- To be able to spend more in my Go-Go years (first 10 years) without needing to cut back regardless of what the markets do.
- To SWAN knowing I will have a comfortable, if perhaps not luxurious, retirement.
1.1 Estimate a comfortable but minimal lifestyle. Housing, cable, cell phones etc. Don’t gold plate but don’t leave anything out. Don’t factor in extra travel or hobbies in the go-go years. That happens in step 4...but if you want 1 modest vacation a year to visit the grandkids, I'd factor that in.
This gives you an estimate where you have a “normal” retirement with some amount of slack in the budget.
1.2 Figure out a contingency reserve. This covers known unknowns that you can estimate a cost for and a probability of occurrence. This part is tough to do right but presumably you have decades of life experience to help. Examples might be help with kid’s college expenses, new roof in 10-20 years, etc.
1.3 Create a management reserve. This is to cover unknown unknowns. When I was doing bid and proposal we tacked on a 15% management reserve…but we were pretty confident in our estimation abilities. There’s a balancing act here since you need enough to mitigate risk but not so much you lose the bid. Each industry or company has its own rules of thumb here from 10% to 100%+. I'm reasonably happy with 15%, YMMV...
1.4 Compute end of life expenses. If this means CCRC then you need to budget that in…either amortized across the whole period or better, if you use an online tool or spreadsheet, put it in as a known future expense and it will figure it out for you. CCRC is a big spend…and future cost estimates are questionable. In my personal case, I hope to offset the buy-in cost with the proceeds of selling our final house.
Step 2. This gives you an annual budget target to use as a WR. If this WR is below SWR (for your retirement duration) in your country great. If not, hope Step 3 fixes this.
Step 3. Compute your retirement income outside of your portfolio. Social security, pensions, sale of house, etc.
For US retirees, delay SS to age 70.
Add this into the WR equation…using an online calculator makes this step easier.
Step 4: If your computed WR is lower than your country’s SWR for your retirement duration you can use this method. Otherwise you don’t have enough slack to have a Go-Go years up-spend. Use another method…
Step 5 Calculate the portfolio size required to support your budget using SWR. Round up to the nearest $100K for a little more safety.
The remainder becomes your Go-Go years fun budget.
For example if your portfolio is $2M but only $1.8 million is required to support your computed budget using SWR (ie 100% success rate in your favorite retirement calculator) then you have $200K for your go-go years. See below for a FICalc example.
Spend this as you please knowing:
- Your estimated retirement expenses has some slack built in before you have to eat cat food.
- You considered known unknowns and set aside a reserve for them,
- You considered unknown unknowns and set aside a reserve for them.
- You considered longevity when you picked the duration of your retirement for SWR.
- Your withdrawal rate didn’t run out of money using the historical worst case for your country.
- You include cost of living increases everywhere you could so even in 1966 your plan survived
- Your go-go year budget is yet another reserve until you completely spend it all. If SORR hits in the first 10 years fly coach instead…I’d still do everything planned, just be more frugal about it…
$2M portfolio 60/40, rebalance annually
40 year retirement period (60-100)
$60K a year expenses
$200K Contingency Reserve ($5K a year over 40 years)
15% Management Reserve ($9K a year)
$74,000 a year of which you plan to spend only up to $60K. The other $14K a year you can put into your EF, leave it in your portfolio or use to cover any uncovered expenses.
$20K a year SS income starting age 70 (10 years after start of retirement)
$250K income at age 75 from selling primary residence
$500K expense for CCRC buy in at age 75
100% success rate at $1,800,000
That gives us a $200K Age 60 to Age 70 Go-go years budget or $20K a year.
https://ficalc.app?additionalIncome=%5B ... tantDollar
But I don’t like SWR!
The nice thing is that using a tool like FICalc you can change it to anything the tool supports.
Keep $1.8M portfolio and switch to VPW with a minimum spending of $74,000. Still 100% success rate. $10K extra initial withdrawal over SWR + 20K go-go budget gives you an extra $30K above your nominal spend for your first go-go year,
And so forth for the other withdrawal options.
Note that 5.2% Constant Percentage has a 100% historical success rate with a floor of $74K a year and a $1.8M portfolio. You can front load even more spending that way…$93K first year or $39K for first year go-go spend...almost double the SWR amount of $20K.
https://ficalc.app?additionalIncome=%5B ... lioPercent
I choose SWR because I want to leave a decent estate with a step up in basis…but the nice thing is that I can use something like VPW or a high Constant Percentage the first 10 years for more up front spend ($30K vs $20K) and then just drop back down to $60K a year spend from age 70+ and get something in-between in the results…all with a historical 100% success rate AND with reserves built into the plan.
This works because the WR to cover my expenses (including reserves) is below SWR…essentially I’m spending the extra between $1.8M and whatever the amount really is supposed to be and if SORR hits I still go back down to the $74K a year withdrawal number...so I still should have a 100% success rate. This may require a little more analysis to be sure...but it seems right.
Now, obviously, if you don’t have enough saved to meet your estimated retirement expenses, with or without reserves, this approach doesn’t help you much…although going through the process and figuring out contingencies and so forth should still be useful.
Obligatory Disclaimer: Im not a financial professional and this is by no means financial advice. This is just what I’m looking at for my own retirement.