Safe withdrawal rate at 38 years old

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Jefferson
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Safe withdrawal rate at 38 years old

Post by Jefferson » Mon Jan 07, 2019 1:53 pm

I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.

dknightd
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Re: Safe withdrawal rate at 38 years old

Post by dknightd » Mon Jan 07, 2019 2:01 pm

Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
There is lots of research on this. I'm sure you have found some of it.
2-2.5% is pretty safe on any AA between 70/30 and 30/70 if memory serves.
All this based on past returns.

randomguy
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Re: Safe withdrawal rate at 38 years old

Post by randomguy » Mon Jan 07, 2019 2:09 pm

:?:
Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
On past data something around 3%.

allocation wise the best results come from like 70/30 or 80/20. You might prefer the volatility of 60/40 or 50/50.

Realistically with a 50+ year time frame, you are going to be making all sorts of adjustments along the way. As far as low income is that low income relative to expenses or compared to what you used to make. Having jobs that pay say half your expenses for 5-10 years adds in a lot of safety.

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aj76er
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Re: Safe withdrawal rate at 38 years old

Post by aj76er » Mon Jan 07, 2019 2:12 pm

Look up the VPW spreadsheet and tables on the wiki and plug in your numbers. Even with pessimistic future returns and high personal longevity numbers, I think you'll see that the SWR is more likely between 3% - 3.5%.

Note that with SWR above 3%, some years you'll be dipping a teeny bit into principle, which freaks some people out. But statistically, it will be rare and not often, so really nothing to worry about. Even with an unprecedented long stretch of bad returns, it's OK to eat into principle a little bit as no one lives forever ;).

Over very long time horizons, there is much more personal budget uncertainty than there is broad market uncertainty. Thus, spend most of your time creating a solid budget.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

delamer
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Re: Safe withdrawal rate at 38 years old

Post by delamer » Mon Jan 07, 2019 2:19 pm

I’d think in terms of years of expenses, adjusted for changes as you age — mortgage paid off, kids raised, etc. — and some conservative real return on investments.

Seems to me you are talking about 50 years.

I’d want to have at least 10 years of expenses in cash/cash equivalents, another 5 years in bonds, and the rest in stocks.

Maybe put your data into https://www.i-orp.com/CashAcc/index.html

renue74
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Re: Safe withdrawal rate at 38 years old

Post by renue74 » Mon Jan 07, 2019 2:21 pm

3% would be good.

I sold a business in 2013 and have a small business I still work out. The new money allowed me to invest in rental property and some minor flips.

At your age...the next job should be fun for you. Take your time and find a good fit.

Topic Author
Jefferson
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Re: Safe withdrawal rate at 38 years old

Post by Jefferson » Mon Jan 07, 2019 2:28 pm

Regarding using a multiple of expenses, this is hard. Our business gives us a high income. We spend well under our means and have saved well, but we don’t have a traditional budget. If my wife wants to go on a few expensive vacations per year, we do it. If it’s a lean year, then we don’t. We live in a LCOL area, so I’m not worried about basic expenses. I’m trying to see if we can maintain our same lifestyle perpetually.

delamer
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Re: Safe withdrawal rate at 38 years old

Post by delamer » Mon Jan 07, 2019 3:03 pm

Jefferson wrote:
Mon Jan 07, 2019 2:28 pm
Regarding using a multiple of expenses, this is hard. Our business gives us a high income. We spend well under our means and have saved well, but we don’t have a traditional budget. If my wife wants to go on a few expensive vacations per year, we do it. If it’s a lean year, then we don’t. We live in a LCOL area, so I’m not worried about basic expenses. I’m trying to see if we can maintain our same lifestyle perpetually.
You’ll find it worthwhile to come up with an actual budget based on your current spending.

For those of us who do budget, usually there are two (as you implied above):

A basic budget to cover housing, food, clothing, medical care, transportation, and any other core expenses.

A high-end budget to cover the basics above plus travel, more dining out, a 2nd home — the finer things in life, if you will. If some of these things are more required for you, then include them in your basic budget.

dayzero
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Re: Safe withdrawal rate at 38 years old

Post by dayzero » Mon Jan 07, 2019 3:03 pm

Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
Just FYI you will get radically different answers on this site vs other sites. People here will give answers like 1%, which is irrational. The last time I checked, foundations use 2.25% as their safe perpetual withdrawal rate. Personally I would go with 2.75% and a paid off house at age 38 and factor out things like college expenses from that, but even that is probably paranoid safe. 3% is probably fine. Make sure to full read this entire series:

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

Day9
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Re: Safe withdrawal rate at 38 years old

Post by Day9 » Mon Jan 07, 2019 3:14 pm

In the classic Trinity Study where the 4% rule was first coined, the 4% rule worked in 95% of historical 30-year retirement scenarios. It failed in scenarios like retiring just before the great depression or just before the stagflation of the 60s and 70s. If you changed this to a 3% rule, and extended the retirement length from 30 to 50 years, there would be success in 100% of scenarios.

