Which withdrawal plan or method?

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standard7
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Which withdrawal plan or method?

Post by standard7 » Wed Jun 12, 2019 10:18 am

I'm curious, is anyone using RPM or i-ORP and following either plan... in real life retirement? There are plenty of people using the BH 3fund or similar for investments and often comment on their success with that model. I guess I'm looking for that type of feedback/review. If not, is there a better plan or does it change depending upon the person, tax brackets and spending?

Picking a withdrawal plan seems more "muddy" than the simple and defined Boglehead accumulation strategies. Even the BH wiki on withdrawal methods lists 4 methods of withdrawal and 5 different allocation methods. And, no mention of Roth conversions on the page.

So, if the withdrawal process is determined by individual circumstance, how did you choose and/or how would you steer someone to a particular withdrawal plan?

thank you.
Last edited by standard7 on Wed Jun 12, 2019 10:57 am, edited 1 time in total.

delamer
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Re: What withdrawal plan or method?

Post by delamer » Wed Jun 12, 2019 10:32 am

I’ve used 3 different methods to calculate available income in retirement.

They all came within 10% of one another.

So I’d feel comfortable anywhere in that range. Others might use the lowest or highest amount, depending on their risk profile and other factors.

jebmke
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Re: What withdrawal plan or method?

Post by jebmke » Wed Jun 12, 2019 10:36 am

delamer wrote:
Wed Jun 12, 2019 10:32 am
I’ve used 3 different methods to calculate available income in retirement.

They all came within 10% of one another.

So I’d feel comfortable anywhere in that range. Others might use the lowest or highest amount, depending on their risk profile and other factors.
Do you use a method in practice or just for planning? In other words, do you control spending to the withdrawal or vice versa?
When you discover that you are riding a dead horse, the best strategy is to dismount.

livesoft
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Re: What withdrawal plan or method?

Post by livesoft » Wed Jun 12, 2019 10:42 am

standard7 wrote:
Wed Jun 12, 2019 10:18 am
So, if the withdrawal process is determined by individual circumstance, how did you choose and/or how would you steer someone to a particular withdrawal plan?
This is easy to answer for me. First, I read all the stuff, the blogs, the studies, the opinions. Pretty much all of them state that a sustained withdrawal rate somewhere between 3% and 5% is gonna work for most people. I discovered that our withdrawal rate is about 0.5% to 1.0%, so I stopped worrying about it and just spend what I want.
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jebmke
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Re: What withdrawal plan or method?

Post by jebmke » Wed Jun 12, 2019 10:47 am

livesoft wrote:
Wed Jun 12, 2019 10:42 am
This is easy to answer for me. First, I read all the stuff, the blogs, the studies, the opinions. Pretty much all of them state that a sustained withdrawal rate somewhere between 3% and 5% is gonna work for most people. I discovered that our withdrawal rate is about 0.5% to 1.0%, so I stopped worrying about it and just spend what I want.
Given how much discussion there seems to be about various "methods" -- some very long threads - it would be interesting to know what proportion of those who are now retired use a "method" vs no method (I would include the "Taylor Larimore Method" as a no-method system).
When you discover that you are riding a dead horse, the best strategy is to dismount.

Topic Author
standard7
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Re: What withdrawal plan or method?

Post by standard7 » Wed Jun 12, 2019 10:55 am

Thanks for mentioning the Taylor Larimore Method
I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.
A sidebar question... since most of the methods on the BH wiki don't mention Roth conversions, are they considered an unnecessary complexity?

delamer
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Re: What withdrawal plan or method?

Post by delamer » Wed Jun 12, 2019 10:57 am

jebmke wrote:
Wed Jun 12, 2019 10:36 am
delamer wrote:
Wed Jun 12, 2019 10:32 am
I’ve used 3 different methods to calculate available income in retirement.

They all came within 10% of one another.

So I’d feel comfortable anywhere in that range. Others might use the lowest or highest amount, depending on their risk profile and other factors.
Do you use a method in practice or just for planning? In other words, do you control spending to the withdrawal or vice versa?
Really for planning.

My response was a bit misleading in regards to our situation. :?

We can cover recurring expenses with our pensions and Social Security, so savings are for “lumpy” expenses like new cars.

But I think having multiple estimates that are similar is a sign that you have a good plan/set up.

If you used a few different methods to calculate withdrawals and they diverged quite a bit, that would be really problematic.

livesoft
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Re: What withdrawal plan or method?

Post by livesoft » Wed Jun 12, 2019 10:57 am

A Roth conversion is not a withdrawal method. I consider it a way to pay less taxes. And paying taxes is a budget item.
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delamer
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Re: What withdrawal plan or method?

