SWR and Current/Future Cash Flows

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Just sayin...
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SWR and Current/Future Cash Flows

Post by Just sayin... » Fri Aug 05, 2016 3:42 pm

In reading another excellent thread (viewtopic.php?f=2&t=196768) about the 4% rule, I had a question of what makes up the denominator when calculating SWR. Here's my question:

How do you account for current and future cash streams when calculating SWR? I am planning on retiring in a few months on my 56th birthday, and have five cash flows (one current, four future at various dates) that will have a material impact on my SWR calculations, and I’m seeking help. These amounts cannot be ignored or waved away, and will significantly impact future spending – so I have to figure out a way to realistically account for them. Here are my examples:

1). I currently have a $100/mo. cash flow (some months higher, but the lowest is slightly more than $100) from an illiquid inherited investment, that will continue in perpetuity
2). I have a $412/mo. Joint and Survivor pension from a previous employer that will start when I reach the age of 65, continuing until we have both passed
3). I have a $589/mo. Joint and Survivor pension from my current employer that will start when I reach the age of 65, continuing until we have both passed
4). I plan on waiting until age 70 to draw Social Security. According to the AnyPIA tool, the amount I will receive at that time will be slightly higher than $3,200/mo. - continuing until I have passed
5). My wife, who is 8 years my junior, plans on drawing Social Security at age 62. According to the AnyPIA tool, she will receive slightly more than $850/mo. at that time - continuing until she has passed

The three variables I am using for estimating are:

A). My lifespan (I picked 84)
B). My wife’s lifespan (I picked 93)
C). The discount rate (I picked 4%)

Constructing a spreadsheet model, today’s NPV for the above cash flows is:

1). $26,000 – for cash flow I am currently receiving
2). $63,000 – for cash flow #2 starting at my age 65
3). $90,000 – for cash flow #3 starting at my age 65
4). $219,000 – for cash flow #4 starting at my age 70
5). $57,000 – for cash flow #5 starting at wife’s age 62 (my age 70)

...which is an approximate total NPV of $455,000 that equates to $1,137.50/mo. using a 3% SWR. So, do I take my current net worth, add the above NPV, then use that total to estimate my SWR? Should I only use a couple of the above values? Or, should I just ignore anything in the future?

Thanks for the help!
Last edited by Just sayin... on Fri Aug 05, 2016 3:52 pm, edited 1 time in total.

jebmke
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Re: SWR and Current/Futre Cash Flows

Post by jebmke » Fri Aug 05, 2016 3:51 pm

I just reduce my expenses by the amount of period cash flows and then calculate my withdrawal = expenses (net) divided by assets (liquid assets only).

So, if my expenses (including all taxes) is $100,000 and my Pension is $25K and my SS is $20K then my net expenses are $55,000

If my total portfolio is $2,000,000 then my withdrawal rate will be 2.75% ($55K/$2M) -- if I did the arithmetic correctly.
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Re: SWR and Current/Future Cash Flows

Post by Just sayin... » Fri Aug 05, 2016 3:57 pm

I get what you are saying, but there is no way to figure SWR for reduced expenses at various future intervals. For example, I will have a slight expense reduction (~$1,000/mo.) in 9 years, then a much larger reduction in another 5 years (~$4,000/mo.) creating a significant error to any current estimates. I'm looking to understand whether I will be starting at 2.75% SWR at age 56, or at 3.75%... and these future amounts create this delta. Since I'm looking at at a 40 year retirement when factoring in my wife's longevity, this is the difference between go and no-go for me (and I'd *really* like to go sooner, rather than later).

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Re: SWR and Current/Future Cash Flows

Post by jebmke » Fri Aug 05, 2016 4:14 pm

Just sayin... wrote:I get what you are saying, but there is no way to figure SWR for reduced expenses at various future intervals. For example, I will have a slight expense reduction (~$1,000/mo.) in 9 years, then a much larger reduction in another 5 years (~$4,000/mo.) creating a significant error to any current estimates. I'm looking to understand whether I will be starting at 2.75% SWR at age 56, or at 3.75%... and these future amounts create this delta. Since I'm looking at at a 40 year retirement when factoring in my wife's longevity, this is the difference between go and no-go for me (and I'd *really* like to go sooner, rather than later).

You really need to use Firecalc or a some kind of Monte Carlo simulation - relying solely on a SWR is too simplistic.

