Proposing new acronym NWR (Necessary Withdrawal Rate)

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TheTimeLord
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Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by TheTimeLord »

Reading through the recent threads about living on dividends and 2% SWR has made me believe we need a new acronym, NWR (Necessary Withdrawal Rate). The reason I think we need this new acronym is that I don't think people saying they want to achieve a 2% SWR are meaning that is all they will spend or possibly even want to spend, I believe what they are saying is that they are targeting 2% to be all they need to spend to maintain a certain lifestyle. Maybe that is already understood, maybe it is wrong or maybe the acronym NWR already exists but I think at least in my case it would add clarity when I try to explain some of the things I am considering. Thoughts, criticisms?
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JoMoney
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by JoMoney »

Does anybody actually use a hard SWR for their real-world withdrawal method?
To be clear, the SWR methodology only used a percentage of the portfolio at a single point in time when withdrawals started, then never again used a percentage it used the dollar amount and adjusted it up with inflation. People talking about having a 2% SWR under that context are essentially bragging about their portfolio being well beyond the size of anything needing to worry having depleted over 30 years (which is the SWR studies context.) On its face, a 2% SWR suggests it would last 50 years if only keeping up with inflation.

If you can reference a book or study that utilizes a "NWR" methodology, and it's simple enough to understand, perhaps it will catch on for people running their back-tests for withdrawal scenario testing.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by jebmke »

JoMoney wrote: Wed May 25, 2022 7:52 am Does anybody actually use a hard SWR for their real-world withdrawal method?
I know a lot of retirees. None of them use a mathematical method. Some do have a mental barrier between the income (interest and dividends) thrown off and the invested capital but that isn't atypical, especially in my generation.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by quietseas »

Or just withdrawal rate so it is factual without making judgement about whether the withdrawals fund necessary, desired, discretionary, or luxury expenses.
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JoMoney
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by JoMoney »

jebmke wrote: Wed May 25, 2022 7:55 am
JoMoney wrote: Wed May 25, 2022 7:52 am Does anybody actually use a hard SWR for their real-world withdrawal method?
I know a lot of retirees. None of them use a mathematical method. Some do have a mental barrier between the income (interest and dividends) thrown off and the invested capital but that isn't atypical, especially in my generation.
Prior to interest rates falling to unbelievably low levels, the advice I always heard was your spending should be generally coming out of the income of the portfolio, and only selling off capital gains/principal on rare occasions when there was a shortfall. In a time when stocks were generally yielding 2-3%, and and bonds yielded around 6%, having a balanced portfolio that was generally expected to throw off around 4% in distributions from the get-go was the norm.
John Bogle in Bogle on Mutual Funds part IV wrote:... It is conventional wisdom that an investor should never dip into principal. Broadly speaking, that is sound policy. Yet circumstances may arise under which you will need additional spendable resources. In my view, spending principal is often better than increasing the yield on the account...
Last edited by JoMoney on Wed May 25, 2022 8:12 am, edited 1 time in total.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Doc7 »

My contention is that there is no such thing as a “2% SWR.” The “SWR” is a calculated number and you can arrive at one based on various studies and formulas from 3-4.8%.

The “SWR” (despite subjectivity in determining WHAT it is) is the same for every investor, and can be predicted based on studies or known in reflection for a given cohort of retirees and asset allocation. Your “WR” can be anything from 0 to 100% of SWR. 2% isn’t an SWR, it is a WR.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Nowizard »

Our view of a withdrawal rate is based on the overall, primary goal of our assets lasting as long as we do, including any goal of leaving an inheritance, donations to charity, children, increased/decreased spending for assisted/nursing care or other unknowns that we project. The necessary and the goal interact. For example, there are some who withdraw what they feel is "necessary" even though it is not prudent and risks depleting their portfolio when cutting expenses would be more sustainable but others who withdraw what is "necessary" but less than would be sustainable.

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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by vineviz »

Doc7 wrote: Wed May 25, 2022 8:05 am My contention is that there is no such thing as a “2% SWR.” The “SWR” is a calculated number and you can arrive at one based on various studies and formulas from 3-4.8%.

The “SWR” (despite subjectivity in determining WHAT it is) is the same for every investor, and can be predicted based on studies or known in reflection for a given cohort of retirees and asset allocation. Your “WR” can be anything from 0 to 100% of SWR. 2% isn’t an SWR, it is a WR.
Thank you. I was about to make the same point.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Gecko10x »

Doc7 wrote: Wed May 25, 2022 8:05 am My contention is that there is no such thing as a “2% SWR.” The “SWR” is a calculated number and you can arrive at one based on various studies and formulas from 3-4.8%.

The “SWR” (despite subjectivity in determining WHAT it is) is the same for every investor, and can be predicted based on studies or known in reflection for a given cohort of retirees and asset allocation. Your “WR” can be anything from 0 to 100% of SWR. 2% isn’t an SWR, it is a WR.
Exactly. The problem is people misusing the term "SWR" when they mean "planned WR".
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by nigel_ht »

JoMoney wrote: Wed May 25, 2022 7:52 am Does anybody actually use a hard SWR for their real-world withdrawal method?
SWR is a ceiling and not a floor. As such many folks use SWR in the FIRE community.

