, 2017 7:59 am

I do not understand the above answers to the question.

The "S" in "SWR" means "Safe." The SAFE withdrawal rate does not depend on the NEEDED withdrawal rate, which most of the above answers seem to be talking about. Safety depends on how that money is invested (stocks, bonds, tulip bulbs?) and assumptions about an unknown future (war, peace, pestilence?) so different people come up with different "safe" withdrawal rate estimates (2%, 3%, 4%?) depending on their assumptions.

"X times [yearly] expenses" does refer to the NEEDED withdrawal amount over X years. If you need to cover $50,000 per year then an X of 25 means you can withdraw $50,000 for 25 years before running out -- even if the money (25 times $50,000, or $1,250,000) is in cash under your mattress. So, for example, an X of 30 is longer lasting than an X of 25.

Inflation and unexpected expenses still need to be accounted for.
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by The Wizard » Sat Nov 11, 2017 8:35 am

bertilak wrote:
Sat Nov 11, 2017 7:59 am
I do not understand the above answers to the question.

The "S" in "SWR" means "Safe." The SAFE withdrawal rate does not depend on the NEEDED withdrawal rate, which most of the above answers seem to be talking about. Safety depends on how that money is invested (stocks, bonds, tulip bulbs?) and assumptions about an unknown future (war, peace, pestilence?) so different people come up with different "safe" withdrawal rate estimates (2%, 3%, 4%?) depending on their assumptions.

"X times [yearly] expenses" does refer to the NEEDED withdrawal amount over X years. If you need to cover $50,000 per year then an X of 25 means you can withdraw $50,000 for 25 years before running out -- even if the money (25 times $50,000, or $1,250,000) is in cash under your mattress. So, for example, an X of 30 is longer lasting than an X of 25.

Inflation and unexpected expenses still need to be accounted for.
To make your understanding even worse, "expenses" are no where near the whole story.
My expenses in retirement may be around $50k per year, but my Desired Income is quite higher, perhaps double. And it turns out to be attainable, even though a portion of my excess retirement income is taken "early" from tax deferred accounts to reduce later RMDs and taxes.

So I would prefer discussions to focus on Basic Expenses plus additional Discretionary Recreational Income.
But there doesn't seem to be much consensus for making this distinction...
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by Johnnie » Sat Nov 11, 2017 9:56 am

There are two resources that I have found useful for refining my own thinking on this and related issues:

The first is "Cut-Throat's famous 'Delay Social Security to age 70 and Spend more money at 62'" post:
viewtopic.php?t=102609

The other is a deep dive Michael Kitces did a few years ago on research surrounding the SWR:
https://www.aicpa.org/interestareas/per ... ch2012.pdf
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by dbr » Sat Nov 11, 2017 10:06 am

The issue is about what is going to happen to your portfolio under withdrawal. Safe means the rate of withdrawal is small enough that there is little chance of the portfolio being exhausted too soon.

The relationship of withdrawals to expenses is that withdrawals are what is required to make up the difference between what one spends and what is provided for by sources of income such as SS. One obvious complication in relating withdrawal rate or $ X expenses is that the size of the sources of income may vary, in particular from before one starts to take SS to after. That is why SWR is not a plan for retirement income. SWR is a description of how portfolios behave under certain simple conditions. In short, saying one has a certain SWR or a certain X time expenses is probably an oversimplification for most people and rather meaningless in general.

It is also true, as commented by someone else, that expenses are not one simple number, vary over time, and may be subject to reconsideration. All of the retirement planners allow one to input sources of income and expenditure that start and/or stop at arbitrary times. In any case perfect flexibility to reflect all circumstances is not possible.

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by KlangFool » Sat Nov 11, 2017 10:23 am

dbr wrote:
Sat Nov 11, 2017 10:06 am
The issue is about what is going to happen to your portfolio under withdrawal. Safe means the rate of withdrawal is small enough that there is little chance of the portfolio being exhausted too soon.

The relationship of withdrawals to expenses is that withdrawals are what is required to make up the difference between what one spends and what is provided for by sources of income such as SS. One obvious complication in relating withdrawal rate or $ X expenses is that the size of the sources of income may vary, in particular from before one starts to take SS to after. That is why SWR is not a plan for retirement income. SWR is a description of how portfolios behave under certain simple conditions. In short, saying one has a certain SWR or a certain X time expenses is probably an oversimplification for most people and rather meaningless in general.

