Retirees: The common sense withdrawal method

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tennisplyr
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Retirees: The common sense withdrawal method

Post by tennisplyr » Fri Feb 16, 2018 8:16 am

Obviously, there are endless discussions here about withdrawal methods usually involving some kind of formulae or calculations. I was wondering if there are people like me who just use common sense...they take out what they need, when they need it. Please share your story.
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Re: Retirees: The common sense withdrawal method

Post by jebmke » Fri Feb 16, 2018 8:35 am

This is also called "the Taylor Larimore method." It is what I follow. I know a lot of retirees since I work along side many of them in TaxAide centers. I don't know any who use a mathematical method for managing their cash flow. Most use the Taylor method. Many have some pension, social security and supplement their spending with dividends+interest - maybe an occasional dip into their principle for something special or monetary gifts to children/grandchildren.

We actually increased our spending right after the 2008-09 downturn because we knew we wanted to get some home improvements done and the availability of contractors and their low pricing made it a no-brainer to go ahead with this spending. We took a trip to Italy in 2009 because the prices were too good to pass up.

edit: sometimes the confusion comes from inconsistent definition of withdrawal. To me, withdrawal means spending. Money that comes from various accounts and ends up in other various accounts, including savings accounts is merely accounting manipulation. The critical metric is where the money goes out the door never to return.
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Re: Retirees: The common sense withdrawal method

Post by The Wizard » Fri Feb 16, 2018 9:24 am

No. "Common Sense" withdrawals are ill defined and not appropriate for some folks.

What I've done is set up lifetime annuities which cover the bulk of my retirement income needs. I am withdrawing around 4% of my tax deferred 403(b) balance each year in lieu of SS, but the bulk of that is actually a Roth conversion so that may not count, per jebmke.

When I start full personal SS in two years, I will have won the game and my portfolio will be purely discretionary...
Last edited by The Wizard on Fri Feb 16, 2018 9:26 am, edited 1 time in total.
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Re: Retirees: The common sense withdrawal method

Post by TeamArgo » Fri Feb 16, 2018 9:25 am

I used a 4% rule to determine if I was in a position to retire and I still aim in that direction, but I do not use that figure as an absolute target. I have described my method on another thread as "4 percent-ish". Common sense is the real driver, as you have stated. Three years ago we wanted to remodel our bathroom, devised a good plan, and took more than 4% to cover it. Last year, we felt that our ability and desire to travel might well start to decline in the future, so we went over 4% to travel. Three other years of my retirement have landed well short of the 4% target, so all is working out fine.
But we are helped in this by the fact that my wife and I have always used common sense to set and control our spending. We have known others who did not have this, I don't know exactly, so let's say ability or desire or sense. Some used budgets or rules as tools to keep them where they needed to be, and some spent wildly and never were able to hang on to their money at all. For those who need a rule or a budget to make it all work out, I say good for you and hang in there. But if you can live and thrive with the combination of flexibility and chaos that comes from using common sense, good for you, too.
"A man hears what he wants to hear, and disregards the rest" -Paul Simon (The Boxer, 1970)

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Re: Retirees: The common sense withdrawal method

Post by iceport » Fri Feb 16, 2018 9:35 am

jebmke wrote:
Fri Feb 16, 2018 8:35 am
This is also called "the Taylor Larimore method." It is what I follow.
Congratulations on your good fortune, jebmke. This might work out well for some, but it seems hardly appropriate as general guidance or for those trying to figure out if they have enough to retire.

There are some important caveats that come with the "spend whatever" method, as I have noted before. Do you have a portfolio large enough that even a 4% withdrawal rate would put you in the top quintile for income in your area, plan to retire in a year whose future sequence of returns will support a 9% withdrawal rate, and have a government pension and possibly a working spouse? Well sure, it would be fair to ask, "What, me worry?"

Most of us are do not share those circumstances.
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Re: Retirees: The common sense withdrawal method

Post by dbr » Fri Feb 16, 2018 9:42 am

tennisplyr wrote:
Fri Feb 16, 2018 8:16 am
Obviously, there are endless discussions here about withdrawal methods usually involving some kind of formulae or calculations. I was wondering if there are people like me who just use common sense...they take out what they need, when they need it. Please share your story.
Sure. I do that with the caveat that I keep track of the overall rate of withdrawal and asset balance to anticipate if withdrawals are getting dangerously out of hand. I know my spending can bounce around enough that I have spent twice as much in one year as in another year. To try to spend an even budget every year would be silly. I doubt Mr. Larrimore ever literally spend "whatever he wanted." People are going to have common sense. Also an aside is that if you retire in a really good year, of which 1982 was one, the safe withdrawal rate for that year really is up around 8% or so. Of course you only find that out after going along for awhile, maybe most of the while before you are sure.

I know a guy who died with $8M and refused for years to let his wife ever have a new car instead of an old Camry. I guess that is also a withdrawal method.

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Re: Retirees: The common sense withdrawal method

Post by jebmke » Fri Feb 16, 2018 9:51 am

iceport wrote:
Fri Feb 16, 2018 9:35 am
for those trying to figure out if they have enough to retire.
Figuring out whether you have enough and actually managing the withdrawal are two different problems. Obviously, the closer to the edge one is, the more scrutiny is required. However, keep in mind that over the years millions of people have retired without having to resort to fancy calculations to manage their spending. Some were competent enough to do it even before the age of hand-held calculators much less fancy spreadsheets. People are remarkably efficient at making good judgements on their own.

