What is your preferred withdrawal formula?

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What is your preferred withdrawal formula?

1. Fixed Dollar Amount and increase for inflation.
13
14%
1. Fixed Dollar Amount and increase for inflation.
13
14%
2. Variable Dollar Amount depending on annual portfolio performance.
30
33%
3. Spend only dividend and interest distributions.
10
11%
3. Spend only dividend and interest distributions.
10
11%
5. Other - Please explain.
6
7%
6. I'm not withdrawing from my portfolio yet, but I wanted to vote just the same.
10
11%
 
Total votes: 92

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bob90245
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What is your preferred withdrawal formula?

Post by bob90245 » Wed Sep 02, 2009 10:01 pm

The topic of different withdrawal formulas are making the rounds again on more than one thread. Do Bogleheads have a preference? What is your preferred withdrawal formula?

1. Fixed Dollar Amount and increase for inflation.

2. Variable Dollar Amount depending on annual portfolio performance.

3. Spend only dividend and interest distributions.

4. Spend only what I need without concern for any formula.

5. Other - Please explain.

6. I'm not withdrawing from my portfolio yet, but I wanted to vote just the same.


And if any of this seems Greek, a good article on withdrawal methods is on the Bogleheads Wiki:

http://www.bogleheads.org/wiki/Withdrawal_Methods
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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dothemontecarlo
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Post by dothemontecarlo » Wed Sep 02, 2009 10:20 pm

My preferred formula is theoretical, since I'm not in the w/d stage.

But I would recommend setting one's retirement budget to be slightly greater than (if some savings in equities) or equal to (if not) the amortized budget all of your current savings and future anticipated resources (e.g., SS, pensions, etc.) could sustain at some selected risk-free rate of return over your targeted portfolio duration.

The logic of such a floor is this: absent a terminal wealth goal, people should only invest in stocks to the extent that it will enable them, on average, to spend more during their lifetimes.

In all kinds of scenarios I've simulated, it yields pretty high (i.e., 90%+) success rates (particularly if you are flexible enough to dip a little bit below that initial amount in bad times).

dbr
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Post by dbr » Wed Sep 02, 2009 10:59 pm

Either 4 or 5 (I voted 5). Working with a lifetime projected budget and lifetime projected sources of non investment income, any gap is represented by required withdrawals from investments. As long as this number is less than any of several possible formulas, I have verified that my assets are sufficient to support my needs with a margin for safety. The idea of withdrawing and spending according to a formula seems exactly backwards. If or when projected withdrawals for some currently unanticipated reason drift into what appears to be dangerous territory, then adjustments to spending would need to be made or some other fallback would have to be invoked.

conundrum
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Post by conundrum » Wed Sep 02, 2009 11:28 pm

Voted #6 as we are not yet retired.

At this point we are planning to have a variable dollar amount depending on portfolio performance. We are planning to use FIREcalc (and perhaps Otar's retirement calculator and TIPSTER) to evaluate our maximal % withdrawal each year. We will probably do a bit of #4 as well as our withdrawal rate is fairly low (<3%)

Drum
Last edited by conundrum on Wed Sep 02, 2009 11:36 pm, edited 1 time in total.

dbr
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Post by dbr » Wed Sep 02, 2009 11:30 pm

I should add that verifying the feasibility of a retirement plan really requires exercising some sorts of retirement planning models, ones that accept step changes and events in both spending and resources. Real retirements are not one time set budgets (and not uniformly inflation adjusted either) nor funded by one time set investment portfolios.

It would be a great misunderstanding, in my opinion, to consider withdrawal formulas to be actual plans for how to manage a retirement. Rather, these schemes are simply paradigms that map out the boundaries and properties of how portfolios evolve under negative contribution conditions. Actual retirement plans need more content than that.

conundrum
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Post by conundrum » Wed Sep 02, 2009 11:43 pm

Agree with you dbr.

We are planning to utilize retirement calculators, etc. as rough guidelines. We plan to maintain flexibility in our spending and withdrawals and continue to adjust our portfolio as necessary. Would agree that retirement planning is a dynamic process.

