Retirees: The common sense withdrawal method

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willthrill81
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Re: Retirees: The common sense withdrawal method

Post by willthrill81 » Mon Feb 19, 2018 9:57 pm

longinvest wrote:
Mon Feb 19, 2018 8:11 pm
My goal isn't to maximize the number of retirements where I don't end up bankrupt, living under a bridge eating cat food, over a hypothetical future 1,000 lives.
I completely agree that from an actuarial perspective, as individuals we have a risk pool of one.

But I also think that we need to remember that, as said by Annie Duke on the Stacking Benjamins podcast today, we aren't playing chess here, we're playing poker. With chess, the outcome is 100% dependent on the players' choices. In poker, there is certainly an element of strategy, but luck plays an important part as well. And in reality, every potential path carries risk, including Social Security, annuities, and savings accounts. The elimination of risk is beyond our ability. Reducing one risk can result in the amplification of another and carry a big price tag to boot. We as individuals have to decide for ourselves how much risk we want to take, but it's a question of how much, not whether we take on any.

Also, I really doubt that any Bogleheads will be eating cat food. Rice and beans are cheaper anyway. :wink:
“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

CurlyDave
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Re: Retirees: The common sense withdrawal method

Post by CurlyDave » Tue Feb 20, 2018 1:01 am

willthrill81 wrote:
Sat Feb 17, 2018 11:28 am
... consistency and reliability may not be realistic and/or may come with too high of a price tag. To go our whole lives with variable income but then expect an unchanging one in retirement seems like a desirable but unrealistic goal IMHO. Further, if something like a 4% WR is used in order to maintain income stability, then on average, the retiree would have withdrawn too little (apart from a desire for a bequest). Maximizing your withdrawals comes at the expense of a consistent income...
+1 IMHO this is a great fundamental truth.

We work on a non-inflation adjusted fixed percentage withdrawal. We have pensions and SS to provide a floor, but other parts of our spending can vary with our success.

vested1
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Re: Retirees: The common sense withdrawal method

Post by vested1 » Tue Feb 20, 2018 10:15 am

TN_Boy wrote:
Mon Feb 19, 2018 2:17 pm
The notion of putting aside seven, or in my question, ten years of expenses in instruments guaranteed to NOT beat inflation is a good way to ensure that you wind up with less total money (for you or your heirs) when all is said and done.


Also not stated in my example, but a factor, in this example if somebody did retire at 60 and deferred SS until 70, I think they would be unwise to need a very high withdrawal rate from the portfolio until SS hit. Sure, maybe 5% or 6% until SS kicks in, but if you needed 8% during the 10 year gap, you probably should have worked longer. I'm guessing we all agree on my last sentence.

I think deferring SS is a good idea for many. I certainly plan to defer it until 70. But I think there are three issues entangled here, which makes analysis difficult:

1) Whether to defer SS (often a good idea)
2) How to fund a gap between retirement and starting SS (the cash bucket you suggest is not an obviously good idea to me)
3) Portfolio withdrawal strategy (4%, VPW, pick your favorite plan).
If your aim is to delay SS until 70 your challenge is to find a way to make that happen. The three issues you listed aren't mutually exclusive. It's like creating a jigsaw puzzle and fitting the pieces together. No two puzzles alike.

As longinvest mentioned, handing over an amount to an insurance company to fund your delay simply adds more cost. Refilling "buckets" with dividends can allow you to withdraw from the portfolio at a low percentage while still capturing gains, albeit sacrificing the smaller gains of reinvested dividends. Using only available cash in a zero interest vehicle to fund the delay is the worst case plan IMHO. The best method of course is to take steps years earlier than an impending retirement to create a source, or multiple sources for funding the delay. The primary thing to consider is the term of the delay, which may dictate working longer.

I use a variation of VPW, bucket, and distributed dividends to achieve success. I have an advantage in that I am older and can use a restricted application to remove 48k from the amount needed to fund our delay. That was "luck", if being older can be construed as being lucky. My wife has a pension, which can also be misconstrued as being lucky, since we consider her pension as compensation for lower long term compensation.

For us, reinvesting dividends until balances in low interest non-invested funds were projected to be depleted before the delay was complete, compelled us at a certain point to redirect dividends to MM. This took up the slack and maintained more time in the markets. Flexibility is the key, which circles back around to VPW.

Grt2bOutdoors
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Re: Retirees: The common sense withdrawal method

Post by Grt2bOutdoors » Tue Feb 20, 2018 12:38 pm

itstoomuch wrote:
Sat Feb 17, 2018 10:44 pm
itstoomuch wrote:
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
The simpler version:
We bought 6-deferred VA annuities that were Market sensitive as Long Straddle options and 2-deferred Interest sensitive annuities as deeper Long Straddle options. Combined they made a Strangle option.
We bought Income producing Rentals.
Now only <10% is directly exposed to the Markets and that <10% is purely Discretionary and mostly in cash or individual stocks.

Even Simpler:
We sold off Risk to those who wanted Risk.

YMMV
You had the fortune of having the right advice provided/given to you. The average person saving for retirement or even going to a financial advisor is not going to be given that sort of information/advice. How many people know what a Straddle or Strangle option is?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

TN_Boy
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Joined: Sat Jan 17, 2009 12:51 pm

Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Tue Feb 20, 2018 12:47 pm

longinvest wrote:
Mon Feb 19, 2018 8:11 pm
TN_Boy wrote:
Mon Feb 19, 2018 7:41 pm
longinvest wrote:
Mon Feb 19, 2018 2:57 pm
TN_Boy,
TN_Boy wrote:
Mon Feb 19, 2018 2:17 pm
The notion of putting aside seven, or in my question, ten years of expenses in instruments guaranteed to NOT beat inflation is a good way to ensure that you wind up with less total money (for you or your heirs) when all is said and done.
I don't understand the problem, here.

Someone worried about inflation could use I-Bonds, which are inflation-indexed cash instruments. As for other cash instruments, I've seen CDs and even savings accounts sometimes return more than inflation (as measured by the CPI-U). We aren't discussing about keeping money into no-volatility financial instruments for a lifetime; we are only discussing using them during a short period of a few years to build a stable income bridge between retirement and the start of an annuity.

The idea, explained in Delay Social Security to age 70 and Spend more money at 62, is simply to increase one's safe lifelong income by delaying Social Security to age 70 and building a stable inflation-indexed replacement income during the gap created by the delay. Investing the bridge money into volatile markets doesn't seem like a good idea to me.
My problem is that I'm not really buying that putting (in my example) a full ten years worth of spending into something equivalent to a savings account is an obviously good idea. At a high level, it seems like just a bucket strategy, and I think safe low volatility instruments will have a negative return after taxes and inflation. For example, what are I-bonds yielding, 0? .1? I would instead simply spend more from the portfolio, a portfolio which includes a generous dose of bonds, and depend upon the bonds to dampen volatility. Clearly, if you compare two portfolios, one with a large chunk in cash (the 10 years of expenses) the second without the cash drag, most of the time the second portfolio will give you more money over your lifetime.

Also not stated in my example, but a factor, in this example if somebody did retire at 60 and deferred SS until 70, I think they would be unwise to need a very high withdrawal rate from the portfolio until SS hit. Sure, maybe 5% or 6% until SS kicks in, but if you needed 8% during the 10 year gap, you probably should have worked longer. I'm guessing we all agree on my last sentence.

I think deferring SS is a good idea for many. I certainly plan to defer it until 70. But I think there are three issues entangled here, which makes analysis difficult:

1) Whether to defer SS (often a good idea)
2) How to fund a gap between retirement and starting SS (the cash bucket you suggest is not an obviously good idea to me)
3) Portfolio withdrawal strategy (4%, VPW, pick your favorite plan).
The term "bucket" usually refers to a part of a portfolio which is regularly replenished from another one, or serves to replenish another one. That's not the case, in the examples I've shown. There is no replenishing. Let me try to explain differently.

It might be clearer if I simply stated that I would go and buy a term-certain inflation-indexed Single Premium Immediate Annuity (SPIA) to cover the missing payments between retirement and the start of Social Security payments.

This wouldn't be called a "bucket".

I am simply planning to self-build a term-certain inflation-indexed SPIA using cash instruments, keeping the same guaranteed outcome, but with the benefit of keeping control of the money (in case of premature demise), instead of paying an insurance company to do it. That's all.

As for using volatile investments, instead of a (self-built) term-certain inflation-indexed SPIA, that's up to the taste of the retiree.

I would much prefer to be able to count on a term-certain inflation-indexed SPIA followed by delayed Social Security to provide a stable lifelong inflation-indexed income basis which is unaffected by stock and bond market volatility. Others might have other tastes.