We plan on using it for our own retirement with some minor modifications:

$200K “Fun” budget to be spent in the first 10 years for travel and whatever.

3.5%-4% SWR baseline dependent on valuations at time of retirement and targeting a 50% bequest at end of 30-40 years.

https://earlyretirementnow.com/2016/12/ ... ation/amp/

After that it’s simple budgeting…once a quarter move 1/4 of the annual budget to cash.

Once a year compute annual budget based on CPI and make sure there is enough in short term safer assets for quarterly transfer. Rebalance if it’s time to rebalance (once every 4 years).

LBYM and ignore market and finances. If there is money in the bank it’s spendable. If there is too much money in the bank give some to kids or charity.

No spreadsheets or worries about leaving behind too much or or too little or running out of money as long as the 3.5%-4% baseline is comfortable enough to begin with.

Or to use the NWR term…so long as NWR + desired luxuries is below SWR everything is good.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by nigel_ht »

Doc7 wrote: Wed May 25, 2022 8:05 am My contention is that there is no such thing as a “2% SWR.” The “SWR” is a calculated number and you can arrive at one based on various studies and formulas from 3-4.8%.

The “SWR” (despite subjectivity in determining WHAT it is) is the same for every investor, and can be predicted based on studies or known in reflection for a given cohort of retirees and asset allocation. Your “WR” can be anything from 0 to 100% of SWR. 2% isn’t an SWR, it is a WR.
That’s a good way of explaining it…I wouldn’t call it subjective though…as you say, it’s a calculated number.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by TheTimeLord »

Doc7 wrote: Wed May 25, 2022 8:05 am My contention is that there is no such thing as a “2% SWR.” The “SWR” is a calculated number and you can arrive at one based on various studies and formulas from 3-4.8%.

The “SWR” (despite subjectivity in determining WHAT it is) is the same for every investor, and can be predicted based on studies or known in reflection for a given cohort of retirees and asset allocation. Your “WR” can be anything from 0 to 100% of SWR. 2% isn’t an SWR, it is a WR.
Yeah, to me SWR equals something like 3.7% for a 30 year retirement, I guess if you bring AA into there would be some variation. If your goal is to live off 2% inflation adjusted in retirement it probably is most logical to say 2% WR.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Ron »

We're at the age that our withdrawal rate is defined by the government via the RMD table - not by us. We don't withdraw any Roth IRA holdings (they are being held for estate bequests) and we're lucky that what we do withdraw via RMD's is more than we need to cover our annual expenses (along with other retirement income sources).

Excess RMD's go to savings. We don't reinvest in taxable funds since the bulk of our TIRA's are subject to investment risk. We don't need to add more risk at this stage of our lives (mid-70's).

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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by jebmke »

nigel_ht wrote: Wed May 25, 2022 8:21 am SWR is a ceiling and not a floor.
Which demonstrates how useless it is except as a wet finger sustainability test. If I had a "SWR" of 2% I could go for several years, say at 1% and then easily have a year with an excursion to 4-5% without any harm. So I could easily blow the lid off the ceiling.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by WoodSpinner »

OP,

I am using a metric like the NWR but am not sure we are defining it the same.

I categorize my expenses to include my Minimum Dignity Floor (Food, Transportation, Utilities, Healthcare, Housing) and then other groups like Gifting, Charity, Fun etc. Borrowed this idea from Jim at The Riterment and IRA Show.

My goal is to understand the Necessary Withdrawal Rate needed to cover my Minimum Dignity Floor over time. Before SS, I need a 1% (approx) rate to cover the gap since my Pension covers the rest. If this shifts upwards by more than 10% it’s time for a deeper look at these expenses. After SS, I should have all of the Minimum Dignity Floor covered by Pensions+SS. If this shifts upwards by more than 10% it’s time for a deeper look.

If my NWR rate was > 3% I would be out looking for a part time job to help reduce the NWR and to improve the quality of my Retirement.

I overlay a Total Withdrawal Rate Metric to roughly align to VPW and ABW but typically I am spending a bit more than these targets. This aligns with our overall Retirement Goal of really enjoying our GoGo years, Gifting, and Charitable Giving.

So, I am not sure if you want to shift your definition of NWR or just continue. Personally fine either way, but I do think there is significant value in my approach — whatever you call it.

WoodSpinner
Last edited by WoodSpinner on Thu May 26, 2022 12:27 am, edited 1 time in total.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Jack FFR1846 »

Any SWR or NWR is simply a starting point. Are you even close to being financially independent? I've recommended to people, especially with mortgages or with kids heading to college that a spread sheet documenting expected future expenses, income, assets annually is more enlightening. This makes 4 years of college for a kid at $80k a year easy to document and show effect on assets. Starting SS at 70, RMDs at 72 again can be done.