Post by delamer » Wed Jun 12, 2019 11:04 am

livesoft wrote:
Wed Jun 12, 2019 10:57 am
A Roth conversion is not a withdrawal method. I consider it a way to pay less taxes. And paying taxes is a budget item.
Right.

Conversions will increase your taxes in the short run and decrease them (or your heirs’) in the long run. So you need to budget for that.

But withdrawals are monies to be spent, not monies moved from one bucket to another within your portfolio (which is what you are doing with a Roth).

Topic Author
standard7
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Re: Which withdrawal plan or method?

Post by standard7 » Wed Jun 12, 2019 11:12 am

A Roth conversion is not a withdrawal method. I consider it a way to pay less taxes. And paying taxes is a budget item.
agreed, I can see why it wouldn't be included in that wiki page.
But withdrawals are monies to be spent, not monies moved from one bucket to another within your portfolio (which is what you are doing with a Roth).
Roth conversion strategies can impact how much money is in your portfolio, so it's seems like it would be difficult to not consider it in context to a withdrawal strategy.

delamer
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Re: Which withdrawal plan or method?

Post by delamer » Wed Jun 12, 2019 12:36 pm

standard7 wrote:
Wed Jun 12, 2019 11:12 am
A Roth conversion is not a withdrawal method. I consider it a way to pay less taxes. And paying taxes is a budget item.
agreed, I can see why it wouldn't be included in that wiki page.
But withdrawals are monies to be spent, not monies moved from one bucket to another within your portfolio (which is what you are doing with a Roth).
Roth conversion strategies can impact how much money is in your portfolio, so it's seems like it would be difficult to not consider it in context to a withdrawal strategy.
Other than the need to pay taxes on a conversion, which decreases your assets unless you are able to pay them out of current income, are there any other impacts on a portfolio?

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standard7
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Re: Which withdrawal plan or method?

Post by standard7 » Wed Jun 12, 2019 12:46 pm

I guess it could impact your RMD, and the potential of greater after tax dollars if it works in your favor? But I really don’t know. My comment was simply to say that it seems that a comprehensive withdrawal plan, not just the bare withdrawal rate would consider Roth. Although it may determine it not necessary.

I’m honestly curious about the different strategies because I’ll be heading down the retirement path in the near future (2-6 yrs)

delamer
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Re: Which withdrawal plan or method?

Post by delamer » Wed Jun 12, 2019 1:07 pm

standard7 wrote:
Wed Jun 12, 2019 12:46 pm
I guess it could impact your RMD, and the potential of greater after tax dollars if it works in your favor? But I really don’t know. My comment was simply to say that it seems that a comprehensive withdrawal plan, not just the bare withdrawal rate would consider Roth. Although it may determine it not necessary.

I’m honestly curious about the different strategies because I’ll be heading down the retirement path in the near future (2-6 yrs)
Both RMDs and Roth conversions have tax consequences, as you noted. And you need to account for the taxes in expenses, which can affect your withdrawal rate.

As you said, hopefully in the long run you’ll have more after-tax income with conversions

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willthrill81
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Re: Which withdrawal plan or method?

Post by willthrill81 » Wed Jun 12, 2019 1:23 pm

The most logical and useful withdrawal plan I've seen and which I'm planning to use myself is the time value of money formula (i.e. PMT approach). The VPW method is one specific application of this approach, but I prefer to take on a more hands-on approach by using the underlying formula directly. It can be as simple or as complex as you want, and multiple income streams and lump sum payments can be incorporated. This thread discusses many aspects of it.
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MikeG62
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Re: What withdrawal plan or method?

Post by MikeG62 » Wed Jun 12, 2019 1:46 pm

jebmke wrote:
Wed Jun 12, 2019 10:47 am
livesoft wrote:
Wed Jun 12, 2019 10:42 am
This is easy to answer for me. First, I read all the stuff, the blogs, the studies, the opinions. Pretty much all of them state that a sustained withdrawal rate somewhere between 3% and 5% is gonna work for most people. I discovered that our withdrawal rate is about 0.5% to 1.0%, so I stopped worrying about it and just spend what I want.
Given how much discussion there seems to be about various "methods" -- some very long threads - it would be interesting to know what proportion of those who are now retired use a "method" vs no method (I would include the "Taylor Larimore Method" as a no-method system).
I use a method.

Before getting into the method, I would point out that we are in our fourth full year of early retirement (I am 56 and DW is 54). We do not have any pension, so we are living off our investments.

Here was/is my approach to selecting a method.

First, I read extensively on retirement planning and living off one’s portfolio in the decade or more prior to retiring. This provided the necessary understanding of SWR’s and how to live off one’s assets.

