Baseline income options for early retirees?

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mortal
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Baseline income options for early retirees?

Post by mortal » Tue Sep 10, 2019 11:04 pm

So, I plan on using a variable percentage withdrawal, or a constant percentage withdrawal style retirement. The only problem is that such methods can have *wild* swings in what they allow one to withdraw in a major downturn. The standard advice around this if one is 62 or older is to simply draw social security.

What of the early retiree? What options do they have? If one retires at 45, it's about 20 years until they're eligible for SS. SPIA aren't really attractive (or often even available) at that age. What's the best bet for establishing a baseline for your must have expenses? A tips ladder? Forgive me but recent rates have been pretty terrible.

I'm interested in what suggestions you may have.
Last edited by mortal on Wed Sep 11, 2019 6:13 am, edited 1 time in total.

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FiveK
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Re: Baseline income options for early retirees?

Post by FiveK » Tue Sep 10, 2019 11:15 pm

One option, described in the article referenced in Long-time member Nords profiled in Forbes, is to hold a significant amount (2 years was Nords' amount) in cash.

Somewhere between that and the wild swings a 100% stock portfolio can have are the various amounts of bond holdings. See threads such as A " Bond Tent" During the "Retirement Red Zone?" - Bogleheads.org.

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Summit111
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Re: Baseline income options for early retirees?

Post by Summit111 » Tue Sep 10, 2019 11:20 pm

What is VPW / CPW? Acronym definition will help us help you...

Summit
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JoMoney
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Re: Baseline income options for early retirees?

Post by JoMoney » Tue Sep 10, 2019 11:22 pm

I would expect that the return on TIPS and nominal bonds would be pretty similar.
As dismal as it may be, the payout on a SPIA is likely fair based on current interest rates amortized out over actuarial life expectancy.
The rates are what they are. We can complain that we want a higher return, but there's no rule that having money entitles one to earn any particular rate on it.
If the "early retiree" can't afford to get by at current rates, they're going to have to cut their spending or get a job to earn more income.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Horton
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Re: Baseline income options for early retirees?

Post by Horton » Wed Sep 11, 2019 8:45 am

mortal wrote:
Tue Sep 10, 2019 11:04 pm
What of the early retiree? What options do they have?
Keep working! :beer
"You must know that there is nothing higher and stronger and more wholesome and good for life in the future than some good memory, especially a memory of childhood, of home." - Dostoyevsky

mhalley
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Re: Baseline income options for early retirees?

Post by mhalley » Wed Sep 11, 2019 8:56 am

Retiring early isn’t for the faint of heart. You need big bucks, probably going with a 3% withdrawal rate. Some recommend a bucket strategy of several years of cash in case of a huge down turn. Going back to work or working part time is often mentioned on the early retirement sites.

sharx
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Re: Baseline income options for early retirees?

Post by sharx » Wed Sep 11, 2019 1:37 pm

Summit111 wrote:
Tue Sep 10, 2019 11:20 pm
What is VPW / CPW? Acronym definition will help us help you...

Summit
variable percentage withdrawal and constant percentage withdrawal.

bhsince87
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Re: Baseline income options for early retirees?

Post by bhsince87 » Wed Sep 11, 2019 2:11 pm

I retired at 53 last year and plan to delay SS till 70 (unless things change between now and then). DW will probably claim spousal at 62.

I put 20 years of base income needs in short and medium term treasury funds.

And I didn't retire until I felt a traditional type SWR of 2.5% would meet our basic needs.

I seriously considered a chain of 5 or 10 year period-certain annuities. I still might do that at some point.

It took me a few years to comfortably transition (mentally) from a "maximize return" approach to "preserve capital" . But I'm still not quite ready to make the jump to "start consuming capital". But I know it has to happen at some point.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

randomguy
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Re: Baseline income options for early retirees?

Post by randomguy » Wed Sep 11, 2019 2:38 pm

FiveK wrote:
Tue Sep 10, 2019 11:15 pm
One option, described in the article referenced in Long-time member Nords profiled in Forbes, is to hold a significant amount (2 years was Nords' amount) in cash.

Somewhere between that and the wild swings a 100% stock portfolio can have are the various amounts of bond holdings. See threads such as A " Bond Tent" During the "Retirement Red Zone?" - Bogleheads.org.
The problem is that this stuff does basically nothing other than maybe help you sleep at night. If you look at the SWR or portfolio survivability of buckets, bond ladders, tents, rising glide paths and so on, you are getting anything.