A listing of expenses in retirement are the starting point for SWR. Taking that list and dividing it into invested assets gives you the magic 4% number or in my case, 2%. My kids are done with college so the big upcoming expense is going to be an expensive, stupid car for me. But also, that 2% percentage is going to dramatically drop. What? Drop? Yes, because my method of accounting for social security for both me and DW at 70 is going to reduce the amount needed. So in my case, $66k for my initial retirement spending sees....let's say $40k of my social security and drops it to $26k. So now, my initial 2% is now 0.7%. Then when DW hits 70 and collects SS at 30k, spending drops to a negative number and the percentage goes to 0, or negative technically.

Also, it's very important in my opinion to set a RETIREMENT spending list. You aren't putting money in a 401k when retired. Your other taxes are very different and need to be considered one by one. Sure, property tax may be the same but what about payroll taxes? Probably gone. Income taxes due to Roth conversions? Probably there but controllable and low. Travel? A big one for us rich Bogleheads. Mine's set at $5k a year. I'm sure others are set at $30k or $50k or sky's the limit. In any case, that's the basis of figuring out if you're at 4% or 3.8% or 2%. Then go to the spread sheet and look forward to expected numbers.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by spectec »

Interesting discussion. I see SWR as a running average that I need to achieve. None of us live our lives in annual segments, so why would we manage our finances that way? Sometimes we might exceed our SWR and in other times we should come short of it in order to stay "within the range". But the concept is valid over a long period of time if one want to maximize the probability of not running out of money in retirement.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Marseille07 »

jebmke wrote: Wed May 25, 2022 8:37 am Which demonstrates how useless it is except as a wet finger sustainability test. If I had a "SWR" of 2% I could go for several years, say at 1% and then easily have a year with an excursion to 4-5% without any harm. So I could easily blow the lid off the ceiling.
You could, but you don't is the point of the ceiling.

There's nothing preventing you from spending 10% of your assets in a year, no matter which methodology you're using.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by nigel_ht »

jebmke wrote: Wed May 25, 2022 8:37 am
nigel_ht wrote: Wed May 25, 2022 8:21 am SWR is a ceiling and not a floor.
Which demonstrates how useless it is except as a wet finger sustainability test. If I had a "SWR" of 2% I could go for several years, say at 1% and then easily have a year with an excursion to 4-5% without any harm. So I could easily blow the lid off the ceiling.
There are 3 general scenarios:

1) You didn’t save enough for your desired retirement. Your withdrawal rate is above 5-6%.

No withdrawal strategy can help you meet your retirement objectives. You should plan on eventual depletion and living only on SS.

Good outcomes will delay depletion. Bad outcomes will hasten depletion but it will happen unless death intervenes first.

2) You’ve saved so much that your withdrawal rate is below 2-3% like your example where you live several years at 1% using a 2% WR baseline.

You can use any of withdrawal method (or just wing it) and your probability of failure is still minimal. Your biggest risk is some health issue permanently ballooning your expenses or the collapse of the western financial system.

Unexpected health expenses is your largest risk and no withdrawal strategy will help with that.

3) You’ve saved in between scenario 1 and 2. Your required WR is somewhere from 3-5% which is probably enough to support your desired retirement lifestyle given historical performance.

Your withdrawal method might make some marginal difference in outcomes but for the most part the different strategies just push risk around, not eliminate any. Anyone telling you different is selling you something.

You trade some level of portfolio depletion risk (say from using 4% SWR) for risk of insufficient withdrawals to meet living expenses (variable withdrawal strategies) during worse than historical outcomes.

The largest variable generally isn’t portfolio performance (because we have historical data) but expenses.

Single year excursions is lost in the noise…it’s a sustained excursion over a very long period that is the most significant and likely most common risk and no withdrawal strategy mitigates that risk.

So none are much more than “wet finger sustainability test” since the error bars are so wide in both performance and expenses.

Performance risk is the less likely of the two since worse than historical worst cases are rare.

Folks get sick for long periods on a far more regular basis. That’s not a once in a blue moon outcome.

So using a SWR method is conceptually simple and gives you sufficient comparison to see how well you are trending vs historical outcomes. Very few other methods gives you the same wealth of historical analysis.

Mitigation of unexpected expenses over long periods is done using other strategies that are generally equally applicable to whatever withdrawal method you use.
Last edited by nigel_ht on Wed May 25, 2022 10:22 am, edited 1 time in total.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by nigel_ht »

WoodSpinner wrote: Wed May 25, 2022 9:26 am Before SS, I need a 1% (approx) rate to cover the gap since my Pension covers the rest. … After SS, I should have all of the Minimum Dignity Floor covered by Pensions+SS.
Here is an example where any withdrawal strategy works…whether you pick SWR, VPW, ABW is immaterial.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by nigel_ht »

jebmke wrote: Wed May 25, 2022 8:37 am
nigel_ht wrote: Wed May 25, 2022 8:21 am SWR is a ceiling and not a floor.
Which demonstrates how useless it is except as a wet finger sustainability test. If I had a "SWR" of 2% I could go for several years, say at 1% and then easily have a year with an excursion to 4-5% without any harm. So I could easily blow the lid off the ceiling.
Oh, if you really care about underspend you can always just add it to your EF…then any unexpected excursions are covered which is what the EF is for anyway.