This is just a starting point and there are more advanced studies now, for example ones that use Monte Carlo simulations. But if a 3% rule worked in all historic 50-year retirement scenarios then in my opinion it is good enough for your purposes.

2% is far too conservative.

Source: https://www.firecalc.com/
I'm just a fan of the person I got my user name from

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4nursebee
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Re: Safe withdrawal rate at 38 years old

Post by 4nursebee » Mon Jan 07, 2019 3:16 pm

4nursebee

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TheTimeLord
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Re: Safe withdrawal rate at 38 years old

Post by TheTimeLord » Mon Jan 07, 2019 3:18 pm

Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
You might find this interesting.
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

letsgobobby
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Re: Safe withdrawal rate at 38 years old

Post by letsgobobby » Mon Jan 07, 2019 3:19 pm

Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
I'd run Firecalc iteratively... Three tweny year iterations, for instance. For my own purposes and a possible complete early retirement at age fifty, I run two twenty year iterations and use the tenth decile return of the first iteration to run the second. Adjust accordingly to your optimism and expectations.

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Watty
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Re: Safe withdrawal rate at 38 years old

Post by Watty » Mon Jan 07, 2019 3:21 pm

A couple of things to remember;

1) "Failure" does not mean that you would spend your money until you are broke and homeless, realistically it means something like you might have to reduce your spending by 10 or 20 percent when you are in your 50. Assuming that you are living more than a subsistence lifestyle that should not be a terrible hardship.

2) You will get some sort of Social Security and Medicare some day.

3) Instead of looking at it as a withdrawal rate you could use a liability matching portfolio where you do something like buy a ladder of individual TIPS that mature each year for 22 years when you are 60. The rest of your money could be left invested until then,

Topic Author
Jefferson
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Re: Safe withdrawal rate at 38 years old

Post by Jefferson » Mon Jan 07, 2019 3:22 pm

TheTimeLord wrote:
Mon Jan 07, 2019 3:18 pm
Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
You might find this interesting.
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
That’s great info! Thanks!

renue74
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Re: Safe withdrawal rate at 38 years old

Post by renue74 » Mon Jan 07, 2019 3:23 pm

I was in a similar boat as you when I was 40 (4 years ago). I sold a side gig mobile app business. I still own a very small web design agency with 2 employees.

My suggestion is to look for a job that interests you and do that. Live off that $ and then if you want to go on nice vacations, etc. Do it. If you need to dip into your portfolio...do it. Just don't dip a lot.

Don't look at is as I'm retiring at 38 and need to pull 3% from my portfolio. Look at it as, I've got a lot of money and can choose my future path unlike many of my peers.

I actually started buying rental property when I had the capital from the sale of my business. I'm handy and like making $ from the rentals. So now...that is my side gig.

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Jefferson
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Re: Safe withdrawal rate at 38 years old

Post by Jefferson » Mon Jan 07, 2019 3:32 pm

Watty wrote:
Mon Jan 07, 2019 3:21 pm
A couple of things to remember;

1) "Failure" does not mean that you would spend your money until you are broke and homeless, realistically it means something like you might have to reduce your spending by 10 or 20 percent when you are in your 50. Assuming that you are living more than a subsistence lifestyle that should not be a terrible hardship.

2) You will get some sort of Social Security and Medicare some day.

3) Instead of looking at it as a withdrawal rate you could use a liability matching portfolio where you do something like buy a ladder of individual TIPS that mature each year for 22 years when you are 60. The rest of your money could be left invested until then,
I don’t mean to sound bad, but If I have to even consider Social Security as a factor here, then I’m not selling. And I can’t realistically expect my business (e-commerce) to even exist when I’m old enough for Medicare, so I was going to have to figure that out separately anyway.

Leesbro63
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Re: Safe withdrawal rate at 38 years old

Post by Leesbro63 » Mon Jan 07, 2019 3:41 pm

If it were me, I'd go 60/40 and live off the dividends and income, which I'm guesstimating to be about 2 to 2.5%. Assuming it's taxable money, you'll probably wanna set it up so that you never sell anything and have to incur capital gains taxes. Your age suggests you could be higher equity, but it's a large dollar amount and it sounds like you may never pass this way again (no chance at a second fortune); so I'd be more conservative than 80/20. Also, over time, hopefully, the equity portion will rise and you might eventually get to 70 or 75% equity anyway. If you start at 80/20 and things rise to 90/10 then we have a crash (you can expect a few during your lifetime), how will you feel if millions of dollars go away, even just for a time (you won't know until after when it will come back).

