The WR in practice [Withdrawal Rate]

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

Hi All,

I've been lurking for a long time and I've finally saved enough for retirement.

I'm (a guy *edited) about to turn 38 and I've saved $1M. Mostly equities.

My withdrawal rate will be 3.5% and I'm planning on taking out that amount (per month) for life. So that would be $2,916.67.

(I will be planing to work part time making at least $1,000 to $2,000 a month *edited)

I have read about SORR and pretty much everything else.

Am I understanding the WR right? Just want to make sure.

Thanks,
JPG

*Edited for clarity
Last edited by blueandyellow123 on Sat Sep 19, 2020 11:25 am, edited 1 time in total.
User avatar
FiveK
Posts: 10315
Joined: Sun Mar 16, 2014 2:43 pm

Re: The WR in practice [Withdrawal Rate]

Post by FiveK »

You have the math correct for the first year.

Whether $35K/yr, increased each year for inflation, will suffice for the rest of your life is a larger question.

See
- Safe withdrawal rates - Bogleheads
- Withdrawal methods - Bogleheads
and similar articles (e.g., links in the above two). Good luck!
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

Thank you! Appreciate these links.

So it looks like I'm planning the "Constant-dollar" where my income will always be 35k (plus an inflation adjustment).

Therefore going forward I will NOT be taking 3.5% of the portfolio, but rather just 35k ever year.

Is that right?

Sorry if this is quite a dumb question.
terran
Posts: 1703
Joined: Sat Jan 10, 2015 10:50 pm

Re: The WR in practice [Withdrawal Rate]

Post by terran »

I think you might have a slight misunderstanding in that withdrawal rate studies generally assume neither a particular rate every year nor a particular dollar amount every year, but rather a particular rate the first year and then that dollar amount adjusted for inflation every year thereafter. So a 3.5% WR would mean $35,000 the first year, then if inflation was 1% the first year then the next year it would be $35,350, then if inflation was 3% the second year it would be $36,410.50, etc.

3.5% might be a little high for a long retirement at current high historic equity valuations. https://earlyretirementnow.com/safe-wit ... te-series/ would be worth reading through if you haven't already. In particular, https://earlyretirementnow.com/2017/08/ ... sed-rules/ examines adjusting the initial withdrawal rate for equity valuations. Basically, reducing the withdrawal rate if you retire when stocks are "high" vs "low."
User avatar
celia
Posts: 11409
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: The WR in practice [Withdrawal Rate]

Post by celia »

Regarding inflation, today's $35K in 15-20 years will only be able to buy things that cost $17.5K in today's dollars. In 30-40 years, the $35K will only pay for things that cost $9K today. In other words, every 15-20 years, the cost of everything pretty much doubles.

What are you going to do for medical insurance?

Is the money all in taxable or do you have to pay taxes on withdrawals (from a 401K or tIRA) or early withdrawal penalties (from a Roth)?
Mr. Rumples
Posts: 1068
Joined: Sun Aug 25, 2019 7:16 am

Re: The WR in practice [Withdrawal Rate]

Post by Mr. Rumples »

There is no perfect answer that will suit everyone. I use this calculator as a guide, but not gospel:

http://www.mycalculators.com/ca/retcalc2m.html
User avatar
racy
Posts: 266
Joined: Sun Mar 30, 2008 7:38 am

Re: The WR in practice [Withdrawal Rate]

Post by racy »

Mr. Rumples wrote: Sat Sep 19, 2020 5:30 am There is no perfect answer that will suit everyone. I use this calculator as a guide, but not gospel:

http://www.mycalculators.com/ca/retcalc2m.html
This kind of calculator is misleading because it does not factor in sequence of return risk. I wouldn't use it for a guide on how to plan retirement income nor portfolio balances.
RadAudit
Posts: 3915
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: The WR in practice [Withdrawal Rate]

Post by RadAudit »

blueandyellow123 wrote: Fri Sep 18, 2020 8:11 pm I've finally saved enough for retirement.

I'm about to turn 38 and I've saved $1M. Mostly equities.
Congrats on your ability to amass a rather impressive amount of money for a guy your age.

You might want to revisit the Trinity studies. https://www.forbes.com/sites/wadepfau/2 ... db30f46860 I've always found it interesting how the probability of success (the portfolio still has some money in it) varies with AA, withdrawal rates, and the length of time in retirement.

Best of luck.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.
User avatar
JoMoney
Posts: 9776
Joined: Tue Jul 23, 2013 5:31 am

Re: The WR in practice [Withdrawal Rate]

Post by JoMoney »

A 38 year old has a life expectancy of about 45.6 years
That's significantly more than the 25-30 year life expectancy for someone 55 or older, and the retirement period most "safe withdrawal rates" are considered for.
The simple SWR method I usually look it is 1/x , where x is life expectancy.
1/45.6 is 2.2%

You might also consider Social Security, and what you might expect your SS benefit should be at full retirement age. If you've earned enough SS credits where you can expect to replace your portfolio withdrawal income at retirement age or later, perhaps you only need the portfolio to last until that point, which might only be 30 years away, so 1/30 = 3.33% but even that's a shortfall to your 3.5% rate, which at the size of your portfolio seems like an income many would consider as just scraping by... If you're not forced into the situation where you have to barely make ends meet, I don't know why you'd want to do that to yourself... relative to just finding a different job if the one you're in is miserable enough to drive you to that.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
TomatoTomahto
Posts: 11130
Joined: Mon Apr 11, 2011 1:48 pm

Re: The WR in practice [Withdrawal Rate]

Post by TomatoTomahto »

RadAudit wrote: Sat Sep 19, 2020 6:26 am
blueandyellow123 wrote: Fri Sep 18, 2020 8:11 pm I've finally saved enough for retirement.

I'm about to turn 38 and I've saved $1M. Mostly equities.
Congrats on your ability to amass a rather impressive amount of money for a guy your age.
Sorry to be the gender police, but JPG has not indicated that they are a “guy.” 😄

Gender aside, JPG, you will likely have many many years of life ahead of you. I would not want to put my faith in a 3.5% withdrawal rate for what could be 70 years of retirement. Even without medical advances, 60 years are highly possible. What’s so bad about how you got to $1M?
Okay, I get it; I won't be political or controversial. The Earth is flat.
rkhusky
Posts: 10206
Joined: Thu Aug 18, 2011 8:09 pm

Re: The WR in practice [Withdrawal Rate]

Post by rkhusky »

blueandyellow123 wrote: Fri Sep 18, 2020 8:11 pm My withdrawal rate will be 3.5% and I'm planning on taking out that amount (per month) for life. So that would be $2,916.67.
Just realize this is a rough planning amount. You won't actually be withdrawing that amount each month in retirement. You will withdraw whatever you happen to need. Therefore, you don't need such precision - about $3,000/mo (inflation-adjusted) is close enough.
User avatar
vineviz
Posts: 7839
Joined: Tue May 15, 2018 1:55 pm

Re: The WR in practice [Withdrawal Rate]

Post by vineviz »

blueandyellow123 wrote: Fri Sep 18, 2020 8:11 pm Hi All,

I've been lurking for a long time and I've finally saved enough for retirement.