It is also true, as commented by someone else, that expenses are not one simple number, vary over time, and may be subject to reconsideration. All of the retirement planners allow one to input sources of income and expenditure that start and/or stop at arbitrary times. In any case perfect flexibility to reflect all circumstances is not possible.
dbr,

<< In short, saying one has a certain SWR or a certain X time expenses is probably an oversimplification for most people and rather meaningless in general. >>

1) You are correct.

2) But, if the portfolio is big enough and it is at the size of 50 times or bigger than required expense or 2% or less SWR, that is all a person needs. It is a good enough estimation.

3) For many folks with a low annual expense, social security cover 50% or more of their annual retirement expense. Hence, it is possible for the portfolio to reach that size. Ditto for people with a very big portfolio. It is for the people in the middle that greater precision is needed.

4) People in the middle are

A) Annual expense big enough that social security income and/or pension cover less than 50% of retirement expense.

B) Portfolio not bigger than 40 times retirement expense.

KlangFool

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by TheTimeLord » Sat Nov 11, 2017 10:46 am

KlangFool wrote:
Sat Nov 11, 2017 10:23 am
dbr wrote:
Sat Nov 11, 2017 10:06 am
The issue is about what is going to happen to your portfolio under withdrawal. Safe means the rate of withdrawal is small enough that there is little chance of the portfolio being exhausted too soon.

The relationship of withdrawals to expenses is that withdrawals are what is required to make up the difference between what one spends and what is provided for by sources of income such as SS. One obvious complication in relating withdrawal rate or $ X expenses is that the size of the sources of income may vary, in particular from before one starts to take SS to after. That is why SWR is not a plan for retirement income. SWR is a description of how portfolios behave under certain simple conditions. In short, saying one has a certain SWR or a certain X time expenses is probably an oversimplification for most people and rather meaningless in general.

It is also true, as commented by someone else, that expenses are not one simple number, vary over time, and may be subject to reconsideration. All of the retirement planners allow one to input sources of income and expenditure that start and/or stop at arbitrary times. In any case perfect flexibility to reflect all circumstances is not possible.
dbr,

<< In short, saying one has a certain SWR or a certain X time expenses is probably an oversimplification for most people and rather meaningless in general. >>

1) You are correct.

2) But, if the portfolio is big enough and it is at the size of 50 times or bigger than required expense or 2% or less SWR, that is all a person needs. It is a good enough estimation.

3) For many folks with a low annual expense, social security cover 50% or more of their annual retirement expense. Hence, it is possible for the portfolio to reach that size. Ditto for people with a very big portfolio. It is for the people in the middle that greater precision is needed.

4) People in the middle are

A) Annual expense big enough that social security income and/or pension cover less than 50% of retirement expense.

B) Portfolio not bigger than 40 times retirement expense.

KlangFool
I guess I find all the SWR and X times expenses stuff a little too difficult to utilize for someone planning to retire 5, 10 or more years before collecting SS. I have an Excel spreadsheet that models what I can expect to be able to withdraw annually given the size of my portfolio, my retirement start date, when SS and pensions kick in and the occurrence of one time events like the sale of a house when one goes into assisted living. I run the same parameters assuming an annual return of 3%, 3.3%, 3.5% and 4% on my portfolio, but I look at 3.3% as the gold standard. I occasionally run Firecalc or I-Orp to validate my model. It also has about 4 spending periods as I expect my spending to evolve over my retirement. So I end up with a number I can compare to the base expenses of my current lifestyle and assume any overage will be discretionary income. Also I do use an assumed tax rate to arrive at that number.
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by Ron » Sat Nov 11, 2017 11:17 am

I retired in early 2007 (10 years ago) at age 59.

My forecast at that time using FIDO's RIP software showed annual withdrawal amounts between 4.7 and 10% until age 66 which is my/wife's FRA and when we originally planned on filing for our respective SS. After age 66, our joint withdrawal rate was forecast to be in the 3-4% range.

What happened during that time was the 2008-09 downturn where our joint portfolio dropped more than a few hundred $K and probably blew our forecast withdrawal rate well beyond our forecast. However, it didn't cause a problem at all since during our planning process and the five years leading up to retirement, we each set aside 3-4 years of expenses (including taxes on withdrawals) in our respective cash buckets.