Likewise, you ignored the bit where we are reserving $200K for travel outside of our baseline budget.

Whatever our computed SWR ends up being, we are unlikely to ever exceed it except for a large expansion of expenses cause by some health issue of a family member.

Like Marseille pointed out…you’re not supposed to exceed ceilings…that’s the point of them.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Marseille07 »

nigel_ht wrote: Wed May 25, 2022 10:30 am Oh, if you really care about underspend you can always just add it to your EF…then any unexpected excursions are covered which is what the EF is for anyway.

Likewise, you ignored the bit where we are reserving $200K for travel outside of our baseline budget.

Whatever our computed SWR ends up being, we are unlikely to ever exceed it except for a large expansion of expenses cause by some health issue of a family member.

Like Marseille pointed out…you’re not supposed to exceed ceilings…that’s the point of them.
Correct. If you want to track the money underspent, you treat the money as if it is already *withdrawn*, hence it is no longer part of your asset allocation.

Adding to your EF outside of your AA is the correct move if you must track this.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by jebmke »

Marseille07 wrote: Wed May 25, 2022 10:34 am Adding to your EF outside of your AA is the correct move if you must track this.
Mental accounting. Besides, I have no EF; ditched it in my 40s. My entire portfolio is my EF.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by nigel_ht »

jebmke wrote: Wed May 25, 2022 10:38 am
Marseille07 wrote: Wed May 25, 2022 10:34 am Adding to your EF outside of your AA is the correct move if you must track this.
Mental accounting. Besides, I have no EF; ditched it in my 40s. My entire portfolio is my EF.
Then whatever your short term safe investment bucket is. Whatever you want to call it.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Marseille07 »

jebmke wrote: Wed May 25, 2022 10:38 am
Marseille07 wrote: Wed May 25, 2022 10:34 am Adding to your EF outside of your AA is the correct move if you must track this.
Mental accounting. Besides, I have no EF; ditched it in my 40s. My entire portfolio is my EF.
So you don't need to track the $ underspent from 4% SWR? Then I lost track of what you're trying to accomplish.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by jebmke »

nigel_ht wrote: Wed May 25, 2022 10:41 am
jebmke wrote: Wed May 25, 2022 10:38 am
Marseille07 wrote: Wed May 25, 2022 10:34 am Adding to your EF outside of your AA is the correct move if you must track this.
Mental accounting. Besides, I have no EF; ditched it in my 40s. My entire portfolio is my EF.
Then whatever your short term safe investment bucket is. Whatever you want to call it.
There is nothing to add to -- it simply doesn't get withdrawn if it isn't being spent.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by jebmke »

Marseille07 wrote: Wed May 25, 2022 10:41 am
jebmke wrote: Wed May 25, 2022 10:38 am
Marseille07 wrote: Wed May 25, 2022 10:34 am Adding to your EF outside of your AA is the correct move if you must track this.
Mental accounting. Besides, I have no EF; ditched it in my 40s. My entire portfolio is my EF.
So you don't need to track the $ underspent from 4% SWR? Then I lost track of what you're trying to accomplish.
mine was a hypothetical example of why WR is only relevant as an indicator of sustainability. I keep track of spending in total more out of curiosity (and it is easy to do once per year). If I stopped keeping track, nothing would change. I have enough data to know now that our initial budget was largely correct.

You have to keep in mind that the concept of "a number" and SWR are more recent and the people in my generation didn't come up through their accumulation years thinking about retirement in this fashion. When it came time to seriously think about retirement I had VG run some simulations (they used to do that for free) and I did a few quick simulation type exercises with Firecalc and other tools. The conclusion was that it was feasible. After that, I largely ignored the whole thing.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Marseille07 »

jebmke wrote: Wed May 25, 2022 10:52 am mine was a hypothetical example of why WR is only relevant as an indicator of sustainability. I keep track of spending in total more out of curiosity (and it is easy to do once per year). If I stopped keeping track, nothing would change. I have enough data to know now that our initial budget was largely correct.

You have to keep in mind that the concept of "a number" and SWR are more recent and the people in my generation didn't come up through their accumulation years thinking about retirement in this fashion. When it came time to seriously think about retirement I had VG run some simulations (they used to do that for free) and I did a few quick simulation type exercises with Firecalc and other tools. The conclusion was that it was feasible. After that, I largely ignored the whole thing.
Well...it sounds like you have enough, and that's fantastic. That said, the concept of SWR (or whatever methodology) being the ceiling is still important because it would allow one to spend up to that amount without jeopardizing their retirement (note: I'm assuming market returns would remain similar and a retiree chose something reasonable like 4%/year, not 15%/year).