You should so some estate planning. There are good opportunities with 529 accounts for really rich folks like yourself. Right now you and your wife can pass a total of almost $24Million estate tax free, but as recently as 20 years ago you could only pass $600,000 per person and current political winds can easily shift. This might be a good opportunity to take advantage of large gift tax exemptions.

Just my .02.
Last edited by Leesbro63 on Mon Jan 07, 2019 3:48 pm, edited 2 times in total.

dknightd
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Re: Safe withdrawal rate at 38 years old

Post by dknightd » Mon Jan 07, 2019 3:44 pm

Lets pretend your investments just keep up with inflation, and you live 60 more years.
Then your safe withdrawal rate is 1/60= 1.67% I would consider that very very conservative. But you never know!

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HomerJ
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Re: Safe withdrawal rate at 38 years old

Post by HomerJ » Mon Jan 07, 2019 3:52 pm

Jefferson wrote:
Mon Jan 07, 2019 2:28 pm
Regarding using a multiple of expenses, this is hard. Our business gives us a high income. We spend well under our means and have saved well, but we don’t have a traditional budget. If my wife wants to go on a few expensive vacations per year, we do it. If it’s a lean year, then we don’t. We live in a LCOL area, so I’m not worried about basic expenses. I’m trying to see if we can maintain our same lifestyle perpetually.
Well, until you have a rough budget, you really can't figure anything out.

You don't have to track every nickel, but you need to figure out if you spend on average, around $5,000 a month, $10,000 a month, or $15,000 a month or more.
The J stands for Jay

delamer
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Re: Safe withdrawal rate at 38 years old

Post by delamer » Mon Jan 07, 2019 4:49 pm

Jefferson wrote:
Mon Jan 07, 2019 3:32 pm
Watty wrote:
Mon Jan 07, 2019 3:21 pm
A couple of things to remember;

1) "Failure" does not mean that you would spend your money until you are broke and homeless, realistically it means something like you might have to reduce your spending by 10 or 20 percent when you are in your 50. Assuming that you are living more than a subsistence lifestyle that should not be a terrible hardship.

2) You will get some sort of Social Security and Medicare some day.

3) Instead of looking at it as a withdrawal rate you could use a liability matching portfolio where you do something like buy a ladder of individual TIPS that mature each year for 22 years when you are 60. The rest of your money could be left invested until then,
I don’t mean to sound bad, but If I have to even consider Social Security as a factor here, then I’m not selling. And I can’t realistically expect my business (e-commerce) to even exist when I’m old enough for Medicare, so I was going to have to figure that out separately anyway.
If you retire at 38 and have no more earned income, then your SS benefits will be small.

germark
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Re: Safe withdrawal rate at 38 years old

Post by germark » Mon Jan 07, 2019 5:10 pm

Leesbro63 wrote:
Mon Jan 07, 2019 3:41 pm
If it were me, I'd go 60/40 and live off the dividends and income, which I'm guesstimating to be about 2 to 2.5%. Assuming it's taxable money, you'll probably wanna set it up so that you never sell anything and have to incur capital gains taxes. Your age suggests you could be higher equity, but it's a large dollar amount and it sounds like you may never pass this way again (no chance at a second fortune); so I'd be more conservative than 80/20. Also, over time, hopefully, the equity portion will rise and you might eventually get to 70 or 75% equity anyway. If you start at 80/20 and things rise to 90/10 then we have a crash (you can expect a few during your lifetime), how will you feel if millions of dollars go away, even just for a time (you won't know until after when it will come back).
I recently created a thread on this: Modeling "withdrawing just income generated": viewtopic.php?f=10&t=268718&newpost=430 ... ead#unread

Someone there posted an academic paper on this: "Is a Portfolio Built to Produce Yield a Sensible Retirement Income Portfolio?" by Sam Pittman. You can read the paper here: https://www.onefpa.org/journal/Pages/AU ... folio.aspx

My one-sentence summary of the paper is that, if you do this, the portfolio will likely retain or exceed value over long periods of time. However, the annual income will likely vary wildly. The results surprised me, and the paper is well written, so I recommend reading it.

skime
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Re: Safe withdrawal rate at 38 years old

Post by skime » Mon Jan 07, 2019 5:25 pm

Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
50x any and all annual expenses - i.e. 2% or less at any allocation

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corn18
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Re: Safe withdrawal rate at 38 years old