Keep in mind that the Taylor Larimore method is not "spend whatever" -- just read the myriad of his prior posts.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: Retirees: The common sense withdrawal method

Post by Dandy » Fri Feb 16, 2018 9:59 am

I am very lucky to be in great financial shape with a high income floor and asset level. So it is easy for me to think a withdrawal approach is relatively easy. For the most part I can take what I need without excessive impact on my finances.

I think those who aren't as lucky face daunting choices and many confusing approaches. A bad sequence of returns or unexpected expenses can easily make their well made plans to go south. And with the human capital going to zero their are no do-overs and recovery is much harder/longer.

To me retirees should err on the safe side rather than try to maximize their withdrawals. They probably should consider an immediate annuity at some point if their income floor is low to take some pressure/risk off their investment portfolio. They should try to delay collecting Social Security as long as possible to maximize their inflation protected income.

I don't think any withdrawal approach is set it and forget it. Retirees that don't have ample assets need to be involved with their finances and not be on semi automatic pilot. When the portfolio takes a hit they should reduce withdrawals rather than try the X amount plus inflation approach for example. They should keep their fixed expenses to a minimum so they can reduce expenses a bit when investments take a hit or they experience a bump up of expense.

I favor an approach that keeps X years worth of drawdown in "safe" products but withdrawing some or most from riskier investments when they do well thereby extending the coverage of the "safe" assets.

I guess my point is you can't avoid managing your retirement finances. You are responsible not some well thought out plan or adviser. You need to make sure the plan is working in real life and take actions if it is not. Change expenses, change investments, change advisers etc. it is really up to you.

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Re: Retirees: The common sense withdrawal method

Post by randomguy » Fri Feb 16, 2018 10:27 am

jebmke wrote:
Fri Feb 16, 2018 8:35 am
This is also called "the Taylor Larimore method." It is what I follow.
Any scheme works pretty well when you retire in a year when the SWR was about 10%:) Reality is that most people will retire in average times, take out about what they have always spent and do things like postpone trips/remodels when the markets are down 25% for a year or two. Things only get interesting when you hit those 2 or 3 bad periods with crashes and decade long periods of no performance and you have to start making real cuts (i.e. do you sell you house and move to much smaller apartment) or do you gamble that things will bounce back.

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Re: Retirees: The common sense withdrawal method

Post by dbr » Fri Feb 16, 2018 10:38 am

We haven't explicitly added the comment that life is very different when a substantial fraction of one's "withdrawal" is actually income streams from pensions, annuities, and Social Security (or even other sources). Whether or not it should be part of the withdrawal method that a person lacking annuitized income streams should then annuitize is a discussion. Taylor has mentioned many times the value to him of having purchased annuities.

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Re: Retirees: The common sense withdrawal method

Post by jebmke » Fri Feb 16, 2018 10:45 am

dbr wrote:
Fri Feb 16, 2018 10:38 am
We haven't explicitly added the comment that life is very different when a substantial fraction of one's "withdrawal" is actually income streams from pensions, annuities, and Social Security (or even other sources). Whether or not it should be part of the withdrawal method that a person lacking annuitized income streams should then annuitize is a discussion. Taylor has mentioned many times the value to him of having purchased annuities.
Yes, purchased annuities are a good way to insure your cash flow. The insurance part of it can be pretty expensive if purchased early so early retirees face a choice between managing and insuring. I suppose the same phenomenon occurs when faced with the choice of when to take Social Security.
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Re: Retirees: The common sense withdrawal method

Post by dbr » Fri Feb 16, 2018 10:49 am

jebmke wrote:
Fri Feb 16, 2018 10:45 am
dbr wrote:
Fri Feb 16, 2018 10:38 am
We haven't explicitly added the comment that life is very different when a substantial fraction of one's "withdrawal" is actually income streams from pensions, annuities, and Social Security (or even other sources). Whether or not it should be part of the withdrawal method that a person lacking annuitized income streams should then annuitize is a discussion. Taylor has mentioned many times the value to him of having purchased annuities.
Yes, purchased annuities are a good way to insure your cash flow. The insurance part of it can be pretty expensive if purchased early so early retirees face a choice between managing and insuring. I suppose the same phenomenon occurs when faced with the choice of when to take Social Security.
Indeed. A major argument for delaying SS is just precisely that of maximizing the opportunity to hold an inflation indexed annuity where the benefit of delaying is quite large along with the benefit of unburdening the portfolio of longevity risk. Of course that also depends on the relative magnitude of SS benefits to overall spending. For a lot of people on this forum near or in retirement now SS is generally a large factor.

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Re: Retirees: The common sense withdrawal method

Post by dkturner » Fri Feb 16, 2018 11:02 am

We have settled on a process that uses 3 separate inputs: (1) portfolio yield (2) RMD amount and (3) 4% “rule” adjusted for investment expenses. Our goal is to limit our withdrawals from our combined portfolios to the lowest of the 3 inputs. We are in our 7th year of retirement and we only exceeded our goal once, because of remodeling expenses.

