How do I know what withdrawal rate to use?

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UKFred
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How do I know what withdrawal rate to use?

Post by UKFred »

First of all, apologies for my long post… TLDR: Use a simplified G-K strategy to discover my own withdrawal rate.

I am in my mid-50’s and I am planning to retire in the next couple of years. Naturally, my thoughts have been turning towards withdrawal strategies. The basic strategy, of course, is Bengen’s 4% rule. Simply, take 4% of the portfolio value at the start of retirement and adjust it for inflation each year, ignoring portfolio fluctuations along the way and relying on history as a guide that it will be fine for you as well.

This has the advantage of simplicity and a fair amount of back-testing support, but almost definitely not the strategy I would choose (I am sure that even Bengen never intended it to be a fill it and forget it method for the full length of retirement either). My thoughts are:
  • 4% worked in the past. But this time is different - interest rates are super-low, global economy-stopping pandemics are a real thing, stocks are over-valued, take your pick.
  • 4% is the SWR - the Safe Withdrawal Rate. Aka, the minimum withdrawal rate that in the last century worked for at least 30 years before the portfolio ran out. In reality, there is a different withdrawal rate that will work for a given starting year of retirement and asset allocation. But there is no way of knowing a priori what that withdrawal rate is for you. So, if you used the 4% rule at any time in the past century, you would have left money (quite often, a lot of money) on the table at the end of your retirement.
  • The fear of running out of money in retirement is as real as range anxiety is for electric car drivers and this causes many retired people (and electric car drivers) to be needlessly cautious in their spending.
  • FOMO - the Fear Of Missing Out - is real too. The regret minimisation framework argues against the above rule and says that we should spend more money. Especially because our health and energy decline with age and I’d rather spend more money now than look back in my eighties with many unexperienced bucket list items and a fat portfolio.
Taking all the above into account, I want to spend the most I can while making sure (to a high confidence) that my portfolio doesn’t run out. I also want to front-load my spending to the earlier retirement years, rather than towards the end. I am aware that these are contradictory aims.

So, I am leaning towards a modified (or at least a simplified) form of Guyton-Klinger rules as my preferred withdrawal strategy. Briefly, the strategy says:
  • Decide three parameters: an initial withdrawal rate (R0), a guardrail percentage (G) and finally, a portfolio adjustment percentage (A). For the purposes of illustration, let us assume R0 as 5%, guardrails of 1% and portfolio adjustment rate of 10%.
  • In the first year, withdraw R0% of your portfolio. Assuming a starting portfolio of $1M, this would be 50K in our example.
  • In the second year, adjust the previous year’s withdrawal amount by the previous year’s inflation. Calculate R1 as new withdrawal amount divided by the current portfolio value. f the portfolio fell in the previous and R1 causes the withdrawal rate from the new portfolio value to be greater than R0, stick to R0. For example, if the portfolio value is now more than $950K (1M minus previous year’s 50K withdrawal), use the calculated withdrawal amount . If the portfolio fell below 950K instead, the withdrawal would remain at 50K. You never make up the missed inflation adjustment in subsequent years.
    If R1 falls outside the guardrails, i.e. less than 4% (R0 - G) or 6% (R0 + G), adjust the withdrawal amount by 10% (the portfolio adjustment rate) in the appropriate direction. For example, if the portfolio value fell to 750K and your withdrawal amount was still 50K, the withdrawal rate will become 6.67% (50/750). So, we reduce it to 45K (50 - 5). If instead, the portfolio value had jumped to 1.3M, 50K withdrawal would be 3.8% and hence the amount would be adjusted to 55K. Subsequent years will be calculated on this amount.
  • G-K has a few other rules about which pot of money to withdraw from and when to stop applying these rules once you get to a certain age, which I will ignore.
Apologies if I have just rehashed something most of you are already aware of. My primary motivation in using G-K rules is to discover my own safe withdrawal rate as I go through my retirement journey while keeping year-on-year fluctuations in withdrawal amounts to a minimum. I would start with a high initial withdrawal rate (say 6%) and then adjust based on the portfolio performance. It is likely that in a few years, my withdrawals will come down and I am okay with that because I have sufficient non-portfolio income for my needs. And there is always the possibility that post-Covid, the stock market will continue it’s upward march and I can sustain or even increase my withdrawals (one can always dream!).

What are bogleheads thoughts on using the G-K (or similar strategy) as a way to discover your own personal safe withdrawal rate?
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Re: How do I know what withdrawal rate to use?

Post by Dottie57 »

I am spending according to needs and not let FOMO affect me.
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midareff
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Re: How do I know what withdrawal rate to use?

Post by midareff »

I like the VPW as a guideline with a small change in that I use the application of the average of the three prior years portfolio balance for smoothing year to year undulations. You could give it a try with or without that change and see if it suits you. Just plug in your data and see what it provides for you.
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Watty
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Re: How do I know what withdrawal rate to use?