Post by corn18 » Mon Jan 07, 2019 5:31 pm

OP, I would use 3% and see if that is enough. My base budget is $100k/year for retirement which is generous in all categories but does not include travel. We would love to have $50k/year for travel, so we are saving more until we hit that @ 4% WR (our time frame is shorter).

visualguy
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Re: Safe withdrawal rate at 38 years old

Post by visualguy » Mon Jan 07, 2019 5:45 pm

skime wrote:
Mon Jan 07, 2019 5:25 pm
Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
50x any and all annual expenses - i.e. 2% or less at any allocation
There are non-annual expenses as well, some of which can be big-ticket. In general, there are too many unknowns for me to figure out how much I will need for the 30 or 35 year retirement that I hope to have. I can't even imagine how one would figure it out for a 50 year retirement. It's one of those things where if you have a large amount like $10M+ you can be pretty confident that you'll be fine (even then some things like a divorce can change the picture). If you aren't at that level, then who the heck knows, and it's better to keep making money.

Leesbro63
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Re: Safe withdrawal rate at 38 years old

Post by Leesbro63 » Mon Jan 07, 2019 5:54 pm

If you use a “spend the income” approach, as we discussed above, you will start at about 2 to 2.5%. As noted, over time the portfolio will probably continue to grow. You can use “good times” to make periodic withdrawals of principal if you want (and are willing to pay capital gains taxes) for big ticket stuff like vacations, homes, vehicles & college.

I believe Rick Ferri, a good while back, suggests that his clients do this if they can. With a 60 year withdrawal period, it’s essentially an indefinite period. 2.5% is not too conservative. Certainly I wouldn’t set more than a 3% SWR.
Last edited by Leesbro63 on Mon Jan 07, 2019 6:48 pm, edited 1 time in total.

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vitaflo
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Re: Safe withdrawal rate at 38 years old

Post by vitaflo » Mon Jan 07, 2019 6:39 pm

If I remember correctly 3.5% had a ~97% chance of success over 60 years, so that’s the min SWR that I use.

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David Jay
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Re: Safe withdrawal rate at 38 years old

Post by David Jay » Mon Jan 07, 2019 6:45 pm

renue74 wrote:
Mon Jan 07, 2019 3:23 pm
Look at it as, I've got a lot of money and can choose my future path unlike many of my peers.
This is a great perspective!

My brother “retired” from the US Foreign Service after 20-some years. He said he needed a position but he could, essentially, take any position. He ended up starting a foreign-affairs program at small, private university.

So figure out what you want to do with your life and do it.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Starfish
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Re: Safe withdrawal rate at 38 years old

Post by Starfish » Mon Jan 07, 2019 6:56 pm

Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
There is no such thing.
If you look at past performance probably anything under 3% is "safe". But past performance does not guarantee future results.
So nobody can give you the answer. It's all about your risk tolerance and what you lose for sure (time life) vs. the uncertainty of money.

Starfish
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Re: Safe withdrawal rate at 38 years old

Post by Starfish » Mon Jan 07, 2019 7:01 pm

skime wrote:
Mon Jan 07, 2019 5:25 pm
Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
50x any and all annual expenses - i.e. 2% or less at any allocation
Based on...? Research, links, clairvoyance?

Socal77
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Re: Safe withdrawal rate at 38 years old

Post by Socal77 » Mon Jan 07, 2019 7:02 pm

I really trust Kitces' advice. Check out this talk on SWR. Don't forget the WR can be adjusted according to market circumstances up and down.

Just listened again. This covers younger retiree scenarios too. Highly recommended.

https://www.youtube.com/watch?v=7YfkoS9tttU

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jainn
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Re: Safe withdrawal rate at 38 years old

Post by jainn » Mon Jan 07, 2019 8:26 pm

We like this blog post, regarding CAPE withdrawals, which is a variable/option using cfiresim. We prefer to use the most conservative method available (CAPE 1.00/.05), mostly out of fear due to us living on our portfolio at a youngish age with 3 kids and have no plans returning to the work force.

https://earlyretirementnow.com/2017/08/ ... sed-rules/

Based on today's shiller PE of 28.21 (seen here: http://www.multpl.com/shiller-pe/, the formula of SUM((1÷ CAPE)×0.5)+0.01 allows for 2.77% withdrawal rate. We have this formula in our spreadsheet, even though 1/3 of our portfolio is in INTL markets and our portfolio CAPE is lower than if our portfolio was 100% SP500...it just lets us know based on the blog post that historically we should be OK withdrawing the current ~2.75%. Our current annual spending without any tightening of the belt is 2.75% of the portfolio during this slightly depressed market (down 14% from all time highs)...typically (last 2 years), we spend 2.5% of our portfolio..and we are just a couple years older than you and retired as well.