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Re: Retirees: The common sense withdrawal method

Post by Sheepdog » Fri Feb 16, 2018 11:24 am

I live off of savings and SS only. I take out what I need, but with controls, in my 19 years in retirement. I planned for an average of 4.5% annual withdrawal percentage. The withdrawals have been variable year to year, lower in some years in order to pay for the larger expenses in others. They have ranged from 3.11% to as high as 7.52%, but the average withdrawal was 4.56%. My savings balance today is higher than it was at retirement.
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Re: Retirees: The common sense withdrawal method

Post by iceport » Fri Feb 16, 2018 11:42 am

jebmke wrote:
Fri Feb 16, 2018 9:51 am
iceport wrote:
Fri Feb 16, 2018 9:35 am
for those trying to figure out if they have enough to retire.
Figuring out whether you have enough and actually managing the withdrawal are two different problems.

Yes, but they are intimately related; figuring out how much can prudently be spent from a given portfolio is common to both.

Obviously, the closer to the edge one is, the more scrutiny is required.

Exactly!

However, keep in mind that over the years millions of people have retired without having to resort to fancy calculations to manage their spending. Some were competent enough to do it even before the age of hand-held calculators much less fancy spreadsheets. People are remarkably efficient at making good judgements on their own.

Yes, but the vast majority retired relatively late and lived a meager existence borne of necessity rather than choice.
Dandy wrote:
Fri Feb 16, 2018 9:59 am
I am very lucky to be in great financial shape with a high income floor and asset level. So it is easy for me to think a withdrawal approach is relatively easy. For the most part I can take what I need without excessive impact on my finances.

I think those who aren't as lucky face daunting choices and many confusing approaches. A bad sequence of returns or unexpected expenses can easily make their well made plans to go south. And with the human capital going to zero their are no do-overs and recovery is much harder/longer.

To me retirees should err on the safe side rather than try to maximize their withdrawals. They probably should consider an immediate annuity at some point if their income floor is low to take some pressure/risk off their investment portfolio. They should try to delay collecting Social Security as long as possible to maximize their inflation protected income.

I don't think any withdrawal approach is set it and forget it. Retirees that don't have ample assets need to be involved with their finances and not be on semi automatic pilot. When the portfolio takes a hit they should reduce withdrawals rather than try the X amount plus inflation approach for example. They should keep their fixed expenses to a minimum so they can reduce expenses a bit when investments take a hit or they experience a bump up of expense.

I favor an approach that keeps X years worth of drawdown in "safe" products but withdrawing some or most from riskier investments when they do well thereby extending the coverage of the "safe" assets.

I guess my point is you can't avoid managing your retirement finances. You are responsible not some well thought out plan or adviser. You need to make sure the plan is working in real life and take actions if it is not. Change expenses, change investments, change advisers etc. it is really up to you.
Thanks for such a thoughtful and concise summary, Dandy! There's a lot of wisdom here — and a lot of empathy for those who don't share your own circumstances.
"Discipline matters more than allocation.” ─William Bernstein

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Re: Retirees: The common sense withdrawal method

Post by MnD » Fri Feb 16, 2018 11:52 am

jebmke wrote:
Fri Feb 16, 2018 9:51 am
Keep in mind that the Taylor Larimore method is not "spend whatever" -- just read the myriad of his prior posts.
Also keep in mind that the Taylor Larimore Retirement Year was 1982. That's the sequence (the green line on the right much higher than others) where at 4% SWR and starting at $1 million, the portfolio blows well past $5 million and then pretty much stays around $5M from there on out (plus or minus a million or so). The 1887 retiree did a little bit better, but 1982 was the jackpot retirement year for the recent era. Meanwhile, the 1966 retiree, and other 1960's retiree sequences goes broke. If you don't want to turn a $1M portfolio into a $5M one while spending a whopping $40K inflation-adjusted a year, or go broke doing so, you better plan on a variable spending model.

Image

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Re: Retirees: The common sense withdrawal method

Post by wolf359 » Fri Feb 16, 2018 12:07 pm

I'm not currently retired, but I have been mulling over a question for those who are. I intend to use the 4% rule to get me into the ballpark, but use common sense for the actual withdrawal method. I'd benchmark the withdrawals against the 4% number so I'd know roughly if I'm getting out of hand or not.

I have noticed that when running simulations of the times that the 4% rule failed, or came close to failing, you can tell within the first 5-10 years. If the portfolio balance in years 5-10 is equal to or lower than the starting balance, then you have to be cautious and reduce expenses or take steps to add money/income (get a job, downsize the home to replenish the portfolio, annuitize the bond portion, etc)

For someone following the common sense withdrawal method, this might be a quick non-math method to see if you're in trouble.

What do the experienced hands think?