It doesn't mean you must spend 4% every year or have to track the underspent $ to "make whole" later, though you certainly *could* do so if you so choose. You could also go *above* 4% then balance out in future years, though I do not recommend this approach in case your spending stays elevated for whatever reason and you might go over the ceiling.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by jebmke »

Marseille07 wrote: Wed May 25, 2022 11:01 am go *above* 4% then balance out in future years, though I do not recommend this approach in case your spending stays elevated for whatever reason and you might go over the ceiling.
Yes, it does depend a lot on why you are deviating. If it is for one-time things, it is easy to expect that you can avoid those in future years. We actually had our highest spending in the three years 2008-10 right after I retired. But the big ticket items were travel and home improvement which I didn't expect to continue indefinitely. It was simply a good time to spend money (ignoring the markets) because the prices were good, contractors were available and in the case of travel, the destinations were uncluttered with the usual crowds of tourists. 2010 was also extra big spending because I did Roth conversions that year so our tax expenditure spiked.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by nigel_ht »

jebmke wrote: Wed May 25, 2022 10:44 am
nigel_ht wrote: Wed May 25, 2022 10:41 am
jebmke wrote: Wed May 25, 2022 10:38 am
Marseille07 wrote: Wed May 25, 2022 10:34 am Adding to your EF outside of your AA is the correct move if you must track this.
Mental accounting. Besides, I have no EF; ditched it in my 40s. My entire portfolio is my EF.
Then whatever your short term safe investment bucket is. Whatever you want to call it.
There is nothing to add to -- it simply doesn't get withdrawn if it isn't being spent.
If you care to know if a 4-5% excursion matters (ie increases risk of failure) then you would need to track underspend.

If you think excursions are likely then you’d want to keep the underspend in the same place you put short term money which means you will generally have more liquidity (and a higher balance) than if you hadn’t underspent.

Regardless, you haven’t made any case that any other method is much more than a wet finger test of sustainability so how you track (or even if you need to) underspend for SWR is immaterial…
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by marcopolo »

JoMoney wrote: Wed May 25, 2022 7:52 am Does anybody actually use a hard SWR for their real-world withdrawal method?
To be clear, the SWR methodology only used a percentage of the portfolio at a single point in time when withdrawals started, then never again used a percentage it used the dollar amount and adjusted it up with inflation. People talking about having a 2% SWR under that context are essentially bragging about their portfolio being well beyond the size of anything needing to worry having depleted over 30 years (which is the SWR studies context.) On its face, a 2% SWR suggests it would last 50 years if only keeping up with inflation.

If you can reference a book or study that utilizes a "NWR" methodology, and it's simple enough to understand, perhaps it will catch on for people running their back-tests for withdrawal scenario testing.
It is a misuse of terminology, even by people that are very knowledgeable.

Individuals do not have a SWR. People have their own WR.
The SWR was the result of an observational study to determine the highest real withdrawal rate that was sustainable in the past. It is a fixed number 4% or 3.8%, depending on what study you look at. That does not change based on what anyone chooses to do. They can have a lower, or even higher WR, but the SWR is still what it is. Some day we may get poorer outcomes that change the SWR, but it will not be because of individual decisions to use specific WR.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by jebmke »

nigel_ht wrote: Wed May 25, 2022 11:08 am Regardless, you haven’t made any case that any other method is much more than a wet finger test of sustainability so how you track (or even if you need to) underspend for SWR is immaterial…
When looking at sustainability (which is a forward looking assessment, not backward), SWR is a static number. At the end of the day, probabalistic methods are more robust. To do those requires distribution functions on both the returns and the spending to make them really robust.

Looking backward at what I didn't spend is irrelevant. The pile is what it is whether it got there through underspending or some other means.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by WoodSpinner »

nigel_ht wrote: Wed May 25, 2022 10:18 am
WoodSpinner wrote: Wed May 25, 2022 9:26 am Before SS, I need a 1% (approx) rate to cover the gap since my Pension covers the rest. … After SS, I should have all of the Minimum Dignity Floor covered by Pensions+SS.
Here is an example where any withdrawal strategy works…whether you pick SWR, VPW, ABW is immaterial.
Nigel,

Wish it were that easy….

My Total Withdrawal Rate has been averaging about 4.5%, Travel, Gifting, Charity add up. After SS it will drop to 2% (approximately). Still some risk that the markets head south and stay south but manageable.

For us, the thought of missing out on the fun of Retirement in our GoGo years is greater (at
least that is our perception) than running out of funds in Retirement. Definitely one of the personal choices of personal finance.

WoodSpinner
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by bertilak »

Doc7 wrote: Wed May 25, 2022 8:05 am 2% isn’t an SWR, it is a WR.
So, at what percent dose it become safe?

When planning for retirement by looking at "necessary" expenses, given a portfolio size, what withdrawal rate is necessary to cover those expenses? Does your necessary withdrawal rate come in below the safe withdrawal rate?

In other words, I think the concept of a necessary withdrawal rate is a useful planning metric.

I don't know if NWR will ever become a widely used acronym. One can't make it so by edict but when talking about withdrawal rates one should be clear about which aspect one is talking. This could be necessary, planned, projected, safe, or actual.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by HMSVictory »

What you need to spend and what you'd like to spend are the most important numbers to know for retirement.

I think your acronym is good and focuses the mind on the necessities (food, taxes, utilities, insurance, ect).

You can cut back on giving, eating out, car upgrades and vacation if needed.