If you insist on doing it your way, I'd price annuities and use the annuity price -- not NPV.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: SWR and Current/Future Cash Flows

Post by Just sayin... » Fri Aug 05, 2016 7:22 pm

I have run Firecalc. And Fidelity's retirement planner, Personal Capital's retirement planner, as well as the Otar Retirement Calculator. But I can't be the only person that's trying to get a handle on how SWR is impacted by staggered cash flows that are a significant percentage of their later-life budget. I mean, at age 70, I'm looking at ~50% of my budget coming from deferred cash flows - and this has to figure into today's SWR somehow...right?

I will look into using annuities to derive values and see where that takes me. Thanks.

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Re: SWR and Current/Future Cash Flows

Post by SuzBanyan » Fri Aug 05, 2016 8:06 pm

Just sayin... wrote:I have run Firecalc. And Fidelity's retirement planner, Personal Capital's retirement planner, as well as the Otar Retirement Calculator. But I can't be the only person that's trying to get a handle on how SWR is impacted by staggered cash flows that are a significant percentage of their later-life budget. I mean, at age 70, I'm looking at ~50% of my budget coming from deferred cash flows - and this has to figure into today's SWR somehow...right?

I will look into using annuities to derive values and see where that takes me. Thanks.

Have you read thru this thread: viewtopic.php?f=10&t=102609

While it talks about only 2 changes in income (pre-SS and post-SS), it could applied to more changes.

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Re: SWR and Current/Future Cash Flows

Post by Stonebr » Fri Aug 05, 2016 8:44 pm

Just sayin... wrote:I have run Firecalc. And Fidelity's retirement planner, Personal Capital's retirement planner, as well as the Otar Retirement Calculator. But I can't be the only person that's trying to get a handle on how SWR is impacted by staggered cash flows that are a significant percentage of their later-life budget. I mean, at age 70, I'm looking at ~50% of my budget coming from deferred cash flows - and this has to figure into today's SWR somehow...right?

I will look into using annuities to derive values and see where that takes me. Thanks.


Not sure what you mean. I used Otar RC for planning. My wife and I have large amounts of deferred annuity payments coming up in the future. The Otar calculator took these into account as I recall. We have a spreadsheet with rough guidelines of how much (in dollars) we can withdraw, and follow it. Until age 70 we withdraw a much higher percentage than after 70.

The thing is, the percentage is not a constant. It's high for a few years, then it's low. It's simple arithmetic.

As for your assumptions, unless you smoke cigarettes, drink to excess, and don't buckle up, you should assume a longer lifespan for both you and the wife. I used 100.
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Re: SWR and Current/Future Cash Flows

Post by Just sayin... » Sat Aug 06, 2016 8:41 am

I am trying to understand, given today's unique market environment, where my planned retirement stands WRT risk. Otar, Firecalc and Fidelity all tell me things look good. Personal Capital tells me I have a 97% chance of success. However, when I read threads like this viewtopic.php?f=2&t=196768 that discuss whether or not the 4% SWR rule is now broken, I want to accurately understand where I am according to that measure. Perhaps things truly have changed beyond the range originally modeled by the creators and a lower SWR is appropriate. However, with future cash flows that are roughly 50% of my planned spend in a few years, I'm trying to understand how to account for that when creating a comparative model. In summary, I want to understand if a 3.75% SWR for a 35 year retirement with no future cash flows really become a 2.75% SWR for the same period, when factoring in said future cash flows.

About the longevity number: I have a couple underlying health issues and a family history that led me to that very optimistic number. If I see 84+, it will be cause to celebrate.

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Re: SWR and Current/Future Cash Flows

Post by dbr » Sat Aug 06, 2016 8:53 am

Probably the best way to incorporate SWR with significant income streams is to recognize that withdrawal from the portfolio supplies income after those income streams have been used to support expenses. The meaning of "safe" changes because now exhausting the portfolio only means that one is reduced to living on those income streams, which may be safe enough all by itself. You can even make it safe enough by annuitizing enough of your assets to supply all your income needs. Some people like to divide income needs into "really needed" and "discretionary" and make sure the really needed does not depend on withdrawal from risky assets.