Wish you all the best!
Jainn




cfiresim FAQ on spending options http://www.cfiresim.com/faq.php
Variable CAPE Method: CAPE (Cyclically-adjusted price-to-earning ratio) is a valuation measure usually applied to the US S&P 500 equity market. It is defined as price divided by the average of ten years of earnings (moving average), adjusted for inflation. The CAPE method adjusts your retirement based on this valuation of the market (spending more in the boom times, and less in the down times). Example for how spending is calculated in a given year: Spending will always equal (spendingRate = currentCAPEYield * multiplier + constantAdjustment). If we're in a year where the CAPE is 17.48, currentCAPEYield will equal 1/17.48 or 0.0572. If you kept the the defaults inputs, the "constantAdjustment" would equal 1/100 or .01. So, for that given year, your spending rate would be adjusted to 0.0572 * 0.5 + .01 = 0.0386 (or 3.86% withdrawal rate). So if your portfolio happened to be $1M at the time, you'd withdraw $38,600.

Image

CAPE 1.00/0.5: a=1% and b=0.5. This is the traditional CAPE-based rule that’s set as the default at cFIREsim. With the current CAPE at 30, this implies a pretty measly SWR of just under 2.7%!

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Re: Safe withdrawal rate at 38 years old

Post by are_cynic » Mon Jan 07, 2019 8:39 pm

It sounds like you’re asking about a perpetual withdrawal rate. https://portfoliocharts.com/2016/12/09/ ... etirement/
"Invert, always invert" ~Carl Jacobi

mgensler
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Re: Safe withdrawal rate at 38 years old

Post by mgensler » Mon Jan 07, 2019 8:43 pm

We're mid forties and sold our business a few years ago. I think the best advice is not to increase your overhead. Plan for the big vacations which you can always pull back on in a down market. Don't go loading up on multiple homes, boats, airplanes, household employees, etc. Keep life simple.

AlphaLess
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Re: Safe withdrawal rate at 38 years old

Post by AlphaLess » Mon Jan 07, 2019 8:49 pm

A few things to remember about withdrawal rate and asset preservation:

1. It is easier to model / plan for a 'forever' scenario rather than a fixed time frame such as 30 or 40 years.
In a forever scenario, the problem is recursively the same every year, as every year you are planning for the same problem.

2. The biggest variable input is future asset returns. Obviously, you can not predict this, but you can make assumptions about it,

3. The second biggest variable input is the asset allocation. Something like 60-80% stock seems to be optimal in many ways (except maximizing the higher end of the terminal wealth). However, it is hard to make an exact pick here,

4. The outputs of the models are generally about withdrawal rate (fixed, variable, etc). Something to remember: even basis point adjustments (like 8 or 10) to the withdrawal rate can make a big difference in terms of success probabilities, when the probabilities in question need to be something like almost 100% vs NOT-almost-100%.

One more thing: going from say 99% success to 100% success becomes virtually impossible. But does it matter?

5. Your biggest modeled risk, once implemented, would be early-stage returns. If you can built flexibility here, that would be the best thing that YOU can control (besides withdrawal rate).

One of the ways to model #2 is to use CAPE, as the starting value of CAPE can be used to infer an expectation of equity returns.

You might find that forum responses go anywhere from:
- 2% is safe,
to
- 3.5% is safe.

That is actually a very large range, given the sensitivity of survival probably to even BASIS points.

Also, you will probably find that the un-modeled risks matter too. By definition, un-modeled risks are hard to predict and those that the model did not consider:
- health care risk,
- asset mis-management risk,
- other risks (like your assets disappear from the account).
"You can get more with a kind word and a gun than with just a kind word." George Washington

EnjoyTheJourney
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Re: Safe withdrawal rate at 38 years old

Post by EnjoyTheJourney » Tue Jan 08, 2019 9:25 am

In case it helps for the broader challenge of knowing whether a safe withdrawal rate would work well for the OP and his wife, it seems that a lot of frugal people track expenses, but don't have a budget per se*.

Tracking expenses in and of itself often leads to seeing where money may be leaking out in larger-than-desirable amounts, which can then be fixed.

A budget can be a mutually agreed-upon solution if expense tracking reveals that income and spending are substantially out of line. In a sense, for those who might not love living on a budget the prospect of having to go through the bother and creating and following one can be helpful for changing spending patterns.