I do think it is a mistake to under spend early in retirement out of fear and miss out on the go-go years. Just my 2 cents.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by harvestbook »

To me the NWR and SWR are pretty much the same. The most important number is the expected minimum budget I can comfortably live on. Everything above that is gravy, since I'm pretty content with basic necessary things. I've never really wanted things I can't afford and I don't expect that to change in the next few decades. Of course there are the wild cards like the death of capitalism or the more-possible health depletion.

Psychologically I can go "Hmm, 4 percent looks good. I can get by on 2 percent if needed. Don't worry about it." It will be fun to see what the actual outcome will be, but based on my past, I know I can cut spending a lot easier than I can wish for more things to spend money on.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by nigel_ht »

WoodSpinner wrote: Wed May 25, 2022 11:37 am
nigel_ht wrote: Wed May 25, 2022 10:18 am
WoodSpinner wrote: Wed May 25, 2022 9:26 am Before SS, I need a 1% (approx) rate to cover the gap since my Pension covers the rest. … After SS, I should have all of the Minimum Dignity Floor covered by Pensions+SS.
Here is an example where any withdrawal strategy works…whether you pick SWR, VPW, ABW is immaterial.
Nigel,

Wish it were that easy….

My Total Withdrawal Rate has been averaging about 4.5%, Travel, Gifting, Charity add up. After SS it will drop to 2% (approximately). Still some risk that the markets head south and stay south but manageable.

For us, the thought of missing out on the fun of Retirement in our GoGo years is greater (at
least that is our perception) than running out of funds in Retirement. Definitely one of the personal choices of personal finance.

WoodSpinner
Not sure how 1% became 4.5% but given you’ll get SS it works out fine…

As I said above we are funding our GoGo years with $200K that’s not counted for SWR.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Ben Mathew »

Doc7 wrote: Wed May 25, 2022 8:05 am My contention is that there is no such thing as a “2% SWR.” The “SWR” is a calculated number and you can arrive at one based on various studies and formulas from 3-4.8%.

The “SWR” (despite subjectivity in determining WHAT it is) is the same for every investor, and can be predicted based on studies or known in reflection for a given cohort of retirees and asset allocation. Your “WR” can be anything from 0 to 100% of SWR. 2% isn’t an SWR, it is a WR.
Agree with this.

I will also add that the term "SWR" seems to implicitly assume fixed withdrawals, whereas the term "WR" is general and can be applied to variable withdrawals as well.

Also, "SWR" rate is on the starting portfolio, whereas "WR" would be on the current portfolio.
Last edited by Ben Mathew on Wed May 25, 2022 6:59 pm, edited 1 time in total.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Doc7 »

bertilak wrote: Wed May 25, 2022 11:48 am
Doc7 wrote: Wed May 25, 2022 8:05 am 2% isn’t an SWR, it is a WR.
So, at what percent dose it become safe?

When planning for retirement by looking at "necessary" expenses, given a portfolio size, what withdrawal rate is necessary to cover those expenses? Does your necessary withdrawal rate come in below the safe withdrawal rate?

In other words, I think the concept of a necessary withdrawal rate is a useful planning metric.

I don't know if NWR will ever become a widely used acronym. One can't make it so by edict but when talking about withdrawal rates one should be clear about which aspect one is talking. This could be necessary, planned, projected, safe, or actual.

The objective “SWR” to me, is the % depletion of portfolio in Year 1 with subsequent inflation adjustments that ends at $0.00 on the day of the retirees death and never negative in the intervening years.

(This is why I said it is subjectively calculated, because some may calculate it based on 30 years. Or 35. Or with a different inflation adjustment. SS Bridge inclusion. Or with a 95% success vs 100%. And so on.)

Anything above it is “unsafe” and anything below it was “too safe” unless an inheritance is desirable. It can truly only be known based on future knowledge but you can estimate an “SWR” based on all available data to you, and then choose a WR in the 0-SWR as a max % range, and most likely live more than happily ever after, at least until you die, with regards to finances. Or you can choose one of the plethora other portfolio depletion methods discussed on this forum. But it’s nearly impossible that your “SWR” is 2% in any case.


I don’t think there is “N” WR outside of the calories, minimum shelter, and health care you need to survive. I think you need to simplify your language to simply say, “withdrawal rate”, and in the simplest of portfolio depletion methods, it needs to be at or below what you have determined based on data available to you to be a “safe withdrawal rate”.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by WoodSpinner »

nigel_ht wrote: Wed May 25, 2022 3:35 pm
WoodSpinner wrote: Wed May 25, 2022 11:37 am
nigel_ht wrote: Wed May 25, 2022 10:18 am
WoodSpinner wrote: Wed May 25, 2022 9:26 am Before SS, I need a 1% (approx) rate to cover the gap since my Pension covers the rest. … After SS, I should have all of the Minimum Dignity Floor covered by Pensions+SS.
Here is an example where any withdrawal strategy works…whether you pick SWR, VPW, ABW is immaterial.
Nigel,

Wish it were that easy….

My Total Withdrawal Rate has been averaging about 4.5%, Travel, Gifting, Charity add up. After SS it will drop to 2% (approximately). Still some risk that the markets head south and stay south but manageable.