Post by Watty »

UKFred wrote: Sun Aug 09, 2020 6:32 am G-K strategy
Not sure what that acronym is.
How do I know what withdrawal rate to use?
The bottom in is that they are only really useful for backtesting and to trigger a red flag if your plans are totally unrealistic. 4% is fine for that.

They were never meant to be used to manage your actual spending. Not only will your actual income needs vary during the different phases of retirement but it will also vary randomly from year to year. For example if you have a year when you need a new roof and have large medical bills you will pay them no matter what you plan says you should spend. You may also have years when you have few large expenses so you might spend less than planned so there is no good reason to spend lots of money just because your plan says you can.

Likewise an early retiree that is doing extensive travel will have higher expenses than a 75 year old that has slowed down a lot. Your expenses will also be different if you go into long term care or a spouse dies.

It is also not realistic to think that you will not change your spending if your portfolio goes up or down by an unusual amount no matter what your plan says. For example when the stock market crashed in 2008 most peoples plans were reset and they went into survival mode.

There is a wiki on different withdrawal methods.

https://www.bogleheads.org/wiki/Withdrawal_methods
Last edited by Watty on Sun Aug 09, 2020 7:04 am, edited 3 times in total.
Mr. Rumples
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Re: How do I know what withdrawal rate to use?

Post by Mr. Rumples »

This might help with your thinking on this:

https://www.mycalculators.com/ca/retcalc2m.html
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dogagility
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Re: How do I know what withdrawal rate to use?

Post by dogagility »

Thinking about this myself for some time, I've concluded VPW is my method of choice. https://www.bogleheads.org/wiki/Withdra ... percentage
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Re: How do I know what withdrawal rate to use?

Post by Emilyjane »

I use VPW system.

viewtopic.php?f=10&t=284519

I use Longinvest’s spreadsheet monthly to calculate withdrawal; whatever I don’t need at the time gets transferred from traditional to Roth,as a way of saving for future new cars or vacations. I don’t use the savings account buffer he refers to in the thread. You could also use yearly; I like monthly in that there is immediate response to changing market conditions. Plus, it satisfies my desire to “do something” without needing to adjust my portfolio.

It does result in variability in withdrawal amounts, but that is an acceptable trade off for a higher percent withdrawal. I like that the spreadsheet clearly shows what withdrawal might be with a 50% drop in market. Helpful to keep in mind.
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Re: How do I know what withdrawal rate to use?

Post by nisiprius »

Stuff like the Guyton-Klinger rules are insanely overprecise. It would be much better if you just thought of 4% as a "rule of thumb." You can't make a silk purse out of a sow's ear and you can't make a low-risk stream of all-but-guaranteed income out of a high-risk stock portfolio. One of the influential 1990s studies said this, and IMHO it is probably the most important thing it said:
The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.
Before the studies of the mid-1990s, many people assumed that if a portfolio had an average return of (say) 7% that it would be safe to withdraw 7%/year. The big message of the 1990s studies was that due to sequence-of-returns risk, this was actually not safe at all.

A big question about something like the Guyton-Klinger rules is "how, exactly, do you plan to follow them?" Do you see yourself running a spreadsheet sitting up in bed in a nursing home? One of the things that is a little frustrating to me is that so far am not aware of any brokerage or other service that lets you automate any systematic withdrawal system, basic or sophisticated.

To my mind, the strongest evidence that you shouldn't do more than treat 4% as a rough rule of thumb is the failure of the Vanguard Managed Payout Fund. Introduced in 2008, this fund used a sophisticated, modern, "college-endowment-fund-like" portfolio with a high stock allocation, alternatives, an investment in a Cayman-Islands-domiciled fund that is almost-but-not-quite a hedge fund, etc. It used a withdrawal rule based on a three-year moving average. It targeted a 5% withdrawal rate and aimed (not promised, of course, but aimed) to deliver it in perpetuity, not just 30 years, with both payouts and capital increasing with inflation. In 2012 they cut the target percentage to 4%. In 2020 they gave up and eliminated the calculate monthly payouts, and converted it into a traditional mutual fund that holds that very very nontraditional retirement portfolio, with it being up to you to manage any withdrawals.
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Re: How do I know what withdrawal rate to use?

Post by JoeRetire »

UKFred wrote: Sun Aug 09, 2020 6:32 am Taking all the above into account, I want to spend the most I can while making sure (to a high confidence) that my portfolio doesn’t run out.
Seems kinda like the definition of "safe withdrawal rate" to me?
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UKFred
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Re: How do I know what withdrawal rate to use?

Post by UKFred »

JoeRetire wrote: Sun Aug 09, 2020 7:35 am Seems kinda like the definition of "safe withdrawal rate" to me?
I agree. But we can only know what the safe rate is at the end of retirement, while I am trying to think of a way to discover it (or at least fine tune it) as I go along.
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Re: How do I know what withdrawal rate to use?

Post by UKFred »

Thanks all for your replies so far. It seems that a number of you like VPW, so perhaps I should give it more consideration.
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Re: How do I know what withdrawal rate to use?