I'm about to turn 38 and I've saved $1M. Mostly equities.

My withdrawal rate will be 3.5% and I'm planning on taking out that amount (per month) for life. So that would be $2,916.67.

I have read about SORR and pretty much everything else.

Am I understanding the WR right? Just want to make sure.

Thanks,
JPG
If you’ve got $1 million at age 38 and need to withdraw $35,000 (adjusted for inflation) you have NOT saved enough for retirement.

But you’re about 2/3 of the way there! Congrats, but keep working.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
MikeG62
Posts: 3115
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: The WR in practice [Withdrawal Rate]

Post by MikeG62 »

blueandyellow123 wrote: Fri Sep 18, 2020 9:25 pm Thank you! Appreciate these links.

So it looks like I'm planning the "Constant-dollar" where my income will always be 35k (plus an inflation adjustment).

Therefore going forward I will NOT be taking 3.5% of the portfolio, but rather just 35k ever year.

Is that right?

Sorry if this is quite a dumb question.
Short answer to your question - yes that is right and represents one way to do it (pick a fixed $ amount in year 1 of retirement and adjust that $ amount each year for inflation).

IMHO, 3.5% would be pretty (very) safe for someone with an expected retirement period of 30 years (most safe withdrawal rate studies were done assuming a 30-year period). However, you are looking at a retirement period far, far longer than 30 years (potentially 50 years or more). The longer the period, the lower the initial withdrawal rate (to compensate for the higher risk of a bad outcome during such a long period of time).

Is your plan to truly not work for money another day in your life? Not so sure you'll stick to that given your very young age (and having a ton of human capital still left). If I am right, this is an upside and will provide some buffer/cushion in your model.

What is it that you plan to do with all of your new found free time? Many of those activities will cost money. Do you have a sufficient placeholder in your budget for those activities?

Have you factored in where you will get health insurance (during this very long retirement period) into your annual spend? How significant a portion of the $35,000 is that (you should expect that it will likely increase at a rate far quicker than the rate of overall inflation).

How much have you earned in SS benefits (assuming you are a US citizen)? Seems you only have a maximum of two decades of work history (that will work against you in the SS benefit calculation). Regardless, it will provide some level of additional incoming cash flow (albeit ~ three decades from now).
Real Knowledge Comes Only From Experience
backpacker61
Posts: 167
Joined: Wed May 20, 2020 6:36 am

Re: The WR in practice [Withdrawal Rate]

Post by backpacker61 »

JoMoney wrote: Sat Sep 19, 2020 6:55 am If you're not forced into the situation where you have to barely make ends meet, I don't know why you'd want to do that to yourself... relative to just finding a different job if the one you're in is miserable enough to drive you to that.
+1

My mother recently passed away, and was spending ~$4K/month at an assisted living facility.
If you require skilled nursing care instead of assisted living, that will be more like $7-8K/month, depending on the part of the country you live in.

Her health insurance; Medicare Supplemental and Prescription Drug coverage (Part D) are on top of that. And Medicare itself isn't free, despite what many people think. The premiums will be deducted from your Social Security check.

Suggest exploring pursuing doing something for a living that you find fulfilling; meaning and purpose are important for everyone's mental health. But congratulations, though, on reaching an impressive financial milestone.
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
Mr. Rumples
Posts: 1068
Joined: Sun Aug 25, 2019 7:16 am

Re: The WR in practice [Withdrawal Rate]

Post by Mr. Rumples »

racy wrote: Sat Sep 19, 2020 6:10 am
Mr. Rumples wrote: Sat Sep 19, 2020 5:30 am There is no perfect answer that will suit everyone. I use this calculator as a guide, but not gospel:

http://www.mycalculators.com/ca/retcalc2m.html
This kind of calculator is misleading because it does not factor in sequence of return risk. I wouldn't use it for a guide on how to plan retirement income nor portfolio balances.
I don't disagree. It has worked for me in combination to my income and expenses. Of course, I am on the downside now and preparing to go.
Kelrex
Posts: 241
Joined: Wed Aug 26, 2020 1:32 pm

Re: The WR in practice [Withdrawal Rate]

Post by Kelrex »

If your plan is to withdraw, *and spend*, that set amount per month, then how will you account for one time large expenses?

Will you be saving part of that withdrawal amount in a separate account for those expenses, or will you be drawing further from your principal when they occur? In which case, you don't actually have a 3.5% WR.

The thing with FI calculators is that they are based on a model of spending that no one has or will ever actually follow. No one will spend exactly their WR+estimated inflation year in and year out. That's just not realistic.

Maybe you've already done these rough calculations and already have an e-fund and a plan for sinking funds for the lumpy expenses that occur during various years. However, the way you've presented your question implies that you might not have a plan for these things. In which case, you may want to give it some strategic thought.

You may or may not be totally fine with 1M and a 3.5% WR, but the factors that determine if it will work can't be seen in the outputs of an FI calculator, because they depend on the assumptions behind the numbers you put into the calculator.

If your core yearly expenses are around 30+K, and you haven't accounted for likely/probable/guaranteed major expenses, then you are kind of screwed.

Meanwhile, if your core yearly expenses are closer to 15K, and the remainder is padding and travel fund, and you could easily mobilize 20K/year with just a few simple plan adjustments, then that's a whole other matter.

The calculator can't distinguish between the two though, so the REAL probability of success of your plan depends more on how you planned it and understood your own personal risks rather than what the extremely limited mathematical simulation suggests.

The math can't actually tell you what your level of risk is because it can't capture the actual, biggest risks in your plan.
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

JoMoney wrote: Sat Sep 19, 2020 6:55 am A 38 year old has a life expectancy of about 45.6 years
That's significantly more than the 25-30 year life expectancy for someone 55 or older, and the retirement period most "safe withdrawal rates" are considered for.
The simple SWR method I usually look it is 1/x , where x is life expectancy.
1/45.6 is 2.2%

You might also consider Social Security, and what you might expect your SS benefit should be at full retirement age. If you've earned enough SS credits where you can expect to replace your portfolio withdrawal income at retirement age or later, perhaps you only need the portfolio to last until that point, which might only be 30 years away, so 1/30 = 3.33% but even that's a shortfall to your 3.5% rate, which at the size of your portfolio seems like an income many would consider as just scraping by... If you're not forced into the situation where you have to barely make ends meet, I don't know why you'd want to do that to yourself... relative to just finding a different job if the one you're in is miserable enough to drive you to that.
Thank you for this math. I like the idea of going down to 3.3%.

I am planning on getting SS benefits, plus I'm planning to do freelance work along the way (not fully retired). Sorry I did not mention this, as it's a material fact.

I just want to know FOR SURE that I can cover all of my basic expenses at 35k (plus adjusting for inflation going forward). Everything else I'm going to be working for (if I need a new computer,new car, a vacation, etc).
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

MikeG62 wrote: Sat Sep 19, 2020 7:24 am
blueandyellow123 wrote: Fri Sep 18, 2020 9:25 pm Thank you! Appreciate these links.

So it looks like I'm planning the "Constant-dollar" where my income will always be 35k (plus an inflation adjustment).