Finally, I don't plan my retirement using a probabilistic approach. My goal isn't to maximize the number of retirements where I don't end up bankrupt, living under a bridge eating cat food, over a hypothetical future 1,000 lives. I've got a single life and a single retirement to hopefully enjoy. I just can't afford to mess it up.
(Does anyone else find it ironic that the OP was talking about simple, "common sense" withdrawal methods and we've wound up going rather in a different direction. And the OP has lost interest.)

I don't know, a bucket that is filled once still sorta feels like a bucket to me, but what we call it is a detail.

To improve my understanding, consider this extra detail based on my original example:

1) Retire at 60, take SS at 70
2) Want/need $50/yr [50k includes taxes and some room to cut back, but cutting way back would be very difficult.]
3) Portfolio $1,000,000, SS at 70 is 25k

Disregarding any "just work longer" suggestions, this strikes me as an entirely manageable scenario, albeit not as super-low risk as some BH's want.

What I would do in this situation is build a portfolio, maybe 60/40 or 50/50 stocks/fixed income, and withdraw around 5% from age 60 to 70. If the market crashes, there is quite a lot of money in bonds/CDs to cushion that impact. And probably some "common sense" applied to the withdrawal. But a 5% withdrawal rate for only 10 years, at which point the withdrawals can be cut in half, is hardly daredevil.

Now, if I have it right, you would suggest taking $500,000 out of the portfolio and putting it in something that is really really safe and matches inflation* How would you invest the $500,000 remaining in the portfolio? If 100% stocks, then your suggestion and my approach will likely yield somewhat similar results. If the money not in "the bucket" is invested 60/40, or even 80/20, then most of the time the retiree using your approach will have less money in the end -- the expected return is lower with the lower equity percentage.

But I don't see the merits of splitting the portfolio as you describe.

* looks like 1 year treasuries are now yielding almost the inflation rate; life is better in the fixed income realm than it has been. One could probably build a treasury/CD ladder that comes pretty close to matching inflation.

itstoomuch
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Re: Retirees: The common sense withdrawal method

Post by itstoomuch » Tue Feb 20, 2018 12:50 pm

@grt2boutdoors
Nothing unusual in what I did. Nothing more than mimicking a tier1, PERs plan.
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

TN_Boy
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Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Tue Feb 20, 2018 1:00 pm

vested1 wrote:
Tue Feb 20, 2018 10:15 am
TN_Boy wrote:
Mon Feb 19, 2018 2:17 pm
The notion of putting aside seven, or in my question, ten years of expenses in instruments guaranteed to NOT beat inflation is a good way to ensure that you wind up with less total money (for you or your heirs) when all is said and done.


Also not stated in my example, but a factor, in this example if somebody did retire at 60 and deferred SS until 70, I think they would be unwise to need a very high withdrawal rate from the portfolio until SS hit. Sure, maybe 5% or 6% until SS kicks in, but if you needed 8% during the 10 year gap, you probably should have worked longer. I'm guessing we all agree on my last sentence.

I think deferring SS is a good idea for many. I certainly plan to defer it until 70. But I think there are three issues entangled here, which makes analysis difficult:

1) Whether to defer SS (often a good idea)
2) How to fund a gap between retirement and starting SS (the cash bucket you suggest is not an obviously good idea to me)
3) Portfolio withdrawal strategy (4%, VPW, pick your favorite plan).
If your aim is to delay SS until 70 your challenge is to find a way to make that happen. The three issues you listed aren't mutually exclusive. It's like creating a jigsaw puzzle and fitting the pieces together. No two puzzles alike.

As longinvest mentioned, handing over an amount to an insurance company to fund your delay simply adds more cost. Refilling "buckets" with dividends can allow you to withdraw from the portfolio at a low percentage while still capturing gains, albeit sacrificing the smaller gains of reinvested dividends. Using only available cash in a zero interest vehicle to fund the delay is the worst case plan IMHO. The best method of course is to take steps years earlier than an impending retirement to create a source, or multiple sources for funding the delay. The primary thing to consider is the term of the delay, which may dictate working longer.

I use a variation of VPW, bucket, and distributed dividends to achieve success. I have an advantage in that I am older and can use a restricted application to remove 48k from the amount needed to fund our delay. That was "luck", if being older can be construed as being lucky. My wife has a pension, which can also be misconstrued as being lucky, since we consider her pension as compensation for lower long term compensation.

For us, reinvesting dividends until balances in low interest non-invested funds were projected to be depleted before the delay was complete, compelled us at a certain point to redirect dividends to MM. This took up the slack and maintained more time in the markets. Flexibility is the key, which circles back around to VPW.
The three points are of course related, but implementation of 2) and 3) can vary widely.

I think the primary thing to consider is the term of the delay and the amount of the gap. If the gap amount is small, the term can be large.

The example I give (expanded upon in my last post) intentionally gives the age as that of a "young" retiree, and a portfolio size that might or might not be comfortable to everybody given the "delay years" spending before SS. I believe that scenario makes the potential choices somewhat interesting. Scenarios where somebody is late in retirement, or has a very large portfolio, well, it doesn't much matter near as much what they do. I also explicitly stated that severe cutbacks in the spending amount would be very painful.

I would need another level of detail to fully understand your strategy as described above.

gaspr
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Re: Retirees: The common sense withdrawal method

Post by gaspr » Tue Feb 20, 2018 1:04 pm

After looking at all the spendown strategies that I could find over several years leading up to retirement, I have chosen VPW. In my mind it is dead simple, and is chock full of common sense. It is "rules based" and therefore less likely to be tampered with by the one person who is most likely to be fooled...me. It is ingenious in that it allows one to safely spend down the nest egg early, resulting in a significantly higher burn rate. I love it.

longinvest
Posts: 2876
Joined: Sat Aug 11, 2012 8:44 am

Re: Retirees: The common sense withdrawal method

Post by longinvest » Tue Feb 20, 2018 1:34 pm

TN_Boy wrote:
Tue Feb 20, 2018 12:47 pm
1) Retire at 60, take SS at 70
2) Want/need $50/yr [50k includes taxes and some room to cut back, but cutting way back would be very difficult.]
3) Portfolio $1,000,000, SS at 70 is 25k

Now, if I have it right, you would suggest taking $500,000 out of the portfolio and putting it in something that is really really safe and matches inflation*
This is different from my suggestion. What I suggested was to build an SS bridge.

Mainly, I want to give myself an annual SS payment between retirement and the actual start of SS payments at age 70. This requires putting a total of 10 years X 25k/year = $250,000 into something that more or less matches inflation. The simplest is a high-interest savings account. A more complex, but perfect approach, would be to build a non-rolling 9-year TIPS ladder constructed such that the total of coupons and maturing principal is exactly an inflation-adjusted $25k each year (9 rungs because the first year's $25k is kept in a savings account to spend during the first year, of course).


In any case, I think that it's important to stress-test one's plan.

With my approach and your above parameters, using a 50/50 stocks/bonds portfolio and assuming a 50% stock market drop during the first year with 0% return on cash and fixed income, I get the following total retirement income at ages 60 and 61:

Selected asset allocation: 50/50 stocks/bonds
Withdrawal method: VPW (variable-percentage withdrawal)
(All numbers are inflation-adjusted)

Age 60

Before withdrawal: Cash $250,000, Portfolio $750,000 (total $1,000,000)
Retirement income: $25,000 + 4.5% X $750,000 = $58,750
After withdrawal: Cash $225,000, Portfolio $716,250 (total $941,250)

Age 61

Before withdrawal: Cash $225,000, Portfolio $537,188 (total $762,188)
Retirement income: $25,000 + 4.6% X $537,188 = $49,711
After withdrawal: Cash $200,000, Portfolio $512,477 (total $712,477)

The effective withdrawal rates were ($58,750 / $1,000,000) = 5.9% at age 60 and ($49,711 / $762,188) = 6.5% at age 61.

As withdrawals are variable, we might want to consider the impact of a 50% stock drop. It's a reduction of (($49,711 / $58,750) - 1) = 15% in total income.
Last edited by longinvest on Tue Feb 20, 2018 2:36 pm, edited 3 times in total.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

longinvest
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Re: Retirees: The common sense withdrawal method

Post by longinvest » Tue Feb 20, 2018 1:41 pm

Let's stress test this, now:
TN_Boy wrote:
Tue Feb 20, 2018 12:47 pm
What I would do in this situation is build a portfolio, maybe 60/40 or 50/50 stocks/fixed income, and withdraw around 5% from age 60 to 70. If the market crashes, there is quite a lot of money in bonds/CDs to cushion that impact. And probably some "common sense" applied to the withdrawal. But a 5% withdrawal rate for only 10 years, at which point the withdrawals can be cut in half, is hardly daredevil.
Selected asset allocation: 60/40 stocks/bonds
Withdrawal method: 5% SWR (constant-dollar withdrawal)
(All numbers are inflation-adjusted)

Age 60

Before withdrawal: Portfolio $1,000,000
Retirement income: 5% X $1,000,000 = $50,000 (will be the same for the next 9 years)
After withdrawal: Portfolio $950,000

Age 61

Before withdrawal: Portfolio $665,000
Retirement income: $50,000
After withdrawal: Portfolio $615,000

The effective withdrawal rates were ($50,000 / $1,000,000) = 5.0% at age 60 and ($50,000 / $665,000) = 7.5% at age 61.