Post by UKFred »

nisiprius wrote: Sun Aug 09, 2020 7:25 am Do you see yourself running a spreadsheet sitting up in bed in a nursing home?
Good point :oops:
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Re: How do I know what withdrawal rate to use?

Post by aristotelian »

UKFred wrote: Sun Aug 09, 2020 7:42 am Thanks all for your replies so far. It seems that a number of you like VPW, so perhaps I should give it more consideration.
VPW definitely came to mind with one of your goals being to spend your funds. Problem is, early in retirement there is not much difference between VPW or SWR. You can always do SWR and increase your spending if you get favorable returns, which amounts to the same thing.
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Re: How do I know what withdrawal rate to use?

Post by UKFred »

aristotelian wrote: Sun Aug 09, 2020 7:44 am You can always do SWR and increase your spending if you get favorable returns, which amounts to the same thing.
My holy grail is the opposite! Start with a higher withdrawal rate and then reduce it if the markets don’t support the level of withdrawal, on the basis that I will be able to enjoy the money more the younger and healthier my wife and I are.
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Re: How do I know what withdrawal rate to use?

Post by rkhusky »

4% is my cap for average withdrawal, with 5% for one-off expenses. If I only need 2% or 3% to do what I want, that's what I withdraw.
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Re: How do I know what withdrawal rate to use?

Post by MathIsMyWayr »

Can you use 4% as a retirement readiness tool and the RMD table as a withdrawal tool? The ride may be bumpy at times, but it should work if you can stomach it.
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Re: How do I know what withdrawal rate to use?

Post by RadAudit »

UKFred wrote: Sun Aug 09, 2020 6:32 am I am in my mid-50’s and I am planning to retire in the next couple of years.
UKFred wrote: Sun Aug 09, 2020 6:32 am 4% is the SWR - the Safe Withdrawal Rate. Aka, the minimum withdrawal rate that in the last century worked for at least 30 years before the portfolio ran out.
Something to watch out for is the planning horizon. Anyone in your family planning to live more than 30 yrs on your retirement? I'm having the devil of a time determining a SWR due to some folks who depend on my retirement planning not wanting to commit to only living more than 30 years. (~20 left to go.)
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Re: How do I know what withdrawal rate to use?

Post by aristotelian »

UKFred wrote: Sun Aug 09, 2020 7:48 am
aristotelian wrote: Sun Aug 09, 2020 7:44 am You can always do SWR and increase your spending if you get favorable returns, which amounts to the same thing.
My holy grail is the opposite! Start with a higher withdrawal rate and then reduce it if the markets don’t support the level of withdrawal, on the basis that I will be able to enjoy the money more the younger and healthier my wife and I are.
That is fine if you have the flexibility to reduce spending later. If you are on a budget that would of course be the riskiest approach.
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Re: How do I know what withdrawal rate to use?

Post by UKFred »

aristotelian wrote: Sun Aug 09, 2020 8:47 am That is fine if you have the flexibility to reduce spending later. If you are on a budget that would of course be the riskiest approach.
Agreed. Absolutely. This is a very good point. I do have the flexibility and other income that makes this possible for me.
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Re: How do I know what withdrawal rate to use?

Post by Ron »

I retired at age 59. At the time, I had no income sources other than my retirement portfolio and I didn't measure my withdrawals against the 4% "suggestion" but I know that they were well above 4%.

Fast forward to today, where I'm 72 years of age and all my retirement income sources (all eight of them, including those for my wife) are "on-line".

Our combined withdrawal rates for the last four years have been 3.12, 3.19, 3.29, 3.40%, which is under the 4% guideline.

I'm just pointing out that what you may be withdrawing in your early retirement years may have little to do with what your actual withdrawal rates later on in retirement. To say that you can't retire because you exceed at magic 4% rate today has little to do with the future if all your retirement income sources are not available on day one of retirement.

In fact, you may delay retirement and find years later that it was a mistake to do so, just to meet some published guideline 🤢 ...

FWIW,

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Re: How do I know what withdrawal rate to use?

Post by dkturner »

In the U.S. retirees have to make mandated withdrawals from their tax deferred retirement plans, beginning at age 72. If you are fortunate enough to have a significant amount of non-retirement assets, striving to live on the mandated withdrawals from your tax deferred retirement plans is probably the simplest solution. Mandated withdrawals adjust annually, based on a combination of age and prior year end market value of your tax-deferred retirement plans. If push comes to shove you can always supplement your mandated withdrawals by spending the income generated by your taxable assets. This is about as simple as it could be, at least for those whose situation makes this approach possible. The only strategy that’s simpler is to spend what you want/need and hope you don’t outlive your assets.
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Re: How do I know what withdrawal rate to use?