(the OP and his wife may not be particularly keen about budgeting, but perhaps expense tracking would be more agreeable for them)

* the MrMoneyMustache forum has a thread about this

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Watty
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Re: Safe withdrawal rate at 38 years old

Post by Watty » Tue Jan 08, 2019 11:31 am

All the studies about a safe withdrawal rate are interesting and can be a good reality check to keep you from obviously overspending but you need to be cautious about how you use them.

The length of historical data that the studies use is limited compared to the 60 year retirement you are looking at so there is a lot more risk that the next 60 years will be different. It is very hard to predict 60 years into the future when you are using less than 100 years of relevant historical data.

A huge problem with the safe withdrawal rate is that they also do not take the real world into account. You could invest your money with a large stock asset allocation and it could go up or down 20% or more over the next year. Few people in the real world would ignore that and not adjust their spending accordingly.

One of the criticisms of the SWR studies is something like; "You have two twins with identical investments, one of them retires a year earlier than the other. The first twin spends 4% of their portfolio and the portfolio drops by 10% that year. The other twin then retires and starts a 4% SWR. Based on a 4% SWR rate the first twin, with less money will be spending more than the second twin." The response to this is basically; "It was only an academic study, it was not meant to be a spending model." The authors of the original study have been saying this for years.

There is a wiki on other withdrawal methods if you have not seen it.

https://www.bogleheads.org/wiki/Withdrawal_methods

If I was in your situation I would just look at putting at least ten years expenses into a seperate conservative portfolio then investing the rest in a second portfolio. The big question then is if the second portfolio of the remaining money looks large enough to support you after that.
Jefferson wrote:
Mon Jan 07, 2019 2:28 pm
If my wife wants to go on a few expensive vacations per year, we do it. If it’s a lean year, then we don’t.
I retired a few years ago and I have found that travel is less expensive now since I am more flexible and can go for longer trips. Often when you are at your destination extending your stay for a for another week will not be terribly expensive if you are just staying at a normal hotel and now some expensive resort.

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Re: Safe withdrawal rate at 38 years old

Post by clockman323 » Tue Jan 08, 2019 12:21 pm

Almost every reply is based on what the average investor should do. Someone retiring with $500K needs to be absolutely certain that they will not run out of money when they are 85 years old.

The OP didn't mention how much money he made from the sale of his business. If it was $100 million, then his choices are different than the guy with $500K. He could invest $10 million in a 3 fund account and take a 2.5% withdrawal of $250K per year. He is able to do anything he wants with the remaining $90 million.

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Jefferson
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Re: Safe withdrawal rate at 38 years old

Post by Jefferson » Tue Jan 08, 2019 12:41 pm

Watty wrote:
Tue Jan 08, 2019 11:31 am


If I was in your situation I would just look at putting at least ten years expenses into a seperate conservative portfolio then investing the rest in a second portfolio. The big question then is if the second portfolio of the remaining money looks large enough to support you after that.

I like this idea a lot. So maybe 60/40 stocks/bonds on the first (maybe even 50/50), with the second something like 80/20. The second one goes into a (minimum) ten-year lockbox.

Leesbro63
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Re: Safe withdrawal rate at 38 years old

Post by Leesbro63 » Tue Jan 08, 2019 1:10 pm

Jefferson wrote:
Tue Jan 08, 2019 12:41 pm
Watty wrote:
Tue Jan 08, 2019 11:31 am


If I was in your situation I would just look at putting at least ten years expenses into a seperate conservative portfolio then investing the rest in a second portfolio. The big question then is if the second portfolio of the remaining money looks large enough to support you after that.

I like this idea a lot. So maybe 60/40 stocks/bonds on the first (maybe even 50/50), with the second something like 80/20. The second one goes into a (minimum) ten-year lockbox.
This is just mental accounting, like the many threads on here about “buckets”. In the end there is just one portfolio: there’s you and there’s your assets. You can mentally slice it any way you want but the total amount of stuff you own is your equity portion. And the total amount that you lend is your bond /fixed income portion.

Leesbro63
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Re: Safe withdrawal rate at 38 years old

Post by Leesbro63 » Tue Jan 08, 2019 1:13 pm

clockman323 wrote:
Tue Jan 08, 2019 12:21 pm
Almost every reply is based on what the average investor should do. Someone retiring with $500K needs to be absolutely certain that they will not run out of money when they are 85 years old.

The OP didn't mention how much money he made from the sale of his business. If it was $100 million, then his choices are different than the guy with $500K. He could invest $10 million in a 3 fund account and take a 2.5% withdrawal of $250K per year. He is able to do anything he wants with the remaining $90 million.
This is an excellent point. We don’t know if we’re talking mere wealth, lotta wealth or mega wealth. And while investing is the same mechanics for all, the magnitude of wealth is required to be known in making asset allocation decisions.