What helps in the bad cases (10-15 years of 0% returns) is
a) low SWR
b) cutting spending for long periods of time (i.e.not skipping 1 trip. Skipping 1 trip for a decade).

If you want to take 10-20 years of bonds, give them some fancy name, and spend them down, great. You just need to make sure you are maintaining enough equity exposure. Instead of holding say 50/50 in your portfolio, you might need to hold 90/10 to get those same level of returns.

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dwickenh
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Re: Baseline income options for early retirees?

Post by dwickenh » Wed Sep 11, 2019 3:27 pm

bhsince87 wrote:
Wed Sep 11, 2019 2:11 pm
I retired at 53 last year and plan to delay SS till 70 (unless things change between now and then). DW will probably claim spousal at 62.

I put 20 years of base income needs in short and medium term treasury funds.

And I didn't retire until I felt a traditional type SWR of 2.5% would meet our basic needs.

I seriously considered a chain of 5 or 10 year period-certain annuities. I still might do that at some point.

It took me a few years to comfortably transition (mentally) from a "maximize return" approach to "preserve capital" . But I'm still not quite ready to make the jump to "start consuming capital". But I know it has to happen at some point.

/quote]

Remember that DW can't claim spousal until you claim your benefit. Even if you wait to 70, she will get a reduced about 35% of your PIA
(primary Insurance amount) at age 62. This may be the best choice, but she will need to be 8 years younger than you
to make the plan work.

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

bhsince87
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Re: Baseline income options for early retirees?

Post by bhsince87 » Wed Sep 11, 2019 3:57 pm

dwickenh wrote:
Wed Sep 11, 2019 3:27 pm




Remember that DW can't claim spousal until you claim your benefit. Even if you wait to 70, she will get a reduced about 35% of your PIA
(primary Insurance amount) at age 62. This may be the best choice, but she will need to be 8 years younger than you
to make the plan work.

Dan
Hmmm, I was just using https://opensocialsecurity.com/ a few days ago, and it told me that was the optimum strategy. I don't think she files for spousal though, but for full benefit. So that wording was a mistake on my part.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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dwickenh
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Re: Baseline income options for early retirees?

Post by dwickenh » Wed Sep 11, 2019 4:30 pm

It does make sense for her to take her own benefit at 62 and then wait to take spousal when you take yours at 70.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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FiveK
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Re: Baseline income options for early retirees?

Post by FiveK » Wed Sep 11, 2019 5:17 pm

randomguy wrote:
Wed Sep 11, 2019 2:38 pm
FiveK wrote:
Tue Sep 10, 2019 11:15 pm
One option, described in the article referenced in Long-time member Nords profiled in Forbes, is to hold a significant amount (2 years was Nords' amount) in cash.

Somewhere between that and the wild swings a 100% stock portfolio can have are the various amounts of bond holdings. See threads such as A " Bond Tent" During the "Retirement Red Zone?" - Bogleheads.org.
The problem is that this stuff does basically nothing other than maybe help you sleep at night. If you look at the SWR or portfolio survivability of buckets, bond ladders, tents, rising glide paths and so on, you are getting anything.

What helps in the bad cases (10-15 years of 0% returns) is
a) low SWR
b) cutting spending for long periods of time (i.e.not skipping 1 trip. Skipping 1 trip for a decade).

If you want to take 10-20 years of bonds, give them some fancy name, and spend them down, great. You just need to make sure you are maintaining enough equity exposure. Instead of holding say 50/50 in your portfolio, you might need to hold 90/10 to get those same level of returns.
One can always imagine ever worse cases. E.g., picture Topper from Dilbert saying "that's nothing - I'm preparing for 25 years of -5% returns," or Monte Carlo simulations that overlay 1929-1932 stock losses with 1970s inflation, etc.

Things that help people sleep at night - thus avoid selling in a panic - have a real value, as does cutting spending (aka Stay flexible my friend!) instead of panic selling.

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mortal
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Re: Baseline income options for early retirees?

Post by mortal » Wed Sep 11, 2019 6:39 pm

A lot of you are suggesting a lower SWR / higher savings. What you don't realize is just *how much* higher one's savings has to be in order to use a variable percentage withdrawal. If you want to cover all your expenses this way, you have to salt away 50 times your annual expenses to handle something like the 1960s.