Post by MikeG62 »

UKFred wrote: Sun Aug 09, 2020 6:32 am
...What are bogleheads thoughts on using the G-K (or similar strategy) as a way to discover your own personal safe withdrawal rate?
DW and I are following a modified version of Guyton & Klinger's withdrawal decision rules. We are in our 5th year of early retirement (I am now 58 and DW is 55). We started at an initial withdrawal rate in low 3% range, with a plan to increase the dollar amount of our withdrawals annually by inflation. In three of the first four years of retirement, we underspent our budget (quite significantly in the first two years), largely due to underspend of T&E. As a result, we chose not implement any inflationary increases in the years following those where we underspent our budget (my own attempt to build in even more conservatism in our model).

Our plan does contemplate step changes in our annual WD $ amount, but we have not needed to implement any so far. These step changes result from following the Prosperity and Capital Preservation Rules under G&K's methodology. More specifically, should our current annual WD rate (as a % of our current portfolio value) fall below or rise above certain predetermined thresholds (guardrails), we would update (increase or decrease) our annual WD $ amount by +/-10%. G&K set their tripwires for these step changes symmetrically at a +/-20% increase/decrease in the WD rate. Our guardrails are customized (larger change required to trip the Capital Preservation threshold, which would result in a 10% reduction in our annual WD amount, than the Prosperity threshold, which would result in a 10% increase to it) since we are starting with a different (much lower) initial WD rate than G&K used in their modeling. This is similar to the "ratcheting" methodology that Kitces has written about.

So, how has that worked out so far? Our portfolio value has increased since we retired (with the rise in the markets). As a result, our withdrawal rate has fallen as a % of our current portfolio value.

I believe you want to start with a higher initial WD rate. That is what their modeling was intended to allow for. We choose to take a more conservative approach.

Hope that helps.
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Re: How do I know what withdrawal rate to use?

Post by jeffyscott »

UKFred wrote: Sun Aug 09, 2020 6:32 amIt is likely that in a few years, my withdrawals will come down and I am okay with that because I have sufficient non-portfolio income for my needs.
With that, you can pretty much do whatever you want with regard to your portfolio withdrawals. That's becoming pretty rare in the US, where most have only SS as a non-portfolio income source, while also having extensive economic wants.

We retired in our 50s and also very likely will have sufficient non-portfolio income to meet needs and even most wants throughout retirement. Our economic wants are pretty modest, though, if we spend $3000 in a month (excluding income taxes) it's a lot and that includes the pre-covid era. We have no rent or mortgage to pay, so that's a big factor in the monthly expenses. I have no real withdrawal plan in terms of X% per year, so far we used portfolio assets to buy a car and to gift some funds our kids. I never actually checked the percentage before, but it looks like it comes to about 3.3% per year with most (~80%) of that being the gifts, but neither of those is an ongoing regular expense.
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Re: How do I know what withdrawal rate to use?

Post by FRANK2009 »

This paper from Stanford University outlines a withdrawal method using rates for people in their 60's extrapolated from US govt RMD tables. You can of course read the entire paper but you may be most interested in the table on page 10.

http://longevity.stanford.edu/wp-conten ... %20SCL.pdf
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Re: How do I know what withdrawal rate to use?

Post by UKFred »

Thanks all for your personal experiences and views. It was very interesting and informative. In the UK, we don't have to make RMDs, but our pension portfolio value is limited to £1.07M with the excess being taxed at 55% at various points in life including at death. We also have ISAs, which are invested from post-tax income but are income and capital gains tax free on withdrawal. The state pension in the UK is quite limited by OECD standards, at up to £135 per week per person - about £14,000 per annum per couple, and it is not related to how much you've paid in, but on the number of years you've paid in, with 30 years of contribution to get the full amount.

In my personal circumstances, I think I can maintain my current standard of living with less than 3% of withdrawals from my portfolio + other income. But our current expenses are high and I expect them to fall quite substantially in a couple of years when my boys leave university and I don't have to pay their fees or accomodation costs, so I could probably live on just my other income or at most a 1% withdrawal. My wife is more conservative in her financial outlook than me (which is a good thing!) and I have been trying to figure out how much we could potentially spend in the first 5-10 years of our retirement years on holidays and other entertainment without stressing our portfolio to the breaking point.
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Re: How do I know what withdrawal rate to use?

Post by Sandi_k »

We are planning a bucket strategy. We too want to spend more the first decade of retirement. We're estimating a $1.1M portfolio in 2025. As we have other non-portfolio income, this works out nicely.

Year 0: transfer $225K of portfolio into cash/bonds/FI. Add to estimated $75k delayed income from employer. Total: $300k to spend in Years 1-5, leaving an investment portfolio of $875k ($1.1M - $225k).

Years 1-5: Transfer $50k per year into spending account, plus 3.5% of $875k portfolio for regular expenses each year. Note that in year 1, DH can file for early SocSec which will pay ~ $20k per year as well. In Year 5, the mortgage is paid off, adding another $30k per year in disposable income.

Years 6-10: With SocSec for DH and paid off house, we have an additional $50k annually in income/reduced expenses than when we started, which replaces the $50k annual "bucket" we established in Year 0. We also have ~ $50k left over from initial $300k bucket. Use the leftover funds for any big ticket items: car, house repair, etc.