Thanks for all your great posts and thoughts.

Drum

dizzy
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Post by dizzy » Thu Sep 03, 2009 1:02 am

I divert dividends and interest to a VG MM fund. I figure I'm paying tax on them anyway, so I might as well spend it first. Then a fixed monthly "salary" EFT goes from MM to checking at our bank. The portfolio is a diversified indexed-based 50-50 mix. The overall yield is right around 3%, which is (hopefully) well into the safe withdrawl zone, and is about equal to our budget (which includes a decent discretionary chunk). I guess it's kind of coincidence that our yield and our comfortable SWR are essentially the same, but I like not having to pull principal. Right now the MM balance stays pretty constant with a balanced inflow from the portfolio, and monthly outflow to checking. If the MM buffer gets too large, I reinvest some. If too small, I would give myself a modest paycut, cut out some discretionary spending, and build it back up again. (fortunately this hasn't happened yet :-) ).
Last edited by dizzy on Thu Sep 03, 2009 1:50 am, edited 2 times in total.

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Post by traineeinvestor » Thu Sep 03, 2009 1:23 am

#5 - Other

When the time comes we hope to be able to live of rent, dividends and interest without drawing down on capital. With a potential need for the money to last 50 years, I am concerned about any draw down of principal being safe.

There'll be some "mad money" over and above the main portfolio which will be used as the first resource in the event that we come up short and room to trim the expenses should the need arise.

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Post by Ron » Thu Sep 03, 2009 6:11 am

#1.

Retired (and pre-SS). I withdraw from my portfolio (actually, my cash bucket, which is kept there) my budgeted amounts, adjusted for my personal inflation factor calculated from the previous year.

Since I don't withdraw directly from either equity or bond funds for my living expenses, the flux in the market means little to me.

I take it out of the cash bucket all the time. When profits are made, I sell the appropriate fund (last done in late '07) and add to the cash bucket. Nothing exotic at all.

BTW, all distributions are reinvested in the original fund (in case you were wondering).

- Ron

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Post by stlrick » Thu Sep 03, 2009 7:25 am

Not there yet, but thinking about it a lot. I'm surprised the question assumes a single strategy (yes, any set of multiple strategies combine to one overall effect), but still, there are ways to hedge your bets on the assumption that no one knows what the future will bring. My tentative plan is:

30% SPIA ladder. This will insure that I am never homeless, never need to choose between food and prescription co-pays, and will not lose sleep at night about either of those worries.

20% classic 60/40 portfolio for SWR, probably using an "endowment formula" type of adjustable withdrawal rate

20% Bond/CD ladder. Spend income. Never spend principal. Part of my bequest objective.

20% Large cap value dividend income strategy. Mutual funds and maybe even a diversified portfolio of individual stocks with good dividends and history of dividend growth. Spend dividends, never touch principal. The other part of my bequest objective. I've been doing this with my fun money for 25 years and am very comfortable with it.

10% Cash bucket to modify or postpone withdrawals from any of the above.

Rick

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DRiP Guy
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Post by DRiP Guy » Thu Sep 03, 2009 7:38 am

Since I will likely be instituting a 72(t) within a few years of my *very* early retirement, by definition, I will be taking a fixed withdrawal.

But the fact I am *withdrawing* it doesn't mean I am *spending* it.

I thing my Investing Plan will continue to show a fixed -plus inflation withdrawal, but I also think I will (naturally or by overt choice) adapt my spending patterns in step with local realities of what the economy is doing during those periods between withdrawals, and let my 'slush fund/cash reserve/non-committed dollars/discretionary pool/ whatever you want to call it, float a bit. If my investments in the portfolio are doing far above expectation, I can see myself spending down that fund to baseline, while if my portfolio is doing poorly at a given time, my inclination will be to allow my ready cash pool to grow a bit, not by changing WR, but by being more frugal, so that I am *NOT* tempted to fiddle with my allocation in ways not covered by my original Investment Plan.