Anyway, as far as numerators and denominators are concerned SWR is not about your income or your spending or your net worth. The whole thing is a study of how portfolios survive withdrawals of money, so the numerator is what you withdraw, whether dividends, interest, sale of shares, etc. The denominator is the value of the portfolio. In many studies that was taken to be the starting value of the portfolio and a studied withdrawal rate would be constant in real dollars.

To plan what actually happens or is happening, as other posters have pointed out, you need to run a fairly sophisticated probabilistic model to estimate outcomes. There will be a fair amount of uncertainty in doing so.

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Re: SWR and Current/Future Cash Flows

Post by SuzBanyan » Sat Aug 06, 2016 9:51 am

Just sayin... wrote:I am trying to understand, given today's unique market environment, where my planned retirement stands WRT risk. Otar, Firecalc and Fidelity all tell me things look good. Personal Capital tells me I have a 97% chance of success. However, when I read threads like this viewtopic.php?f=2&t=196768 that discuss whether or not the 4% SWR rule is now broken, I want to accurately understand where I am according to that measure. Perhaps things truly have changed beyond the range originally modeled by the creators and a lower SWR is appropriate. However, with future cash flows that are roughly 50% of my planned spend in a few years, I'm trying to understand how to account for that when creating a comparative model. In summary, I want to understand if a 3.75% SWR for a 35 year retirement with no future cash flows really become a 2.75% SWR for the same period, when factoring in said future cash flows.

About the longevity number: I have a couple underlying health issues and a family history that led me to that very optimistic number. If I see 84+, it will be cause to celebrate.

For your situation, I think you are probably asking the wrong question.

With only nominal income between your retirement and age 65 when your non-cola pensions begin, would you be happy living on 4% or less of your portfolio? If so, you are likely to be fine because your need to withdraw at that rate would decrease over time, especially after you reach 70 and begin taking SS.

Another way to look at the problem is to calculate the amount needed to match your income at 70 in the years before then. Without accounting for inflation, you need about $790K to match the almost $62K you will get from your trust, pension and SS in 14 years. You can then run the SWR on the balance of your portfolio, assuming you theoretically put that $790K in a TIPs ladder today.

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Re: SWR and Current/Future Cash Flows

Post by #Cruncher » Sat Aug 06, 2016 3:50 pm

Just sayin... in original post wrote:4). I plan on waiting until age 70 to draw Social Security. ... $3,200/mo. - continuing until I have passed
5). My wife, who is 8 years my junior, plans on drawing Social Security at age 62. ... $850/mo. ... continuing until she has passed. (underline added)
As I understand Social Security, when you die, your wife will begin getting your $3,200 benefit and stop getting her own $850 benefit. Therefore, the period of the $3,200 should be her lifespan and the period of the $850 should be yours.
Just sayin... in original post wrote:C). The discount rate (I picked 4%)
I would use a lower discount rate for inflation-indexed annuities like SS. For example, I get a present value (PV) of $944,000 using 2% for SS and 4.04% [1] for the other cash flows which I'm assuming are not indexed for inflation.

Code: Select all

       Col A           Col B     Col C     Col D    Col E    Col F
Row                     Misc  Pensions    SS # 1   SS # 2    Total
---                    -----  --------    ------   ------   ------
  4  Per Month           100     1,001     3,200      850    
  5  Per Year          1,200    12,012    38,400   10,200    
  6  From Yea              0         9        14       14    
  7  To Year              45        45        45       28    
  8  Is CPI-indexed?   FALSE     FALSE      TRUE     TRUE    
  9  Discount Rate     4.04%     4.04%     2.00%    2.00%   
 10  PV - calculated  24,705   158,147   667,542   93,585   943,980 [2]
 11  PV - orig post   26,000   153,000   219,000   57,000   455,000
This $943,980 present value is equivalent to a single $32,010 inflation-indexed annuity covering the entire 45 year period. Using Excel PMT function:

Code: Select all

32,010 = PMT(2%, 45, -943980, 0, 0)
The staggered cash flows -- some inflation-indexed and some not -- can be replaced for planning purposes by this single inflation-indexed cash flow. Subtract this from your anticipated inflation-indexed spending to determine the amount you need to draw from investments each year. For example, if you need $70,000 in total every year, only $37,990 needs to be drawn from investments. Assuming a constant 2% real growth rate, you'd need $1,120,000 at age 56 to last 45 years until your wife reaches age 93. Using Excel PV function:

Code: Select all

 1,120,331 = -PV(2%, 45, 37990, 0, 0)

To show that this single annuity is equivalent to the staggered cash flows, here is a table showing how the same $1,120,000 starting balance is enough to fund a $70,000 annual withdrawal after crediting the varying real value of the cash flows each year. The following assumes a constant 2% annual CPI increase and a constant 2% real growth rate. (Scroll down to see that the balance reaches $0 when your wife reaches age 93.)