Years 11-infinity: I start delayed SocSecurity, adding another $30k to the income streams. Investment portfolio has stayed pretty much at a 3.5% withdrawal rate that first decade, so we bump withdrawals to 4% at this time. I will be 70, DH 72 - so we're confident that 4% is sustainable for the rest of our lives, especially when added to SocSecurity and pension as floors.
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Re: How do I know what withdrawal rate to use?

Post by Leif »

Watty wrote: Sun Aug 09, 2020 6:48 am The bottom in is that they are only really useful for backtesting and to trigger a red flag if your plans are totally unrealistic. 4% is fine for that.
A good summary of how I look at it. I have a spreadsheet showing me the WR using a number of different strategies. However, that is for entertainment (I know, weird).

I just keep an eye on my spending. I don't do detailed budgeting, that would defeat my purpose of keeping it simply. I just track money moving from my investment accounts to spending accounts and vice versa. That also gives me some idea about the cash I want to keep on hand. I aim for about 1 year of spending in cash. Luckily for me that is a relative small percentage of my portfolio, so no big cash drag (not that anything is earning much now anyway).
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Re: How do I know what withdrawal rate to use?

Post by Uncorrelated »

Based on Floor and Upside Investing in Retirement without Annuities and Floor and Upside Investing in Retirement with Nominal SPIAs, buy an annuity and put the rest of your portfolio in stocks. The magic chart is this one:

Image

The rest of your assets being mostly stocks.

Depending on your desired spending (this chart was generated with $15k social security income, minimum required spending of $30k and desired spending of $40k), the chart area can shift up or down. More research here: https://www.aacalc.com/about

Stay away from market timing schemes such as glidepaths, Guyton-Klinger or anything involving buckets. Those are based on very poor science.
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Re: How do I know what withdrawal rate to use?

Post by JoeRetire »

UKFred wrote: Sun Aug 09, 2020 7:40 am
JoeRetire wrote: Sun Aug 09, 2020 7:35 am Seems kinda like the definition of "safe withdrawal rate" to me?
I agree. But we can only know what the safe rate is at the end of retirement, while I am trying to think of a way to discover it (or at least fine tune it) as I go along.
I think you are confusing "safe" versus "optimal".
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Re: How do I know what withdrawal rate to use?

Post by muddlehead »

Apologies for having to post this, whenever I see the 4% withdrawal rate discussion. You do know if you did absolutely nothing w/the $$, and still took out 4% a year, it would last 25 years.
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Re: How do I know what withdrawal rate to use?

Post by MathIsMyWayr »

JoeRetire wrote: Sun Aug 09, 2020 3:56 pm
UKFred wrote: Sun Aug 09, 2020 7:40 am
JoeRetire wrote: Sun Aug 09, 2020 7:35 am Seems kinda like the definition of "safe withdrawal rate" to me?
I agree. But we can only know what the safe rate is at the end of retirement, while I am trying to think of a way to discover it (or at least fine tune it) as I go along.
I think you are confusing "safe" versus "optimal".
I imagine I may be able to guess what "safe" means, but I have no idea about what criterion "optimal" is against.
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Re: How do I know what withdrawal rate to use?

Post by David Jay »

muddlehead wrote: Sun Aug 09, 2020 4:27 pm Apologies for having to post this, whenever I see the 4% withdrawal rate discussion. You do know if you did absolutely nothing w/the $$, and still took out 4% a year, it would last 25 years.
The 4% SWR from Bengen and Trinity is an inflation adjusted 4%. Withdrawing cash from under the mattress would last much less than 25 years I’d one was withdrawing in this manner.
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Re: How do I know what withdrawal rate to use?

Post by rich126 »

muddlehead wrote: Sun Aug 09, 2020 4:27 pm Apologies for having to post this, whenever I see the 4% withdrawal rate discussion. You do know if you did absolutely nothing w/the $$, and still took out 4% a year, it would last 25 years.

Yup although depending on inflation you may end up with a lot less purchasing power a decade or two down the road.

I plan to spend more than 4% in the first decade and once social security kicks in, it may drop to 3% or so. Or as someone else mentioned you divide it into buckets with one mostly adhering to 4% and another to conver the early years and maybe a third for emergencies. You don't need high returnsfor ut to last, just avoid big losses. I think 2% real return will last 35+ years. And to avoid running out get an annuity if needed in your 70s or maybe 80.
m@ver1ck
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Re: How do I know what withdrawal rate to use?

Post by m@ver1ck »

How about starting with 4% rule, but
- withdraw and out into savings account.
- that’s ultimately your budget
- In down years don’t withdraw as much or anything - if cash in savings are enough to deal with expenses.
- keep track of the amount you did not withdraw
- when markets are looking back up, withdraw the normal and the $$ you did not withdraw.

- and start with two years of expenses in savings to bootstrap this scheme.
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UKFred
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Re: How do I know what withdrawal rate to use?