If the stock market doesn't recover quickly, 7.5% is a worrisome effective withdrawal rate.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

longinvest
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Re: Retirees: The common sense withdrawal method

Post by longinvest » Tue Feb 20, 2018 1:48 pm

My approach guarantees me a $25k income basis all retirement long (the bridge between age 60 and 69, then SS starting at age 70), regardless of market girations. It's something that I can always count on. At age 80, I would increase the guaranteed income to be sufficient to live comfortably regardless of portfolio withdrawals, as inflation-indexed SPIAs are less expensive at that age (this would eliminate longevity risk).

As for the portfolio, it's exposed to market girations, but VPW mathematically guarantees that it will never be prematurely depleted. VPW will also allow me to spend more money, if markets are good.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

TN_Boy
Posts: 321
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Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Tue Feb 20, 2018 2:02 pm

longinvest wrote:
Tue Feb 20, 2018 1:41 pm
Let's stress test this, now:
TN_Boy wrote:
Tue Feb 20, 2018 12:47 pm
What I would do in this situation is build a portfolio, maybe 60/40 or 50/50 stocks/fixed income, and withdraw around 5% from age 60 to 70. If the market crashes, there is quite a lot of money in bonds/CDs to cushion that impact. And probably some "common sense" applied to the withdrawal. But a 5% withdrawal rate for only 10 years, at which point the withdrawals can be cut in half, is hardly daredevil.
Selected asset allocation: 60/40 stocks/bonds
Withdrawal method: 5% SWR (constant-dollar withdrawal)
(All numbers are inflation-adjusted)

Age 60

Before withdrawal: Portfolio $1,000,000
Retirement income: 5% X $1,000,000 = $50,000 (will be the same for the next 9 years)
After withdrawal: Portfolio $950,000

Age 61

Before withdrawal: Portfolio $665,000
Retirement income: $50,000
After withdrawal: Portfolio $615,000

The effective withdrawal rates were ($50,000 / $1,000,000) = 5.0% at age 60 and ($50,000 / $665,000) = 7.5% at age 61.

If the stock market doesn't recover quickly, 7.5% is a worrisome effective withdrawal rate.
Okay, I didn't understand the percentage in "safe" instruments. Thanks for the clarification. But I'll stand by my assertion that a 5% withdrawal rate for 10 years is not concerning. The portfolio impact would need to be modeled more carefully -- a single year doesn't tell us much. I reckon we could use the various calculators to simulate both cases.

longinvest
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Re: Retirees: The common sense withdrawal method

Post by longinvest » Tue Feb 20, 2018 2:16 pm

SWR carries a high probability of an undesired outcome. When SWR "succeeds", it tends to leave a humongous unspent portfolio behind. Worse: when SWR fails, it completely fails, leaving the retiree penniless. This can be a huge source of anxiety during retirement.

I'll never use such a method to withdraw money from my portfolio.

VPW makes much more sense. VPW mathematically guarantees that the portfolio won't be prematurely depleted regardless of actual market returns. It also allows its adopters to spend more in good times. It can be viewed as a mathematical encoding of Taylor Larimore's common sense approach, but without the guessing part.

Did I say that VPW was simple to use? Maybe, but I'll repeat it. It only requires looking at one's portfolio balance, once a year, then multiply it by the percentage in the VPW table for the retiree's age and portfolio allocation to make a withdrawal.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

vested1
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Re: Retirees: The common sense withdrawal method

Post by vested1 » Tue Feb 20, 2018 3:47 pm

#1
TN_Boy wrote:
Tue Feb 20, 2018 1:00 pm
(To Vested1)
I would need another level of detail to fully understand your strategy as described above.
#2
TN_Boy wrote:
Tue Feb 20, 2018 2:02 pm
(To longinvest)
Okay, I didn't understand the percentage in "safe" instruments. Thanks for the clarification. But I'll stand by my assertion that a 5% withdrawal rate for 10 years is not concerning. The portfolio impact would need to be modeled more carefully -- a single year doesn't tell us much. I reckon we could use the various calculators to simulate both cases.
#1 - My puzzle is different than yours. I have 3 sources of income starting this year in July at my FRA.

A- Wife's 30k 100% survivor pension
B- VPW from portfolio, non-invested portion.
C- (July 2018) Wife's SS filing, and my simultaneous restricted application on half of her PIA.

During the 1st 2.5 years of retirement I only had A & B, Our expenses & discretionary remained constant at 90k a year. This meant taking 60k a year from a matured deferred annuity paying 1.5% simple interest. When I determined that the annuity would be exhausted before the delay was comlete I redirected dividends on stocks and bonds into MM starting in August of 2017. Dividends have been about 20k a year, so MM, which already had 30k in it is filling up and not yet tapped. No selling or buying of stocks or bonds has occurred since retirement other than one instance of rebalancing this January to get back to 60/40 AA. My withdrawals didn't vary even though gains far outpaced withdrawal amounts. If performance was worse I would have cut back on withdrawals by perhaps 1% (VPW).

The onset of initial SS filings in July will add $18,100 to income in 2018 which is not subject to State tax and taxed more favorably on federal. Withdrawals will drop (to about 3%) to retain 90k income, but less taxes will result in perhaps 3k more spending power this year (2018). Add another 3k of spendable income next year, due to an entire year of SS benefits ($36,200), for an increase from 2017 to 2019 of 6k. This will leave 3 more years of delay while withdrawing from MM only, which will be replenished by dividends. I will file for my own SS at 70, increasing our income from SS to approx 68k - 70k, depending on COLA. Base income without the portfolio at that time will be 100k, with RMD's only from age 70.5 on.

I will also do (5) ROTH conversions, one a year starting this year at least up to the top of the 12% federal bracket to reduce the future RMD's. This will of course increase taxation, which I will have to pay from the IRA when converting. RMD's begin in 2023, five years after the first ROTH conversion, so no tax consequence on those gains.

#2

I don't see a problem with your plan of taking 5% a year from your portfolio. The mitigating variables are a large hit from inflation, which can be lessened with inflation protected investments, or a prolonged bear market. My plan is not subject to market fluctuations as much as yours is during the SS delay because I have three sources of income, whereas you are describing one.

TN_Boy
Posts: 321
Joined: Sat Jan 17, 2009 12:51 pm

Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Wed Feb 21, 2018 9:22 am

vested1 wrote:
Tue Feb 20, 2018 3:47 pm
#1
TN_Boy wrote:
Tue Feb 20, 2018 1:00 pm
(To Vested1)
I would need another level of detail to fully understand your strategy as described above.
#2
TN_Boy wrote:
Tue Feb 20, 2018 2:02 pm
(To longinvest)
Okay, I didn't understand the percentage in "safe" instruments. Thanks for the clarification. But I'll stand by my assertion that a 5% withdrawal rate for 10 years is not concerning. The portfolio impact would need to be modeled more carefully -- a single year doesn't tell us much. I reckon we could use the various calculators to simulate both cases.
#1 - My puzzle is different than yours. I have 3 sources of income starting this year in July at my FRA.

A- Wife's 30k 100% survivor pension
B- VPW from portfolio, non-invested portion.
C- (July 2018) Wife's SS filing, and my simultaneous restricted application on half of her PIA.

During the 1st 2.5 years of retirement I only had A & B, Our expenses & discretionary remained constant at 90k a year. This meant taking 60k a year from a matured deferred annuity paying 1.5% simple interest. When I determined that the annuity would be exhausted before the delay was comlete I redirected dividends on stocks and bonds into MM starting in August of 2017. Dividends have been about 20k a year, so MM, which already had 30k in it is filling up and not yet tapped. No selling or buying of stocks or bonds has occurred since retirement other than one instance of rebalancing this January to get back to 60/40 AA. My withdrawals didn't vary even though gains far outpaced withdrawal amounts. If performance was worse I would have cut back on withdrawals by perhaps 1% (VPW).

The onset of initial SS filings in July will add $18,100 to income in 2018 which is not subject to State tax and taxed more favorably on federal. Withdrawals will drop (to about 3%) to retain 90k income, but less taxes will result in perhaps 3k more spending power this year (2018). Add another 3k of spendable income next year, due to an entire year of SS benefits ($36,200), for an increase from 2017 to 2019 of 6k. This will leave 3 more years of delay while withdrawing from MM only, which will be replenished by dividends. I will file for my own SS at 70, increasing our income from SS to approx 68k - 70k, depending on COLA. Base income without the portfolio at that time will be 100k, with RMD's only from age 70.5 on.