As it turned out, more than a few things happened that affected the forecast withdrawal rate in the early years. Beyond the downturn, my wife decided to stay working; not because she could not afford to retire, but she came to terms of not being emotionally ready for retirement, even though she was financially ready to do so. She just let her cash bucket ride until she actually retired five years later at age 64.

Another thing that happened was we found out about the file/suspend/restricted application for SS, which we didn't know about a decade ago. That increased our actual income a bit over the last 3.5 years while we both decided to delay our respective SS until age 70 - next year. The decision to each delay SS until age 70 greatly increased our forecast future income when compared against our plan from 2007 when we forecast we would be taking SS at age 66.

Of course, while the return in the market returns over the last 7+ years resulted in us not having more than we started with 10 years ago as others had the good luck to do so, it reduced our burn rate resulting in having just 2.7% less in current joint portfolio value than we had on our planned retirement date of May 1st, 2007.

As far as our actual withdrawal rate after we both start our respective SS in the first half of 2018? It drops to under 2% planned for the remainder of our lives.

I've always stated that you can't forecast/measure any withdrawal rate until all sources of income are "on-line" in retirement. Too many things (unknowns) happen between the time you retire and when all your income sources are available.

Anyway, why would one that is retiring somewhat early stick to a withdrawal rate of say 4% which may drop to some minimal 1-2% rate in the future after all income sources come on-line? We spent a heck of a lot of $$$ over the last decade, not necessarily on "stuff" but more so on "experiences" (traveling the world) during a period in our lives that we're still fairly active. I for one, don't necessarily want to be sitting at home because I'm not physically able to get around just to ensure I had a low withdrawal rate in an early retirement scenario.

FWIW,

- Ron

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by KlangFool » Sat Nov 11, 2017 11:38 am

TheTimeLord wrote:
Sat Nov 11, 2017 10:46 am
KlangFool wrote:
Sat Nov 11, 2017 10:23 am
dbr wrote:
Sat Nov 11, 2017 10:06 am
The issue is about what is going to happen to your portfolio under withdrawal. Safe means the rate of withdrawal is small enough that there is little chance of the portfolio being exhausted too soon.

The relationship of withdrawals to expenses is that withdrawals are what is required to make up the difference between what one spends and what is provided for by sources of income such as SS. One obvious complication in relating withdrawal rate or $ X expenses is that the size of the sources of income may vary, in particular from before one starts to take SS to after. That is why SWR is not a plan for retirement income. SWR is a description of how portfolios behave under certain simple conditions. In short, saying one has a certain SWR or a certain X time expenses is probably an oversimplification for most people and rather meaningless in general.

It is also true, as commented by someone else, that expenses are not one simple number, vary over time, and may be subject to reconsideration. All of the retirement planners allow one to input sources of income and expenditure that start and/or stop at arbitrary times. In any case perfect flexibility to reflect all circumstances is not possible.
dbr,

<< In short, saying one has a certain SWR or a certain X time expenses is probably an oversimplification for most people and rather meaningless in general. >>

1) You are correct.

2) But, if the portfolio is big enough and it is at the size of 50 times or bigger than required expense or 2% or less SWR, that is all a person needs. It is a good enough estimation.

3) For many folks with a low annual expense, social security cover 50% or more of their annual retirement expense. Hence, it is possible for the portfolio to reach that size. Ditto for people with a very big portfolio. It is for the people in the middle that greater precision is needed.

4) People in the middle are

A) Annual expense big enough that social security income and/or pension cover less than 50% of retirement expense.

B) Portfolio not bigger than 40 times retirement expense.

KlangFool
I guess I find all the SWR and X times expenses stuff a little too difficult to utilize for someone planning to retire 5, 10 or more years before collecting SS. I have an Excel spreadsheet that models what I can expect to be able to withdraw annually given the size of my portfolio, my retirement start date, when SS and pensions kick in and the occurrence of one time events like the sale of a house when one goes into assisted living. I run the same parameters assuming an annual return of 3%, 3.3%, 3.5% and 4% on my portfolio, but I look at 3.3% as the gold standard. I occasionally run Firecalc or I-Orp to validate my model. It also has about 4 spending periods as I expect my spending to evolve over my retirement. So I end up with a number I can compare to the base expenses of my current lifestyle and assume any overage will be discretionary income. Also I do use an assumed tax rate to arrive at that number.
TheTimeLord,

<< I guess I find all the SWR and X times expenses stuff a little too difficult to utilize for someone planning to retire 5, 10 or more years before collecting SS. >>

Why do you think it is hard? I am around 5 to 10 more years before collecting SS. SS cover about 50% of my expense. My targeted number is 25 times my current annual expense. This number is 50 times my retirement expense when I collect my SS. It is fairly safe. I am planning to retire around 5 years.