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Re: Retirees: The common sense withdrawal method

Post by itstoomuch » Fri Feb 16, 2018 12:17 pm

YMMV. YvehiclesMV.
We use a FundingRatio (FR).
Expenses = Income.
Our Income is determined what the vehicle provides:
Recurring: SS pays something. Pension pays something. None asset based.
Mostly Recurring, Discounted: Rental Income. About 3-6% ROI depending on vacancies.
To Be Recurring and Mostly Recurring: Deferred GLWB annuities (8 annuities in time and . I have started and stopped withdrawals to extend guaranteed period and to manage Income. Currently, Income Value=Accumulation_Liquidation Value.
Discretionary: Remaining Discretionary Accts are mostly in IRA. I expect that we don't need to take RMD withdrawals until we are 75-78. There is a glitch in RDM requirements when using annuities for RMD.

what retirement vehicles you use can determine withdrawal amounts.
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Retirees: The common sense withdrawal method

Post by rj49 » Fri Feb 16, 2018 12:36 pm

It all depends on your safety net (pensions, paid-off house, health care), your self-control and spending style (spendthrift with a gambling instinct would benefit from rules that limit spending, whereas a frugal person might need to encourage spending to get over the reluctance to touch principal or not die with lost opportunities), and whether or not one has a spouse that would need to be supported as well.

All the exhaustive research about withdrawal rules don't really take into account the reality of spending needs and human behavior. For instance, a lot of retirement spending goes to house projects, travel, and other larger-ticket items that can easily be skipped during bad market periods, and that would be less likely much later in life. Then the rules don't take into account the potentially huge financial benefit of downsizing housing, or simply ending a mortgage. Then if you are 80 and you have a million dollars in investments, are you really going to stay with a 4% solution, or try living it up a little more?

Personally, as a 56-yr-old early retiree, with the safety of a military pension and health care and no spouse or mortgage, I'm fine with a 4-5% spending solution now (based on portfolio value, not initial value + inflation). My rough plan is to increase withdrawals as I get older by .1% a year, so by 60 I'll be at 5%, and so on. I'm at 20% equities, so my portfolio doesn't swing widely in value, but if it was being depleted too quickly, I'd simply cut back on spending, since almost all my portfolio spending is discretionary. I have a Roth IRA set aside for longevity insurance/LTC, which I won't touch unless I live behind my expected years.

At the same time, if you read William Sharpe and others, the 4% solution is an inefficient method for maximizing lifetime utility of spending, since in many cases it leaves a lot of money on the table, and doesn't account for decreased patterns of spending as we get older, especially with the common fear among retirees of spending principal (thus the huge interest in dividend strategies over the probably-more-profitable total return one). Here's a short article encouraging more retirement spending:

https://www.marketwatch.com/story/why-r ... 2018-02-13

In that case, it might be better to adopt a strategy of dividing up your portfolio into a generously-estimated life expectancy and spending 1/n each year. In practice, if you wanted to budget for 30 years, you could spend 1/30 of a fund's shares each year. William Sharpe came up with a similar practice, if you google 'william sharpe lockbox', where you allocate a certain amount of stock shares for each remaining year of your life, combined with a safe amount of fixed income (he uses TIPS). The benefit of such an approach is that it forces you to spend down your portfolio efficiently, it helps eliminate the problem of diminishing faculties as we age (or the urge to fiddle with portfolios and withdrawal rates or selling out of fear), with the drawback being variability of withdrawal values by year.

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Re: Retirees: The common sense withdrawal method

Post by rgs92 » Fri Feb 16, 2018 12:41 pm

Mnd, was that Firecalc chart for a 60/40 constant asset allocation?

I guess the big problem with 1966 was the runaway inflation causing bonds to decline dramatically and the need for very large nominal withdrawals to cope the rising cost of living. And the energy crisis played a big part in that.

Inflation seems to be a big factor in portfolio-survival scenarios.

Thanks for the great chart. Very informative.
Last edited by rgs92 on Fri Feb 16, 2018 12:43 pm, edited 1 time in total.

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Re: Retirees: The common sense withdrawal method

Post by FrugalInvestor » Fri Feb 16, 2018 12:41 pm

I don't know that "taking out what you need when you need it" is common sense. If you have enough that your 'needs' are aligned with portfolio sustainability over the period of your lifetime then that will work fine. If not, you're going to run into a problem and I think common sense would dictate that you find another method.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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Re: Retirees: The common sense withdrawal method

Post by Chip » Fri Feb 16, 2018 12:46 pm

We use Taylor's method as well, and have been doing so for 17 years now since retiring in 2001 with no pension or income source other than the portfolio. I do track spending fairly carefully and annually compare it to some targets based on SWR studies. But we don't slavishly adhere to those targets -- if we need to buy a car we buy a car, even if it blows through the target. But on average our spending oscillates around those target levels.

I guess it helps tremendously if one's asset levels and associated SWR are in congruence with one's "natural" spending predilections.

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Re: Retirees: The common sense withdrawal method

Post by retire57 » Fri Feb 16, 2018 1:03 pm

So far, two years into retirement, we take what we need. That has worked out to a 1% withdrawal rate from our taxable Vtsax in the form of dividends.

This thread will garner input from people who are not yet retired and will jump the track. But hearing from those who are actually retired will be enlightening, I'm sure. :D

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Re: Retirees: The common sense withdrawal method

Post by texasdiver » Fri Feb 16, 2018 1:09 pm

FrugalInvestor wrote:
Fri Feb 16, 2018 12:41 pm
I don't know that "taking out what you need when you need it" is common sense. If you have enough that your 'needs' are aligned with portfolio sustainability over the period of your lifetime then that will work fine. If not, you're going to run into a problem and I think common sense would dictate that you find another method.