I will also do (5) ROTH conversions, one a year starting this year at least up to the top of the 12% federal bracket to reduce the future RMD's. This will of course increase taxation, which I will have to pay from the IRA when converting. RMD's begin in 2023, five years after the first ROTH conversion, so no tax consequence on those gains.

#2

I don't see a problem with your plan of taking 5% a year from your portfolio. The mitigating variables are a large hit from inflation, which can be lessened with inflation protected investments, or a prolonged bear market. My plan is not subject to market fluctuations as much as yours is during the SS delay because I have three sources of income, whereas you are describing one.
To be clear, when I say 5%, I actually mean 5% + yearly inflation adjustments. The 4% rule, only, 5%.

Yes, multiple sources of income generally make the problem easier, that's why I specified only the one source during the gap years :-)

In my personal situation (which is not the same as the example I gave) I too will be doing Roth conversions. They would be paid for out of the taxable accounts.

TN_Boy
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Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Wed Feb 21, 2018 9:45 am

longinvest wrote:
Tue Feb 20, 2018 2:16 pm
SWR carries a high probability of an undesired outcome. When SWR "succeeds", it tends to leave a humongous unspent portfolio behind. Worse: when SWR fails, it completely fails, leaving the retiree penniless. This can be a huge source of anxiety during retirement.

I'll never use such a method to withdraw money from my portfolio.

VPW makes much more sense. VPW mathematically guarantees that the portfolio won't be prematurely depleted regardless of actual market returns. It also allows its adopters to spend more in good times. It can be viewed as a mathematical encoding of Taylor Larimore's common sense approach, but without the guessing part.

Did I say that VPW was simple to use? Maybe, but I'll repeat it. It only requires looking at one's portfolio balance, once a year, then multiply it by the percentage in the VPW table for the retiree's age and portfolio allocation to make a withdrawal.
There is a lot of good discussion around VPW so we probably shouldn't rehash too much of here yet again! The "raw" version of VPW has potentially more variation in yearly spending than I like; I don't believe one should aim for no variation (a strict 4% + inflation is unrealistic) , but I'd like less than VPW might give you*.

Also, I keep seeing "the portfolio won't be prematurely depleted regardless of actual market returns" which is technically true, but in practice seriously misleading. No matter what withdrawal method is used, really awful real returns may leave a retiree in some trouble; if one's portfolio has dwindled to some small number, the fact that VPW will keep you from completely depleting it is largely irrelevant; you don't have enough money. VPW does not protect you from being poor if your luck runs badly. It may be better than some alternatives, but it is not a magic money tree.

* a tangent; forgive me. I frequently see people assert on this board that people have fluctuating income pre-retirement, so no big deal to have it post retirement. Then I think about my situation, and frankly most of my friends, and most have had ..... pretty consistent, generally increasing income through the years. Many people are not so fortunate, but a lot are. A desire for *reasonably* stable retirement income is quite logical. That said, I will use some "common sense" during market downturns and retirees often do have the ability to be very flexible -- "let's go on that big trip in a year or two."

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Re: Retirees: The common sense withdrawal method

Post by dbr » Wed Feb 21, 2018 10:04 am

TN_Boy wrote:
Wed Feb 21, 2018 9:45 am

* a tangent; forgive me. I frequently see people assert on this board that people have fluctuating income pre-retirement, so no big deal to have it post retirement. Then I think about my situation, and frankly most of my friends, and most have had ..... pretty consistent, generally increasing income through the years. Many people are not so fortunate, but a lot are. A desire for *reasonably* stable retirement income is quite logical. That said, I will use some "common sense" during market downturns and retirees often do have the ability to be very flexible -- "let's go on that big trip in a year or two."
"Income" from portfolio withdrawals is not like income from salary and wages on a job. It is in fact spending of previously saved money. People in accumulation who have income from jobs also have savings from which they might spend in large lumps as needed. I think people get very badly mentally offset when they try to create income streams from savings as distinct from recognizing they are just spending now what they did not spend in the past. The issue with a portfolio is not how much income it delivers but rather whether or not one is running through one's savings too fast, or too slow, whether or not the rate is uniform.

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Re: Retirees: The common sense withdrawal method

Post by Admiral » Wed Feb 21, 2018 10:18 am

Show me a retiree who sticks to their spreadsheet-dictated withdrawal rate when markets are plunging and I will show you a fairy riding a unicorn.

Isn't the real point that you need to have enough wiggle room in both projected income AND EXPENSES such that if you need to cut back (or psychologically/emotionally feel you must, even if the spreadsheet says otherwise) you can?

For example, I would think that most Bhs planning for and nearing retirement have a discretionary expense line item in their budget. Travel, meals out, entertainment, and so on. It seems highly likely (at least in my case) that I would reduce such spending in the face of massive portfolio losses even if my software told me I was being too cautious. This is just human nature.

If you are retiring with a combination of portfolio and fixed income (pension, annuity, SS) that would put you out on the street if the portfolio suffers from a bad sequence of returns, then I would posit that you should not be retiring yet.

EDIT TO ADD: This is of course assuming you are choosing retirement and it's not being chosen for you...

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Re: Retirees: The common sense withdrawal method

Post by longinvest » Wed Feb 21, 2018 11:07 am

TN_Boy,
TN_Boy wrote:
Wed Feb 21, 2018 9:45 am
The "raw" version of VPW has potentially more variation in yearly spending than I like
I've showed, in previous posts, that the impact of a 50% stock drop on retirement income could be as low a 15% when combining VPW on a balanced portfolio with non-portfolio income (including any necessary bridge).

Stable income can be bought. It is sold, for a price, by insurance companies. Those in employer DB pension plans are forced to buy it. Others can buy it with their retirement savings. Social Security (SS) is a form of it, its payments can be increased by delaying SS to age 70, and a bridge for SS payments between retirement and age 70 can be bought from an insurance company or constructed using cash investments (I-Bonds, CDs, savings accounts) or bonds (properly constructed non-rolling TIPS ladder). VPW is not meant to replace annuities. No portfolio withdrawal strategy can efficiently replace an annuity, due to the impossibility of an individual to self-build mortality credits.

As for VPW without modifications, it is a logical mathematical approach to portfolio withdrawals. Artificially smoothing VPW withdrawals (e.g. without smoothing portfolio volatility) is inefficient. Such smoothing causes a "buy high / sell low" behavior (e.g. it keeps more invested in expensive markets, and sells more investments to make a withdrawal in cheap markets).

But, there's a logical and natural solution to reduce withdrawal volatility. This solution is to reduce portfolio volatility by including enough bonds in the portfolio to dampen stock volatility. Nominal volatility can be dampened with nominal bonds, and inflation-indexed volatility can be dampened with inflation-indexed bonds (such as TIPS). Letting withdrawals fluctuate along with the portfolio is a very efficient approach to taking money out of a portfolio and makes VPW is easy to follow by a retiree, even in bad scenarios. In deep crises, a VPW adopter is likely to cut his withdrawal less, because of the mathematical guarantees of VPW, than an SWR adopter who will likely use his emotions to decide how much to cut spending (being emotionally unable to keep his SWR withdrawals constant after a major market crash).

Here's a short summary of what I've just written. When combining VPW with non-portfolio income, total retirement income stability can be increased in 2 ways : (1) by increasing the ratio of stable non-portfolio income relative to portfolio withdrawals, and (2) by dampening portfolio volatility with bonds.
TN_Boy wrote:
Wed Feb 21, 2018 9:45 am
Also, I keep seeing "the portfolio won't be prematurely depleted regardless of actual market returns" which is technically true, but in practice seriously misleading.
Our wiki provides an open, easy-to-use-and-modify backtesting spreadsheet so that everyone can see how bad things would have gotten, in the past, in bad scenarios.

The VPW wiki page is particularly clear about the importance of combining VPW with stable non-portfolio income. Also, I don't remember how many times I've written, in our forums, that VPW cannot guarantee any lower bound on withdrawals.
TN_Boy wrote:
Wed Feb 21, 2018 9:45 am
No matter what withdrawal method is used, really awful real returns may leave a retiree in some trouble
That's exactly why our VPW wiki page recommends to combine it with stable lifelong non-portfolio income.
TN_Boy wrote:
Wed Feb 21, 2018 9:45 am
I frequently see people assert on this board that people have fluctuating income pre-retirement, so no big deal to have it post retirement. Then I think about my situation, and frankly most of my friends, and most have had ..... pretty consistent, generally increasing income through the years. Many people are not so fortunate, but a lot are. A desire for *reasonably* stable retirement income is quite logical. That said, I will use some "common sense" during market downturns and retirees often do have the ability to be very flexible -- "let's go on that big trip in a year or two."
Let me repeat it: Stable lifelong inflation-indexed income can be bought. It is called an inflation-indexed Single Premium Immediate Annuity (SPIA). It's the only kind of annuity generally recommended on our forums. It comes at a price, but it does what it claims.