For us, the thought of missing out on the fun of Retirement in our GoGo years is greater (at
least that is our perception) than running out of funds in Retirement. Definitely one of the personal choices of personal finance.

WoodSpinner
Not sure how 1% became 4.5% but given you’ll get SS it works out fine…

As I said above we are funding our GoGo years with $200K that’s not counted for SWR.
My goal is to understand the Necessary Withdrawal Rate needed to cover my Minimum Dignity Floor over time. Before SS, I need a 1% (approx) rate to cover the gap since my Pension covers the rest. If this shifts upwards by more than 10% it’s time for a deeper look at these expenses. After SS, I should have all of the Minimum Dignity Floor covered by Pensions+SS. If this shifts upwards by more than 10% it’s time for a deeper look.
The 1% relates to my Minimum Dignity Floor Cashflow Requirements.

4.5% relates to total spend which includes the Minimum Dignity Floor + Vacations + Dining out + Gifting + Charity + Other expenses.

I use this approach to insure my Minimum Dignity Floor Expenses are covered by guaranteed income (Pensions +SS). It’s similar to the Safety First Retirement Planning Approach.

Hope that explains things…

WoodSpinner
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Marseille07 »

I think a lot about this these days.

Let's say I need 70K/year (medical estimate included but no discretionary budget). If I want to finance this at 3% WR, I need 2.33M.

The question is, can I walk with 2.33M at 4% WR, drawing 93K/year? The idea is that, since my bare minimum is 70K/year, I have 20K+ of discretionary accounted for by simply raising the WR% from 3% to 4%. And of course, I can slash the discretionary if things get tight.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by 9-5 Suited »

I was just thinking what we needed was another withdrawal approach acronym :) This seems to just be restating the differences between mandatory and discretionary expenses. I don't see a ton of utility in making such distinctions ... I want to live my life a certain way. I could live in a one room shanty with a roomate, eat canned tuna, and pay my utility bill. So anything above that is 'discretionary' and we're just talking about lifestyle choice.

Much better, IMO, to have a simple, workable downside plan. It could be as simple as "if X happens to my portfolio, we will reduce vacation budget by $x".
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Marseille07 »

9-5 Suited wrote: Thu May 26, 2022 1:43 pm I was just thinking what we needed was another withdrawal approach acronym :) This seems to just be restating the differences between mandatory and discretionary expenses. I don't see a ton of utility in making such distinctions ... I want to live my life a certain way. I could live in a one room shanty with a roomate, eat canned tuna, and pay my utility bill. So anything above that is 'discretionary' and we're just talking about lifestyle choice.

Much better, IMO, to have a simple, workable downside plan. It could be as simple as "if X happens to my portfolio, we will reduce vacation budget by $x".
I kind of agree, the more I think about NWR the less I like, because at the end of the day we need to include discretionary budget then multiply by 25X, 33X or what have you. Peeking NWR can give some information but it's not terribly useful to know.

The "downside plan" should be a simple one though. If I budgeted 15K/year as discretionary, then I ought to be able to slash all of it if necessary.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by MathWizard »

My NWR would be 2% if I don't lower my standard of living , but also don't do the traveling I want.

This will is what I call the hunker down rate .

If I go to a barbones rate, I could go a bit lower, but it much.

The biggest expense that I could cut would be driving and car replacement.

We could go to 1 car, and drive half as much and drop to 1.75% .

I plan using 3.4% WR
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Marseille07 »

If my NWR is 3% and WR is 4%, could I walk with 2.3M?

Think of something along the lines of: 2.3M port, 70K/year necessary spending, 90K/year spending including discretionary (70K+20K).

I feel 4% WR is a bit high, but my approach is "use it or lose it" tracked monthly so it's *unlikely* to be 4% spent in full every year. For example, I don't reinvest dividends so I'm likely skipping withdrawals one month every quarter because dividends provide extra fixed income to be spent down instead of drawing from equities.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by marcopolo »

Marseille07 wrote: Fri May 27, 2022 11:41 am If my NWR is 3% and WR is 4%, could I walk with 2.3M?

Think of something along the lines of: 2.3M port, 70K/year necessary spending, 90K/year spending including discretionary (70K+20K).

I feel 4% WR is a bit high, but my approach is "use it or lose it" tracked monthly so it's *unlikely* to be 4% spent in full every year. For example, I don't reinvest dividends so I'm likely skipping withdrawals one month every quarter because dividends provide extra fixed income to be spent down instead of drawing from equities.
At the risk of turning this into yet another "are dividends free money?" debate...

You don't think taking the dividends is withdrawing from your portfolio?!?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Marseille07 »

marcopolo wrote: Fri May 27, 2022 12:54 pm At the risk of turning this into yet another "are dividends free money?" debate...

You don't think taking the dividends is withdrawing from your portfolio?!?
It is, but it's a bit more nuanced than that in this context, because we're talking about withdrawing 0.33% (4% / 12) vs skipping a month (the "use it or lose it" concept).