Therefore going forward I will NOT be taking 3.5% of the portfolio, but rather just 35k ever year.

Is that right?

Sorry if this is quite a dumb question.
Short answer to your question - yes that is right and represents one way to do it (pick a fixed $ amount in year 1 of retirement and adjust that $ amount each year for inflation).

IMHO, 3.5% would be pretty (very) safe for someone with an expected retirement period of 30 years (most safe withdrawal rate studies were done assuming a 30-year period). However, you are looking at a retirement period far, far longer than 30 years (potentially 50 years or more). The longer the period, the lower the initial withdrawal rate (to compensate for the higher risk of a bad outcome during such a long period of time).

Is your plan to truly not work for money another day in your life? Not so sure you'll stick to that given your very young age (and having a ton of human capital still left). If I am right, this is an upside and will provide some buffer/cushion in your model.

What is it that you plan to do with all of your new found free time? Many of those activities will cost money. Do you have a sufficient placeholder in your budget for those activities?

Have you factored in where you will get health insurance (during this very long retirement period) into your annual spend? How significant a portion of the $35,000 is that (you should expect that it will likely increase at a rate far quicker than the rate of overall inflation).

How much have you earned in SS benefits (assuming you are a US citizen)? Seems you only have a maximum of two decades of work history (that will work against you in the SS benefit calculation). Regardless, it will provide some level of additional incoming cash flow (albeit ~ three decades from now).
Thank you for your reply! After much reading, I still can't decide if I want to go for the 3.5% now, or try to save more and go for the 3% WR.

Not sure how Bogleheads feel about Michael Kitces, but he's run the numbers and says 3.5% is fine, even for an extended retirement (50+ year period). Now, I understand, don't just trust one person, and this time could be different, returns might be lower going forward, etc.)

I'm leaning to the 3.5% since if it fails, I can always go back to work (not opposed to it) to pickup the slack.

I'm planning to do freelance work along the way (not fully retired). Sorry I did not mention this, as it's a material fact. As of now the plan is to try to earn at least $1,000-$2,000 a month as a freelancer. But business has been really slow the past few years for me.

I just want to know FOR SURE that I can cover all of my basic expenses at 35k (plus adjusting for inflation going forward).

I'm covered as of now for my healthcare as of now, but it's a concern for sure. The plan would be to pickup more side-work if needed.
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

Kelrex wrote: Sat Sep 19, 2020 8:28 am If your plan is to withdraw, *and spend*, that set amount per month, then how will you account for one time large expenses?

Will you be saving part of that withdrawal amount in a separate account for those expenses, or will you be drawing further from your principal when they occur? In which case, you don't actually have a 3.5% WR.

The thing with FI calculators is that they are based on a model of spending that no one has or will ever actually follow. No one will spend exactly their WR+estimated inflation year in and year out. That's just not realistic.

Maybe you've already done these rough calculations and already have an e-fund and a plan for sinking funds for the lumpy expenses that occur during various years. However, the way you've presented your question implies that you might not have a plan for these things. In which case, you may want to give it some strategic thought.

You may or may not be totally fine with 1M and a 3.5% WR, but the factors that determine if it will work can't be seen in the outputs of an FI calculator, because they depend on the assumptions behind the numbers you put into the calculator.

If your core yearly expenses are around 30+K, and you haven't accounted for likely/probable/guaranteed major expenses, then you are kind of screwed.

Meanwhile, if your core yearly expenses are closer to 15K, and the remainder is padding and travel fund, and you could easily mobilize 20K/year with just a few simple plan adjustments, then that's a whole other matter.

The calculator can't distinguish between the two though, so the REAL probability of success of your plan depends more on how you planned it and understood your own personal risks rather than what the extremely limited mathematical simulation suggests.

The math can't actually tell you what your level of risk is because it can't capture the actual, biggest risks in your plan.
Thank you for the lengthy reply! My core expenses are 35k. Sorry I didn't give more information. The plan is to work part-time to make $1-2k a month. But that is not guaranteed by any means.

My main question is how do I adjust for inflation? My budget mainly consists of Rent (fixed for a year as I rent), Food (some inflation each year), cell phone (price doesn't change year-to-year), Gas for the car (some inflation maybe), etc. Does one use a "personal" inflation number? I feel like I could get by at 3k/month for at least a few years for fixed expenses. Then if I need a new laptop or something, I'd have to work for that.
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

terran wrote: Fri Sep 18, 2020 10:35 pm I think you might have a slight misunderstanding in that withdrawal rate studies generally assume neither a particular rate every year nor a particular dollar amount every year, but rather a particular rate the first year and then that dollar amount adjusted for inflation every year thereafter. So a 3.5% WR would mean $35,000 the first year, then if inflation was 1% the first year then the next year it would be $35,350, then if inflation was 3% the second year it would be $36,410.50, etc.

3.5% might be a little high for a long retirement at current high historic equity valuations. https://earlyretirementnow.com/safe-wit ... te-series/ would be worth reading through if you haven't already. In particular, https://earlyretirementnow.com/2017/08/ ... sed-rules/ examines adjusting the initial withdrawal rate for equity valuations. Basically, reducing the withdrawal rate if you retire when stocks are "high" vs "low."
Thanks, I'm leaning to maybe waiting for CAPEs to come down. But don't Bogleheads frown upon that type of behavior? I don't believe in market timing. But I do believe valuations are stretched, at least here in the US (maybe not Int). Perhaps more allocation to Intl and EM compared to US would be a better way to go about it. Then adjust once per year.
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

celia wrote: Sat Sep 19, 2020 1:45 am Regarding inflation, today's $35K in 15-20 years will only be able to buy things that cost $17.5K in today's dollars. In 30-40 years, the $35K will only pay for things that cost $9K today. In other words, every 15-20 years, the cost of everything pretty much doubles.

What are you going to do for medical insurance?

Is the money all in taxable or do you have to pay taxes on withdrawals (from a 401K or tIRA) or early withdrawal penalties (from a Roth)?
90% taxable and 10% tax deferred...
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

vineviz wrote: Sat Sep 19, 2020 7:21 am
blueandyellow123 wrote: Fri Sep 18, 2020 8:11 pm Hi All,

I've been lurking for a long time and I've finally saved enough for retirement.

I'm about to turn 38 and I've saved $1M. Mostly equities.

My withdrawal rate will be 3.5% and I'm planning on taking out that amount (per month) for life. So that would be $2,916.67.

I have read about SORR and pretty much everything else.

Am I understanding the WR right? Just want to make sure.

Thanks,
JPG
If you’ve got $1 million at age 38 and need to withdraw $35,000 (adjusted for inflation) you have NOT saved enough for retirement.

But you’re about 2/3 of the way there! Congrats, but keep working.
Understood! That's something I've considered for sure...
JediMisty
Posts: 607
Joined: Tue Aug 07, 2018 7:06 am
Location: Central NJ

Re: The WR in practice [Withdrawal Rate]

Post by JediMisty »

blueandyellow123 wrote: Fri Sep 18, 2020 8:11 pm Hi All,

I've been lurking for a long time and I've finally saved enough for retirement.