Based upon that research, I decided we would follow a modified version of Guyton and Klinger's Withdrawal Decision Rules - modified to use a much lower initial withdrawal rate (we are at ~3.0%) than their research suggested (~4.6%) with the associated guardrails being adjusted off of that lower initial WD rate. Also, I have not assumed any SS income in my modeling.

So if financial markets going forward are worse than any historical 40-year period, we have SS as a buffer (to fill in some/most/all of the shortfall). If that is not sufficient to fill in the entire gap, we can cut discretionary expenses (which represent a very sizable percentage of our annual spending) and also move to a LCOL location or home (in fact we will likely move from our larger home to something more appropriate for two people at some point in the future regardless of market conditions).

The built-in guardrails within G&K's withdrawal decision rules help in a quantitative way to automatically dial back spending targets if things get bad. The way I have set the upper guardrail, and given our roughly 40/60 allocation to equities/fixed income, there would need to be a very substantial decline in equity markets before we'd need to dial back spending.

As a result, I have a high level of confidence that our annual withdrawal rate will support a 40-year retirement period.

So far so good. Financial assets are >10% higher than when we retired. So additional buffer being built for the inevitable downturn.
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Taylor Larimore
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Re: What withdrawal plan or method?

Post by Taylor Larimore » Wed Jun 12, 2019 1:57 pm

jebmke wrote:
Wed Jun 12, 2019 10:47 am

Given how much discussion there seems to be about various "methods" -- some very long threads - it would be interesting to know what proportion of those who are now retired use a "method" vs no method (I would include the "Taylor Larimore Method" as a no-method system).
jebmke:

Sorry, but I must disagree. I have been retired for 38 years so that I have had a long time to decide what retirement "method" suits me. This is the result:

What I cannot afford to lose is in Vanguard Total Bond Market -- the rest is in Vanguard 500 Market Index Fund.

I would prefer having my stocks: 80% Total Stock Market and 20% Total International Stock Index Fund but capital gains made this impossible for me.

Keep investing simple [your care-givers and heirs will love you for it). Read my link below.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

dcdowden
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Re: Which withdrawal plan or method?

Post by dcdowden » Wed Jun 12, 2019 2:00 pm

Any withdrawal plan needs to consider the following elements:
1) What will be your expenses in retirement - both absolute minimum needs and additional wants and splurges?
2) What are your plans for health insurance prior to medicare eligibility? Some people manage their income so that they qualify for subsidies. Otherwise health insurance costs may be substantially larger prior to medicare.
3) What other sources of income will you have and what is your plan for claiming social security benefits?
4) How long do you want to make the plan last?
5) How large of an estate do you want to leave?
6) How much do you want to give your children/grandchildren while you are living.
7) Do you plan to do any tIRA to Roth IRA conversions?
8) What provisions do you have for Long Term Care?

Since many of these elements interact with each other, I wound up creating a spreadsheet model that let me explore what would work best for us. In our case, the model showed that once RMD's kicked in, we were bumped up to a much higher tax bracket with IRMAA surcharges, etc. In general, I tried to manage our income by doing Roth conversions before RMD's start to keep us in a lower tax bracket for a longer period of time.

jebmke
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Re: What withdrawal plan or method?

Post by jebmke » Wed Jun 12, 2019 3:19 pm

Taylor Larimore wrote:
Wed Jun 12, 2019 1:57 pm
jebmke wrote:
Wed Jun 12, 2019 10:47 am

Given how much discussion there seems to be about various "methods" -- some very long threads - it would be interesting to know what proportion of those who are now retired use a "method" vs no method (I would include the "Taylor Larimore Method" as a no-method system).
jebmke:

Sorry, but I must disagree. I have been retired for 38 years so that I have had a long time to decide what retirement "method" suits me. This is the result:

What I cannot afford to lose is in Vanguard Total Bond Market -- the rest is in Vanguard 500 Market Index Fund.

I would prefer having my stocks: 80% Total Stock Market and 20% Total International Stock Index Fund but capital gains made this impossible for me.

Keep investing simple [your care-givers and heirs will love you for it). Read my link below.

Best wishes.
Taylor
Hi Taylor:

By non-method, I meant that it [withdrawal rate] isn't driven by some formula based model. I happen to use the Taylor method - I don't just spend recklessly but I don't feel constrained by some mathematical relationship. Judgement is my main tool. As an example, despite the fact that the equity markets were hit hard in 2008-09, we made a decision to increase our spending in 2009-10, knowing we would be trimming back afterward. Those years were exceptional opportunities to get some home renovation done and we took a trip to Italy. The prices for both were very advantageous compared to "good economic times."

Best regards
When you discover that you are riding a dead horse, the best strategy is to dismount.

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