Code: Select all

     -- Age --                ------ Future Cash Flow -----
Year You  Wife     Balance    Nominal       Real   Combined

Code: Select all

  0   56    48   1,120,331      1,200          0      1,176
  1   57    49   1,073,914      1,200          0      1,153
  2   58    50   1,026,546      1,200          0      1,131
  3   59    51     978,208      1,200          0      1,109
  4   60    52     928,880      1,200          0      1,087
  5   61    53     878,545      1,200          0      1,066
  6   62    54     827,181      1,200          0      1,045
  7   63    55     774,770      1,200          0      1,024
  8   64    56     721,289      1,200          0      1,004
  9   65    57     666,719     13,212          0     10,838
 10   66    58     620,892     13,212          0     10,626
 11   67    59     573,936     13,212          0     10,418
 12   68    60     525,832     13,212          0     10,213
 13   69    61     476,562     13,212          0     10,013
 14   70    62     426,106     13,212     48,600     58,417
 15   71    63     423,045     13,212     48,600     58,224
 16   72    64     419,730     13,212     48,600     58,036
 17   73    65     416,160     13,212     48,600     57,851
 18   74    66     412,334     13,212     48,600     57,669
 19   75    67     408,250     13,212     48,600     57,491
 20   76    68     403,906     13,212     48,600     57,317
 21   77    69     399,301     13,212     48,600     57,146
 22   78    70     394,433     13,212     48,600     56,978
 23   79    71     389,300     13,212     48,600     56,814
 24   80    72     383,901     13,212     48,600     56,653
 25   81    73     378,232     13,212     48,600     56,495
 26   82    74     372,292     13,212     48,600     56,340
 27   83    75     366,078     13,212     48,600     56,189
 28   84    76     359,588     13,212     38,400     45,840
 29   85    77     342,620     13,212     38,400     45,694
 30   86    78     325,166     13,212     38,400     45,551
 31   87    79     307,220     13,212     38,400     45,411
 32   88    80     288,775     13,212     38,400     45,273
 33   89    81     269,824     13,212     38,400     45,138
 34   90    82     250,359     13,212     38,400     45,006
 35   91    83     230,373     13,212     38,400     44,877
 36   92    84     209,857     13,212     38,400     44,750
 37   93    85     188,804     13,212     38,400     44,625
 38   94    86     167,205     13,212     38,400     44,503
 39   95    87     145,053     13,212     38,400     44,384
 40   96    88     122,337     13,212     38,400     44,266
 41   97    89      99,050     13,212     38,400     44,151
 42   98    90      75,183     13,212     38,400     44,038
 43   99    91      50,725     13,212     38,400     43,928
 44  100    92      25,667     13,212     38,400     43,820
 45  101    93           0
Example formulas:

Code: Select all

Year 14 Combined cash flow =  58,417 =  13212 / 1.02 ^ 15 + 48600
Year 15 Balance            = 423,045 = 426106 * 1.02 - (70000 - 58417)

  1. I'm using a 4.04% discount rate for non-inflation-indexed cash flows to be consistent with a 2% real discount rate and a 2% inflation rate:

    Code: Select all

    4.04% = 1.02 * 1.02 - 1
  2. Here is the formula used to calculate the present value (PV) in cell B10. It is written so that it can be copied right through cell E10:

    Code: Select all

    B10: 24,705 = -PV(B9, B7 - B6, B5, 0, 0) / (1 + B9) ^ B6

LeisureLee
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Re: SWR and Current/Future Cash Flows

Post by LeisureLee » Sat Aug 06, 2016 6:40 pm

SuzBanyan wrote:Another way to look at the problem is to calculate the amount needed to match your income at 70 in the years before then. Without accounting for inflation, you need about $790K to match the almost $62K you will get from your trust, pension and SS in 14 years. You can then run the SWR on the balance of your portfolio, assuming you theoretically put that $790K in a TIPs ladder today.