I'm (a guy *edited) about to turn 38 and I've saved $1M. Mostly equities.

My withdrawal rate will be 3.5% and I'm planning on taking out that amount (per month) for life. So that would be $2,916.67.

(I will be planing to work part time making at least $1,000 to $2,000 a month *edited)

I have read about SORR and pretty much everything else.

Am I understanding the WR right? Just want to make sure.

Thanks,
JPG

*Edited for clarity
Read your SS estimate pages carefully. The benefits amounts estimated assume that you will continue to work at the same salary your have now. If you stop working or otherwise reduce your contributions, you will receive considerably less than the benefit estimated. Many folks retiring before 62 don't realize that if they stop working be fore 62 and claim at 62 the estimate they're seeing today I'd completely the wrong figure. Do yourself a favor and apply for an estimate with the information that you stop working now.
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

JediMisty wrote: Sat Sep 19, 2020 11:50 am
blueandyellow123 wrote: Fri Sep 18, 2020 8:11 pm Hi All,

I've been lurking for a long time and I've finally saved enough for retirement.

I'm (a guy *edited) about to turn 38 and I've saved $1M. Mostly equities.

My withdrawal rate will be 3.5% and I'm planning on taking out that amount (per month) for life. So that would be $2,916.67.

(I will be planing to work part time making at least $1,000 to $2,000 a month *edited)

I have read about SORR and pretty much everything else.

Am I understanding the WR right? Just want to make sure.

Thanks,
JPG

*Edited for clarity
Read your SS estimate pages carefully. The benefits amounts estimated assume that you will continue to work at the same salary your have now. If you stop working or otherwise reduce your contributions, you will receive considerably less than the benefit estimated. Many folks retiring before 62 don't realize that if they stop working be fore 62 and claim at 62 the estimate they're seeing today I'd completely the wrong figure. Do yourself a favor and apply for an estimate with the information that you stop working now.
Got it, thanks for the tip!
MikeG62
Posts: 3115
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: The WR in practice [Withdrawal Rate]

Post by MikeG62 »

blueandyellow123 wrote: Sat Sep 19, 2020 11:16 am
MikeG62 wrote: Sat Sep 19, 2020 7:24 am
blueandyellow123 wrote: Fri Sep 18, 2020 9:25 pm Thank you! Appreciate these links.

So it looks like I'm planning the "Constant-dollar" where my income will always be 35k (plus an inflation adjustment).

Therefore going forward I will NOT be taking 3.5% of the portfolio, but rather just 35k ever year.

Is that right?

Sorry if this is quite a dumb question.
Short answer to your question - yes that is right and represents one way to do it (pick a fixed $ amount in year 1 of retirement and adjust that $ amount each year for inflation).

IMHO, 3.5% would be pretty (very) safe for someone with an expected retirement period of 30 years (most safe withdrawal rate studies were done assuming a 30-year period). However, you are looking at a retirement period far, far longer than 30 years (potentially 50 years or more). The longer the period, the lower the initial withdrawal rate (to compensate for the higher risk of a bad outcome during such a long period of time).

Is your plan to truly not work for money another day in your life? Not so sure you'll stick to that given your very young age (and having a ton of human capital still left). If I am right, this is an upside and will provide some buffer/cushion in your model.

What is it that you plan to do with all of your new found free time? Many of those activities will cost money. Do you have a sufficient placeholder in your budget for those activities?

Have you factored in where you will get health insurance (during this very long retirement period) into your annual spend? How significant a portion of the $35,000 is that (you should expect that it will likely increase at a rate far quicker than the rate of overall inflation).

How much have you earned in SS benefits (assuming you are a US citizen)? Seems you only have a maximum of two decades of work history (that will work against you in the SS benefit calculation). Regardless, it will provide some level of additional incoming cash flow (albeit ~ three decades from now).
Thank you for your reply! After much reading, I still can't decide if I want to go for the 3.5% now, or try to save more and go for the 3% WR.

Not sure how Bogleheads feel about Michael Kitces, but he's run the numbers and says 3.5% is fine, even for an extended retirement (50+ year period). Now, I understand, don't just trust one person, and this time could be different, returns might be lower going forward, etc.)
Personally a big fan of Kitces myself. I've spent more time than I care to admit reading stuff off his site (well over 100 articles I am sure). Yes, 3.5% for extended retirements has worked "in the past". He may also think that 3.5% is sensible in the future, but that is not the same thing as saying it will work for certain in the future. Two headwinds that exist now (and perhaps not when he published the piece you referring to) are high equity valuations and low bond yields (almost assuredly the latter). Not a great combination and one that would lead me to start with a lower initial WD rate than would otherwise be the case.

Also, someone starting with 3.5% with a significant portion of the 3.5% being discretionary is in a much better position to make a downward adjustment to their WD rate in the future if that becomes necessary than someone with a much lower amount of discretionary spending. So, if you told me you were planning to withdraw 3.5% and that was $100,000 and 50% or $50,000 of that spend was entirely discretionary, I would feel very different about that than telling me you want to begin with an initial withdraw rate of 3.5%, which represents $35,000 and likely does include a substantial amount of discretionary dollars. So individual circumstances matter, even for those with similar expected retirement periods.

Bill Bengen (the guy who came up with the 4.0% rule of thumb) also addressed retirement periods longer than 30 years in his book, "Conserving Client Portfolios in Retirement". For these, what he called these Methuselah clients, he concluded that the SafeMax for a 45 year retirement was about 30bps (call it roughly 10%) lower initial WD rate than for a 30 year retirement. You are talking about a period potentially a bit longer than that. Again, bond yields were very different for the time periods he studied. So may want to hedge your initial WD rate a bit for that.

Ed from the earlyretirenow website has written extensively (and I mean extensively) on withdrawal rates and making your money last in retirement. Would not be a bad idea to peruse his website and see if there are articles he's written which you find helpful. I have little doubt you won't find things which add value for this very important decision you are trying to make.

https://earlyretirementnow.com/start-here/
blueandyellow123 wrote: Sat Sep 19, 2020 11:16 am
I'm leaning to the 3.5% since if it fails, I can always go back to work (not opposed to it) to pickup the slack.
Maybe yes and maybe no. Depends on when you determine that it fails (or is failing). You are in your 50's, probably yes. You are in your late 70's or beyond, maybe not so much.
blueandyellow123 wrote: Sat Sep 19, 2020 11:16 am
I'm planning to do freelance work along the way (not fully retired). Sorry I did not mention this, as it's a material fact. As of now the plan is to try to earn at least $1,000-$2,000 a month as a freelancer. But business has been really slow the past few years for me.
That helps for sure.
blueandyellow123 wrote: Sat Sep 19, 2020 11:16 am
I just want to know FOR SURE that I can cover all of my basic expenses at 35k (plus adjusting for inflation going forward).

