Author Topic: How much of a cushion to have beyond 4% SWR to RE - the issue is budget risk  (Read 1264 times)

NotCreativeName

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I am getting close to pulling the plug and feeling nervous.  We currently have 105.2% of budget at 4% SWR saved in an array of taxable, IRA, Roth & HSA accounts plus just over a year of expected budget in cash.  The SWR budget is after assuming early SS and modest pension (from job 20 yrs ago).  Home is paid for.

Now after doing some modeling, I'm not feeling super confident on the budget #'s.  I can see how just a few extra expenses can impact the % of budget projection.  There's probably no way for me to better tune the budget, so I'm looking for any feedback on how much cushion to have for reasonable protection.  Is 110% of SWR plus 1.5 years living expenses enough?

I'd like to tap out early enough to move $$ from trad IRA to Roth.  Any feedback is appreciated.
« Last Edit: November 12, 2018, 06:33:25 AM by NotCreativeName »

kpd905

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Re: How much of a cushion to have beyond 4% SWR to RE
« Reply #1 on: November 12, 2018, 05:52:11 AM »
Using a $1 million portfolio, your 110% plus 1.5 years means you'd have a total of $1,160,000 for a withdrawal rate of $40k.  Or a 3.45% withdrawal rate.  That seems pretty safe to me.  If you read the whole SWR series from Big ERN he concludes that a 3.5% or so withdrawal rate is what you should shoot for based on current market CAPE ratios and such.

NotCreativeName

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Re: How much of a cushion to have beyond 4% SWR to RE
« Reply #2 on: November 12, 2018, 06:06:52 AM »
Thanks for the feedback.  Thinking of it as a revised SWR is one way of looking at it, but that has to do with market and sequence of returns. 

My issue is that I'm unsure of budget given the variability of healthcare costs and possibility I've underestimated some expenses.  And the stache needs to cover from now to early SS & pension (3.5 years) and then 50% of projected budget.  This is where variability in budget is my risk.

Maybe I'm over-thinking this; there are so many great people on this forum that I'm hoping to get other thoughts than my own into the mix.

2Birds1Stone

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Re: How much of a cushion to have beyond 4% SWR to RE
« Reply #3 on: November 12, 2018, 06:23:38 AM »
Your cushion should be your human capital.

Anyone who got to 25X+ expenses at a relatively early age will be able to adapt and make almost any situation work.

You can simply cut expenses back to 3.5% during really bad market years, and be just fine.

NotCreativeName

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Re: How much of a cushion to have beyond 4% SWR to RE
« Reply #4 on: November 12, 2018, 06:32:10 AM »
Ummmm......I wish!  I'm 58 now, so options are becoming more limited.  Good thing I found MMM a few years back and re-arranged a bit.  And now am much more informed.   

My hope is that I can rest my weary brain sooner than later and manage ACA, Roth conversions and capital gains harvesting to reduce taxes in the future.  I don't want to go into too much more detail to turn this into a full blown case study.

(Thanks for the feedback though, 2B1S; I've been following your journey and you have excellent thoughts.  I've been a lurker for far too long and starting to put myself out there a bit.)


Unique User

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Are you including your future SS in your budget?  Based on your age and short ramp up to SS, you will probably be fine.  I ran our numbers through http://www.cfiresim.com/ and was surprised that I was at a 100% success rate even at a 5% SWR when I included SS dollars. 

NotCreativeName

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Yes - I have calculated based on early SS.  Would actually plan SS date as time get closer and sequence of returns plays out for the first 3 years.

I am thinking the 1.5x budget in cash gives me a cushion to manage overall sequence of returns risk and to cash plan for AGI relative to Roth and ACA.  And that 110% of SWR manages any budget mis-steps I may have made.

Thoughts???

Unique User

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Yes - I have calculated based on early SS.  Would actually plan SS date as time get closer and sequence of returns plays out for the first 3 years.

I am thinking the 1.5x budget in cash gives me a cushion to manage overall sequence of returns risk and to cash plan for AGI relative to Roth and ACA.  And that 110% of SWR manages any budget mis-steps I may have made.

Thoughts???

If I was 58 I'd go for it, but the more conservative members of MMM might say to go another year.  If you are flexible to be able to lower your expenses or do some part time work that might help allay your fears. 

Dicey

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I'd go for it, too. You can always look for something small and relatively easy to supplement your earnings a bit. Crossing guard is one suggestion that pops up often. My only concerns are that SS could decrease and you seem a tad unsure of your actual spending. Another thing to consider is what you actually want to do in retirement and if you've budgeted sufficiently for whatever that might be.

ysette9

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The other thing to consider is your asset allocation. Our plan is to follow the reverse equities glide path in the first years of retirement to hedge against sequence of returns risk. In plain English that means we plan in starting FIRE with 40% bonds and then slowly ramping up to a final allocation of around 80% stocks for our long-term asset allocation. This allows protection against the market dumping in the beginning of retirement and then the equities needed later to combat inflation.

The recipe we plan to follow is based on this research:

https://www.google.com/amp/s/earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/amp/

secondcor521

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Rather than calculate a budget in a forward-looking manner as it sounds like OP is doing - I think I'll spend $X on insurance, $Y on travel, $Z on food, etc. - I decided to track what I actually spent in a backward-looking manner.  I then approached the RE question this way:  "If my actual spending divided by my current portfolio value is 100% historically safe, am I OK with that?"  That is, do I feel comfortable with my current rate of spending, or do I want it to go up in retirement, or do I know it will go down for whatever reason?

OP, have you tracked your actual spending?  For how long?  How does it compare to your budget?

If you have tracked for several years and your budget that you're using to calculate your 4% number is higher, then I'd say you're fine.  Especially since it sounds like you're assuming taxes stay the same after you retire.  For me my taxes went from my largest single budget category to less than zero.  Based on what you've written so far, I'm guessing that you will see some of the same effect.

NotCreativeName

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Thanks so much to all who have replied.  Really good feedback so far - I will be looking more closely at some of the strategies referenced above.  I only have about 18 months of good budget data, but lots of assumptions on allowances for repairs/replacement for large ticket items, taxes, and healthcare costs.  Not sure how to validate at this point. 

Also, both my husband and I have worked from home so a large % of our home & property expenses have been tax deductible.  I've used a few different modeling programs for modeling taxes based on type of investment accounts and draw-down.

Any additional thoughts are much appreciated.

Another Reader

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Thanks so much to all who have replied.  Really good feedback so far - I will be looking more closely at some of the strategies referenced above.  I only have about 18 months of good budget data, but lots of assumptions on allowances for repairs/replacement for large ticket items, taxes, and healthcare costs.  Not sure how to validate at this point. 

Also, both my husband and I have worked from home so a large % of our home & property expenses have been tax deductible.  I've used a few different modeling programs for modeling taxes based on type of investment accounts and draw-down.

Any additional thoughts are much appreciated.

It would probably be helpful for you to join the early-retirement.org forum.  That group is full of people in your age group, plus or minus a few years, that have already retired or are planning to retire.  Run your numbers and scenarios by them. 

One thing I would suggest is that you spend a bit more time tracking your expenses.  Make sure your proposed budget correlates to your actual spending and that it includes expected major future expenses, such a a new roof, cars, etc.  Consider the effect of reduced Social Security in later years and how safe your pension is.  Any employer paid health insurance after retirement  is subject to change, as many people, myself included, have discovered.  Factor that in.