It will certainly work if you have an upward ceiling on annual withdrawals. Say cap your withdrawals at 5% and then in any given year withdraw 0-5% depending on what you need. Might no work so well if your "what you need" amount is 25% of your holdings
My wife and I are still 10 years away but what I'm thinking is following something like the 4% rule even though I don't project we'll need the full 4% and then roll the surplus into Roth conversions which I would treat as something like a growing emergency fund or "what we need" fund. In other words, "re-saving" part of our retirement withdrawals. Perhaps that is just a mental construct. But it's how I'm thinking about it.

That is essentially what my 80 year old parents are doing. And then every so often they have the surplus savings available for big splurges. Lke a couple of years ago when they flew all their children and grandchildren to Costa Rica for a week to celebrate their 50th wedding anniversary.

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Re: Retirees: The common sense withdrawal method

Post by FrugalInvestor » Fri Feb 16, 2018 1:13 pm

We retired quite early. Since a poor sequence of returns can take a painful bite out of early retirees' investments we started with a withdrawal target which was very conservative equating to 3% or less of our portfolio value. That wasn't a hard and fast number but we stuck to it pretty closely. We've now been retired for 15 years and based on market and portfolio performance, age and circumstances I've ratched that number up to about 3.5%. Again, this is not set in stone. We sometimes come in under or over that number but it gives us a 'budget' which I believe is helpful.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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Re: Retirees: The common sense withdrawal method

Post by DrGoogle2017 » Fri Feb 16, 2018 1:16 pm

tennisplyr wrote:
Fri Feb 16, 2018 8:16 am
Obviously, there are endless discussions here about withdrawal methods usually involving some kind of formulae or calculations. I was wondering if there are people like me who just use common sense...they take out what they need, when they need it. Please share your story.
This is what I do, but more like anticipating 6 months of expense. I never cut it close. If I expect months of travelling, I take out the appropriate amount. Luckily they are not retirement account. No tax consequences.

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Re: Retirees: The common sense withdrawal method

Post by ColoradoRick » Fri Feb 16, 2018 2:58 pm

TeamArgo wrote:
Fri Feb 16, 2018 9:25 am
I used a 4% rule to determine if I was in a position to retire and I still aim in that direction, but I do not use that figure as an absolute target. I have described my method on another thread as "4 percent-ish". Common sense is the real driver, as you have stated. Three years ago we wanted to remodel our bathroom, devised a good plan, and took more than 4% to cover it. Last year, we felt that our ability and desire to travel might well start to decline in the future, so we went over 4% to travel. Three other years of my retirement have landed well short of the 4% target, so all is working out fine.
But we are helped in this by the fact that my wife and I have always used common sense to set and control our spending. We have known others who did not have this, I don't know exactly, so let's say ability or desire or sense. Some used budgets or rules as tools to keep them where they needed to be, and some spent wildly and never were able to hang on to their money at all. For those who need a rule or a budget to make it all work out, I say good for you and hang in there. But if you can live and thrive with the combination of flexibility and chaos that comes from using common sense, good for you, too.
Plus one for BW & I

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Re: Retirees: The common sense withdrawal method

Post by cfs » Fri Feb 16, 2018 3:24 pm

Almost 4 years as a member of the Active Retired Force, zero withdrawals and if needed I would use the TLW (Taylor Larimore withdrawal) method. Good luck y gracias por leer / cfs
~ Member of the Active Retired Force since 2014 ~

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Re: Retirees: The common sense withdrawal method

Post by fishandgolf » Fri Feb 16, 2018 3:28 pm

jebmke wrote:
Fri Feb 16, 2018 8:35 am
This is also called "the Taylor Larimore method." It is what I follow.
+1.....TLCSWM.......best one I know of :sharebeer

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Re: Retirees: The common sense withdrawal method

Post by FreeAtLast » Fri Feb 16, 2018 3:54 pm

I vote with jebmke. I have used the "TL" method since retiring 4 years ago, and feel very comfortable with it. I will admit that I live a very simple and frugal lifestyle. It does not take a lot of withdrawal money to make me happy: good books from our excellent public library, a walk around the neighborhood, a casual day (or two or three) trip through upstate, a reasonably priced bottle of wine (Vouvray is one favorite), a steak and potato with a large salad (obtainable for $20 where I live). I did my planning for retirement with the 4% method, but so far have not been close to 4% with any withdrawals.
Illegitimi non carborundum.

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Re: Retirees: The common sense withdrawal method

Post by JoMoney » Fri Feb 16, 2018 4:27 pm

It's hard to model "common sense", I think it could be argued that what is "common" makes very little "sense"... but a typical person who is disciplined enough to save money across there working life can probably work out something that works... maybe even have a hard time spending down everything they've spent a lifetime accumulating.
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Re: Retirees: The common sense withdrawal method

Post by dbr » Fri Feb 16, 2018 6:07 pm

JoMoney wrote:
Fri Feb 16, 2018 4:27 pm
It's hard to model "common sense", I think it could be argued that what is "common" makes very little "sense"... but a typical person who is disciplined enough to save money across there working life can probably work out something that works... maybe even have a hard time spending down everything they've spent a lifetime accumulating.
Maybe a better expression is "informed common sense." You are correct that the issue might be technical enough that knowing something about it would help.