I'm covered as of now for my healthcare as of now, but it's a concern for sure. The plan would be to pickup more side-work if needed.
There is no way to know FOR SURE in advance. We all are taking some amount of risk. However, there are ways to reduce that risk to a manageable level. Among those ways are having some of your future expenses covered by a guaranteed income stream (SS for example or a pension), starting with a lower initial WD rate, having a decent sized chunk of your spending be for discretionary items that can be repurposed if needed, working part time, etc... DW and I are managing that risk by started with a lower initial WD rate (around 3.0%) and having a very sizable portion of our large annual spend in discretionary categories. In addition, our modeling assumes we receive no SS (i.e., we are considering SS as buffer/cushion). If things get bad, we will cut discretionary and have SS as a buffer to help offset any cuts we need to make in our WD rate due to the impact of financial events on our portfolio.

I hope that helps.
Real Knowledge Comes Only From Experience
terran
Posts: 1703
Joined: Sat Jan 10, 2015 10:50 pm

Re: The WR in practice [Withdrawal Rate]

Post by terran »

blueandyellow123 wrote: Sat Sep 19, 2020 11:23 am
terran wrote: Fri Sep 18, 2020 10:35 pm I think you might have a slight misunderstanding in that withdrawal rate studies generally assume neither a particular rate every year nor a particular dollar amount every year, but rather a particular rate the first year and then that dollar amount adjusted for inflation every year thereafter. So a 3.5% WR would mean $35,000 the first year, then if inflation was 1% the first year then the next year it would be $35,350, then if inflation was 3% the second year it would be $36,410.50, etc.

3.5% might be a little high for a long retirement at current high historic equity valuations. https://earlyretirementnow.com/safe-wit ... te-series/ would be worth reading through if you haven't already. In particular, https://earlyretirementnow.com/2017/08/ ... sed-rules/ examines adjusting the initial withdrawal rate for equity valuations. Basically, reducing the withdrawal rate if you retire when stocks are "high" vs "low."
Thanks, I'm leaning to maybe waiting for CAPEs to come down. But don't Bogleheads frown upon that type of behavior? I don't believe in market timing. But I do believe valuations are stretched, at least here in the US (maybe not Int). Perhaps more allocation to Intl and EM compared to US would be a better way to go about it. Then adjust once per year.
Maybe this is market timing, but it's indisputable that retiring at a market top is when most of the sequence of return risk failures happen, so when you're at risk of being at one (could go higher, could go lower, we don't know) it seems unwise to retire with just enough. Of course, even if CAPE was low we could be in for a another drop, but it sure seems more likely if it's high. I wouldn't necessarily wait until CAPE drops, but I would wait if you don't have enough buffer to be able to start at a lower withdrawal rate to compensate for CAPE being high. I guess my point is that even if it is market timing it just means you might work a little too long for some extra safety, which isn't a terrible outcome.
Kelrex
Posts: 241
Joined: Wed Aug 26, 2020 1:32 pm

Re: The WR in practice [Withdrawal Rate]

Post by Kelrex »

blueandyellow123 wrote: Sat Sep 19, 2020 11:11 am
JoMoney wrote: Sat Sep 19, 2020 6:55 am A 38 year old has a life expectancy of about 45.6 years
That's significantly more than the 25-30 year life expectancy for someone 55 or older, and the retirement period most "safe withdrawal rates" are considered for.
The simple SWR method I usually look it is 1/x , where x is life expectancy.
1/45.6 is 2.2%

You might also consider Social Security, and what you might expect your SS benefit should be at full retirement age. If you've earned enough SS credits where you can expect to replace your portfolio withdrawal income at retirement age or later, perhaps you only need the portfolio to last until that point, which might only be 30 years away, so 1/30 = 3.33% but even that's a shortfall to your 3.5% rate, which at the size of your portfolio seems like an income many would consider as just scraping by... If you're not forced into the situation where you have to barely make ends meet, I don't know why you'd want to do that to yourself... relative to just finding a different job if the one you're in is miserable enough to drive you to that.
Thank you for this math. I like the idea of going down to 3.3%.

I am planning on getting SS benefits, plus I'm planning to do freelance work along the way (not fully retired). Sorry I did not mention this, as it's a material fact.

I just want to know FOR SURE that I can cover all of my basic expenses at 35k (plus adjusting for inflation going forward). Everything else I'm going to be working for (if I need a new computer,new car, a vacation, etc).
That was kind of my point in my previous post. Just because a calculator spits out "100% success" doesn't mean that success is assured.

What you do have is enough money to drastically alter your lifestyle towards whatever you want it to look like. What you DO NOT have is enough resources to retire.

That's fine, few people at your age have the resources to fully retire, and there's nothing wrong with that. However, you should really revisit your thinking that this lump sum you've saved allows you to basically retire at this point except for working when you need to to cover extras.

That's a dangerous plan with very high risks. A single large expense during a down market under conditions where you can't find work will result in possible plan failure.

Meanwhile, if you took a different approach of socking away most or all of your nest egg and leave it to grow, but continue to work enough to cover most or all of your expenses, then you could end up quite wealthy with very little risk. Think about what 1M would look like left alone for a decade.

Basically, you've saved a ton of money, and that's awesome, but you haven't saved enough to buy yourself indefinite security. You're close, but you just aren't there yet, and how you choose your next steps will determine if you live your remaining decades in comfort or constant risk.
tibbitts
Posts: 11930
Joined: Tue Feb 27, 2007 6:50 pm

Re: The WR in practice [Withdrawal Rate]

Post by tibbitts »

TomatoTomahto wrote: Sat Sep 19, 2020 6:59 am
RadAudit wrote: Sat Sep 19, 2020 6:26 am
blueandyellow123 wrote: Fri Sep 18, 2020 8:11 pm I've finally saved enough for retirement.

I'm about to turn 38 and I've saved $1M. Mostly equities.
Congrats on your ability to amass a rather impressive amount of money for a guy your age.
Sorry to be the gender police, but JPG has not indicated that they are a “guy.” 😄

Gender aside, JPG, you will likely have many many years of life ahead of you. I would not want to put my faith in a 3.5% withdrawal rate for what could be 70 years of retirement. Even without medical advances, 60 years are highly possible. What’s so bad about how you got to $1M?
Now that we know OP is a guy, he can be more confident in his plan than if he weren't. But there's no way I would trust that 3.5% rate for even my retirement starting in my 60s, much less at the OP's age.
livesoft
Posts: 73346
Joined: Thu Mar 01, 2007 8:00 pm

Re: The WR in practice [Withdrawal Rate]

Post by livesoft »

tibbitts wrote: Sat Sep 19, 2020 1:37 pmNow that we know OP is a guy, he can be more confident in his plan than if he weren't.
I'm trying to figure that statement out. LOL! Maybe because life expectancy is different?

Some folks have getting married as a backup plan, but I don't think gender matters with marriage.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

Kelrex wrote: Sat Sep 19, 2020 1:33 pm
blueandyellow123 wrote: Sat Sep 19, 2020 11:11 am
JoMoney wrote: Sat Sep 19, 2020 6:55 am A 38 year old has a life expectancy of about 45.6 years
That's significantly more than the 25-30 year life expectancy for someone 55 or older, and the retirement period most "safe withdrawal rates" are considered for.
The simple SWR method I usually look it is 1/x , where x is life expectancy.
1/45.6 is 2.2%

You might also consider Social Security, and what you might expect your SS benefit should be at full retirement age. If you've earned enough SS credits where you can expect to replace your portfolio withdrawal income at retirement age or later, perhaps you only need the portfolio to last until that point, which might only be 30 years away, so 1/30 = 3.33% but even that's a shortfall to your 3.5% rate, which at the size of your portfolio seems like an income many would consider as just scraping by... If you're not forced into the situation where you have to barely make ends meet, I don't know why you'd want to do that to yourself... relative to just finding a different job if the one you're in is miserable enough to drive you to that.
Thank you for this math. I like the idea of going down to 3.3%.