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Watty
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Re: Safe withdrawal rate at 38 years old

Post by Watty » Tue Jan 08, 2019 1:20 pm

Jefferson wrote:
Tue Jan 08, 2019 12:41 pm
Watty wrote:
Tue Jan 08, 2019 11:31 am


If I was in your situation I would just look at putting at least ten years expenses into a seperate conservative portfolio then investing the rest in a second portfolio. The big question then is if the second portfolio of the remaining money looks large enough to support you after that.

I like this idea a lot. So maybe 60/40 stocks/bonds on the first (maybe even 50/50), with the second something like 80/20. The second one goes into a (minimum) ten-year lockbox.
There are not any magic "right" numbers but I might just put two or three years expenses into CDs or high interest savings and then use something like the Vanguard Lifestrategy funds for the rest.

You could use the income or conservative growth lifestrategy fund for the conservative investment and lifestrategy growth fund for the long term investments.

https://investor.vanguard.com/mutual-fu ... estrategy/#/

Taxes will likely be an ongoing issue for you so tweaking this to use something similar that is more tax efficient might make sense.

The growth 80/20 stock allocation for the long term investing might be an OK textbook generic answer but one thing to consider is if you really have any need to be that aggressive. If you don't have the need then it might make sense to reduce the stock asset allocation a bit, maybe 70/30 or even less.

You would probably want to set the funds to not automatically reinvest the dividends so you could use that for your expenses and then manually reinvest any additional funds however it makes sense.

I don't know a lot about them but Vanguard also has several tax managed funds.

https://www.bogleheads.org/wiki/Tax-man ... comparison

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willthrill81
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Re: Safe withdrawal rate at 38 years old

Post by willthrill81 » Tue Jan 08, 2019 1:58 pm

First of all, the 'safe withdrawal rate' research assumes that you'll increase your spending every year to keep pace with inflation, regardless of how your portfolio performs. That is not realistic; everyone makes changes to their withdrawals based on portfolio performance. As such, the 'failure' that some have referred to should not be 'run out of money' but much closer to something like 'need to make reductions to our withdrawals'.

That being said, what you should be more interested in is what's referred to as the perpetual withdrawal rate, the rate which will at least preserve the inflation-adjusted value of your starting capital over lengthy periods of time (i.e. 30 years or more). Historically, for an asset allocation based on U.S. assets ranging from about 40/60 to 70/30, that rate has been about 3% (i.e. 3% of your starting portfolio value, then adjusting that dollar amount upward for inflation every subsequent year). If the future is anything like the past, there is a high probability that you would be able to increase this amount as your portfolio increases in value. Actually, the math says that if you started with a 3% fixed nominal withdrawal rate, you could have always taken the greater of last year's withdrawal plus inflation or 3% of your portfolio's current value and always been safe.

Realistically though, I think that some kind of a variable withdrawal strategy is better. There are literally an infinite number of possibilities here. One is to withdrawal a percentage of your portfolio each year (i.e. 4%). Using this approach, it is literally impossible to ever run out of money, although if your withdrawal percentage is too high, your portfolio and subsequent withdrawals could grow too small over time. Starting with something like 4% would probably be a good starting point. The key here is whether you are able to tolerate the inevitable variability in your withdrawals. For instance, if you had a 50/50 portfolio and stocks dropped 50% in value in one year and bonds did nothing, your portfolio and withdrawals would go down by 25%. If you could deal with that, then this kind of approach could work fine. There are many variants of this approach as well. One that I have come across fairly recently that makes a lot of sense is to use a simple time value of money formula. It is described in this thread.
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PEAttorney
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Re: Safe withdrawal rate at 38 years old

Post by PEAttorney » Tue Jan 08, 2019 2:04 pm

Depending on your desires/the business, you may be best off staying involved in your company in some capacity. This not only may provide you an income post-sale, it could also increase the value of your business to potential buyers. Many buyers would pay a premium to have you and your wife stay on at least a year (potentially more) to assist with the transition.

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Jefferson
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Re: Safe withdrawal rate at 38 years old

Post by Jefferson » Tue Jan 08, 2019 2:45 pm

All of these responses have been very helpful. Thank you!

I think what I'm trying to get at (and perhaps not articulating it very well) is what kind of income we could reasonably expect from this money. I'm trying to figure out a range (in dollars) by starting with a percentage.

There is certainly risk here. But I've always lived with risk. My company is e-commerce and it has grown very quickly. But what comes up can go down. This is an opportunity to cash out at a high level. The S&P 500 could be a lot less risky than my company still being profitable in 20-30 years.

