Portfolio Withdrawal 4% rate with Ceiling and Floor

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Alan Roy
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Portfolio Withdrawal 4% rate with Ceiling and Floor

Post by Alan Roy » Mon Jul 21, 2014 6:10 pm

Hi all, my first post, I think. It's been a while since I came to this site. I'm 66, married, and retired at 61 and my wife (65) also retired at 61. Naturally, I am concerned about my retirement nest egg lasting us - until our early 90's, anyway. (I know Vanguard goes to 100 in their simulations but, although healthy, I'm quite certain I won't make it to 100! And, regardless, I know my money won't last that long anyway - hence, I'm planning to early/mid 90's for both of us).

I just recently transferred money from a Fidelity IRA into the VTINX Retirement Income Fund which has 30% stocks. I've always read about the 4% withdrawal rate thing.
I just watched a Vanguard video about three Withdrawal Strategies -(A) a 4% Dollar amount grown by inflation (B) a straight 4% percentage of portfolio and, (C) a 4% percentage of portfolio with "Ceiling and Floor" variable amounts to use as guardrails in subsequent years. https://personal.vanguard.com/us/insights/video/2901-Exc1
I have a question about this Ceiling and Floor hybrid strategy. Vanguard randomly used a 5% Ceiling to withdraw (never withdraw more than 5% of the previous year's amount) and a 2.5% Floor (never withdraw less than 2.5% less than the year before). So, if the market is good the preceding year do you withdraw the Ceiling amount (previous year +5%) and if it is bad you withdraw the Floor amount (previous year -2.5%)? How does that tie in with anything? How "good" or "bad" should the market have been to use those figures? With my VTINX fund being a conservative 30% stocks, it probably won't make more than 5% anyway. I'm just not understanding the randomness of the 5% and 2.5% figures. Where did they come from? Thanks all for any input or feedback. I appreciate it.

gvsucavie03
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Re: Portfolio Withdrawal 4% rate with Ceiling and Floor

Post by gvsucavie03 » Mon Jul 21, 2014 8:10 pm

All of these are merely suggestions, but no one knows the "best" withdrawal rate or method.

Obviously the most risky choice is a fixed amount with an annual inflation increase. The least risky is a fixed rate (variable withdrawal amount based on portfolio value).

I think your floor is what it takes to live on. Anything beyond that needs to be based on what the market produces.

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Dale_G
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Re: Portfolio Withdrawal 4% rate with Ceiling and Floor

Post by Dale_G » Mon Jul 21, 2014 8:32 pm

I think you have it reversed Alan. The idea is to take no more than 5% when the market has done badly - and no less than 2-1/2% if the market has done well.

In practice, RMDs may force larger withdrawals, but the excess can be invested in a taxable account.

Dale
Last edited by Dale_G on Mon Jul 21, 2014 9:06 pm, edited 1 time in total.
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Phineas J. Whoopee
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Re: Portfolio Withdrawal 4% rate with Ceiling and Floor

Post by Phineas J. Whoopee » Mon Jul 21, 2014 8:49 pm

Alan Roy wrote:Hi all, my first post, I think. It's been a while since I came to this site. I'm 66, married, and retired at 61 and my wife (65) also retired at 61. Naturally, I am concerned about my retirement nest egg lasting us - until our early 90's, anyway. (I know Vanguard goes to 100 in their simulations but, although healthy, I'm quite certain I won't make it to 100! And, regardless, I know my money won't last that long anyway - hence, I'm planning to early/mid 90's for both of us).
...

HI Alan, and welcome to the forum!

Not to argue about that part, but I'm going to argue about that part. :wink:

Any one person might not be likely to make it beyond early 90s, but for a couple, that one or the other of them could is well within the range of possibilities.