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Re: Retirees: The common sense withdrawal method

Post by willthrill81 » Fri Feb 16, 2018 6:13 pm

JoMoney wrote:
Fri Feb 16, 2018 4:27 pm
It's hard to model "common sense", I think it could be argued that what is "common" makes very little "sense"... but a typical person who is disciplined enough to save money across there working life can probably work out something that works... maybe even have a hard time spending down everything they've spent a lifetime accumulating.
That's close to what I was thinking.

Image

In all seriousness, it's impossible to know if you have an adequate portfolio unless you have some idea of how much income that it can likely produce for you over a given period of time. Just winging it and relying on gut instinct doesn't sound appealing to me. Granted, few retirees are going to continue to make increasing withdrawals from a declining portfolio early into the process, but I still want to have some data on the side of my withdrawal method.
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Re: Retirees: The common sense withdrawal method

Post by NotWhoYouThink » Fri Feb 16, 2018 6:21 pm

There are plenty of people who just take out what they need, when they need it. And go broke, and run up credit card bills, and mortgage the house, and take cruises, and then depend on their kids for money. My parents aren't those people, but the stories I hear from my friends!

If you have a good understanding of how you accumulated your money, and an informed prediction of how much you can spend to make it last, then sure, wing it and feel safe. But most people don't have that.

Megacorp has started promoting Financial Engines to help retirees transition from earning a paycheck to spending down their 401k. An old friend is excited to work with them, because you just turn everything over to them and they turn it into income. Makes my knees buckle to think about it, but knowing this person's capacity for deferred gratification, it's starting to sound perfect for him.

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Re: Retirees: The common sense withdrawal method

Post by JoeRetire » Fri Feb 16, 2018 6:23 pm

tennisplyr wrote:
Fri Feb 16, 2018 8:16 am
I was wondering if there are people like me who just use common sense...they take out what they need, when they need it.
Obviously there are some who follow the "take out what you need" method.

Some of them will have sufficiently large portfolios and sufficiently small needs such that they will be fine.
Others will have insufficient portfolios and will get themselves in trouble. They will end up relying on family or will find them selves relying solely on social security and unable to cover their needs.

I take what I need.
But before planning to do that, I spent a lot of time myself and with my financial adviser estimating a retirement budget and planning our portfolio accordingly. I know that what I will need is sustainable throughout our retirement.

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Re: Retirees: The common sense withdrawal method

Post by Orion » Fri Feb 16, 2018 6:53 pm

When I retired in 2000, I found many retail financial/investment advisors were still using 7% for a retirement withdrawal rate. And some of my friends were using higher rates, and opening margin accounts, etc. More examples of how "Common sense" may be more variable than you think.

I used the standard rule as an indicator that I could retire, however, once retired I only check the numbers roughly and infrequently. The standard rule assumes you want a stable inflation-adjusted "salary". I can understand that desire, but now that my retirement depends on the market, I find that I can't help but hunker down in bad years anyway. And then in really good years I suddenly notice that my car is really old, etc.

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Re: Retirees: The common sense withdrawal method

Post by willthrill81 » Fri Feb 16, 2018 7:32 pm

Orion wrote:
Fri Feb 16, 2018 6:53 pm
When I retired in 2000, I found many retail financial/investment advisors were still using 7% for a retirement withdrawal rate. And some of my friends were using higher rates, and opening margin accounts, etc. More examples of how "Common sense" may be more variable than you think.
Precisely. Flying by the seat of your pants (i.e. 'common sense') can be very dangerous. An informed position seems far preferential to me.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Retirees: The common sense withdrawal method

Post by AlohaJoe » Fri Feb 16, 2018 7:58 pm

tennisplyr wrote:
Fri Feb 16, 2018 8:16 am
I was wondering if there are people like me who just use common sense...they take out what they need, when they need it.
Obviously, the overwhelming majority of people don't use formulas. Instead of looking at individual anecdotes, we can look at more rigorous surveys and research, such as this recently published one from BlackRock that looked at over 7,000 retiree households:
Research conducted by the BlackRock Retirement Institute (BRI) in conjunction with the Employee Benefit Research Institute (EBRI) found that on average across all wealth levels, most current retirees still have 80% of their pre-retirement savings after almost two decades in retirement.