You don't need to have loads of dividends to tip your fixed income amount above your threshold, at which point I don't slash equities for a month.
Last edited by Marseille07 on Fri May 27, 2022 3:18 pm, edited 1 time in total.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by nigel_ht »

Marseille07 wrote: Thu May 26, 2022 2:20 pm
9-5 Suited wrote: Thu May 26, 2022 1:43 pm I was just thinking what we needed was another withdrawal approach acronym :) This seems to just be restating the differences between mandatory and discretionary expenses. I don't see a ton of utility in making such distinctions ... I want to live my life a certain way. I could live in a one room shanty with a roomate, eat canned tuna, and pay my utility bill. So anything above that is 'discretionary' and we're just talking about lifestyle choice.

Much better, IMO, to have a simple, workable downside plan. It could be as simple as "if X happens to my portfolio, we will reduce vacation budget by $x".
I kind of agree, the more I think about NWR the less I like, because at the end of the day we need to include discretionary budget then multiply by 25X, 33X or what have you. Peeking NWR can give some information but it's not terribly useful to know.

The "downside plan" should be a simple one though. If I budgeted 15K/year as discretionary, then I ought to be able to slash all of it if necessary.
The probability that the stock market will have a worse than 1929 or 1966 outcome during your retirement is low. So a 97% (or whatever) success rate for 4% over 30 years is very safe. So a 3.something SWR that results in 100% historical success is fairly conservative.

I would say that the NWR spending is "If I spend this much I don't need to do anything drastic...like move in with the kids".

If your NWR number is based around moving to Penang on the MM2H program and geoarbitrage then covid probably just taught you that strategies that work in most normal years can unexpectedly fall apart and drastically changing your NWR...

Somewhat less adventurous would be assuming you can live in your LCOL forever home only to discover that you need to have frequent medical care and the only provider is 3 hours away in a HCOL area...

Or rather than moving in with the kids some of them boomerang on you and now your NWR is higher.

So the more likely outcome is you calculated your NWR wrong and it pushed your total spending above the SWR amount.

Therefore it would be good to know what that estimated NWR number would be before you pull the retirement trigger...because as folks often point out, we don't get to live the average outcome. Then start adding to that NWR number for a few common outcomes...

"Plans Are Worthless, But Planning Is Everything" - Eisenhower
Marseille07 wrote: Fri May 27, 2022 11:41 am If my NWR is 3% and WR is 4%, could I walk with 2.3M?

Think of something along the lines of: 2.3M port, 70K/year necessary spending, 90K/year spending including discretionary (70K+20K).

I feel 4% WR is a bit high, but my approach is "use it or lose it" tracked monthly so it's *unlikely* to be 4% spent in full every year. For example, I don't reinvest dividends so I'm likely skipping withdrawals one month every quarter because dividends provide extra fixed income to be spent down instead of drawing from equities.
I think you can trim that $70K...but unless something dire happens you don't need to...

So that seems pretty safe...there's more of a risk that you won't spend your discretionary because the situation is iffy even though it turns out not to be as bad as historical worst cases.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by Marseille07 »

nigel_ht wrote: Fri May 27, 2022 1:21 pm The probability that the stock market will have a worse than 1929 or 1966 outcome during your retirement is low. So a 97% (or whatever) success rate for 4% over 30 years is very safe. So a 3.something SWR that results in 100% historical success is fairly conservative.

I would say that the NWR spending is "If I spend this much I don't need to do anything drastic...like move in with the kids".

If your NWR number is based around moving to Penang on the MM2H program and geoarbitrage then covid probably just taught you that strategies that work in most normal years can unexpectedly fall apart and drastically changing your NWR...

Somewhat less adventurous would be assuming you can live in your LCOL forever home only to discover that you need to have frequent medical care and the only provider is 3 hours away in a HCOL area...

Or rather than moving in with the kids some of them boomerang on you and now your NWR is higher.

So the more likely outcome is you calculated your NWR wrong and it pushed your total spending above the SWR amount.

Therefore it would be good to know what that estimated NWR number would be before you pull the retirement trigger...because as folks often point out, we don't get to live the average outcome. Then start adding to that NWR number for a few common outcomes...

"Plans Are Worthless, But Planning Is Everything" - Eisenhower
Well, it's not easy to estimate expenses accurately. That's why my necessary spending is 70K/year; it doesn't include travel, but I am probably overestimating healthcare / car (12K and 7.6K respectively). But it's better to be conservative than aggressive & end up falling short.
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Re: Proposing new acronym NWR (Necessary Withdrawal Rate)

Post by marcopolo »

Marseille07 wrote: Fri May 27, 2022 1:01 pm
marcopolo wrote: Fri May 27, 2022 12:54 pm At the risk of turning this into yet another "are dividends free money?" debate...

You don't think taking the dividends is withdrawing from your portfolio?!?
It is, but it's a bit more nuanced than that in this context, because we're talking about withdrawing 0.33% (4% / 12) vs skipping a month (the "use it or lose it" concept).

You don't need to have loads of dividends to tip your fixed income amount above your threshold, at which point I don't slash equities for a month.
Dividends (not reinvested) is "slashing equities".
Once in a while you get shown the light, in the strangest of places if you look at it right.
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