I have a pair of older relatives who are hurting financially. Their reasoning for spending slightly too much was "we won't live forever." Today they're both much older than what they assumed "not living forever" meant. They've only recently stopped borrowing more than what it takes just to pay the interest on what they already borrowed. Their former (seemingly modest) overspending is causing them severe problems now - losing their house level problems. (Of course signing a note without reading it or even keeping a copy didn't help either.)

I'm not saying assume living forever, but I am saying while you're planning think about the fact lifespan is uncertain, and adopt a flexible approach with (financial) downside (that is to say living a long and active life!) protection. You're already thinking about it with the ceiling and floor strategy. There's more you can do, and we can help you. Keep asking questions.

PJW

Spewin
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Re: Portfolio Withdrawal 4% rate with Ceiling and Floor

Post by Spewin » Mon Jul 21, 2014 9:35 pm

The withdrawal method you're referring to is detailed here:

https://www.google.com/url?sa=t&rct=j&q ... WXoYaf-aJA

Heres how it works:

The first year, take 4% as "Sallary" of your portfolio.

Every year after do the following:

1. Calculate 4% of your portfolio. This is your Goal Salary.
2. Add 5% to last years salary. This is your Ceiling.
3. Take 2.5% from your last years salary. This is you Floor.
4. Take the middle of these three numbers as this years salary. (i.e. take the goal amount unless it is above the ceiling or bellow the floor. Then take that amount instead.)


Note that while this method has a higher success rate, this might be barbecue success could be taking $10k per year and never depleting the portfolio after a string of bad years. Success in this case is just not running out of money.

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Peter Foley
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Re: Portfolio Withdrawal 4% rate with Ceiling and Floor

Post by Peter Foley » Mon Jul 21, 2014 9:48 pm

There is a withdrawal strategy described on the Wiki that is a version of the ceiling and floor strategy you talk about. The ones I have read about are based on the Trinity Study. One use of a ceiling and floor approach is to not give oneself too big a raise when inflation is high. If one takes this approach it increases the confidence level that the 4% withdrawal rate can be sustained.

There are a few of these strategies described in the Boglehead's Wiki. They are more guides than absolutes.

gkaplan
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Re: Portfolio Withdrawal 4% rate with Ceiling and Floor

Post by gkaplan » Mon Jul 21, 2014 10:09 pm

I also think Vanguard's website describes this.
Gordon

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Sheepdog
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Re: Portfolio Withdrawal 4% rate with Ceiling and Floor

Post by Sheepdog » Mon Jul 21, 2014 10:42 pm

Alan, I did not like the "Ceiling and Floor" method. It is too confining for me. And, I don't understand why you would write
I know Vanguard goes to 100 in their simulations but, although healthy, I'm quite certain I won't make it to 100! And, regardless, I know my money won't last that long anyway.
Why would you believe that? I certainly don't. Now in my 16th retirement year, approaching 81, having taken out an average of 4.5% a year, my assets have grown. There's no ceiling and no floor for me, except for staying within a planned average withdrawal. My annual withdrawal goal is 4.5%, but I may take more than that and I may take less than that, but I maintain the average, year to year. I have taken out as low as 3.11% in any one year (2009), and as much as 7.52% in another (2011), but the average since 1998 is 4.52% as of the end of 2013. I believed that keeping annual records of spending and withdrawals and calculating the average withdrawals to stay within the planned average year to year, works to finance my retirement along with SS. (My average investment earnings invested in "100 minus my age in stocks" has been 6.62% the last 18 years or 6.13% the last 10....well more than my 4.52% withdrawal.) I won't run out at 90 or 100 (unless I lose all of my sanity.) Why do you believe that you can't have enough?
Jim
Last edited by Sheepdog on Tue Jul 22, 2014 12:52 am, edited 1 time in total.
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Re: Portfolio Withdrawal 4% rate with Ceiling and Floor

Post by placeholder » Tue Jul 22, 2014 12:50 am

Alan Roy wrote:Hi all, my first post, I think.

Nope: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=114891

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