Author Topic: CASE STUDY - Safe Withdrawal % You Would Use?  (Read 1762 times)

rolliefingers

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CASE STUDY - Safe Withdrawal % You Would Use?
« on: January 28, 2018, 07:52:45 AM »
Market run-up aside, I believe we are ready to escape at the end of 2018. 

*I am seeking SWR advice and a "how to" on pre 59.5 drawdowns from the community. 

Life Situation:  I am 45 & my wife is 36.  We live in the Midwest & have no children.

Gross Salary/Wages: We earn a combined $270k a year.

Portfolio:
Taxable: $1.27MM
IRA 1:  $813K
401k 1: $363K
IRA 2:  $30K
401k 2: $45K
savings: $57K
HSA:  $3K
TOTAL:  $2.58MM

Pension:  @ 65, I have a $16,800 Non-COLA adjusted pension which will begin

Dividends have been coming in around $40K for past couple of years.

Social Security:  I no longer include it in my calculations

Only Debt:  Mortgage has $305K left at 3.125% for 19 years ($551K was starting point)

Current expenses:  Our current spend is 85-92K a year. 
We are looking to sell our home and downsize significantly.  This will reduce the spend into the 60Ks, in all likelihood.  Another consideration is purchasing a two level home in Hawaii.  Renting out the bottom at 1500 a month will cover most of our monthly spend for the mortgage.  This is our heavy lean on "what to do next."  Granted, our grocery and energy bills will rise but these will be offset by some form of part time work of our choosing.

I guess my two questions are, where would you choose to peg your SWR in this scenario?

And, before 59.5 how would you plan to meet your spending needs?  I am honestly not sure that Roth conversions are even needed in our situation.  I would appreciate any insights, especially from the "been there/done that" folks who have lived it already.

Cheers.  Thanks for reading through and any commentary provided.
« Last Edit: January 28, 2018, 03:31:03 PM by rolliefingers »

SwordGuy

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #1 on: January 28, 2018, 08:14:40 AM »
I love Hawaii.   Lived there for 3 years.   That set of rocks in the ocean can get really small.

So, for me, it's a great place to visit but I wouldn't want to live there.

Everybody's different, but the above is food for thought.

My guess is that if you live in the Midwest in a $551,000 house, you live in a house that's way bigger than you need.   So unless it was the best of all possible houses for me to live in, I would downsize and never worry about money again.  Again, that's just me. 

wordnerd

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MDM

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #3 on: January 28, 2018, 11:05:42 AM »
...where would you choose to peg your SWR in this scenario?
That's an interesting question.

The Compound Annual Growth Rate (CAGR) needed to support the "4% rule" for 30 years is 1.31% (assuming withdrawal at the start of the year).

Using the same 1.31% CAGR for a 50 year period, the withdrawal rate that exactly depletes the balance is 2.7%.

But, historically, the vast majority of 4% withdrawers have more after 30 years than they started with.

Looking at ~50 year retirement, I might hedge the 4% down "somewhat", but how much...?  Depends on how well the day started. ;)

ender

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #4 on: January 28, 2018, 12:25:55 PM »
I think before you figure out the % you should figure out the things you "might do" which have massive implications.

You *might* reduce spending to 60k, "in all likilhood." Well, would it?

You *might* buy a place in Hawaii.  Well, will you? Hawaii is also much higher COL than most midwest locations. I'm curious on your math for $1500/month covering all living expenses.

I'm also a little confused how downsizing will reduce your spend by nearly $30k though, so I kind of think I'm missing something. Are you really going to be able to reduce your housing costs by $3k a month?

rolliefingers

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #5 on: January 28, 2018, 03:29:27 PM »
Thanks SwordGuy -- noted, on both fronts.

I love Hawaii.   Lived there for 3 years.   That set of rocks in the ocean can get really small.

So, for me, it's a great place to visit but I wouldn't want to live there.

Everybody's different, but the above is food for thought.

My guess is that if you live in the Midwest in a $551,000 house, you live in a house that's way bigger than you need.   So unless it was the best of all possible houses for me to live in, I would downsize and never worry about money again.  Again, that's just me.

rolliefingers

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #6 on: January 28, 2018, 03:39:08 PM »
Ender - to clarify, if our present home sells and we downsize in the Midwest, then we will buy our next home with cash (our current home equity).