The closest thing to a self-built inflation-indexed SPIA is a non-rolling TIPS ladder. But, at age 65, for example, it is more expensive to construct such a 30-year ladder than to buy an inflation-indexed SPIA which delivers equivalent inflation-indexed payments. The ladder stops delivering payments after 30 years (age 95), leaving a significant longevity risk. The inflation-indexed SPIA, on the other hand, continues as long as the retiree survives. The SPIA is thus more efficient on both counts: it is less expensive and it eliminates longevity risk.

I'm a proponent of using the right tool for the right job. A Hammer for a nail, and a screwdriver for a screw. In other words, non-portfolio income for income stability, VPW for portfolio withdrawals, and bonds to dampen portfolio volatility. Others can make other choices.
Last edited by longinvest on Wed Feb 21, 2018 6:07 pm, edited 3 times in total.
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MnD
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Re: Retirees: The common sense withdrawal method

Post by MnD » Wed Feb 21, 2018 11:36 am

longinvest wrote:
Tue Feb 20, 2018 2:16 pm
Did I say that VPW was simple to use? Maybe, but I'll repeat it. It only requires looking at one's portfolio balance, once a year, then multiply it by the percentage in the VPW table for the retiree's age and portfolio allocation to make a withdrawal.
Interesting that VPW at 70/30 AA is right about 5% from age 56-65. I've spent a great deal of time examining better alternatives to inflation adjusted SWR and the "race to the bottom" discussions of sub-4% SWR and even sub-3%.

We've settled on 5% of annual portfolio balance for 70/30 age 56 with significant (50%) other stable income sources that easily covers all true "needs". I had never circled back to VPW after completing this work and I was pleased to see VPW pretty much right where my independent analysis put us, for the first decade at least. :beer

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Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Wed Feb 21, 2018 6:00 pm

longinvest wrote:
Wed Feb 21, 2018 11:07 am
TN_Boy,
TN_Boy wrote:
Wed Feb 21, 2018 9:45 am
The "raw" version of VPW has potentially more variation in yearly spending than I like
I've showed, in previous posts, that the impact of a 50% stock drop on retirement income could be as low a 15% when combining VPW on a balanced portfolio with non-portfolio income (including any necessary bridge).

Stable income can be bought. It is sold, for a price, by insurance companies. Those in employer DB pension plans are forced to buy it. Others can buy it with their retirement savings. Social Security (SS) is a form of it, its payments can be increased by delaying SS to age 70, and a bridge for SS payments between retirement and age 70 can be bought from an insurance company or constructed using cash investments (I-Bonds, CDs, savings accounts) or bonds (properly constructed non-rolling TIPS ladder). VPW is not meant to replace annuities. No portfolio withdrawal strategy can efficiently replace an annuity, due to the impossibility of an individual to self-build mortality credits.

As for VPW without modifications, it is a logical mathematical approach to portfolio withdrawals. Artificially smoothing VPW withdrawals (e.g. without smoothing portfolio volatility) is inefficient. Such smoothing causes a "buy high / sell low" behavior (e.g. it keeps more invested in expensive markets, and sells more investments to make a withdrawal in cheap markets).

But, there's a logical and natural solution to reduce portfolio withdrawals. This solution is to reduce portfolio volatility by including enough bonds in the portfolio to dampen stock volatility. Nominal volatility can be dampened with nominal bonds, and inflation-indexed volatility can be dampened with inflation-indexed bonds (such as TIPS). Letting withdrawals fluctuate along with the portfolio is a very efficient approach to taking money out of a portfolio and makes VPW is easy to follow by a retiree, even in bad scenarios. In deep crises, a VPW adopter is likely to cut his withdrawal less, because of the mathematical guarantees of VPW, than an SWR adopter who will likely use his emotions to decide how much to cut spending (being emotionally unable to keep his SWR withdrawals constant after a major market crash).

Here's a short summary of what I've just written. When combining VPW with non-portfolio income, total retirement income stability can be increased in 2 ways : (1) by increasing the ratio of stable non-portfolio income relative to portfolio withdrawals, and (2) by dampening portfolio volatility with bonds.
TN_Boy wrote:
Wed Feb 21, 2018 9:45 am
Also, I keep seeing "the portfolio won't be prematurely depleted regardless of actual market returns" which is technically true, but in practice seriously misleading.
Our wiki provides an open, easy-to-use-and-modify backtesting spreadsheet so that everyone can see how bad things would have gotten, in the past, in bad scenarios.

The VPW wiki page is particularly clear about the importance of combining VPW with stable non-portfolio income. Also, I don't remember how many times I've written, in our forums, that VPW cannot guarantee any lower bound on withdrawals.
TN_Boy wrote:
Wed Feb 21, 2018 9:45 am
No matter what withdrawal method is used, really awful real returns may leave a retiree in some trouble
That's exactly why our VPW wiki page recommends to combine it with stable lifelong non-portfolio income.
TN_Boy wrote:
Wed Feb 21, 2018 9:45 am
I frequently see people assert on this board that people have fluctuating income pre-retirement, so no big deal to have it post retirement. Then I think about my situation, and frankly most of my friends, and most have had ..... pretty consistent, generally increasing income through the years. Many people are not so fortunate, but a lot are. A desire for *reasonably* stable retirement income is quite logical. That said, I will use some "common sense" during market downturns and retirees often do have the ability to be very flexible -- "let's go on that big trip in a year or two."
Let me repeat it: Stable lifelong inflation-indexed income can be bought. It is called an inflation-indexed Single Premium Immediate Annuity (SPIA). It's the only kind of annuity generally recommended on our forums. It comes at a price, but it does what it claims.

The closest thing to a self-built inflation-indexed SPIA is a non-rolling TIPS ladder. But, at age 65, for example, it is more expensive to construct such a 30-year ladder than to buy an inflation-indexed SPIA which delivers equivalent inflation-indexed payments. The ladder stops delivering payments after 30 years (age 95), leaving a significant longevity risk. The inflation-indexed SPIA, on the other hand, continues as long as the retiree survives. The SPIA is thus more efficient on both counts: it is less expensive and it eliminates longevity risk.

I'm a proponent of using the right tool for the right job. A Hammer for a nail, and a screwdriver for a screw. In other words, non-portfolio income for income stability, VPW for portfolio withdrawals, and bonds to dampen portfolio volatility. Others can make other choices.
Right, so I do not mean to denigrate all the excellent work done by you and others on VPW. I probably struggle a bit with your terminology. That could be me. When someone says "VPW" I tend to think in terms of the actual withdrawal method tables. But I think when you say VPW, and the wiki does go into this*, I believe that you are usually thinking that the withdrawal method is only part of it, you want to create "stable lifelong non-portfolio income."

Whereas I tend to view withdrawal process as separate from the step of either buying an SPIA, or doing something with (for example TIPs) to create stable funds that keep up with inflation.

And the reason I separate the two is that if one uses TIPS or SPIA to create some "guaranteed income" in conjunction with other withdrawal strategies, that also makes portfolio failure/low withdrawals less critical. That is, anything that exchanges portfolio $$ to get guaranteed income should make the withdrawal strategies less critical in some sense; it is a separate point that VPW is a superior way to draw on that portfolio.

And I actually agree with reducing expected portfolio returns to gain better stability. But I look at what you are saying and part of my response is:

1) Setting aside part of the portfolio to generate stable returns lowers the portfolio expected return (for most stock/bond allocations)
2) A large(r) bond allocation (to dampen volatility) lowers portfolio expected returns.

And I like 2). But if we've aside enough in 1), then maybe you don't need to do 2), etc. I guess it depends on how much you want to set aside in 1).

And I think these things are okay, but I don't always find them obvious when VPW is discussed. I have not worked through all the spreadsheets to try and compare VPW with (for example) other withdrawal methods that try to be more clever than simply "4% + inflation adjustments."

I should try and do at least one baseline comparison with the backtesting spreadsheets, for example a 60/40 stock/bond using the 4% rule versus setting aside some of the money and using VPW (obviously it starts getting pretty complex comparing a wide variety of combinations).

*the core VPW wiki talks about this. The higher level withdrawal method wiki doesn't seem to, though of course it links to the main VPW wiki.

longinvest
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Re: Retirees: The common sense withdrawal method

Post by longinvest » Wed Feb 21, 2018 7:15 pm

TN_Boy,
TN_Boy wrote:
Wed Feb 21, 2018 6:00 pm
I should try and do at least one baseline comparison with the backtesting spreadsheets, for example a 60/40 stock/bond using the 4% rule versus setting aside some of the money and using VPW (obviously it starts getting pretty complex comparing a wide variety of combinations).
I think that it's a great idea not to rely on what I or others write, but to build your own personal understanding of the dynamics of various withdrawal methods. Backtesting is a useful tool to develop such understanding. I've learned a lot by looking at what would have happened in the past, year by year, for many retirement scenarios and many withdrawal methods.