I am planning on getting SS benefits, plus I'm planning to do freelance work along the way (not fully retired). Sorry I did not mention this, as it's a material fact.

I just want to know FOR SURE that I can cover all of my basic expenses at 35k (plus adjusting for inflation going forward). Everything else I'm going to be working for (if I need a new computer,new car, a vacation, etc).
That was kind of my point in my previous post. Just because a calculator spits out "100% success" doesn't mean that success is assured.

What you do have is enough money to drastically alter your lifestyle towards whatever you want it to look like. What you DO NOT have is enough resources to retire.

That's fine, few people at your age have the resources to fully retire, and there's nothing wrong with that. However, you should really revisit your thinking that this lump sum you've saved allows you to basically retire at this point except for working when you need to to cover extras.

That's a dangerous plan with very high risks. A single large expense during a down market under conditions where you can't find work will result in possible plan failure.

Meanwhile, if you took a different approach of socking away most or all of your nest egg and leave it to grow, but continue to work enough to cover most or all of your expenses, then you could end up quite wealthy with very little risk. Think about what 1M would look like left alone for a decade.

Basically, you've saved a ton of money, and that's awesome, but you haven't saved enough to buy yourself indefinite security. You're close, but you just aren't there yet, and how you choose your next steps will determine if you live your remaining decades in comfort or constant risk.
Thanks so much everyone for the input. I really appreciate all of the honesty but also encouragement. Also I don't want to come of in a bad way, like I don't want to work. I do want to work, just freelance and part-time. Upon further review it looks like I need to save another 500k. That would take me to 1.5M and I'd be able to do something closer to a 2.5-3% WR.
terran
Posts: 1703
Joined: Sat Jan 10, 2015 10:50 pm

Re: The WR in practice [Withdrawal Rate]

Post by terran »

Personally I'd feel comfortable with a 3.25% WR rate or even a little higher (though maybe not quite 3.5%). 2.5% is hardly more than dividends on a total market portfolio.
am
Posts: 3525
Joined: Sun Sep 30, 2007 9:55 am

Re: The WR in practice [Withdrawal Rate]

Post by am »

tibbitts wrote: Sat Sep 19, 2020 1:37 pm
TomatoTomahto wrote: Sat Sep 19, 2020 6:59 am
RadAudit wrote: Sat Sep 19, 2020 6:26 am
blueandyellow123 wrote: Fri Sep 18, 2020 8:11 pm I've finally saved enough for retirement.

I'm about to turn 38 and I've saved $1M. Mostly equities.
Congrats on your ability to amass a rather impressive amount of money for a guy your age.
Sorry to be the gender police, but JPG has not indicated that they are a “guy.” 😄

Gender aside, JPG, you will likely have many many years of life ahead of you. I would not want to put my faith in a 3.5% withdrawal rate for what could be 70 years of retirement. Even without medical advances, 60 years are highly possible. What’s so bad about how you got to $1M?
Now that we know OP is a guy, he can be more confident in his plan than if he weren't. But there's no way I would trust that 3.5% rate for even my retirement starting in my 60s, much less at the OP's age.
Wow. Did not realize the future is looking worse then at any time during recorded market history? :D Maybe best to forget about retirement and just work until you can’t or die like previous generations.
av111
Posts: 105
Joined: Mon Jan 26, 2015 1:27 pm

Re: The WR in practice [Withdrawal Rate]

Post by av111 »

OP

50 years is a long time. What are you thinking of doing
AV111
User avatar
vineviz
Posts: 7839
Joined: Tue May 15, 2018 1:55 pm

Re: The WR in practice [Withdrawal Rate]

Post by vineviz »

am wrote: Sun Sep 20, 2020 1:36 pm Wow. Did not realize the future is looking worse then at any time during recorded market history? :D
Actually, this isn't far from the truth: the combination of equity valuations and expected real bond returns right now is plausibly the worst it has been during the lifetime of anyone participating in this forum.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
am
Posts: 3525
Joined: Sun Sep 30, 2007 9:55 am

Re: The WR in practice [Withdrawal Rate]

Post by am »

vineviz wrote: Sun Sep 20, 2020 2:11 pm
am wrote: Sun Sep 20, 2020 1:36 pm Wow. Did not realize the future is looking worse then at any time during recorded market history? :D
Actually, this isn't far from the truth: the combination of equity valuations and expected real bond returns right now is plausibly the worst it has been during the lifetime of anyone participating in this forum.
The equity valuations could be reset to something lower very fast. The bonds could go into negative yield territory and we could have another big bond bull. Who knows? I learned over the years that no one knows and are mostly wrong. But to say the future is worse then ever before is likely not correct.
User avatar
vineviz
Posts: 7839
Joined: Tue May 15, 2018 1:55 pm

Re: The WR in practice [Withdrawal Rate]

Post by vineviz »

am wrote: Sun Sep 20, 2020 2:23 pm
vineviz wrote: Sun Sep 20, 2020 2:11 pm
am wrote: Sun Sep 20, 2020 1:36 pm Wow. Did not realize the future is looking worse then at any time during recorded market history? :D
Actually, this isn't far from the truth: the combination of equity valuations and expected real bond returns right now is plausibly the worst it has been during the lifetime of anyone participating in this forum.
The equity valuations could be reset to something lower very fast. The bonds could go into negative yield territory and we could have another big bond bull. Who knows? I learned over the years that no one knows and are mostly wrong. But to say the future is worse then ever before is likely not correct.
The future is always uncertain: I don’t know what the future looks like.

We CAN see what the present conditions are, however, and they’ve never been less favorable for sustained retirement income in the past than they are now.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
tibbitts
Posts: 11930
Joined: Tue Feb 27, 2007 6:50 pm

Re: The WR in practice [Withdrawal Rate]

Post by tibbitts »

am wrote: Sun Sep 20, 2020 1:36 pm Wow. Did not realize the future is looking worse then at any time during recorded market history? :D Maybe best to forget about retirement and just work until you can’t or die like previous generations.
Well it's a good thing you were reading Bogleheads then, eh? Wouldn't want anyone to be in the dark on that!
User avatar
FiveK
Posts: 10315
Joined: Sun Mar 16, 2014 2:43 pm

Re: The WR in practice [Withdrawal Rate]

Post by FiveK »

vineviz wrote: Sun Sep 20, 2020 2:44 pm The future is always uncertain: I don’t know what the future looks like.