If I reach the number at 33 times my current annual expense, it is definitely safe.

Greater precision is not the same as greater accuracy. All our numbers are based on assumptions that we would not know whether it will be true.

KlangFool

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by TheTimeLord » Sat Nov 11, 2017 11:51 am

KlangFool wrote:
Sat Nov 11, 2017 11:38 am
TheTimeLord wrote:
Sat Nov 11, 2017 10:46 am
KlangFool wrote:
Sat Nov 11, 2017 10:23 am
dbr wrote:
Sat Nov 11, 2017 10:06 am
The issue is about what is going to happen to your portfolio under withdrawal. Safe means the rate of withdrawal is small enough that there is little chance of the portfolio being exhausted too soon.

The relationship of withdrawals to expenses is that withdrawals are what is required to make up the difference between what one spends and what is provided for by sources of income such as SS. One obvious complication in relating withdrawal rate or $ X expenses is that the size of the sources of income may vary, in particular from before one starts to take SS to after. That is why SWR is not a plan for retirement income. SWR is a description of how portfolios behave under certain simple conditions. In short, saying one has a certain SWR or a certain X time expenses is probably an oversimplification for most people and rather meaningless in general.

It is also true, as commented by someone else, that expenses are not one simple number, vary over time, and may be subject to reconsideration. All of the retirement planners allow one to input sources of income and expenditure that start and/or stop at arbitrary times. In any case perfect flexibility to reflect all circumstances is not possible.
dbr,

<< In short, saying one has a certain SWR or a certain X time expenses is probably an oversimplification for most people and rather meaningless in general. >>

1) You are correct.

2) But, if the portfolio is big enough and it is at the size of 50 times or bigger than required expense or 2% or less SWR, that is all a person needs. It is a good enough estimation.

3) For many folks with a low annual expense, social security cover 50% or more of their annual retirement expense. Hence, it is possible for the portfolio to reach that size. Ditto for people with a very big portfolio. It is for the people in the middle that greater precision is needed.

4) People in the middle are

A) Annual expense big enough that social security income and/or pension cover less than 50% of retirement expense.

B) Portfolio not bigger than 40 times retirement expense.

KlangFool
I guess I find all the SWR and X times expenses stuff a little too difficult to utilize for someone planning to retire 5, 10 or more years before collecting SS. I have an Excel spreadsheet that models what I can expect to be able to withdraw annually given the size of my portfolio, my retirement start date, when SS and pensions kick in and the occurrence of one time events like the sale of a house when one goes into assisted living. I run the same parameters assuming an annual return of 3%, 3.3%, 3.5% and 4% on my portfolio, but I look at 3.3% as the gold standard. I occasionally run Firecalc or I-Orp to validate my model. It also has about 4 spending periods as I expect my spending to evolve over my retirement. So I end up with a number I can compare to the base expenses of my current lifestyle and assume any overage will be discretionary income. Also I do use an assumed tax rate to arrive at that number.
TheTimeLord,

<< I guess I find all the SWR and X times expenses stuff a little too difficult to utilize for someone planning to retire 5, 10 or more years before collecting SS. >>

Why do you think it is hard? I am around 5 to 10 more years before collecting SS. SS cover about 50% of my expense. My targeted number is 25 times my current annual expense. This number is 50 times my retirement expense when I collect my SS. It is fairly safe. I am planning to retire around 5 years.

If I reach the number at 33 times my current annual expense, it is definitely safe.

Greater precision is not the same as greater accuracy. All our numbers are based on assumptions that we would not know whether it will be true.