Post by UKFred »

JoeRetire wrote: Sun Aug 09, 2020 3:56 pm I think you are confusing "safe" versus "optimal".
Very good point! Optimal is a better word to express what I mean.
dknightd
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Re: How do I know what withdrawal rate to use?

Post by dknightd »

UKFred wrote: Sun Aug 09, 2020 8:52 am I do have the flexibility and other income that makes this possible for me.
I think this is key. If you have other income that covers your "happy enough" expenses then you can pretty much do whatever you want with the rest :) If you spend all of your fun money early, then at least you'll be "happy enough" in your later years.
I retired last year. Before I retired I looked at various withdrawal rate methods, just like you are doing now.
I also looked at our current spending (call it C), and what it would take to be "happy enough" (call it E).
When I retired I was pretty sure we could afford to spend C forever. C is more or less enough to do what ever we want (we have pretty simple wants). E is less than C (about 25% less).
The retirement system in the UK is different than in the USA, so you might have to adjust your planning accordingly.

I spent some time trying to determine how much I could spend in my first year of retirement. As expected, it was C (otherwise I probably would not have retired ;).
I also looked at how I could make sure E would always be safe. My plan is pretty simple, I'll delay SS till 70. I bought one annuity when I retired (essentially I bought myself a pension). I'll buy another annuity when I claim SS (or I might delay till 72 now that the RMD rules have changed). The plan is annuity income plus SS will cover E. My hope/plan is that whatever I have left in tax deferred (which is subject to RMD - required minimum distributions - in the USA) will bring me back up to C .

The biggest unknowns (besides things I do not know) is inflation and portfolio returns. So I did some simple calculations assuming portfolio returns, on average, would match inflation. i.e. 0% real returns. I hope those were conservative calculations, but, it could turn out they were optimistic. Only time will tell . . .

For now I plan to take out enough to cover this years C. For me that is 6% of my initial balance (call is X). If I do that for 8 years, I'll be left with about 1/2 of my current balance when SS kicks in. So the RMD of 4% will provide about 2% of my current balance. Which will keep me at C. Again, assuming that portfolio returns match inflation.

For me "optimal" is my spending will never go down. I do not want to take a pay cut. I can live with a year or so of inflation. Unless inflation goes crazy (and returns tank). The problem, in my mind, with fancy withdrawal methods is they can cause your "income" to drop. And they take time and effort to calculate. I have no interest in spending every penny I have, I just want to be comfortable.

So my plan is: Make sure E is safe above all else. Keep withdrawing X every year. If I want to increase X to match C, make sure E is safe. If I want to spurge one year don't worry about it as long as E is safe.

Edit: It turns out this year we will probably not spend C. Trips and concerts have been cancelled. So we might have a surplus this year. Which I'll probably apply to our mortgage.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.
Bill2020
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Re: How do I know what withdrawal rate to use?

Post by Bill2020 »

I found the Early Retirement Now series very helpful when I retired. 4% is basically a rule of thumb, its a round number and easy to calculate your portfolio target amount (yearly spending x 25). This is a 39 part series that goes in-depth on many factors that may or may not interest you. I don't recall if there is a TLDR summary, but 3.5% with a 75/25 AA sticks in my mind. He covers Guyton-Klinger (debunks it), capital depletion and capital preservation , AA mix, sequence of return risk, and much more. I think he recommends starting at 60/40 with glide to 100/0 in the sequence section. There is also a section were he covers Bogles 10 years of low returns prediction.

https://earlyretirementnow.com/safe-wit ... te-series/
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Sandtrap
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Re: How do I know what withdrawal rate to use?

Post by Sandtrap »

Start with 3%
Adjust per year up or down.
Will this simple start work?

j🏝
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balbrec2
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Re: How do I know what withdrawal rate to use?

Post by balbrec2 »

rkhusky wrote: Sun Aug 09, 2020 8:13 am 4% is my cap for average withdrawal, with 5% for one-off expenses. If I only need 2% or 3% to do what I want, that's what I withdraw.
What about RMD ? If it's not a Roth or after tax portfolio,
maybe we should call it safe spending rate.
IRS doesn't require you to spend it, just withdraw it and pay your taxes.
If it is a Roth or after tax account, withdraw as needed.
Adjusting spending carries less risk than adjusting the WR
Last edited by balbrec2 on Thu Aug 27, 2020 7:35 am, edited 1 time in total.
sailaway
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Re: How do I know what withdrawal rate to use?

Post by sailaway »

balbrec2 wrote: Thu Aug 27, 2020 7:29 am
rkhusky wrote: Sun Aug 09, 2020 8:13 am 4% is my cap for average withdrawal, with 5% for one-off expenses. If I only need 2% or 3% to do what I want, that's what I withdraw.
What about RMD ?
What about it? RMDs require you to move your money, not spend it.
balbrec2
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Re: How do I know what withdrawal rate to use?