Unfortunatly, we can't test future scenarios, so I try to be careful not to project past returns into the future. In other words, I don't use backtesting to set my expectations about the size of future withdrawals and portfolios; I use backtesting to discover hidden risks I didn't know about.
TN_Boy wrote:
Wed Feb 21, 2018 6:00 pm
*the core VPW wiki talks about this. The higher level withdrawal method wiki doesn't seem to, though of course it links to the main VPW wiki.
I agree with you that the Withdrawal methods wiki page is in need of a serious rewrite. In particular, it should first explain that portfolio withdrawal must be considered as part of a larger retirement plan. I also think that it shouldn't prominently present constant-dollar withdrawal (commonly known as SWR) as an actual withdrawal method. On the contrary, I think that the wiki it should state that SWR isn't a recommended retirement withdrawal method*, but that it can be a useful tool to help answer the question "how much should I accumulate to retire at 65". As a minor wiki contributor, I've shied away from making such radical changes and starting a hot discussion on such a touchy topic. ;)

* It's my opinion that SWR fails the first principle of our philosophy which is to develop a workable plan. Here's a link to my explanation: viewtopic.php?p=3518009#p3518009
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Re: Retirees: The common sense withdrawal method

Post by dbr » Wed Feb 21, 2018 7:33 pm

longinvest wrote:
Wed Feb 21, 2018 7:15 pm

I agree with you that the Withdrawal methods wiki page is in need of a serious rewrite. In particular, it should first explain that portfolio withdrawal must be considered as part of a larger retirement plan. I also think that it shouldn't prominently present constant-dollar withdrawal (commonly known as SWR) as an actual withdrawal method. On the contrary, I think that the wiki it should state that SWR isn't a recommended retirement withdrawal method*, but that it can be a useful tool to help answer the question "how much should I accumulate to retire at 65". As a minor wiki contributor, I've shied away from making such radical changes and starting a hot discussion on such a touchy topic. ;)

* It's my opinion that SWR fails the first principle of our philosophy which is to develop a workable plan. Here's a link to my explanation: viewtopic.php?p=3518009#p3518009
I very much agree with this general assessment. I am less sanguine about any specific engineering of retirement withdrawal but there is at least some work that is thoughtful and in any case most helpfully informative. Note the original work on SWR is also thoughtful but isn't and was never intended to be a plan, as many people on this forum have said many times.

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Re: Retirees: The common sense withdrawal method

Post by TN_Boy » Wed Feb 21, 2018 11:23 pm

dbr wrote:
Wed Feb 21, 2018 7:33 pm
longinvest wrote:
Wed Feb 21, 2018 7:15 pm

I agree with you that the Withdrawal methods wiki page is in need of a serious rewrite. In particular, it should first explain that portfolio withdrawal must be considered as part of a larger retirement plan. I also think that it shouldn't prominently present constant-dollar withdrawal (commonly known as SWR) as an actual withdrawal method. On the contrary, I think that the wiki it should state that SWR isn't a recommended retirement withdrawal method*, but that it can be a useful tool to help answer the question "how much should I accumulate to retire at 65". As a minor wiki contributor, I've shied away from making such radical changes and starting a hot discussion on such a touchy topic. ;)

* It's my opinion that SWR fails the first principle of our philosophy which is to develop a workable plan. Here's a link to my explanation: viewtopic.php?p=3518009#p3518009
I very much agree with this general assessment. I am less sanguine about any specific engineering of retirement withdrawal but there is at least some work that is thoughtful and in any case most helpfully informative. Note the original work on SWR is also thoughtful but isn't and was never intended to be a plan, as many people on this forum have said many times.
I would suggest a wiki page on retirement plans (defer SS?, how do I know if I have enough to retire?, consider SPIAs, etc), with a separate wiki on withdrawal methods.

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Re: Retirees: The common sense withdrawal method

Post by marcopolo » Wed Feb 21, 2018 11:43 pm

longinvest wrote:
Wed Feb 21, 2018 7:15 pm
In particular, it should first explain that portfolio withdrawal must be considered as part of a larger retirement plan. I also think that it shouldn't prominently present constant-dollar withdrawal (commonly known as SWR) as an actual withdrawal method.

* It's my opinion that SWR fails the first principle of our philosophy which is to develop a workable plan. Here's a link to my explanation: viewtopic.php?p=3518009#p3518009
I am trying to understand how this is materially different than a balanced portfolio with just a lower equity allocation. I am sure i am missing something, but it does seem a little like mental accounting.

Lets say someone wants to retire at age 50, has $3M, and expects to get $50k/yr @ age 70 from SS. If i understand the VPW method as a whole, the idea would be to take a portion of it ($50k x 20yrs = $1M) and buy a non-rolling TIPS ladder, then invest the rest in a balanced portfolio, say 50/50. So, in the end one would have $1M in equities, $1M in bonds, and $1M in TIPS.
Then, the withdrawal plan, if i understand it, is to exhaust the TIPS ladder until SS, while also drawing the appropriate percentage (from VPW table) from the other portion of the portfolio. Is this the essential approach?

If so, i am failing to see how that is materially different than simply having a 33/66 equity/FI portfolio (instead of 50/50), and doing a reverse glide path to SS. If you favor TIPS, they could certainly be a portion, maybe even 50% of your fixed income allocation, right?
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Re: Retirees: The common sense withdrawal method

Post by radiowave » Wed Feb 21, 2018 11:46 pm

Instead of a set percentage for withdrawal, has anyone consider or currently using a withdrawal from tax-deferred accounts (401, 403, tIRA, etc.) up to the top of the 12% tax bracket (I think that's around $101k MFJ). The idea is to minimize taxes on the tax-deferred prior to RMD, and use any of the withdrawals for living expense, surplus would go to taxable funds or high yield savings account.
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Re: Retirees: The common sense withdrawal method

Post by AlohaJoe » Wed Feb 21, 2018 11:51 pm

radiowave wrote:
Wed Feb 21, 2018 11:46 pm
Instead of a set percentage for withdrawal, has anyone consider or currently using a withdrawal from tax-deferred accounts (401, 403, tIRA, etc.) up to the top of the 12% tax bracket (I think that's around $101k MFJ). The idea is to minimize taxes on the tax-deferred prior to RMD, and use any of the withdrawals for living expense, surplus would go to taxable funds or high yield savings account.
Adjusting one's portfolio to be more tax-efficient is unrelated to deciding how much you can spend every year.

Moving money from a 401k to a Roth or taxable account isn't a "withdrawal". The money is still in your portfolio.

marcopolo
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Re: Retirees: The common sense withdrawal method

Post by marcopolo » Thu Feb 22, 2018 12:08 am

radiowave wrote:
Wed Feb 21, 2018 11:46 pm
Instead of a set percentage for withdrawal, has anyone consider or currently using a withdrawal from tax-deferred accounts (401, 403, tIRA, etc.) up to the top of the 12% tax bracket (I think that's around $101k MFJ). The idea is to minimize taxes on the tax-deferred prior to RMD, and use any of the withdrawals for living expense, surplus would go to taxable funds or high yield savings account.
The withdrawal part makes sense in many scenarios, but why would you put the surplus into taxable rather than convert it to Roth IRA?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Retirees: The common sense withdrawal method

Post by The Wizard » Thu Feb 22, 2018 12:51 am

AlohaJoe wrote:
Wed Feb 21, 2018 11:51 pm
radiowave wrote:
Wed Feb 21, 2018 11:46 pm
Instead of a set percentage for withdrawal, has anyone consider or currently using a withdrawal from tax-deferred accounts (401, 403, tIRA, etc.) up to the top of the 12% tax bracket (I think that's around $101k MFJ). The idea is to minimize taxes on the tax-deferred prior to RMD, and use any of the withdrawals for living expense, surplus would go to taxable funds or high yield savings account.
Adjusting one's portfolio to be more tax-efficient is unrelated to deciding how much you can spend every year.

Moving money from a 401k to a Roth or taxable account isn't a "withdrawal". The money is still in your portfolio.
It's still a flavor of Common Sense withdrawal for those of us who have higher retirement income potential than our expenses.
I'm doing something similar these years prior to age 70, only I don't worry about my marginal tax bracket. What I do I manage my AGI, including Roth conversions at present, so that the jump in AGI at age 70 won't be too big.
In my case, Roth conversions will stop at the end of 2019 and excess income from SS and RMDs in 2020 and beyond will be reinvested in my taxable account.

Additionally, not all retirement income needs to be "spent" each month. If you put aside $1000/month after taxes into savings or your taxable account, then it seems like it's still in your portfolio, yes.
But then after four years, you spend $50k from that accumulation to buy a new car for cash, so it's just a good form of money management...
Attempted new signature...