This would eliminate the current 1795 we pay monthly for mortgage & 3000 we pay bi-annually for our creeping property taxes.  When reduced utilities and upkeep are spun in from the large property, yes, our monthly outlay in Indiana will be vastly lower.

As for Hawaii, I corrected my poor sentence structure.  The lower level rental, at 1500/mo, would pay nearly all of the mortgage on the property we have identified.  Property taxes are less than half of where we live now.

So, you make a fair point.  We do not have our next step perfectly mapped out as of yet. 

To answer my own question, a 3.5% SWR ought to provide smooth passage for whatever route we decide upon.



I think before you figure out the % you should figure out the things you "might do" which have massive implications.

You *might* reduce spending to 60k, "in all likilhood." Well, would it?

You *might* buy a place in Hawaii.  Well, will you? Hawaii is also much higher COL than most midwest locations. I'm curious on your math for $1500/month covering all living expenses.

I'm also a little confused how downsizing will reduce your spend by nearly $30k though, so I kind of think I'm missing something. Are you really going to be able to reduce your housing costs by $3k a month?

Laura33

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #7 on: January 29, 2018, 07:17:44 AM »
Given your massive taxable 'stache, you are correct that you may not actually need to do a Roth pipeline.  But under some circumstances it would be stupid not to.  Specifically, assuming you do not have any earned income and will have very simple taxes, you will have a $24K standard deduction available.  Any amount that you convert from your IRA/401(k) counts as income.  So that means that you can convert $24K every year from your 401(k)s/IRAs into a Roth, and pay zero taxes on that conversion.  And of course since you didn't pay taxes on that money at all when you put it in your 401(k)/IRA in the first place, that means you get tax free contributions, growth, and withdrawals on every penny that you convert.  That's called a win-win-win.

That said, your situation may be somewhat different given your significant CGs.  There is still a 0% tax rate threshold on CGs, but it is based on your AGI + CGs; I think the total for MFJ is around $77K to stay in the 0% bracket.  So depending on how much you have in terms of CGs to meet your annual living expenses, it is possible that adding $24K more "income" via Roth conversions could push you out of the 0% CG bracket, which would be costly.  Similarly, if you do take a part-time job, that would "take up" some of the $24K space the standard deduction provides.  So you should definitely run the numbers and check out how things would play out in your particular situation. 
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waltworks

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #8 on: January 29, 2018, 01:56:30 PM »
Well, if you didn't change your lifestyle/reduce expenses at all, and your pension never came through, and you never got any social security...you're at 3.5% right now.

That's already insanely conservative. Is there some other question you are really trying to ask here? There's no "advice" to give other than that you're more than golden as long as you don't start spending much, much more than you do now.

-W

rolliefingers

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #9 on: January 31, 2018, 05:28:57 AM »
Thanks Laura

Given your massive taxable 'stache, you are correct that you may not actually need to do a Roth pipeline.  But under some circumstances it would be stupid not to.  Specifically, assuming you do not have any earned income and will have very simple taxes, you will have a $24K standard deduction available.  Any amount that you convert from your IRA/401(k) counts as income.  So that means that you can convert $24K every year from your 401(k)s/IRAs into a Roth, and pay zero taxes on that conversion.  And of course since you didn't pay taxes on that money at all when you put it in your 401(k)/IRA in the first place, that means you get tax free contributions, growth, and withdrawals on every penny that you convert.  That's called a win-win-win.

That said, your situation may be somewhat different given your significant CGs.  There is still a 0% tax rate threshold on CGs, but it is based on your AGI + CGs; I think the total for MFJ is around $77K to stay in the 0% bracket.  So depending on how much you have in terms of CGs to meet your annual living expenses, it is possible that adding $24K more "income" via Roth conversions could push you out of the 0% CG bracket, which would be costly.  Similarly, if you do take a part-time job, that would "take up" some of the $24K space the standard deduction provides.  So you should definitely run the numbers and check out how things would play out in your particular situation.

rolliefingers

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #10 on: January 31, 2018, 05:31:13 AM »
Walt:

I appreciate your input.  Did you personally stick with the 4% level to begin?  I am finding a number of folks who use 3.5% in the first few years to diminish "sequence of returns risk" then ratchet it up to 4% thereafter.  Thanks.