I think this is the correct way to look at it. Basically, you pretend you have three portfolios:
  • "P1" to provide the $1,000 per month until your pensions start in nine years.
  • "P2" to provide the $4,000 per month you need until you get SS in 14 years.
  • "P3" to provide the remaining income you need after your other income streams.

For any need that's less than about 15 years, you basically just need the expense times the number of years, because growth won't help very much.

So, let's say you need $7,000 per month overall.

P3 needs to provide $2,000 per month ($7,000 minus the $5,000 from other income streams). At a 4% WR, you need $600k for this.
P2 is $48k times 14 or $672k, invested so it'll keep up with inflation.
P1 is $12k times 9 or $108k, also just invested to keep up with inflation.

So, I'd estimate that you could retire now with an $84k yearly retirement income and the same safety as the 4% rule with a portfolio of $600k + $672k + $108k = $1,380k. This portfolio would normally produce just $55k, but your future income streams allow you to draw much more. It's easy to see that this is equally safe, because you're drawing 4% of P3 (just like a normal retirement) and just using up P1 and P2, which are invested very conservatively.

This is probably a bit of an overestimate, because you could invest "P2" in stocks and bonds and the growth would allow you to get 14 years of money with less initial capital, though at somewhat more risk (consider that stocks can sometimes maintain negative returns over that many years).

One thing I have not figured out yet is how to account for an income stream which is not inflation adjusted. I'm playing with the math for that now. =)

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Re: SWR and Current/Futre Cash Flows

Post by ubermax » Sun Aug 07, 2016 8:12 am

jebmke wrote:I just reduce my expenses by the amount of period cash flows and then calculate my withdrawal = expenses (net) divided by assets (liquid assets only).

So, if my expenses (including all taxes) is $100,000 and my Pension is $25K and my SS is $20K then my net expenses are $55,000

If my total portfolio is $2,000,000 then my withdrawal rate will be 2.75% ($55K/$2M) -- if I did the arithmetic correctly.


I like this approach , definitely not a PV approach ; if I were retiring at say 50 , I would only include liquid assets at that point in time in the denominator with my expense budget on top , then when SS and other flows kick in I'd do what Jebmke has suggested , sounds reasonable to me .

Forecasting a future withdrawal rate could be an additional exercise , more time consuming and less credible the further out you go but you could put some numbers together .

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Re: SWR and Current/Future Cash Flows

Post by jebmke » Sun Aug 07, 2016 8:31 am

I don't even attempt to forecast a future withdrawal rate. It depends on too much assumption about both the numerator and the denominator.

Our expenses will change a lot -- I just don't know by how much. I do know that as my pension, SS and RMDs kick in that my tax expense may jump significantly. My charitable donations will probably also grow. Portfolio value - who knows?
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: SWR and Current/Future Cash Flows

Post by ubermax » Sun Aug 07, 2016 8:40 am

jebmke wrote:I don't even attempt to forecast a future withdrawal rate. It depends on too much assumption about both the numerator and the denominator.

Our expenses will change a lot -- I just don't know by how much. I do know that as my pension, SS and RMDs kick in that my tax expense may jump significantly. My charitable donations will probably also grow. Portfolio value - who knows?


Bingo !!

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Re: SWR and Current/Future Cash Flows

Post by longinvest » Sun Aug 07, 2016 8:54 am

LeisureLee wrote:One thing I have not figured out yet is how to account for an income stream which is not inflation adjusted. I'm playing with the math for that now. =)


Here are two ways to deal with it:
  • Do nothing about it. Realize that the utility of the income stream is higher in one's younger and healthier days. Here's an interesting article about this subject: http://business.financialpost.com/perso ... -seriously: "What is more important as you plan your retirement is to know your disability-free life expectancy (DFLE). [...] The U.S. National Health Interview Survey that was conducted in 1998 showed that both men and women aged 65 could expect to live at least seven of their remaining years with some disease (this survey is based on self-reporting). The same survey was conducted again 8 years later and while total life expectancy went up, the number of healthy years actually declined for both men and women — a 65-year-old man in 2006 could expect to spend more than half his remaining time with at least one disease."
  • Assume a 3% inflation rate. In other words, calculate the present value of the income stream assuming a gain of 3% per year and death at age 120, then divide the present value by the number of remaining retirement years (until 120) to get the portion that can safely be spent. The remaining should be invested into the portfolio (where, next year, it will be part of the base amount for calculating a withdrawal). Repeat every year.