Four key takeaways:

1. These findings begin to challenge industry norms and academic theories about lifecycle consumption especially during the retirement phase
2. Across all wealth levels measured, more than one third of current retirees grew their assets—leaving considerable potential consumption on the table
3. Late in life out-of-pocket medical expenses—a major reason to retain assets—do not appear to be warranted except for a very small portion of the population
4. The financial landscape for future retirees will most likely be more challenging, requiring different savings and spending behaviors
They look into why this might be:
The resulting “husbanding” of assets over the past two decades may be due to a host of favorable environmental factors current retirees benefited from during their working, accumulation years. These included beneficial changes to Social Security and Medicare, a relatively high percentage of jobs that offered defined benefit pensions, strong real estate appreciation and an investment market that generally delivered strong returns and high interest rates. Has the confluence of these factors created a situation whereby retirees may not have felt the pressure to draw down principal from retirement savings in order to maintain a reasonable standard of living? Perhaps retirees had other plans for their assets beyond themselves—bequests or charitable donations come to mind. Possibly they would have preferred to spend more freely but lacked the financial confidence or tools to efficiently decumulate their assets or were worried about end-of-life healthcare expenses?
The thing to keep in mind is that the overwhelming majority of retirement research is about what to do in the worst case scenario of all time. If you're not in that scenario then your choices matter less. You don't have to be "efficient". Think of it as like the difference between normal life and a famine. In normal life, all of us throw away tons of food, don't meal plan in a lot of detail, and in general are very cavalier because no matter what choices we make we will have "enough". All of that changes in a famine when every grain of rice matters.

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Re: Retirees: The common sense withdrawal method

Post by JBTX » Fri Feb 16, 2018 8:43 pm

iceport wrote:
Fri Feb 16, 2018 9:35 am
jebmke wrote:
Fri Feb 16, 2018 8:35 am
This is also called "the Taylor Larimore method." It is what I follow.
Congratulations on your good fortune, jebmke. This might work out well for some, but it seems hardly appropriate as general guidance or for those trying to figure out if they have enough to retire.

There are some important caveats that come with the "spend whatever" method, as I have noted before. Do you have a portfolio large enough that even a 4% withdrawal rate would put you in the top quintile for income in your area, plan to retire in a year whose future sequence of returns will support a 9% withdrawal rate, and have a government pension and possibly a working spouse? Well sure, it would be fair to ask, "What, me worry?"

Most of us are do not share those circumstances.
Well said.

Just figuring what you need is far too subjective for most. I think you have to start with some sort of framework, such as a target SWR. Now actual circumstances may lead you to deviate modestly from that but you are still working within a framework.

I fully understand there are some who have diligently saved, amassed more savings than they will ever likely need through wise investing as well as the tailwinds of a 35 year bull market and otherwise live modestly. Such people don’t have to worry about SWRs. I have some relatives who fall into that category (and probably spend/ have withdrawal rates effectively in the 2-3% range ). But for most of us we will have to be more deliberate about it.

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Re: Retirees: The common sense withdrawal method

Post by iceport » Fri Feb 16, 2018 8:56 pm

Orion wrote:
Fri Feb 16, 2018 6:53 pm
When I retired in 2000, I found many retail financial/investment advisors were still using 7% for a retirement withdrawal rate.
This reminds me of a basic retirement class (read: infomercial) I took in 2007.

One piece used a chart comparing running balances for a portfolio of 6-month CDs and a balanced portfolio over 20 years. The chart showed how the CDs would have been depleted while the balanced portfolio never dropped from 1986 to 2006. The intended lesson was about inflation risk and asset allocation. But all I could focus on was the 7% initial withdrawal rate, adjusted for inflation. (The withdrawal rate wasn't stated explicitly, but the first-year withdrawal was $21k from a $300k portfolio.)

So after someone recited the "correct" lesson about risks, I commented that another take-away should be that a 7% withdrawal rate is too high. The instructor seemed surprised by that observation, and admitted quietly that their firm had recently started recommending a 5% withdrawal rate, that the 7% rate was now considered outdated. (This was in 2007.)

I never would have known how messed up a 7% withdrawal rate was if I had skipped all the SWR threads and research and instead just planned to "draw whatever I need" when I retired.
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Re: Retirees: The common sense withdrawal method

Post by Sandtrap » Fri Feb 16, 2018 9:08 pm

From "simple Bogle Basics" to Bob's "Funded Ratio", there comes a point where, yes, to those that are aware and informed (most on the forum) things become intuitive and seem like "common sense". But, that's based on an organic understanding where most of the relevant concepts are already internalized.
However, to those not so informed, "mathematically inclined, and educated in personal investment finance, it is not "common sense".
j :D

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Re: Retirees: The common sense withdrawal method

Post by DrGoogle2017 » Fri Feb 16, 2018 9:58 pm

Of course, you should understand what your withdrawal is for. If you have a base of income, can cut back discretionary spending, you have more sources of income later on like taking SS at 70. There are many variables to be accounted for. Maybe that’s what OP refers to as common sense.

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Re: Retirees: The common sense withdrawal method

Post by tennisplyr » Sat Feb 17, 2018 7:26 am

My point in starting this thread was that before computers or sophisticated models, my suspicion is that some people financially navigated their way through retirement. Was wondering if some, like me, are doing that. My mom did. I'm not implying that I spend whatever I want, whenever.
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Re: Retirees: The common sense withdrawal method

Post by jebmke » Sat Feb 17, 2018 8:34 am

tennisplyr wrote:
Sat Feb 17, 2018 7:26 am
My point in starting this thread was that before computers or sophisticated models, my suspicion is that some people financially navigated their way through retirement. Was wondering if some, like me, are doing that. My mom did. I'm not implying that I spend whatever I want, whenever.
This was how I interpreted your original post. The decision to retire can be made based on a number of criteria including but not limited to some financial metric (SWR, N times expenses ...). Similarly, withdrawals can be made based on a number of logical criteria including financial and non-financial ones.
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Re: Retirees: The common sense withdrawal method

Post by JoeRetire » Sat Feb 17, 2018 8:56 am

tennisplyr wrote:
Sat Feb 17, 2018 7:26 am
Was wondering if some, like me, are doing that. My mom did. I'm not implying that I spend whatever I want, whenever.
And the answer is that obviously some do just that.
Some who do are successful, some get themselves in trouble.