KlangFool
I find it unnecessarily hard for 2 reasons. First, because it is hard to understand what the drawdown to your assets will be during you pre-SS years, especially if it is a long period of time. So to me your 25X does not automatically convert to 50X. Secondly, I just want to know what I can reasonably expect to be able to spend each year for the life of my retirement given my current portfolio value. It just seems simpler to me to go to a model or use something like Firecalc or I-ORP instead of abstracting it to numbers that vary so widely depending on if I was pre or post SS.
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by KlangFool » Sat Nov 11, 2017 12:02 pm

TheTimeLord wrote:
Sat Nov 11, 2017 11:51 am

I find it unnecessarily hard for 2 reasons. First, because it is hard to understand what the drawdown to your assets will be during you pre-SS years, especially if it is a long period of time. So to me your 25X does not automatically convert to 50X. Secondly, I just want to know what I can reasonably expect to be able to spend each year for the life of my retirement given my current portfolio value. It just seems simpler to me to go to a model or use something like Firecalc or I-ORP instead of abstracting it to numbers that vary so widely depending on if I was pre or post SS.
TheTimeLord,

I would need some numbers in context in order to understand your position.

<<especially if it is a long period of time.>>

What do you mean by a long period of time? In my case, it is around 5 years. So, 25 to 33 times annual expense before SS and double to 50 to 66 times retirement expense at 62 and beyond is a safe number.

<< Secondly, I just want to know what I can reasonably expect to be able to spend each year for the life of my retirement given my current portfolio value.>>

That would mean that you have a lot more than required expense. It is a "rich person" problem. Some people use VPW. Others create a separate pool of "luxury expense" that is funded by the excess. They average this over about 3 years.

KlangFool

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by TravelforFun » Sat Nov 11, 2017 12:22 pm

If X is the before tax annual amount I need to have, Y is the number of years before I withdraw my social security (SS), then my Financial Independence amount would be:

FI = XY+33(X-SS)

You could make the formula more complicated to cover more scenarios including spousal benefits, pension, annuities, etc. Or change the withdrawal rate from 3% (or 33 in the formula) to 4% (or 25).

TravelforFun

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by TheTimeLord » Sat Nov 11, 2017 12:44 pm

KlangFool wrote:
Sat Nov 11, 2017 12:02 pm
TheTimeLord wrote:
Sat Nov 11, 2017 11:51 am

I find it unnecessarily hard for 2 reasons. First, because it is hard to understand what the drawdown to your assets will be during you pre-SS years, especially if it is a long period of time. So to me your 25X does not automatically convert to 50X. Secondly, I just want to know what I can reasonably expect to be able to spend each year for the life of my retirement given my current portfolio value. It just seems simpler to me to go to a model or use something like Firecalc or I-ORP instead of abstracting it to numbers that vary so widely depending on if I was pre or post SS.
TheTimeLord,

I would need some numbers in context in order to understand your position.

<<especially if it is a long period of time.>>

What do you mean by a long period of time? In my case, it is around 5 years. So, 25 to 33 times annual expense before SS and double to 50 to 66 times retirement expense at 62 and beyond is a safe number.

If I retire 10 years before retirement and for that decade the real return on my investment is 0% then I go from having 25x to 15x which becomes 30x (not 50x) once I start SS. That is what I am talking about.


<< Secondly, I just want to know what I can reasonably expect to be able to spend each year for the life of my retirement given my current portfolio value.>>

That would mean that you have a lot more than required expense. It is a "rich person" problem. Some people use VPW. Others create a separate pool of "luxury expense" that is funded by the excess. They average this over about 3 years.

I guess in my mind I just see it as normal due diligence to want to what lifestyle my portfolio and income streams could reasonably afford before surrendering my human capital. I would hate to leave, only to discover another X months of work could have provided me with something I would value. Sometimes it hard to know what you want until you understand you could actually obtain it.

KlangFool
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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by KlangFool » Sat Nov 11, 2017 1:19 pm

TheTimeLord wrote:
Sat Nov 11, 2017 12:44 pm
KlangFool wrote:
Sat Nov 11, 2017 12:02 pm
TheTimeLord wrote:
Sat Nov 11, 2017 11:51 am

I find it unnecessarily hard for 2 reasons. First, because it is hard to understand what the drawdown to your assets will be during you pre-SS years, especially if it is a long period of time. So to me your 25X does not automatically convert to 50X. Secondly, I just want to know what I can reasonably expect to be able to spend each year for the life of my retirement given my current portfolio value. It just seems simpler to me to go to a model or use something like Firecalc or I-ORP instead of abstracting it to numbers that vary so widely depending on if I was pre or post SS.
TheTimeLord,

I would need some numbers in context in order to understand your position.