The complex approach

Here's an example for a non-indexed annual pension of $10,000 at 65. Using my financial calculator, I set the number of years to 120 - 65 = 55. I set the interest rate to 3%. I set the final value to $0. I set the annual payment to $10,000. And I set the payment at the start of the period:
    n = 55, i = 3, FV = 0, PMT = 10000, BGN=true => PV = -275776.60
This tells me that the present value of my income stream, in constant dollars, is $275,776. As I want to spend it over 55 years, I simply divide this by 55 to get the portion of the $10,000 that I can spend, at 65: $275,776 / 55 = $5,014.12. I invest the remaining $4,985.88 into my portfolio.

At 66, I repeat the calculation. I get a present value of $273,749.90. So, I spend $273,749.90 / 54 = $5,069.44 and I invest the remaining $4,930.56 into my portfolio.

Note that even if the amount spent from the pension only increased by 1.1%, one also got to spend a portion of the $4,985.88 (+ growth) invested one year earlier. Assume a 3.5% growth, and a VPW withdrawal from a 50/50 portfolio, this makes for an additional: $4,985.88 X 1.035 X 4.9% = $252.86.

Let's check: ($5,069.44 + $252,86) / $5,014.12 - 1 = 6.14%. Actually, because VPW is calibrated on a death at 100, and we used a static 3.5% portfolio growth, we actually got an increase that beat our planned 3% inflation (by a small amount: $102.44). That is good enough.

Repeat at 67 and every year after.

The simple approach

My personal plan is to maximize my inflation-indexed public lifelong income (e.g. Social Security in the US, CPP/OAS in Canada) by delaying it to age 70. As for my non-indexed work pension, I'll take into account my disability-free life expectancy and let go of worries about missing inflation adjustments.

As a bonus, it will much simpler to manage thing this way. :wink:
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Just sayin...
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Re: SWR and Current/Future Cash Flows

Post by Just sayin... » Sun Aug 07, 2016 9:06 am

Thank you to everyone for the excellent input. And especially to Cruncher for the examples and reasons behind them. I hadn't considered the lower discount rate for inflation-adjusted cash flows, and the different perspective on SS payouts really helps a lot.

MrDrinkingWater
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Re: SWR and Current/Future Cash Flows

Post by MrDrinkingWater » Sun Aug 07, 2016 7:39 pm

I didn't see anyone mention it in this thread, but I was wondering if it would help the OP to run his data through a tool like I-ORP.

See http://www.i-orp.com

Perhaps the OP could use the fields for Social Security, Annual Retirement Income, Retirement Plans, and Extraordinary Non-Recurring Events to shoehorn in the various start starts (and end dates) for his several income sources that start between 55 and 70.5 years of age.

The OP could see what I-ORP suggests the order of withdrawals should be from the taxable portfolio, tax-deferred portfolio, and Roth portfolio over his and his wife's lifespans. Adding up the net withdrawals each year that go into paying current expenses might be a starting point for identifying a potential Safe Withdrawal value from assets each year.

Like several people wrote, the OP's increase in income each year should allow the OP to not withdraw as much from assets through retirement.

I enjoyed reading through #Cruncher's answer, too.

dbr
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Re: SWR and Current/Future Cash Flows

Post by dbr » Mon Aug 08, 2016 9:44 am

MrDrinkingWater wrote:I didn't see anyone mention it in this thread, but I was wondering if it would help the OP to run his data through a tool like I-ORP.

See http://www.i-orp.com

Perhaps the OP could use the fields for Social Security, Annual Retirement Income, Retirement Plans, and Extraordinary Non-Recurring Events to shoehorn in the various start starts (and end dates) for his several income sources that start between 55 and 70.5 years of age.

The OP could see what I-ORP suggests the order of withdrawals should be from the taxable portfolio, tax-deferred portfolio, and Roth portfolio over his and his wife's lifespans. Adding up the net withdrawals each year that go into paying current expenses might be a starting point for identifying a potential Safe Withdrawal value from assets each year.

Like several people wrote, the OP's increase in income each year should allow the OP to not withdraw as much from assets through retirement.

I enjoyed reading through #Cruncher's answer, too.