Post by balbrec2 »

sailaway wrote: Thu Aug 27, 2020 7:31 am
balbrec2 wrote: Thu Aug 27, 2020 7:29 am
rkhusky wrote: Sun Aug 09, 2020 8:13 am 4% is my cap for average withdrawal, with 5% for one-off expenses. If I only need 2% or 3% to do what I want, that's what I withdraw.
What about RMD ?
What about it? RMDs require you to move your money, not spend it.
I thought we were talking SWR not spending
Seasonal
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Re: How do I know what withdrawal rate to use?

Post by Seasonal »

Sandtrap wrote: Wed Aug 26, 2020 9:00 pm Start with 3%
Adjust per year up or down.
Will this simple start work?

j🏝
A problem is knowing how to adjust. What are the triggers for adjusting and how much should you adjust?

If it's a bad year to you cut spending and, if so, how much, or do you hope it's a temporary glitch and not adjust? Similarly for a good year.
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Sandtrap
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Re: How do I know what withdrawal rate to use?

Post by Sandtrap »

Seasonal wrote: Thu Aug 27, 2020 7:40 am
Sandtrap wrote: Wed Aug 26, 2020 9:00 pm Start with 3%
Adjust per year up or down.
Will this simple start work?

j🏝
A problem is knowing how to adjust. What are the triggers for adjusting and how much should you adjust?

If it's a bad year to you cut spending and, if so, how much, or do you hope it's a temporary glitch and not adjust? Similarly for a good year.
Let's say that retirement expenses are $160k/year.
And, a 3% annual withdrawal = 200k/year.
It makes sense to only withdraw what is needed to live on and if it is less than the 3%, to reinvest, or don't withdraw, that amount for that year. This can't be projected on a spreadsheet because what happens is unknown. So, it's a practical day to day useable strategy vs speculating.
But, let's say one years annual returns are less than 3%, let's say $90k. So, one tries to adjust living expenses downward as one is able to for that year, knowing that over time, with market fluctuations, things will balance out, hopefully (is all one can do). And so forth.

*Adjust up or down per %percentage and size of portfolio and annual expenses.

Again, this is a practical day to day useable strategy that may not fit on a spreadsheet vs speculating (going down a rabbit hole) and projecting which can only do so much.

What we do.
j :happy
Last edited by Sandtrap on Thu Aug 27, 2020 9:00 am, edited 1 time in total.
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jeffyscott
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Re: How do I know what withdrawal rate to use?

Post by jeffyscott »

sailaway wrote: Thu Aug 27, 2020 7:31 am
balbrec2 wrote: Thu Aug 27, 2020 7:29 am
rkhusky wrote: Sun Aug 09, 2020 8:13 am 4% is my cap for average withdrawal, with 5% for one-off expenses. If I only need 2% or 3% to do what I want, that's what I withdraw.
What about RMD ?
What about it? RMDs require you to move your money, not spend it.
balbrec2 wrote: Thu Aug 27, 2020 7:29 ammaybe we should call it safe spending rate.
Yes that would make more sense, SSR (and that could mean sustainable spending rate, too). Or maybe MSSR for maximum sustainable...or SMSR for safe maximum... :?:

It's always perfectly safe to withdraw everything, if you spend none of it. You may pay more in taxes by withdrawing it all right now, but it's still "safe" to do so if you need/want to spend little or none of it, ever.

But the age 70 RMD of 3.6% of assets (or, using the proposed new table, 3.4%) seems like a reasonably a safe figure to use for maximum spending.

Not that this helps with the OP's goal:
UKFred wrote: Sun Aug 09, 2020 6:32 amI also want to front-load my spending to the earlier retirement years, rather than towards the end
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Seasonal
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Re: How do I know what withdrawal rate to use?

Post by Seasonal »

Sandtrap wrote: Thu Aug 27, 2020 8:07 am
Seasonal wrote: Thu Aug 27, 2020 7:40 am
Sandtrap wrote: Wed Aug 26, 2020 9:00 pm Start with 3%
Adjust per year up or down.
Will this simple start work?

j🏝
A problem is knowing how to adjust. What are the triggers for adjusting and how much should you adjust?

If it's a bad year to you cut spending and, if so, how much, or do you hope it's a temporary glitch and not adjust? Similarly for a good year.
Let's say that retirement expenses are $160k/year.
And, a 3% annual withdrawal = 200k/year.
It makes sense to only withdraw what is needed to live on and if it is less than the 3%, to reinvest, or don't withdraw, that amount for that year. This can't be projected on a spreadsheet because what happens is unknown. So, it's a practical day to day useable strategy vs speculating.
But, let's say one years annual returns are less than 3%, let's say $90k. So, one tries to adjust living expenses downward as one is able to for that year, knowing that over time, with market fluctuations, things will balance out, hopefully (is all one can do). And so forth.

*Adjust up or down per %percentage and size of portfolio and annual expenses.

Again, this is a practical day to day useable strategy that may not fit on a spreadsheet vs speculating (going down a rabbit hole) and projecting which can only do so much.

What we do.
j :happy
That's about what we're doing - a very low withdrawal rate makes it easy.

However, many people are closer to the edge or want an "optimal" spend rate. For them, this type of adjustment may not work. They seem to be looking for a degree of precision/certainty that I fear does not exist.