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Sheepdog
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Post by Sheepdog » Thu Sep 03, 2009 7:57 am

#2
Nothing new here from me. You've read it here before. I have preferred budgeting a specific maximum percentage, for me 4.5% , of what I have on the past 12/31. If I have more, I can spend more and vice versa. Portfolio growth has been my inflation component. I can never run out with this formula..
It is worked great for my 11 years in retirement. At some point as I approach 80 I will be willing to increase to a higher percentage, if I need it, say 5%.
Jim
“One moment of patience may ward off great disaster. One moment of impatience may ruin a whole life.” — Chinese Proverb

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Post by tomd37 » Thu Sep 03, 2009 8:12 am

I really don't know how to reply to the poll. Most of my RMD is in excess to our financial needs. The excess is invested in a local bank consumer money market account (2.25% APY) or a taxable fund at Vanguard. The excess might be needed in the future for a non-budgeted, one-time large expense such as for home maintenance or new car purchase.
Tom D.

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bob90245
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Post by bob90245 » Thu Sep 03, 2009 11:37 am

stlrick wrote:Not there yet, but thinking about it a lot. I'm surprised the question assumes a single strategy (yes, any set of multiple strategies combine to one overall effect), but still, there are ways to hedge your bets on the assumption that no one knows what the future will bring.
My question assumes that the retiree has selected an overarching approach to spending the annual withdrawals.

In other words, if stable annual withdrawals with the possibility of invading principal is of prime importance, then the choice is #1.

If spending only distributions from dividends and interest and not wanting to invade principal is of prime importance, then the choice is #3.

If one can tolerate variable spending based on portfolio performance with the possibility of invading principal, then the choice is #2.

I'm assuming that those choosing #4 are indifferent to portfolio survivability and has ample income coming from other sources like social security and/or pension.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Post by DRiP Guy » Thu Sep 03, 2009 11:42 am

bob90245 wrote:
stlrick wrote:Not there yet, but thinking about it a lot. I'm surprised the question assumes a single strategy (yes, any set of multiple strategies combine to one overall effect), but still, there are ways to hedge your bets on the assumption that no one knows what the future will bring.
My question assumes that the retiree has selected an overarching approach to spending the annual withdrawals.

In other words, if stable annual withdrawals with the possibility of invading principal is of prime importance, then the choice is #1.

If spending only distributions from dividends and interest and not wanting to invade principal is of prime importance, then the choice is #3.

If one can tolerate variable spending based on portfolio performance with the possibility of invading principal, then the choice is #2.

I'm assuming that those choosing #4 are indifferent to portfolio survivability and has ample income coming from other sources like social security and/or pension.
Then I guess I am a #2 both "at heart and also by behavior" even though someone looking at the metronome outputs from my 72(t) should think I am a fixed WR type.

8)

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Post by justcurious » Thu Sep 03, 2009 12:05 pm

Forget the %, What about retiree's who must do RMD ????
They have no choice but to adhere to guide lines.

By the way, can someone publish the amount that must be RMD according to age??? I mis-placed that chart

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CABob
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Post by CABob » Thu Sep 03, 2009 12:55 pm

justcurious wrote:Forget the %, What about retiree's who must do RMD ????
They have no choice but to adhere to guide lines.

By the way, can someone publish the amount that must be RMD according to age??? I mis-placed that chart
You will find the numbers in IRS Publication 590 http://www.irs.gov/pub/irs-pdf/p590.pdf Look in the Appendices.
IIRC the charts start out at about 3.6% for a 70 year old.
WRT your comment about no choice if one is taking RMD, someone could (and probably a lot do) take the RMD, but, reinvest a portion of it in a taxable account. The W/D percentage would be that portion not reinvested.
Bob

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Spending what is needed

Post by EyeDee » Thu Sep 03, 2009 1:08 pm

bob90245 wrote:. . .I'm assuming that those choosing #4 are indifferent to portfolio survivability and has ample income coming from other sources like social security and/or pension.
.
Not a good assumption in our case. We are spending from our savings because we cannot find jobs, not because we chose to be retired early, so spending based upon needs not desires or reasonable withdrawal plan (not on pension, too young for Social Security).