Yes, three or four posters suggested that sort of thing. The OP did use FireCalc but doing so did not really answer his question.

I think the issue is that those sorts of programs are the kind of planning tool you need, including iORP, but the problem is that when there are variable income streams you don't see an SWR anymore as such. That is because withdrawals from the portfolio will vary as more or less income is needed and it doesn't look like a simple SWR anymore. SWR studies are not a plan for retirement. The methodology that gets you an SWR can be applied to more complicated situations to formulate a "safe" plan. That is what those tools do. IORP, as you suggest, attempts to be explicit about how to manage taxation in withdrawal.

SWR is probably a useful tool for estimating possibilities when retirement is some time away. People in retirement need an actual plan that is specific to their circumstances including income and expenses that are not portfolio related and changes in scenario as time goes on.

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Re: SWR and Current/Future Cash Flows

Post by Sheepdog » Mon Aug 08, 2016 9:56 am

Just sayin... wrote:

About the longevity number: I have a couple underlying health issues and a family history that led me to that very optimistic number. If I see 84+, it will be cause to celebrate.

Past performance means nothing for the future. My father died of natural causes at 59. I had a heart attack 2 months before I hit 65. I didn't expect much, but here it is at almost 84 and I am still chugging along looking toward a healthy life in my 90s.
Plan for a long life and enjoying it.
People should not say everything they think. They should think about everything they say.

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Re: SWR and Current/Future Cash Flows

Post by kaudrey » Mon Aug 08, 2016 12:38 pm

Just sayin... wrote:I get what you are saying, but there is no way to figure SWR for reduced expenses at various future intervals. For example, I will have a slight expense reduction (~$1,000/mo.) in 9 years, then a much larger reduction in another 5 years (~$4,000/mo.) creating a significant error to any current estimates. I'm looking to understand whether I will be starting at 2.75% SWR at age 56, or at 3.75%... and these future amounts create this delta. Since I'm looking at at a 40 year retirement when factoring in my wife's longevity, this is the difference between go and no-go for me (and I'd *really* like to go sooner, rather than later).


Sure there is! My spreadsheet does it....

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Just sayin...
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Re: SWR and Current/Future Cash Flows

Post by Just sayin... » Mon Aug 08, 2016 12:50 pm

I'm using SWR as a gauge of risk, nothing more. So, when people I respect here argue whether or not the 4% rule is still valid (some say 3%, some have other opinions), I can accurately compare where I stand with regards to their discussion.

For the withdrawal phase, I plan on using a modified VPW model, understanding that my spending will be reduced in later phases of life. By "modified VPW", I mean targeting a 2.75% WR for years 1-2, bumping up to a 3% WR for years 3-4, then switching to the VPW model for years 5+. What I am trying to do is minimize any sequence of returns risk that poor returns during the first few years of retirement may present, and allow for my balance to grow and remaining years to decline in the first four years of retirement, helping to cushion the VPW impacts of BIG down years.

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Just sayin...
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Re: SWR and Current/Future Cash Flows

Post by Just sayin... » Mon Aug 08, 2016 12:55 pm

kaudrey wrote:Sure there is! My spreadsheet does it....

After a bit of tweaking (thanks to #Cruncher above), mine does too!

gneeby
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Re: SWR and Current/Future Cash Flows

Post by gneeby » Wed Aug 10, 2016 10:49 am

dbr wrote:
MrDrinkingWater wrote:I didn't see anyone mention it in this thread, but I was wondering if it would help the OP to run his data through a tool like I-ORP.

See http://www.i-orp.com
.....
SWR is probably a useful tool for estimating possibilities when retirement is some time away. People in retirement need an actual plan that is specific to their circumstances including income and expenses that are not portfolio related and changes in scenario as time goes on.


SWR is the wrong way of stating the problem. Taking a guess at your living expenses and computing your estate (if any) is the wrong way 'round. ORP fixes the estate (at 0?) and computes the after-tax, real, disposable income in the first year of retirement. That number incorporates the factors that constitute retirement financing, including uneven savings distributions due to other factors, e.g. delaying Social Security Benefits. That is a number you can use in What-if analysis. That is number you can budget to. If your spending level is below that, you have a cushion and perhaps an opportunity to enjoy a cruise or two. If your spending level is higher -- you have a problem.

With SWR: ask the wrong question, get an irrelevant answer.

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