We CAN see what the present conditions are, however, and they’ve never been less favorable for sustained retirement income in the past than they are now.
Except for inflation (or lack thereof)?
User avatar
celia
Posts: 11409
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: The WR in practice [Withdrawal Rate]

Post by celia »

blueandyellow123 wrote: Sat Sep 19, 2020 11:11 am I just want to know FOR SURE that I can cover all of my basic expenses at 35k (plus adjusting for inflation going forward). Everything else I'm going to be working for (if I need a new computer,new car, a vacation, etc).
I laughed at this! You are going to work so you can take time off?

And during your retirement, no less... :D :D :D


Maybe it would be good for you to retire asap so you can start working more than now... :sharebeer
Last edited by celia on Sun Sep 20, 2020 3:11 pm, edited 1 time in total.
Kelrex
Posts: 241
Joined: Wed Aug 26, 2020 1:32 pm

Re: The WR in practice [Withdrawal Rate]

Post by Kelrex »

blueandyellow123 wrote: Sun Sep 20, 2020 12:44 pm
Thanks so much everyone for the input. I really appreciate all of the honesty but also encouragement. Also I don't want to come of in a bad way, like I don't want to work. I do want to work, just freelance and part-time. Upon further review it looks like I need to save another 500k. That would take me to 1.5M and I'd be able to do something closer to a 2.5-3% WR.
You could save more or as I said above, you could even stop saving and just earn what you need to live on while leaving your current savings to grow on their own, that way time does a lot of the heavy lifting for you.

It's not that you are coming off "bad" or that there's any issue with you not wanting to work. My point was that your plan depends on you continuing to work pretty much indefinitely because the moment you start drawing your 3.5%, you hobble any further growth of your investments. You have to work, you don't benefit from time and compounding, and you don't ever have total freedom.

If you want to keep working, you only need to earn enough to cover your expenses, which aren't a ton, and your investments will grow passively. This requires you to do more work than your original plan, but not a ton more, and then you can harness huge, effortless compounding gains through time.

Or, you could keep working at full tilt and add to your savings primarily through earnings, but be able to fully retire from work sooner. This also doesn't really get a lot of gains from time, but gets you total freedom through fewer years of more intense work.

So it's not about good or bad, it's just about understanding the role that time has vs the role that work and earnings have.

I was only pointing out that you were planning on the one option that obliges you to have to continue working while also losing out on the benefit of time and compounding. So it's really the worst of all of your options, IMO.
am
Posts: 3525
Joined: Sun Sep 30, 2007 9:55 am

Re: The WR in practice [Withdrawal Rate]

Post by am »

vineviz wrote: Sun Sep 20, 2020 2:44 pm
am wrote: Sun Sep 20, 2020 2:23 pm
vineviz wrote: Sun Sep 20, 2020 2:11 pm
am wrote: Sun Sep 20, 2020 1:36 pm Wow. Did not realize the future is looking worse then at any time during recorded market history? :D
Actually, this isn't far from the truth: the combination of equity valuations and expected real bond returns right now is plausibly the worst it has been during the lifetime of anyone participating in this forum.
The equity valuations could be reset to something lower very fast. The bonds could go into negative yield territory and we could have another big bond bull. Who knows? I learned over the years that no one knows and are mostly wrong. But to say the future is worse then ever before is likely not correct.
The future is always uncertain: I don’t know what the future looks like.

We CAN see what the present conditions are, however, and they’ve never been less favorable for sustained retirement income in the past than they are now.
Sure sustained income from bonds lowest but sustained 0% rates on stocks is like a turbo boost. We haven’t been in this territory either with no good alternatives to stocks. Stay the course. We might be in for a pleasant surprise and ride the bubble to retirement :sharebeer
Katietsu
Posts: 3993
Joined: Sun Sep 22, 2013 1:48 am

Re: The WR in practice [Withdrawal Rate]

Post by Katietsu »

blueandyellow123 wrote: Sat Sep 19, 2020 11:16 am
I'm planning to do freelance work along the way (not fully retired). Sorry I did not mention this, as it's a material fact. As of now the plan is to try to earn at least $1,000-$2,000 a month as a freelancer. But business has been really slow the past few years for me.

I just want to know FOR SURE that I can cover all of my basic expenses at 35k (plus adjusting for inflation going forward).

I'm covered as of now for my healthcare as of now, but it's a concern for sure. The plan would be to pickup more side-work if needed.

Think carefully about these things. Particularly what they look like as you age and move away from full time employment.

You may be end up working at a job that you like less for less money than your current job. Or, at least, than less than a job you might be able to get now.

No, you can not guarantee covering your minimum expenses for 50 years FOR SURE with a million dollars and limited social security.

You might be overestimating your ability to pick up side work. Especially if it is 10 year or 20 years from now when you realize you are in trouble. How are you going to keep yourself in a position to generate income?

And 38 year olds usually have no idea what healthcare expenses look like for a 60 year old. At 60, my mother had a 20 hour a week job and all of her salary went to pay for healthcare. And she did not even have especially high expenses. But without the ACA holding down costs, market rate for health insurance for a 60 year old could consume all of your $35,000.
User avatar
vineviz
Posts: 7839
Joined: Tue May 15, 2018 1:55 pm

Re: The WR in practice [Withdrawal Rate]

Post by vineviz »

FiveK wrote: Sun Sep 20, 2020 2:52 pm
vineviz wrote: Sun Sep 20, 2020 2:44 pm The future is always uncertain: I don’t know what the future looks like.

We CAN see what the present conditions are, however, and they’ve never been less favorable for sustained retirement income in the past than they are now.
Except for inflation (or lack thereof)?
Expected inflation is pretty much a wash in these things, and inflation surprises are - well - unpredictable by definition.

However I think a reasonable argument could be made that low inflation makes the situation more, not less, dire.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

Katietsu wrote: Sun Sep 20, 2020 3:46 pm
blueandyellow123 wrote: Sat Sep 19, 2020 11:16 am
I'm planning to do freelance work along the way (not fully retired). Sorry I did not mention this, as it's a material fact. As of now the plan is to try to earn at least $1,000-$2,000 a month as a freelancer. But business has been really slow the past few years for me.

I just want to know FOR SURE that I can cover all of my basic expenses at 35k (plus adjusting for inflation going forward).

I'm covered as of now for my healthcare as of now, but it's a concern for sure. The plan would be to pickup more side-work if needed.

Think carefully about these things. Particularly what they look like as you age and move away from full time employment.

You may be end up working at a job that you like less for less money than your current job. Or, at least, than less than a job you might be able to get now.

No, you can not guarantee covering your minimum expenses for 50 years FOR SURE with a million dollars and limited social security.

You might be overestimating your ability to pick up side work. Especially if it is 10 year or 20 years from now when you realize you are in trouble. How are you going to keep yourself in a position to generate income?

And 38 year olds usually have no idea what healthcare expenses look like for a 60 year old. At 60, my mother had a 20 hour a week job and all of her salary went to pay for healthcare. And she did not even have especially high expenses. But without the ACA holding down costs, market rate for health insurance for a 60 year old could consume all of your $35,000.
Thanks, that does make sense and gives me a lot to think about!
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

Kelrex wrote: Sun Sep 20, 2020 3:10 pm
blueandyellow123 wrote: Sun Sep 20, 2020 12:44 pm
Thanks so much everyone for the input. I really appreciate all of the honesty but also encouragement. Also I don't want to come of in a bad way, like I don't want to work. I do want to work, just freelance and part-time. Upon further review it looks like I need to save another 500k. That would take me to 1.5M and I'd be able to do something closer to a 2.5-3% WR.
You could save more or as I said above, you could even stop saving and just earn what you need to live on while leaving your current savings to grow on their own, that way time does a lot of the heavy lifting for you.