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Re: Retirees: The common sense withdrawal method

Post by radiowave » Thu Feb 22, 2018 8:32 am

marcopolo wrote:
Thu Feb 22, 2018 12:08 am
radiowave wrote:
Wed Feb 21, 2018 11:46 pm
Instead of a set percentage for withdrawal, has anyone consider or currently using a withdrawal from tax-deferred accounts (401, 403, tIRA, etc.) up to the top of the 12% tax bracket (I think that's around $101k MFJ). The idea is to minimize taxes on the tax-deferred prior to RMD, and use any of the withdrawals for living expense, surplus would go to taxable funds or high yield savings account.
The withdrawal part makes sense in many scenarios, but why would you put the surplus into taxable rather than convert it to Roth IRA?
+ 1 on The Wizard's comment. Main goal would be to reduce tax-advantaged funds to avoid excess taxes at RMD, e.g. getting bumped into a higher tax bracket. You could use the withdrawal from tax-deferred for any number of reasons, living expenses, major purchases, and Roth Conversions. I'm getting confused with the SWR % discussion, I don't see it that way, e.g. withdraw a certain percentage. Accumulating cash on the taxable side does produce an ongoing tax drag, but weighing the options, it makes sense to me to draw down tax-deferred as much as possible at 12% tax rate even if the cash is not needed.
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Re: Retirees: The common sense withdrawal method

Post by The Wizard » Thu Feb 22, 2018 9:23 am

radiowave wrote:
Thu Feb 22, 2018 8:32 am
... I'm getting confused with the SWR % discussion, I don't see it that way, e.g. withdraw a certain percentage. Accumulating cash on the taxable side does produce an ongoing tax drag, but weighing the options, it makes sense to me to draw down tax-deferred as much as possible at 12% tax rate even if the cash is not needed.
I think we can be reasonably confident that 90%+ of General Public retirees are mainly concerned with squeezing out as much sustainable income in retirement as they can, just to live on.
A lot of standard refinements we talk about here, such as delaying SS till 70 and doing Roth conversions before then, are meaningless to folks who need to claim SS at 62 to live on.

Anyhow, you can avoid tax drag prior to age 70 by Roth converting the bulk of tax deferred withdrawals that you don't need for expenses.
After age 70, when SS and RMDs start, I'm not sure it's cost effective to Roth convert anymore. I don't plan to...
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Re: Retirees: The common sense withdrawal method

Post by iceport » Thu Feb 22, 2018 9:38 am

dbr wrote:
Wed Feb 21, 2018 7:33 pm
Note the original work on SWR is also thoughtful but isn't and was never intended to be a plan, as many people on this forum have said many times.
Repetition doesn't create truth. There is a difference between an absolutely rigid plan and a plan intended to work with some monitoring and potential for adjustment. The latter is still a plan.
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Re: Retirees: The common sense withdrawal method

Post by marcopolo » Thu Feb 22, 2018 10:03 am

radiowave wrote:
Thu Feb 22, 2018 8:32 am
marcopolo wrote:
Thu Feb 22, 2018 12:08 am
radiowave wrote:
Wed Feb 21, 2018 11:46 pm
Instead of a set percentage for withdrawal, has anyone consider or currently using a withdrawal from tax-deferred accounts (401, 403, tIRA, etc.) up to the top of the 12% tax bracket (I think that's around $101k MFJ). The idea is to minimize taxes on the tax-deferred prior to RMD, and use any of the withdrawals for living expense, surplus would go to taxable funds or high yield savings account.
The withdrawal part makes sense in many scenarios, but why would you put the surplus into taxable rather than convert it to Roth IRA?
+ 1 on The Wizard's comment. Main goal would be to reduce tax-advantaged funds to avoid excess taxes at RMD, e.g. getting bumped into a higher tax bracket. You could use the withdrawal from tax-deferred for any number of reasons, living expenses, major purchases, and Roth Conversions. I'm getting confused with the SWR % discussion, I don't see it that way, e.g. withdraw a certain percentage. Accumulating cash on the taxable side does produce an ongoing tax drag, but weighing the options, it makes sense to me to draw down tax-deferred as much as possible at 12% tax rate even if the cash is not needed.
I agree with the idea of drawing down from tax-deferred to reduce taxable RMD. You do realize that Roth IRAs are not subject to RMDs, and any withdrawals are not taxable.

The bolded statement above makes it sound like your choices are to put the excess in taxable or NOT take the excess withdrawal from tax-deferred. But, you do have the option to put the excess into Roth IRA. So, why create the cash drag by keeping the excess withdrawals in taxable account? Put it into Roth, when you need the money later, take it out of Roth just like you would from taxable, but it is tax free.

The Wizard seems to be doing Roth Conversions prior to RMD. He is correct that once you start RMD, Roth conversions may not make sense. The RMD amount can not be put into Roth, and taking additional withdrawal beyond RMD to do Roth conversions may not provide much value.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Retirees: The common sense withdrawal method

Post by Abe » Thu Feb 22, 2018 11:16 am

I guess I use the common sense method. I have rent from rental properties and our social security checks go into our bank account. This is more than enough for us to live on. I have never removed any money to live on from my regular investments (stocks, bonds, cd's, etc). Actually it's the other way around.
Slow and steady wins the race.

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Re: Retirees: The common sense withdrawal method

Post by hulburt1 » Thu Feb 22, 2018 11:52 am

This may seem strange but I'm 65 will take SS at 70 maybe. My plan is to die at 80 or so. I take my Ira and divide it by 15 years and that's what I can take out. If it's more then I need to spend I put the rest in my Roth. I do not look at using Roth until 70+ so here is what I get.

Ira 1200000-divided by 15=80000 so I only need 30000 from that so I put the rest in my Roth. That 30000 is in cash, my Ira is in stocks. SS is my back up if I get hurt in the stock market. Next year I'll divide my Ira by 14. I'm hoping to get my Ira down to 1m by 70. I never count my Roth.

My wife has her own money.

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Re: Retirees: The common sense withdrawal method

Post by Nestegg_User » Thu Feb 22, 2018 1:50 pm

Common Sense is a Paine

willthrill81 wrote:
Sat Feb 17, 2018 6:57 pm
Remember that safe withdrawal rate research has actually focused on the worst periods to retire, not the average periods where 5-6% would have worked fine. That being said, a 4% fixed plus inflation WR would not have worked in most countries; per Wade Pfau's research, a globally cap-weighted portfolio would have supported a 3.5% fixed plus inflation WR for 30 years. One could 'guarantee' a 30 year retirement by buying nothing but TIPS and annuitizing the portfolio at a 3.33% WR (and certainly somewhat higher since TIPS do have a small real return). Alternatively, one could buy a SPIA and essentially achieve a significantly higher WR, albeit at the cost of leaving no bequest.
as noted above, withdrawal methods are mostly academic for the vast majority of people who CAN retire, as they have very low portfolios. it also is likely that the BH community is an outlier in that it’s composed of a significant STEM and business owner audience that has the capacity to earn and save at very high rates relative to the general population. (see prior polls on income and savings)

we set up a CD ladder for three years (longer didn’t appear good given their lower rates relative to intermediate bonds) which gave us (together with pension) adequate floor plus some discretionary to get to 62. We’ve also done tax gain harvesting at zero rates and will do Roth conversions before starting SS (none after as both the taxes would be too high as it would kick us into next bracket and the time for compounding isn’t long enough relative to the value one can get via long term capital gains at lower rates versus the full tax when converting). {we also know we are not the “typical “ retiree from the general population in that we have over two and a half mil plus pension before SS ( which will also be above the average draw). }

we’ve also reduced our equities during the few years after retirement to 45/55 to reduce the damage that sequence of returns could do and used the more limiting 3.5% WR indicated from international studies (as we feel that is more indicative of future than the idealized results from the domestic returns of the past) as an upper limit for withdrawals until we start SS. to that end, while we plan to take my (slightly lower) SS at FRA and spouse’s SS at 70, if there was a significant (50%+) drop in equities we would start the first SS earlier to prevent selling at the bottom while maintaining adequate “income “ for our purposes.**
{yes, we’re not likely to have any problems with our situation given our assets/pension/SS so it’s likely academic, especially since we haven’t even hit above 2% WR yet, but if we did we’d follow either Guyton-Klinger or VPW with end age of about 95. We would also expect to purchase a SPIA at later ages if we found ourselves along the bleeding edge (we don’t have any bequest requirements)}

As for the general population, we’ve seen enough “math challenged” individuals, even college graduates, that couldn’t navigate the studies given here in the wiki, that the simpler it could be made the better for that audience. The other issue, mentioned above in the thread, is that many don’t distinguish between true needs and wants or lack the necessary discipline (save those marshmallows). I’ve seen too many people that are in fairly dire situations from both of these- - some that I know will not be retiring in the manner that they envisioned and others that are living a bare bones existence due to lack of planning and self control.

** ( it doesn’t seem necessary for both to wait until 70 for SS as then we’d be at above $200k/ yr with 3.5% WR (assuming NO gain in portfolio) and that will definitely put us in higher bracket) It also preserves enough of the portfolio for the surviving spouse to ensure that they can be comfortable during their remaining retirement.