See a previous thread here: viewtopic.php?p=4515766

TLDR: If you want to use VPW for early retirement, your planning rate had better be 2%, not 4%.

Every time I bring up VPW's wild spending swings, the answer I get is 'Well, you should have baseline income to cover necessities'. I made this thread to try and get a productive conversation going as to what those options are for early retirees. There doesn't appear to be much beyond work *much* longer and save *much* more than is usually advised.

RubyTuesday
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Re: Baseline income options for early retirees?

Post by RubyTuesday » Wed Sep 11, 2019 6:51 pm

TIPS ladder or bond ladder combined with cash reserves.

Perhaps have a year of cash expenses, a CD ladder for years 2-10 and TIPS ladder for years 10-delayed SS.

YMMV
RT

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Horton
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Re: Baseline income options for early retirees?

Post by Horton » Thu Sep 12, 2019 8:22 am

mortal wrote:
Wed Sep 11, 2019 6:39 pm
A lot of you are suggesting a lower SWR / higher savings. What you don't realize is just *how much* higher one's savings has to be in order to use a variable percentage withdrawal. If you want to cover all your expenses this way, you have to salt away 50 times your annual expenses to handle something like the 1960s.

See a previous thread here: viewtopic.php?p=4515766

TLDR: If you want to use VPW for early retirement, your planning rate had better be 2%, not 4%.

Every time I bring up VPW's wild spending swings, the answer I get is 'Well, you should have baseline income to cover necessities'. I made this thread to try and get a productive conversation going as to what those options are for early retirees. There doesn't appear to be much beyond work *much* longer and save *much* more than is usually advised.
The point made on the linked thread though is that it is advisable to have a secure source of retirement income in place for your nondiscretionary spending needs and use VPW for your discretionary spending needs (floor and upside).

Another approach, outlined by Michael Zwecher in Retirement Portfolios (Chapter 9), might be to derive your retirement spending "liability" and then, rather than purchase a TIPS ladder or SPIA, hold an asset allocation such that your fixed income plus stocks less a X% drawdown (e.g., 50%) still exceed the liability. For example, say your liability is $2m and your portfolio is $3m, then you would hold $1m in fixed income and $2m in stocks ($1m + 50% x $2m = $2m liability). The kicker though is that if your portfolio ever drops near the $2m liability - due to an equity decline - then you have to purchase a TIPS ladder or SPIA to secure your retirement spending needs (the liability or floor). So, you retain some upside, but you also have some significant downside compared to just outright securing the $2m floor and using the $1m upside with the VPW formula from the start.
"You must know that there is nothing higher and stronger and more wholesome and good for life in the future than some good memory, especially a memory of childhood, of home." - Dostoyevsky

ryman554
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Re: Baseline income options for early retirees?

Post by ryman554 » Thu Sep 12, 2019 8:46 am

Horton wrote:
Thu Sep 12, 2019 8:22 am
mortal wrote:
Wed Sep 11, 2019 6:39 pm
A lot of you are suggesting a lower SWR / higher savings. What you don't realize is just *how much* higher one's savings has to be in order to use a variable percentage withdrawal. If you want to cover all your expenses this way, you have to salt away 50 times your annual expenses to handle something like the 1960s.

See a previous thread here: viewtopic.php?p=4515766

TLDR: If you want to use VPW for early retirement, your planning rate had better be 2%, not 4%.

Every time I bring up VPW's wild spending swings, the answer I get is 'Well, you should have baseline income to cover necessities'. I made this thread to try and get a productive conversation going as to what those options are for early retirees. There doesn't appear to be much beyond work *much* longer and save *much* more than is usually advised.
The point made on the linked thread though is that it is advisable to have a secure source of retirement income in place for your nondiscretionary spending needs and use VPW for your discretionary spending needs (floor and upside).

Another approach, outlined by Michael Zwecher in Retirement Portfolios (Chapter 9), might be to derive your retirement spending "liability" and then, rather than purchase a TIPS ladder or SPIA, hold an asset allocation such that your fixed income plus stocks less a X% drawdown (e.g., 50%) still exceed the liability. For example, say your liability is $2m and your portfolio is $3m, then you would hold $1m in fixed income and $2m in stocks ($1m + 50% x $2m = $2m liability). The kicker though is that if your portfolio ever drops near the $2m liability - due to an equity decline - then you have to purchase a TIPS ladder or SPIA to secure your retirement spending needs (the liability or floor). So, you retain some upside, but you also have some significant downside compared to just outright securing the $2m floor and using the $1m upside with the VPW formula from the start.
Secure source of retirement income != fixed income unless you want it to be. You'll pay (save) more for that privilege.

