3 year rolling average for withdrawal rate

[djadziadax]

Just today I heard a concept about WR based on a 3 year rolling average of the stash. Is that something anyone is contemplating? So rather than 4% of the stash whatever it is on Jan 1st of that year, it is 4% of the average balance of the accounts in the past 3 years.

Has any blogger talked about?

[RWD]

The traditional SWR is based on the amount you had when you retired (inflation-adjusted). Increasing spending when the stash increases by taking a flat percentage will result in being unable to meet your living expenses. Even a super conservative 2% WR can result in down years where you can then only spend 1% of the original stash amount because you overspent in the good years. Using a 3-year rolling average will help smooth this out a bit but I imagine it runs into the same problems.

You may be interested in looking into one of the variable withdrawal rate strategies.

[terran]

Agreed, a fixed percentage withdrawal rate isn't really the same thing as the safe withdrawal rates we usually talk about on retirement forums. That said, it is an option. For example, higher education endowments are usually drawn down at 5% per year. A fixed withdrawal rate literally can't run out of money since a percentage less than 100% of a number is always less than the number, so the problem is that the withdrawal can be highly variable and could fall below an amount you can live on.

The suggestion of using a moving average would help stabilize things somewhat since when markets are trending upward the previous lower years would keep the withdrawal down and when markets are trending downwards the previous higher years would keep the withdrawal up, but you'd still have years when the amount you can spend is lower than previous years. Since our expenses are generally what they are and people prefer progress to going back this chance of a reduced withdrawal could be painful. This is why the withdrawal rate's we usually discuss are based on the initial portfolio value plus inflation in following years. This does mean we need to start with a lower fixed+inflation withdrawal amount than we would a fixed percentage because we need to account for down years somehow.

[fuzzy math]

If you're using that value to rate DOWN the amount you withdraw, it seems like a solid idea. If you're using it to justify increased withdrawl amounts it seems that could put you in harms way. (ie, there was a downturn at the beginning of the current year)

[bmjohnson35]

The 4% rule is a standardized guideline that can be used to see if your stash is possibly adequate for early retirement.  I never considered it a literal percentage amount to be withdrawn annually.  The amount you need year-to-year is based on your actual expenses plus discretionary spending.  Of course, you could track your actual amount used annually to see how close you are tracking against the aforementioned "standard."   

[djadziadax]

Thank you all for the reply - basically this is a dynamic withdrawal strategy and I see you recommend being cautious with inflating the withdrawal. That is a good point.

[BicycleB]

One approach to a dynamic withdrawal strategy is to use % increase / decrease rules based on performance, such as increase by 5% if portfolio has risen 5% or more, etc. Portfoliocharts.com has a Retirement Spending calculator that lets you input a given portfolio, set your spending rules, and then calculates the results that would have been produced based on all the known data from about 1970.

https://portfoliocharts.com/charts/

[RedmondStash]

I'd be cautious about any strategy that encourages you to increase withdrawals during good years.

What I do is keep a projection of how my investments would have performed had they seen a 7% increase each year, instead of the average 11+% they've seen in the last 5 years. I fully expect the market to flatten out and even drop at some point for a sustained amount of time, and looking at an average 7% increase helps me keep my spending modest during boom years.

[FIRE Artist]

If you want a dynamic withdrawal plan, you would likely be better off looking into the Variable Percentage Withdrawal (VPW) plan where your annual withdrawal percentage is a function of your age and portfolio risk profile, and coordinated with future fixed income and an income floor. 

You can find details about this over at Boggleheads. 

This is how I intend to draw down my portfolio as I don’t have any dependents so am planning to drain my investments by age 100, while ensuring a minimum income through fixed income streams and saving house equity for any assisted living/long term care needs. 

[Bateaux]

I'm 18 dollars a day away or within 95% of my 4% withdrawal amount goal.  Pretty good odds.