The big question is standard of living. We've gotten used to living a certain way (albeit always within our means and with a healthy savings rate). I don't want to do this if there is a high risk of that standard of living being reduced significantly.

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Re: Safe withdrawal rate at 38 years old

Post by KlangFool » Tue Jan 08, 2019 2:50 pm

clockman323 wrote:
Tue Jan 08, 2019 12:21 pm
Almost every reply is based on what the average investor should do. Someone retiring with $500K needs to be absolutely certain that they will not run out of money when they are 85 years old.

The OP didn't mention how much money he made from the sale of his business. If it was $100 million, then his choices are different than the guy with $500K. He could invest $10 million in a 3 fund account and take a 2.5% withdrawal of $250K per year. He is able to do anything he wants with the remaining $90 million.
clockman323,

I disagreed. Whether OP has 500K or 100 million, spending 2% or 5% of the portfolio has the same impact.

<<If it was $100 million, then his choices are different than the guy with $500K. He could invest $10 million in a 3 fund account and take a 2.5% withdrawal of $250K per year. He is able to do anything he wants with the remaining $90 million.>>

Our answers were based on percentage. 2.5% of 100 million is 2.5 million. It is not 250K.

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Re: Safe withdrawal rate at 38 years old

Post by KlangFool » Tue Jan 08, 2019 2:51 pm

Jefferson wrote:
Tue Jan 08, 2019 2:45 pm
All of these responses have been very helpful. Thank you!

I think what I'm trying to get at (and perhaps not articulating it very well) is what kind of income we could reasonably expect from this money. I'm trying to figure out a range (in dollars) by starting with a percentage.

There is certainly risk here. But I've always lived with risk. My company is e-commerce and it has grown very quickly. But what comes up can go down. This is an opportunity to cash out at a high level. The S&P 500 could be a lot less risky than my company still being profitable in 20-30 years.

The big question is standard of living. We've gotten used to living a certain way (albeit always within our means and with a healthy savings rate). I don't want to do this if there is a high risk of that standard of living being reduced significantly.
I believe that 2% is very safe.

KlangFool

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JoMoney
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Re: Safe withdrawal rate at 38 years old

Post by JoMoney » Tue Jan 08, 2019 2:58 pm

I would look at a life expectancy table, and work out what the implied amortization at a reasonable interest rate would be.
Essentially the same process a SEPP 72t early retirement account withdrawal calculator would do, or what getting a quote for an immediate annuity might offer. These calculations would not include an 'inflation adjustment', so you would have to discount the rate suggested by these calculations by your inflation estimates.
https://72t.net/72t/Calculator/Distributions
https://www.blueprintincome.com/income-annuities-quotes
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Re: Safe withdrawal rate at 38 years old

Post by GAAP » Tue Jan 08, 2019 3:04 pm

At age 38, you're basically talking about a perpetuity -- treat it like one and you should be fine.

A variable withdrawal plan will adapt to conditions much better than a fixed withdrawal.

As a starting point, a basic PMT calculation using a 2% rate over 80 years to depletion would still allow a 2.5% initial withdrawal.
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MnD
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Re: Safe withdrawal rate at 38 years old

Post by MnD » Tue Jan 08, 2019 3:12 pm

willthrill81 wrote:
Tue Jan 08, 2019 1:58 pm
Realistically though, I think that some kind of a variable withdrawal strategy is better. There are literally an infinite number of possibilities here. One is to withdrawal a percentage of your portfolio each year (i.e. 4%). Using this approach, it is literally impossible to ever run out of money, although if your withdrawal percentage is too high, your portfolio and subsequent withdrawals could grow too small over time. Starting with something like 4% would probably be a good starting point. The key here is whether you are able to tolerate the inevitable variability in your withdrawals. For instance, if you had a 50/50 portfolio and stocks dropped 50% in value in one year and bonds did nothing, your portfolio and withdrawals would go down by 25%. If you could deal with that, then this kind of approach could work fine.
This.
In the vast majority of sequences, using a non-variable (real-adjusted) ultra-conservative SWR like many have suggested will just end up with you at age 68 or whatever sitting on many times your initial nest egg in real dollars, when you could have enjoyed it much earlier in life when both you and your partner had more time, youth, energy, health and ability.

A variable withdrawal strategy applies the hard medicine on spending if and only if you need to take it - like the 1966 retirees for example.
In contrast, fixed ultra-low SWR's gives you a guaranteed terrible utility in retirement on your hard-earned money whether you needed to or not.
Great for money-hoarders who shudder at the thought of spending much of anything from money mountain, but not so great those saving for retirement with the goal of enjoying the fruits of our savings.

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