Same as it ever was...

If your plan is to take out of your retirement nestegg what you decide you "need" each year, it can always work - unless you "need" more than you have. Even then, if you are willing to decrease your "needs" to match whatever is available, it can work.

I know of some folks years ago who managed to live on amounts so small that it amazed me. Still does. Not the way I want to live though.

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Re: Retirees: The common sense withdrawal method

Post by SGM » Sat Feb 17, 2018 9:33 am

Like many others I have internalized what I have learned by reading multiple methods of withdrawals, many retirement calculators, etc. I have only been retired almost 4 years.

I have a spreadsheet showing expenses, income and portfolio assets. I am happy to say that I am delaying SS until age 70 and have converted all my traditional deferred accounts to Roth IRAs.

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Re: Retirees: The common sense withdrawal method

Post by VictoriaF » Sat Feb 17, 2018 9:42 am

SGM wrote:
Sat Feb 17, 2018 9:33 am
Like many others I have internalized what I have learned by reading multiple methods of withdrawals, many retirement calculators, etc. I have only been retired almost 4 years.

I have a spreadsheet showing expenses, income and portfolio assets. I am happy to say that I am delaying SS until age 70 and have converted all my traditional deferred accounts to Roth IRAs.
My strategy is similar to SGM's. I am delaying taking Social Security until I turn 70, and I am making annual Roth conversions according to a schedule that will eliminate traditional retirement accounts by the time I would have needed to take RMDs.

As a Federal retiree, I have some holdings in the TSP plan. Early in retirement, I transferred a large lump sum from TSP to Vanguard to be able to do Roth conversions. Now, I am taking monthly transfers from TSP to Vanguard in the amounts needed for my annual conversions. I hope to keep the TSP for as long as I can in expectation that they would eventually allow in-plan Roth conversions.

In the beginning of retirement, I put a large amount into cash to cover my expenses until I start taking Social Security. I did not want my expenses to depend on the market behavior. Thus, my allocation is very conservative, but the percent of stocks is increasing as I am spending down cash (and as the market is going up).

When I was preparing for retirement, I have created an approximate budget, which included relatively high annual expenses on travel and some medical expenses. In reality, my travel expenses are much lower than what I've planned, partly because I use miles and points for some travel expenses, and partly because I prefer longer and more active trips to short luxury trips. See, for example, my comments about a recent one-month trip to the Czech Republic, viewtopic.php?f=11&t=241776#p3787415.

My medical expenses, so far, have been negligible.

Victoria
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Re: Retirees: The common sense withdrawal method

Post by bobcat2 » Sat Feb 17, 2018 10:15 am

Sandtrap wrote:
Fri Feb 16, 2018 9:08 pm
From "simple Bogle Basics" to Bob's "Funded Ratio", there comes a point where, yes, to those that are aware and informed (most on the forum) things become intuitive and seem like "common sense".
j :D
I don't believe using the funded ratio for retirement planning is something that is intuitive for most people on the Bogleheads forum. In fact, I don't believe most people on the forum have any idea what a funded ratio is. At best they know that it has something to do with assessing how well a pension plan is funded.
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Re: Retirees: The common sense withdrawal method

Post by Sandtrap » Sat Feb 17, 2018 10:16 am

tennisplyr wrote:
Sat Feb 17, 2018 7:26 am
My point in starting this thread was that before computers or sophisticated models, my suspicion is that some people financially navigated their way through retirement. Was wondering if some, like me, are doing that. My mom did. I'm not implying that I spend whatever I want, whenever.
I have known close family relatives who were worth North of "8 Figures" who were just as frugal as when they had little and were just starting out. Zero change in lifestyle. That generation did not grow up with computers. Mostly piloting their way through life intuitively. Trial and error. Wisdom gathered through the years. It's amazing what many could accomplish.
j :D

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Re: Retirees: The common sense withdrawal method

Post by Sandtrap » Sat Feb 17, 2018 10:21 am

bobcat2 wrote:
Sat Feb 17, 2018 10:15 am
Sandtrap wrote:
Fri Feb 16, 2018 9:08 pm
From "simple Bogle Basics" to Bob's "Funded Ratio", there comes a point where, yes, to those that are aware and informed (most on the forum) things become intuitive and seem like "common sense".
j :D
I don't believe using the funded ratio for retirement planning is something that is intuitive for most people on the Bogleheads forum. In fact, I don't believe most people on the forum have any idea what a funded ratio is. At best they know that it has something to do with assessing how well a pension plan is funded.
Good point.
Within the broad spectrum of understanding of withdrawal methods , from "Bogle Basics" . . . to the "upper end" of sophistication, "funded ratio", -- for each person's level of study, lay an intuitive understanding that some call "common sense".

mahalo,
j :D

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