Well, if you didn't change your lifestyle/reduce expenses at all, and your pension never came through, and you never got any social security...you're at 3.5% right now.

That's already insanely conservative. Is there some other question you are really trying to ask here? There's no "advice" to give other than that you're more than golden as long as you don't start spending much, much more than you do now.

-W

waltworks

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #11 on: January 31, 2018, 07:13:46 AM »
I can't advise you there, other than to say that the 4% rule already incorporates sequence of return risks pretty damn well. Seriously, go read the original Trinity study.

In my own case, I enjoy my work enough that I continue to work ~20 hours a week. So we run a significant surplus and don't withdraw from investments at all. If I were looking to quit earning any money at all, I'd probably do something like 5%. Being too conservative will cost you years and years of your life, and in the worst case scenarios, it's really not hard to go back to work and earn $10k a year if you need to.

-W

Walt:

I appreciate your input.  Did you personally stick with the 4% level to begin?  I am finding a number of folks who use 3.5% in the first few years to diminish "sequence of returns risk" then ratchet it up to 4% thereafter.  Thanks.

Well, if you didn't change your lifestyle/reduce expenses at all, and your pension never came through, and you never got any social security...you're at 3.5% right now.

That's already insanely conservative. Is there some other question you are really trying to ask here? There's no "advice" to give other than that you're more than golden as long as you don't start spending much, much more than you do now.

-W

rolliefingers

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #12 on: January 31, 2018, 12:43:25 PM »
Interesting that you would take 5%.  I see a lot of posters talk about using 2.75%, which is absurd.

I believe I will read the study.  It is something I have not done prior.

4% would be beyond our needs and the lifestyle would be too lavish to comprehend.  Believe I will use the Variable Percentage Withdrawal method in order to not skimp on charitable contributions.

While we are here, how has the ACA impacted your retirement, if you happen to use it.

Thanks again Walt.

I can't advise you there, other than to say that the 4% rule already incorporates sequence of return risks pretty damn well. Seriously, go read the original Trinity study.

In my own case, I enjoy my work enough that I continue to work ~20 hours a week. So we run a significant surplus and don't withdraw from investments at all. If I were looking to quit earning any money at all, I'd probably do something like 5%. Being too conservative will cost you years and years of your life, and in the worst case scenarios, it's really not hard to go back to work and earn $10k a year if you need to.

-W

Walt:

I appreciate your input.  Did you personally stick with the 4% level to begin?  I am finding a number of folks who use 3.5% in the first few years to diminish "sequence of returns risk" then ratchet it up to 4% thereafter.  Thanks.

Well, if you didn't change your lifestyle/reduce expenses at all, and your pension never came through, and you never got any social security...you're at 3.5% right now.

That's already insanely conservative. Is there some other question you are really trying to ask here? There's no "advice" to give other than that you're more than golden as long as you don't start spending much, much more than you do now.

-W

waltworks

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Re: CASE STUDY - Safe Withdrawal % You Would Use?
« Reply #13 on: January 31, 2018, 12:57:43 PM »
Interesting that you would take 5%.  I see a lot of posters talk about using 2.75%, which is absurd.

I believe I will read the study.  It is something I have not done prior.

4% would be beyond our needs and the lifestyle would be too lavish to comprehend.  Believe I will use the Variable Percentage Withdrawal method in order to not skimp on charitable contributions.

While we are here, how has the ACA impacted your retirement, if you happen to use it.

Thanks again Walt.

Really, the folks who are going for <4% are being irrational. Your risks in RE run the gamut from health problems to communist rebel government seizes all private assets/meteor strike. If you're doing 4% rule stuff, running out of money is actually not one of your big risks of having your RE survive 30/40/50 years.

And as Arebelspy pointed out once - if you work 10 extra years to get to 2%, that's sort of an *up front* RE failure, right? I'd rather take the very small risk of running out of money than spend years doing something I hate (this is theoretical, of course - I like my job).

On the ACA front, it's been awesome. Since we only need ~$35k/year, it's very easy to keep our AGI right above the Medicare cutoff. We're currently paying $5.99 (yes, that's right) for a bronze plan for a healthy family of 4.

Now, whether that situation can last is pretty questionable. I'd assume everyone will pay more for HC going forward and I am not about to count on the ACA to stay in place forever. But right now, it's great.

-W