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Re: Retirees: The common sense withdrawal method

Post by trueblueky » Thu Feb 22, 2018 7:16 pm

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. 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.
I grew around farmers who never knew what next year's income would be. They managed.

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Re: Retirees: The common sense withdrawal method

Post by Doom&Gloom » Thu Feb 22, 2018 9:41 pm

Nestegg_User wrote:
Thu Feb 22, 2018 1:50 pm
Common Sense is a Paine
ICWYDT
Nice!

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Re: Retirees: The common sense withdrawal method

Post by hoops777 » Fri Feb 23, 2018 1:52 pm

If the numbers happen to work for you,the easiest method is only taking your RMD’s and living on those along with your SS.I feel fortunate that it works perfectly for us because it is so simple.
K.I.S.S........so easy to say so difficult to do.

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Re: Retirees: The common sense withdrawal method

Post by spookyfudge » Fri Feb 23, 2018 3:03 pm

I have no plan for withdrawl from my 401K plan, I take out what I want to spend, travel gifts, etc. The reason, between pension and SS payments, I bring home more then my take home pay with all the deductions for SS, tax, medical, 401K, so the money in the 401k will only go to my kids when I pass. Hope that helps.

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Re: Retirees: The common sense withdrawal method

Post by willthrill81 » Fri Feb 23, 2018 3:14 pm

hoops777 wrote:
Fri Feb 23, 2018 1:52 pm
If the numbers happen to work for you,the easiest method is only taking your RMD’s and living on those along with your SS.I feel fortunate that it works perfectly for us because it is so simple.
Spending only RMDs is definitely a plausible approach, but it is a very conservative one. Also, it leads to increased withdrawals as retirees age, while research has shown that most (2/3) retirees actually spend less over time.
The RMD rules assume investment returns of 0%, so they do not reflect asset allocation or other market return assumptions. With this conservative return assumption, some retirees may decide the RMD strategy provides overly conservative spending rates.
https://retirementresearcher.com/retire ... ributions/
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Re: Retirees: The common sense withdrawal method

Post by jebmke » Fri Feb 23, 2018 3:28 pm

willthrill81 wrote:
Fri Feb 23, 2018 3:14 pm
Spending only RMDs is definitely a plausible approach, but it is a very conservative one.
It also doesn't deal with irregularity of spending requirements.

Before I retired I prepared a detailed retirement budget estimate for spending (excluding taxes). I have been tracking spending since. The average for the last six years is only 2% above the original budget number. But -- the dispersion of the individual years ranges from +9% to -6%. 2017 was actually below budget despite a great market return year.
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 dbr » Fri Feb 23, 2018 3:31 pm

jebmke wrote:
Fri Feb 23, 2018 3:28 pm
willthrill81 wrote:
Fri Feb 23, 2018 3:14 pm
Spending only RMDs is definitely a plausible approach, but it is a very conservative one.
It also doesn't deal with irregularity of spending requirements.

Before I retired I prepared a detailed retirement budget estimate for spending (excluding taxes). I have been tracking spending since. The average for the last six years is only 2% above the original budget number. But -- the dispersion of the individual years ranges from +9% to -6%. 2017 was actually below budget despite a great market return year.
In ten years my dispersion is +50% to -25%, roughly, relative to the average. The average is pretty close to what was estimated.

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Re: Retirees: The common sense withdrawal method

Post by hoops777 » Fri Feb 23, 2018 3:41 pm

willthrill81 wrote:
Fri Feb 23, 2018 3:14 pm
hoops777 wrote:
Fri Feb 23, 2018 1:52 pm
If the numbers happen to work for you,the easiest method is only taking your RMD’s and living on those along with your SS.I feel fortunate that it works perfectly for us because it is so simple.
Spending only RMDs is definitely a plausible approach, but it is a very conservative one. Also, it leads to increased withdrawals as retirees age, while research has shown that most (2/3) retirees actually spend less over time.
The RMD rules assume investment returns of 0%, so they do not reflect asset allocation or other market return assumptions. With this conservative return assumption, some retirees may decide the RMD strategy provides overly conservative spending rates.
https://retirementresearcher.com/retire ... ributions/
The way I look at is the RMD’s increase a little every year which helps with inflation.As I said it depends on your numbers.When we start ours in a few years,we will need just SS for our basic living.Our RMDs will start in the mid thirties so I do not consider that conservative spending wise.I doubt very much that we will be spending them all.Of course good old health conditions will determine a lot.
K.I.S.S........so easy to say so difficult to do.

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Re: Retirees: The common sense withdrawal method

Post by jebmke » Fri Feb 23, 2018 3:43 pm

hoops777 wrote:
Fri Feb 23, 2018 3:41 pm
.I doubt very much that we will be spending them all.
Then your withdrawal will be lower. Reallocating capital from an IRA to taxable is not a withdrawal (except for the tax payment).
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 hoops777 » Fri Feb 23, 2018 4:28 pm

jebmke wrote:
Fri Feb 23, 2018 3:43 pm
hoops777 wrote:
Fri Feb 23, 2018 3:41 pm
.I doubt very much that we will be spending them all.
Then your withdrawal will be lower. Reallocating capital from an IRA to taxable is not a withdrawal (except for the tax payment).
True.I was just looking at it from the viewpoint of will the RMDs meet our spending wishes if we choose to spend whatever is taken out of the IRA.I was explaining that to my wife because at first she thought the RMD amount meant our investment total was reduced by the RMD amount.
K.I.S.S........so easy to say so difficult to do.

rustyjim
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Re: Retirees: The common sense withdrawal method

Post by rustyjim » Fri Feb 23, 2018 10:43 pm

Here is a research report that seems to fit in with this thread.

http://longevity.stanford.edu/2017/11/2 ... 401k-plan/

rustyjim

DorothyB
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Re: Retirees: The common sense withdrawal method

Post by DorothyB » Sat Feb 24, 2018 8:44 am

I retired in 2014, a few months before turning 57.

Like many have mentioned here, I was faced with bridging the years prior to starting social security.

I based my withdrawal amount on my current standard of living at the time of retirement - took my pre-retirement budget and adjusted it to take out work related expenses, change in taxes and retirement savings, etc. I increase the total by about 2.25% each year for inflation, but can increase it further for high increases beyond my control such as property taxes and health insurance.

I have a few income streams:
Pension with no cola that covers 29% of my 2018 budget
Soc Sec Survivor benefits started last month and covers 14% of my 2018 budget
Regular Soc Sec benefits are planned to start at age 70 and I am calculating that this will be about 4x my survivor benefits

Because I had a few years with only pension and IRA withdrawals, my withdrawal rate for last year was 6.3%. This year it should be about 4.7% due to receiving the survivor benefits. Since my pension doesn't have cola, my withdrawal rate will go up slightly each year until age 70. Once I start my regular social security benefits at age 70, my withdrawal rate will drop to under 2.9%.

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Re: Retirees: The common sense withdrawal method

Post by willthrill81 » Sat Feb 24, 2018 10:55 am

DorothyB wrote:
Sat Feb 24, 2018 8:44 am
I retired in 2014, a few months before turning 57.

Like many have mentioned here, I was faced with bridging the years prior to starting social security.

I based my withdrawal amount on my current standard of living at the time of retirement - took my pre-retirement budget and adjusted it to take out work related expenses, change in taxes and retirement savings, etc. I increase the total by about 2.25% each year for inflation, but can increase it further for high increases beyond my control such as property taxes and health insurance.

I have a few income streams:
Pension with no cola that covers 29% of my 2018 budget
Soc Sec Survivor benefits started last month and covers 14% of my 2018 budget
Regular Soc Sec benefits are planned to start at age 70 and I am calculating that this will be about 4x my survivor benefits

Because I had a few years with only pension and IRA withdrawals, my withdrawal rate for last year was 6.3%. This year it should be about 4.7% due to receiving the survivor benefits. Since my pension doesn't have cola, my withdrawal rate will go up slightly each year until age 70. Once I start my regular social security benefits at age 70, my withdrawal rate will drop to under 2.9%.
Being that your budget will likely be 100% funded (or beyond) by a pension and SS, it probably doesn't really matter what withdrawal rate you use. You'll be fine regardless. If you're planning to drop your withdrawal rate below 3%, I'm guessing that you want to leave behind a significant bequest.
“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 hoops777 » Sat Feb 24, 2018 1:16 pm

rustyjim wrote:
Fri Feb 23, 2018 10:43 pm
Here is a research report that seems to fit in with this thread.

http://longevity.stanford.edu/2017/11/2 ... 401k-plan/

rustyjim
I have to admit I feel pretty good after reading this.Now my wife knows I know what I am talking about,at least once in a while :D
K.I.S.S........so easy to say so difficult to do.

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