Spend a bit more in good years and a bit less in bad years is a popular answer to my question, although "a bit" is never defined.
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siamond
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Re: How do I know what withdrawal rate to use?

Post by siamond »

UKFred wrote: Sun Aug 09, 2020 6:32 amSo, I am leaning towards a modified (or at least a simplified) form of Guyton-Klinger rules as my preferred withdrawal strategy. [...]
A few years before my own early retirement, I studied withdrawal methods at length, including extensive backtesting (here is one thread where I discusses some results). I needed a plan, winging it was NOT the way to go. A simplified form of Guyton-Klinger rules did come out as one of the strongest contenders. It is both adaptive (upwards and downwards as market conditions evolve) and realistic (doesn't make you change your budget on a whim, e.g. due to a market hiccup). All in all, it is not perfect, but it is an excellent pragmatic compromise.

Guardrail rules are the true core of this approach, which are extremely simple to implement, very intuitive when you think about it, and that's really all you need. No need for this weird play on inflation-adjustment or not (I believe Guyton himself admitted later on this was unnecessary). As an option, stopping to adjust spending downwards after you turn 80 seems reasonable.

As to the initial withdrawal rate, 5% is a decent rule of thumb. It probably should be a reasonable estimate of expected returns (in the probabilistic sense) over your entire retirement period, in real terms. Which is a bit of a crystal ball guess. But using historical numbers, if your AA is X% stocks and Y% bonds, X% * 5% + Y% * 2% isn't a bad guess-timate, based on historical returns (worldwide) for stocks and bonds. Note that it should NOT be a 'safe' value (ala SWR), as the point is to pick a happy medium and then let it oscillate up and down. Now if you plan to spend more in early retirement and less in your twilight years, you may want to beef up the initial rate by half a point or a full point, this tends to create a downward skew over time (in the midst of market vagaries).
backpacker61
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Re: How do I know what withdrawal rate to use?

Post by backpacker61 »

nisiprius wrote: Sun Aug 09, 2020 7:25 am One of the things that is a little frustrating to me is that so far am not aware of any brokerage or other service that lets you automate any systematic withdrawal system, basic or sophisticated.
Vanguard will let you set up an automatic withdrawal program from any investment you own with them.
It is found under the 'Account Maintenance' banner.

http://personal.vanguard.com/us/Automat ... Controller

It's very basic; just how many dollars from which funds and on what interval.

I suspect it's not very popular as it is more tax efficient to spend any capital gains and dividends first, rather than reinvesting them and then selling shares later.
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JaneyLH
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Re: How do I know what withdrawal rate to use?

Post by JaneyLH »

Variable Withdrawal Strategy. Enjoy your money knowing it won’t run out. Simple, easy. Thank you Bogleheads for figuring this out.
balbrec2
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Re: How do I know what withdrawal rate to use?

Post by balbrec2 »

midareff wrote: Sun Aug 09, 2020 6:41 am I like the VPW as a guideline with a small change in that I use the application of the average of the three prior years portfolio balance for smoothing year to year undulations. You could give it a try with or without that change and see if it suits you. Just plug in your data and see what it provides for you.
Do you find this let's you be more aggressive with your AA ?
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midareff
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Re: How do I know what withdrawal rate to use?

Post by midareff »

balbrec2 wrote: Fri Aug 28, 2020 4:18 pm
midareff wrote: Sun Aug 09, 2020 6:41 am I like the VPW as a guideline with a small change in that I use the application of the average of the three prior years portfolio balance for smoothing year to year undulations. You could give it a try with or without that change and see if it suits you. Just plug in your data and see what it provides for you.
Do you find this let's you be more aggressive with your AA ?
Frankly, I've always been very conservative about expenses and we live modestly if you look at expenses vs. income. I started my WR (2012) quite conservatively and that averaged 3.09% annually for the first 4 years of retirement. My concept was to live and cover our expenses with my SS (started age 64) and my state pension, and use the $1M portfolio for the finer things, travel, toys and such. Well, we took 16 cruises since the start of 2015 and some were double and some triple length. All nothing less than upper deck staterooms or multi-room suites with balcony...... and the bill ran, and the bull ran. I was also able to send my wife back to Thailand to visit her daughters and family for 2 to 4 weeks at a time yearly with plenty of shopping money. .. and the bull ran, and the bull ran and it runs this August like there is no tomorrow. After the first four years the average WR for the next 4 was 4.9% and that number is on each of the prior year's closing balance. I just booked a cruise for October 2022, just to not let credit vouchers from the four I had to Covid cancel expire... and the bull ran, and the bull ran. It's almost gotten silly now so I'm going to start building some cash like assets in Thailand so there will be less to move for my wife when my ride is over. If this Covid thing gets resolved and us high risk folks get immunized I'd go back to cruising 4 to 6 times a year and go as high as a 6% or 7% WR or more.... ambulatory times have an expiration date, although I would shrink that down in a hurry if the market situation warrants it.
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