<<especially if it is a long period of time.>>

What do you mean by a long period of time? In my case, it is around 5 years. So, 25 to 33 times annual expense before SS and double to 50 to 66 times retirement expense at 62 and beyond is a safe number.

If I retire 10 years before retirement and for that decade the real return on my investment is 0% then I go from having 25x to 15x which becomes 30x (not 50x) once I start SS. That is what I am talking about.


<< Secondly, I just want to know what I can reasonably expect to be able to spend each year for the life of my retirement given my current portfolio value.>>

That would mean that you have a lot more than required expense. It is a "rich person" problem. Some people use VPW. Others create a separate pool of "luxury expense" that is funded by the excess. They average this over about 3 years.

I guess in my mind I just see it as normal due diligence to want to what lifestyle my portfolio and income streams could reasonably afford before surrendering my human capital. I would hate to leave, only to discover another X months of work could have provided me with something I would value. Sometimes it hard to know what you want until you understand you could actually obtain it.

KlangFool
TheTimeLord,

<<
If I retire 10 years before retirement and for that decade the real return on my investment is 0% then I go from having 25x to 15x which becomes 30x (not 50x) once I start SS. That is what I am talking about.
>>

1) Come on. We are not a mindless robot. If the real return is 0%, we would cut our expenses. And, we would not wait for 10 years before we cut our expenses.

2) And, even if that is true, 30X retirement expense is not a bad number to ended up with. It still works.

<< I guess in my mind I just see it as normal due diligence to want to what lifestyle my portfolio and income streams could reasonably afford before surrendering my human capital.>>

3) Versus the opportunity cost of spending more of your time working versus living your life. Not all of us share your opinion of working one more year (OMY) is a productive use of our lives. My life is more precious than earning more money.

4) I do not want to end up the same situation like my oldest brother. Diagnosed with a terminal brain tumor and died a few months later just when he was retired.

KlangFool

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by smitcat » Sat Nov 11, 2017 3:26 pm

FWIW - While we do save well for retirement we are not 'waiting to live' until we are retired.
We never lived like we needed to wait until we are retired to do or experience certain things.
While I really hope that retirement brings another facet to our lives it is not some type of finish line that will allow us to 'finally' do certain things.

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by Sandtrap » Sat Nov 11, 2017 4:10 pm

TheTimeLord wrote:
Fri Nov 10, 2017 11:18 pm
KlangFool wrote:
Fri Nov 10, 2017 11:14 pm
OP,

In my case, I am referring to my current annual expense.

KlangFool
Would those numbers change dramatically if you calculated them for after you started collecting SS and a pension if you have one?
In my case, DW and I have no pension, and not a substantial amount for SS.
I do not add income streams outside of the investment portfolio (SS, rental income, etc) when figuring out SWR because to me that's a "margin of safety". I also do not include R/E holdings or outside income streams, or our home, when figuring out "X times expenses". To me, I can't eat my house or my rentals so I don't add it in. Simplistic but works as another conservative margin.
I use a variable +- 3% withdrawal rate.
As far as expenses. I use what we have right now and adjust it forward several years. I do not anticipate much change. DW and I have always spent about the same amount whether when we were working and after retirement.
So far, with ZZ X times expenses, I think DW and I will be okay in retirement.

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Re: What do people mean when they say their SWR is X% or they have X times expenses?

Post by thangngo » Sat Nov 11, 2017 4:39 pm

TheTimeLord wrote:
Fri Nov 10, 2017 11:10 pm
When people say their savings are enough that they can live on a 2% or 3% SWR or that they have 25, 30 or 40 times expenses are they talking about at once they start to draw SS and pension or before. It would seem to me the before and after calculations of WR and multiple of expenses will be quite different. So to which are early retirees referring?
Personally, I don't count on SS although it's projected to pay 50% of my annual expense. It's too many moving parts when it's 30-40 years in the future. If I have SS, great. If I don't, I never plan to have it.

Also, I want to add that financial planning is very fluid. It changes every year, if not more frequently. One year you might reach 40 times expense, decide to call it quit. Then the market crashes and you might only have 30 times expense. Or if you have a major medical expense, no portfolio seems to be big enough. Or if you divorce, your portfolio might as well shrink in half. Those events are probable so plan for the worst.

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