It's not that you are coming off "bad" or that there's any issue with you not wanting to work. My point was that your plan depends on you continuing to work pretty much indefinitely because the moment you start drawing your 3.5%, you hobble any further growth of your investments. You have to work, you don't benefit from time and compounding, and you don't ever have total freedom.

If you want to keep working, you only need to earn enough to cover your expenses, which aren't a ton, and your investments will grow passively. This requires you to do more work than your original plan, but not a ton more, and then you can harness huge, effortless compounding gains through time.

Or, you could keep working at full tilt and add to your savings primarily through earnings, but be able to fully retire from work sooner. This also doesn't really get a lot of gains from time, but gets you total freedom through fewer years of more intense work.

So it's not about good or bad, it's just about understanding the role that time has vs the role that work and earnings have.

I was only pointing out that you were planning on the one option that obliges you to have to continue working while also losing out on the benefit of time and compounding. So it's really the worst of all of your options, IMO.

This makes sense, thank you. I think the plan will be to just let my investments grow, and try to work to earn the $3k a month it takes to live.
User avatar
FiveK
Posts: 10315
Joined: Sun Mar 16, 2014 2:43 pm

Re: The WR in practice [Withdrawal Rate]

Post by FiveK »

vineviz wrote: Sun Sep 20, 2020 3:56 pm
FiveK wrote: Sun Sep 20, 2020 2:52 pm
vineviz wrote: Sun Sep 20, 2020 2:44 pm The future is always uncertain: I don’t know what the future looks like.

We CAN see what the present conditions are, however, and they’ve never been less favorable for sustained retirement income in the past than they are now.
Except for inflation (or lack thereof)?
Expected inflation is pretty much a wash in these things, and inflation surprises are - well - unpredictable by definition.

However I think a reasonable argument could be made that low inflation makes the situation more, not less, dire.
Perhaps. One can alternatively make a reasonable argument that low inflation makes things better for sustained retirement success.
User avatar
vineviz
Posts: 7839
Joined: Tue May 15, 2018 1:55 pm

Re: The WR in practice [Withdrawal Rate]

Post by vineviz »

:wink:
FiveK wrote: Sun Sep 20, 2020 5:02 pm
vineviz wrote: Sun Sep 20, 2020 3:56 pm
FiveK wrote: Sun Sep 20, 2020 2:52 pm
vineviz wrote: Sun Sep 20, 2020 2:44 pm The future is always uncertain: I don’t know what the future looks like.

We CAN see what the present conditions are, however, and they’ve never been less favorable for sustained retirement income in the past than they are now.
Except for inflation (or lack thereof)?
Expected inflation is pretty much a wash in these things, and inflation surprises are - well - unpredictable by definition.

However I think a reasonable argument could be made that low inflation makes the situation more, not less, dire.
Perhaps. One can alternatively make a reasonable argument that low inflation makes things better for sustained retirement success.
Lower than expected inflation, sure.

Just plain low inflation? Not so much.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
FiveK
Posts: 10315
Joined: Sun Mar 16, 2014 2:43 pm

Re: The WR in practice [Withdrawal Rate]

Post by FiveK »

vineviz wrote: Sun Sep 20, 2020 5:04 pm :wink:
FiveK wrote: Sun Sep 20, 2020 5:02 pm
vineviz wrote: Sun Sep 20, 2020 3:56 pm
FiveK wrote: Sun Sep 20, 2020 2:52 pm
vineviz wrote: Sun Sep 20, 2020 2:44 pm The future is always uncertain: I don’t know what the future looks like.

We CAN see what the present conditions are, however, and they’ve never been less favorable for sustained retirement income in the past than they are now.
Except for inflation (or lack thereof)?
Expected inflation is pretty much a wash in these things, and inflation surprises are - well - unpredictable by definition.

However I think a reasonable argument could be made that low inflation makes the situation more, not less, dire.
Perhaps. One can alternatively make a reasonable argument that low inflation makes things better for sustained retirement success.
Lower than expected inflation, sure.

Just plain low inflation? Not so much.
Better low inflation with low returns than high inflation with low returns. ;)
Topic Author
blueandyellow123
Posts: 17
Joined: Fri Sep 18, 2020 8:02 pm

Re: The WR in practice [Withdrawal Rate]

Post by blueandyellow123 »

Kelrex wrote: Sun Sep 20, 2020 3:10 pm
blueandyellow123 wrote: Sun Sep 20, 2020 12:44 pm
Thanks so much everyone for the input. I really appreciate all of the honesty but also encouragement. Also I don't want to come of in a bad way, like I don't want to work. I do want to work, just freelance and part-time. Upon further review it looks like I need to save another 500k. That would take me to 1.5M and I'd be able to do something closer to a 2.5-3% WR.
You could save more or as I said above, you could even stop saving and just earn what you need to live on while leaving your current savings to grow on their own, that way time does a lot of the heavy lifting for you.

It's not that you are coming off "bad" or that there's any issue with you not wanting to work. My point was that your plan depends on you continuing to work pretty much indefinitely because the moment you start drawing your 3.5%, you hobble any further growth of your investments. You have to work, you don't benefit from time and compounding, and you don't ever have total freedom.

If you want to keep working, you only need to earn enough to cover your expenses, which aren't a ton, and your investments will grow passively. This requires you to do more work than your original plan, but not a ton more, and then you can harness huge, effortless compounding gains through time.

Or, you could keep working at full tilt and add to your savings primarily through earnings, but be able to fully retire from work sooner. This also doesn't really get a lot of gains from time, but gets you total freedom through fewer years of more intense work.

So it's not about good or bad, it's just about understanding the role that time has vs the role that work and earnings have.

I was only pointing out that you were planning on the one option that obliges you to have to continue working while also losing out on the benefit of time and compounding. So it's really the worst of all of your options, IMO.
Any thoughts on the Variable_percentage_withdrawal? I see this table starts at 40 yrs old: https://www.bogleheads.org/wiki/Variabl ... withdrawal

(As compared to percentage plus inflation)
User avatar
FiveK
Posts: 10315
Joined: Sun Mar 16, 2014 2:43 pm

Re: The WR in practice [Withdrawal Rate]

Post by FiveK »

blueandyellow123 wrote: Sun Sep 20, 2020 5:21 pm Any thoughts on the Variable_percentage_withdrawal? I see this table starts at 40 yrs old: https://www.bogleheads.org/wiki/Variabl ... withdrawal

(As compared to percentage plus inflation)
The "percentage plus inflation" is not recommended, even by the Trinity Study authors, as an actual withdrawal strategy. It is useful as a ballpark estimate to answer the "do I have enough to retire?" question.

See Limitations of the Trinity study for a little more on that.
Post Reply