Help me with my retirement math

[jjunk]

I'm sure this is something simple and that I've mentally manipulated myself into a position where I'm missing it, so I'm asking for help. My DW and I have been talking about what our "number" needs to be to properly retire. Most of my past readings on the topic suggest starting with 25x annual expenses as a way to get an idea (based on the Trinity Study). I have an XLSX which calculates that number for 25x, 28.5x and 33.3x as a way to see those values for 3, 3.5 and 4% SWR respectively.

I recently came across the withdrawal rates chart from Portfolio Charts which gives an SWR and PWR for a targeted mix of assets (https://portfoliocharts.com/portfolio/withdrawal-rates/). When I put in my current asset mix of 70% S&P 500 and 30% Intermediate Term Bonds I see those rates for a 40Y retirement being 3.8% and 3.2% respectively.

My current retirement assets are 2.2M across taxable and tax advantaged accounts. We dont have any heirs so plan on consuming 100% of these accounts during retirement and have no need to leave a bequest to anyone. Given that fact, and assuming that a 3.5% withdrawal rate would be fairly bulletproof moving forward, I initially came up with an annual spending amount of ~77K (2.2M*.035). Is that the right way to determine this type of number? The reason I ask is when I use the PWR method above and do 2.2M*1.032/40 I get a much lower number of 57K/yr.

I've now worked myself into mental knots trying to figure out which number is the correct one to use for planning but I cant figure it out

Any help educating me on what I am sure is basic math would be most appreciated.

[jjunk]

I think I'm approaching this the wrong way and thats my problem. I'm trying to find the right number which represents a SWR over a 40yr time which leaves around $0 but doesnt completely run out of money before then. Portfolio Charts has already given me that number, which is 3.8%/3.2%. Given I want to leave no money behind, the math I need to be doing is annual anticipated expenses (72K)*SWR(26.3)=1.9Mish or if I want to be conservative, using PWR (72K*31.25)=2.25M. Is this more correct or am I still an idiot in how I'm looking at this?

[delamer]

I think I'm approaching this the wrong way and thats my problem. I'm trying to find the right number which represents a SWR over a 40yr time which leaves around $0 but doesnt completely run out of money before then. Portfolio Charts has already given me that number, which is 3.8%/3.2%. Given I want to leave no money behind, the math I need to be doing is annual anticipated expenses (72K)*SWR(26.3)=1.9Mish or if I want to be conservative, using PWR (72K*31.25)=2.25M. Is this more correct or am I still an idiot in how I'm looking at this?

Well, 3.2 divided by 3.8 is about 84%. And $2.25 million multiplied by 84% is about $1.9 million.

So you are on the right track.

[ososnilknarf]

I'm not sure I completely understand your question, but I wanted to make sure you understood how the 4% rule works as it wasn't clear to me from your question.
It isn't 4% of your portfolio every year. It says to withdraw 4% of your portfolio the first year of your retirement, then increase the amount you withdraw each year based on the inflation index.

So, if your nest egg is 2.2M, and the inflation rate was 2% per year, it would look like this:
Year 1: $88,000 (2.2M * .04)
Year 2: $89,760 (88000 * 1.02)
Year 3: $91,555.2 (89760 * 1.02)
... and so on

I don't know if this helps at all, but thought I'd clarify this point

[jjunk]

I'm not sure I completely understand your question, but I wanted to make sure you understood how the 4% rule works as it wasn't clear to me from your question.
It isn't 4% of your portfolio every year. It says to withdraw 4% of your portfolio the first year of your retirement, then increase the amount you withdraw each year based on the inflation index.

So, if your nest egg is 2.2M, and the inflation rate was 2% per year, it would look like this:
Year 1: $88,000 (2.2M * .04)
Year 2: $89,760 (88000 * 1.02)
Year 3: $91,555.2 (89760 * 1.02)
... and so on

I don't know if this helps at all, but thought I'd clarify this point

Thanks. Like I was saying, I think I've even confused myself which makes this all the harder to get across cleanly.

Basically I have been calculating a value in my spreadsheets which tells my wife and I what our "safe" income would be per year if we were to retire today. I live in a HCOL area currently (Seattle) and we've been entertaining retiring early and spending our time in a LCOL area as the trade off. We've been using this annual spending number as a way to make that decision.

The way I was calculating this value until today was by taking my current balance and multiplying it by my supposed safe withdrawal rate (3.5%). I was getting a wildly different (read: higher) number than what I was seeing in some of the online simulators and it was because I was using this method vs. calculating the value by taking annual expenses and multiplying them out by the SWR. Seems like thats the best way to determine the right number and I've been messing it up this whole time. Luckily for me, the math is still mostly in our favor for the LCOL scenario.

The actual question now is, given 2.2M and ~72K in annual expenses on a 70/30 portfolio, would it last for 40yrs without running out of money. Seems like the answer to that is yes. Given other factors like spending flexibility as well, we seem like we're ok for any LCOL but need quite a bit more to stay here in Seattle.

[Dottie57]

I think 77k is reasonable. The math is fine. I also assume you will get SS if you are a citizen and will have somewhere around 100k or more when you start taking SS.

[22twain]

given 2.2M and ~72K in annual expenses on a 70/30 portfolio, would it last for 40yrs without running out of money.

Have you tried FIRECalc? I plugged in your numbers and it finds 100% success (barely). Default portfolio is 75% stock, which you can change on the "Your Portfolio" tab. Presumably you'll get Social Security at some time which will make the results even better; you can add it on the "Other Income/Spending" tab.

Somebody will surely mention the usual caveat, so I might as well do it now: this is based on historical data, which could go out the window if the next 40 years are Worse Than Anything We've Seen Before (since 1871, specifically).

[jjunk]

given 2.2M and ~72K in annual expenses on a 70/30 portfolio, would it last for 40yrs without running out of money.

Have you tried FIRECalc? I plugged in your numbers and it finds 100% success (barely). Default portfolio is 75% stock, which you can change on the "Your Portfolio" tab. Presumably you'll get Social Security at some time which will make the results even better; you can add it on the "Other Income/Spending" tab.

Somebody will surely mention the usual caveat, so I might as well do it now: this is based on historical data, which could go out the window if the next 40 years are Worse Than Anything We've Seen Before (since 1871, specifically).

Thanks. Yes, I'd been playing around with FireCalc and noticed the same thing (which is good). I doubt either of us make it the entire 40yrs but given its such a major decision, I'm trying to be as cautious as I possibly can. Based on my backtesting, I'm already over the second bend point for Social Security but I dont use it any of my projections since I see it as the ultimate backup safety net. I'm well aware (and scared) of the caveat too