We spend what we have to survive and try to avoid most other spending with a few exceptions like internet access. Health insurance is almost half of yearly expenses and since we have not reached our deductibles for years, other medical expenses are a significant part of the rest of our expenses. We have not eaten out in years.
Last edited by EyeDee on Thu Sep 03, 2009 3:35 pm, edited 2 times in total.
Randy

stlrick
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Post by stlrick » Thu Sep 03, 2009 1:09 pm

bob90245 wrote:
stlrick wrote:Not there yet, but thinking about it a lot. I'm surprised the question assumes a single strategy (yes, any set of multiple strategies combine to one overall effect), but still, there are ways to hedge your bets on the assumption that no one knows what the future will bring.
My question assumes that the retiree has selected an overarching approach to spending the annual withdrawals.

In other words, if stable annual withdrawals with the possibility of invading principal is of prime importance, then the choice is #1.

If spending only distributions from dividends and interest and not wanting to invade principal is of prime importance, then the choice is #3.

If one can tolerate variable spending based on portfolio performance with the possibility of invading principal, then the choice is #2.

I'm assuming that those choosing #4 are indifferent to portfolio survivability and has ample income coming from other sources like social security and/or pension.
Yes, we agree. It is perfectly clear that you are assuming that the retiree has selected an overarching approach. I asked why you made that assumption. I'm using several of your choices, and I was hoping that those who have selected a single approach might explain why they are so confident in it. As described, I'm doing 30% in choice #1 (the SPIA provides stable annual withdrawals, but gives away the principal), 20% choice #2 with a 60:40 portfolio, and 40% choice #3 (the 20% in a bond/CD ladder and 20% in large cap value dividend stocks).

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Post by norm » Thu Sep 03, 2009 1:15 pm

At the moment I am dealing with my wife's catastrophic illness and getting our house ready to be put on the market so I am spending what I need. I am putting dividends into a money mkt fund and reinvesting CG. In the next 1-2 years I should have an idea what my annual expenses will be and at that time I will know whether or not I have to supplement Social Security & pensions, then I will make a withdrawl plan if necessary.

Robert Hoolko
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Post by Robert Hoolko » Thu Sep 03, 2009 1:30 pm

I had to vote #5 Other, because nothing else fit exactly.

I withdraw whatever I need to cover my expenses. But I use an SWR calculation to determine if my level of expenditures is sustainable for the long term.

I think that an SWR calculation should use recent portfolio balances rather than the balance on the day you retired. But rather than any single balance it should use an average of recent balances. I like to average it over a few years to smooth out the equity volatility.

As a sanity check I also use a rule of thumb that it should be safe to spend all of the stock dividends plus half the bond dividends. This is more useful near the beginning of retirement when you want the portfolio to last a long time, and less useful later if you are willing to spend the portfolio down.

So I vote parts of #4, #2 and #3.

Robert

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CABob
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Post by CABob » Thu Sep 03, 2009 2:01 pm

None of the choices exactly describe my withdrawals. I have been retired for about 7 years and consider my IRA which is about 80% of my total portfolio as my primary source of withdrawals and against whcih I do any calculations. I have taken some withdrawals with the maximum W/D has been about 2.3%. Basically I take what I need, but, also keep track of them from a percentage and dollar amount standpoint.
I have calculated the dollar amount of a 4% w/d with a 3% inflation and as long as I stay below those numbers I feel hopefully confortable that the money will last.
So, I guess my formula is choice #4 with a choice #1 as a calculated amount as a check.
As I review it again I guess it is similar to what Robert has suggested.
Bob

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bob90245
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Post by bob90245 » Thu Sep 03, 2009 2:36 pm

stlrick wrote:
bob90245 wrote:My question assumes that the retiree has selected an overarching approach to spending the annual withdrawals.

In other words, if stable annual withdrawals with the possibility of invading principal is of prime importance, then the choice is #1.