A perpetual portfolio WR of 3.0-3.5% or so (not into the 2's) with a moderately aggressive AA will allow an "income" in a SWR-like fashion. This is exactly the kind of thing (known, fixed expenses) that SWR is designed to predict. So use it. It lasts, well, in perpetuity. I believe in the math, so I would sleep well at night. You mileage may vary. Just be darn sure you know what "expenses" are.

So, I vehemently disagree that VPW for early retirement requires anything close to a 2%, even for early retirement. It's 3-3.5% for the "secure part". Then more for the VPW part, but I admit I have no idea about that side.

Topic Author
mortal
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Re: Baseline income options for early retirees?

Post by mortal » Thu Sep 12, 2019 10:13 pm

ryman554 wrote:
Thu Sep 12, 2019 8:46 am
So, I vehemently disagree that VPW for early retirement requires anything close to a 2%, even for early retirement. It's 3-3.5% for the "secure part". Then more for the VPW part, but I admit I have no idea about that side.
Check out the first graph I linked in my 50x expenses post:
viewtopic.php?p=4513956#p4513956

If one intends to use the VPW method to support oneself in retirement, you *have* to be prepared for the worst case. In the worst case you're living off about 2% of your original starting balance. This isn't in contention, I've pulled it directly from the VPW spreadsheet itself. Check out the numbers for 1906, 1914, 1966 etc. 1M supports ~ 20k inflation adjusted income at the depths of the drawdown. The only way you get around this is by having either social security, a pension, or a SPIA ( all either unavailable or unattractive to an early retiree ).

Believe me, I've been coming at this from a lot of different ways. Nothing magically makes this better.

Edit: In that thread, I did attempt to use the normal SWR and VPW in a mixed strategy to dampen the volatility. That is pretty much spot on with your 3% comment

viewtopic.php?p=4515766#p4515766

StealthRabbit
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Re: Baseline income options for early retirees?

Post by StealthRabbit » Thu Sep 12, 2019 11:12 pm

If you have a lot of dough and can live on paltry TIPS or CD returns in ER... DO IT!

I left employment at age 49 (Hourly night shift worker, single income family... i.e. no windfalls / minimal wealth)

Primarily, I took variable withdrawals (based on up years)
Considered 72t, but... decided I would rather keep fully invested in existing retirement accts,
Became stressful 'wondering' if I had enough for 40+ yrs retirement..

so... (I live in a no income tax state)
1) Did more active trading to generate income (~5 hrs / week can win you $20k / yr using a 'small' portion of your investment)
2) Re-positioned assets to get better cash flows (invested more assets into 'Cash Flowing' income properties (NNN Commercial)
3) Did a couple land deals - deferred as Primary Residence ($500k income tax free growth every 24 months)
4) Took some part-time 'international gigs' (being Paid to travel + I really enjoy that + family was able to come for free + lots of free mileage and hotel perks)
5) Started some LLC's (business entities) for better taxation / cost benefits + a little income (benefit)
6) Did a lot of volunteering with 'smart / retired' people (to get ideas on retirement spending / saving / investing)
7) Drastically reduced costs (Peanuts when Property taxes and HC insurance each climbed 300%)
8) Drive a 40+ year old car that gets 50 mpg on free fuel (home brew) as I have for 40+ yrs (Peanuts too)

Find 'NO-income-required' ways to do what you used to PAY for..
1) gleaning
2) volunteer ushering at venues
3) barter
4) senior discounts (like college tuition)
5) help others in exchange for benefits.
6) Volunteer at a food bank and homeless shelter (lots of perks)

Current Firecalc = 99% probability of success @ ~ 150% draws of my highest ever wage for next 40 yrs.
Will probably survive, but I have a few other things up my sleeve. (Patents / products / downsizing the fleet and tangible assets / downsizing Casa Grande, 1031 into more NNN commercial with high cash flows / move out of USA (cheaper medical and housing and food, Die...and Spouse has a HUGE estate auction!)...

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