If spending only distributions from dividends and interest and not wanting to invade principal is of prime importance, then the choice is #3.

If one can tolerate variable spending based on portfolio performance with the possibility of invading principal, then the choice is #2.

I'm assuming that those choosing #4 are indifferent to portfolio survivability and has ample income coming from other sources like social security and/or pension.
Yes, we agree. It is perfectly clear that you are assuming that the retiree has selected an overarching approach. I asked why you made that assumption.
I think it is based on the retiree's preferences and circumstances.
stlrick wrote:I'm using several of your choices, and I was hoping that those who have selected a single approach might explain why they are so confident in it. As described, I'm doing 30% in choice #1 (the SPIA provides stable annual withdrawals, but gives away the principal), 20% choice #2 with a 60:40 portfolio, and 40% choice #3 (the 20% in a bond/CD ladder and 20% in large cap value dividend stocks).
First of all, your SPIA is perfectly valid. But that money then gets removed from the portfolio and the discussion. That money is no longer yours to manage. Much like a retiree who has social security and/or a pension would not consider it part of his "portfolio".

The remaining portfolio is what is under discussion. And it appears that you intend to invade principal if necessary (less or none in down years, more in up years) because your income from dividend and interest distributions (along with SPIA payments) is insufficient by itself to meet all of your annual spending needs. Or maybe you're using the 60:40 portfolio as discretionary assets and tap it only after a good year to make major purchases or travel (as an example).

Anyway, that's how I see your plan.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Pres
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Post by Pres » Thu Sep 03, 2009 7:48 pm

I was thinking of withdrawing less than 4% per year of whatever my portfolio is worth at that time. No adjusting for inflation.

That way I would automatically spend less if my portfolio shrinks (and find other sources of revenue if necessary) instead of risking to run out of money.

If you think this is a bad idea, please explain why. Thanks!

conundrum
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Post by conundrum » Thu Sep 03, 2009 8:26 pm

Pres

Our plan is similar to what you suggest. We plan to "reretire" every year. Each year we will take our current portfolio value and plug it into FIREcalc, etc. to get our spending maximum for the upcoming year. The only difference between this and a fixed set percentage as you suggest is that it will allow you to slowly increase your withdrawal % as your life expectancy decreases.

Lots of good suggestions on this thread.

Good Luck

Drum

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kramer
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Post by kramer » Thu Sep 03, 2009 9:10 pm

I am a very early retiree (age 43). I chose #2, variable dollar amount depending on annual portfolio performance.

My approach has been to spend less than 3% of the current portfolio in a year. Since I am young and carry high deductible USA-based health insurance, I count my annual HSA contribution as a current expense (as part of the 3%). Since I figure that my health expenses will go up in the future. And I don't plan to spend any of the HSA money for at least 15 years. Also, I subtract my current total HSA balance from my total wealth when computing the withdrawal figure.

If the portfolio dropped dramatically, I would probably stretch this rule. But I can't imagine in any circumstance while in my 40s or 50s ever spending more than 4% of the current year portfolio (using the technique described above), that is my upper limit on comfort and I would cut back on any expenses necessary.

On the other hand, when my spending creeps to far below 3%, I seem to feel free to spend more. Although sometimes I just spend less.

I spend most of my time living in developing countries, so I have the ability to adjust my spending dramatically. This also includes medical expenses and I could at some point drop my USA health insurance if I wanted to or needed to due to escalating premiums. Here in Medellin, I just paid $37 for a extensive blood and urine work up, and a consultation and physical with a physician. My friend has a chronic problem that requires a sonogram to confirm the doctor's suspicions, and he will paying $12 for it tomorrow. My last 3 dental cleaning and checkups in Thailand cost an average of $17 each.

You will notice that most of my writeup covers medical expenses. That is because they are so unpredictable and significant. Since I have learned multiple languages and am familiar with the medical systems in various countries with inexpensive private free markets in medicine (and familiar with living in them), I have effectively bought myself some insurance on this issue.

Kramer

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