Help! SWR from WHAT?

[DCPhil]

Long time lurker, first time poster. Looking forward to the wisdom of the community.

I’m 57. Not married. One kid, who's fully launched and doing fantastic. Four years ago, my portfolio hit $1.2 million, an amount that funded my projected $42k annual FIRE expenses at a conservative 3.50% SWR. (and that’s not counting social security) 

When I hit this number, I decided to sell my business, and, if not fully retire, then at least take substantial time off. The sale netted me $250,000. I’ve been living off of this money for the last four years, and letting my portfolio grow.

These four years, I’ve lived a bunch of dreams, including a indulgent $20,000 purchase. All that, and I still spent an average of only $45k per year. My original $42k annual projection seems accurate and comfortable. I’ve decided that I don’t want to work for money again, and consider myself retired.

Here is my question: during these four years, my portfolio has grown to more than double the original amount. It’s currently just over $2.5 million. So when I start drawing down from this portfolio, should I draw down based on my original $1.2 amount? This new $2.5 amount? Something in between?

My four years have taught me that a $42k budget is comfortable—and also that I can find meaningful ways to spend more. Not especially interested in leaving an estate: I'd prefer spend the money while I'm alive, on indulgences for my family, friends and myself.

What do you all recommend for withdrawl?

[bigalsmith101]

DCPhil, first and foremost, Congratulations on a retirement at age 53! Fantastic! Secondly. What a great time to put your money to work over the past 4-5 years. You're portfolio doubled, fantastic!

Now, to answer your question. It will really depend on what kind of investments your portfolio is distributed into. At your position, I would be considering a very low risk type of investment and settle on a 3% safe withdrawal rate that allowed about $75k in annual spending. That will significantly increase your annual budget, allow you much greater freedom to spend as you see fit, and of course, your portfolio will likely continue growing.

At the same time, this will allow you the flexibility to choose how you want to spend the increasing funds that you are in control of. You can spend time deciding where your comfort zone is relative to your portfolio, and if you want to spend a large portion at once, you can accommodate that by reducing your annual spend. You've already figured out the hard part of living within your means. The easy part now, is to decide how you want to distribute it as you age gracefully into the FIRE.

Alternatively, you could divide your portfolio into two separate segments, if only in theory, rather than in reality. Utilize one part as your living expenses and "survival" fund, and utilize the second as your "meaningful ways to spend more" fund.

You're in a position where you could take 4% SWR from the entire $2.5 million, and have 100% success by the time of your death, whenever that may be. You've also mentioned that your spending rate doesn't include Social Security which will, in my estimations, conservatively add 40% to your current annual spend rate.

You're sitting in a fantastic position. I'm glad you've found time enjoy it!

[dandarc]

Well, the 4% rule says that your portfolio is highly likely to last 30 years if you start at 4% the day you retireme, and blindly adjust that amount upwards for inflation every year.

So, you should be able to draw $100K in year 1, and adjust for inflation without issue.  Since you're so close to social security - only 5 years  until you can draw, 13 until you have to - you can likely go even higher than that.  If you're worried about current valuations being too high, a 3% withdrawal is $75K, which is still a lot of money.

[DCPhil]

Thanks for the advice and support!

BigAl and Bender: that "split portfolio" approach is great. It lets me peel off my regular expenses from the "indulgence money." And that gives me both the comfort of covering my bases, plus the fun of dreaming up meaningful treats and surprises for family and friends.

[DCPhil]

At your position, I would be considering a very low risk type of investment

I would probably go with a 60/40 stock/bond split

A follow up question about risk: I'm currently 80% in stocks. And half of my portfolio is in 3-4 stocks I've held for a long time that have performed very well.

I agree about creating a low risk portfolio now. When I look objectively at what I own, I know the usual way to cut risk would be to sell partial positions of those 3-4 stocks, given the appreciation and portfolio percentage. BUT, I am more confident about their future performance than about anything else I own. In light of this, what is the best way to reduce portfolio risk? (or do I just need facepunches for my stock ownership/allocation?)

[secondcor521]

I agree about creating a low risk portfolio now. When I look objectively at what I own, I know the usual way to cut risk would be to sell partial positions of those 3-4 stocks, given the appreciation and portfolio percentage. BUT, I am more confident about their future performance than about anything else I own. In light of this, what is the best way to reduce portfolio risk? (or do I just need facepunches for my stock ownership/allocation?)

If I were in your shoes, I would sell enough of those 3-4 stocks so that each makes up no more than 3-4% of your total investment portfolio.  If they are in a taxable account, I would probably sell as much as I could reasonably justify paying taxes on (maybe up to the top of the 28% bracket) each year and try to get it done in a few years.

I'm sure you like the stocks and they have done well.  But you're taking, IMHO, an outsized risk for the reward you're getting.  They may be perfectly good competitors with great cash flows and good strategic positions and fantastic CEOs with a good vision and all of that...but the industry might get affected by something exogenous, or the company may get hit with something outside of their control.  As an example, the stock price of Kroger's about a week ago.  Good company, well-managed, but they announce some bad news one day and then Amazon buys Whole Foods the next, and boom, their stock goes from about $30 to about $22 in two days.

So yeah, facepunches a little for you.  But I'm completely an index mutual fund buy-and-hold guy.  I figured out long ago that with time and average 10% returns, I'd be fine.  And it has worked out for me just as I expected it would.  YMMV.

[dandarc]

Thirded - you've already won the game with these individual stocks, so it is time to stop playing.  Reduce risk by moving towards index funds in a way that makes sense in light of taxes.

[DCPhil]

Thirded - you've already won the game with these individual stocks, so it is time to stop playing. 

Well said. Thanks Secondcor521, Bender and Dandarc. Those face punches hardly hurt at all!

[chasesfish]

I'll add to this:

At your position in life, just use Vanguard and split your money between the Wellington Fund and the Wellesley Income Fund.  You've won the stock/index fund game, its time to turn it over to the cheapest active management in the world on a 50/50 bond and income stock portfolio.  0.15% and 0.16% expense ratio respectively for admiral shares.

Then start researching gift taxing/gift rules and contributing out to your family or helping buy experiences.  Pick your floor on value (maybe $1.5mil) and enjoy. 

One of my former frugal and very wealthy clients always got the most value out of cruises, picked a week and went to a travel agent and set the parameters (room type, airfare) then invited all of his friends/family to go and covered the flight/cabin.  Dinner together every night but free to do anything else.  It worked really well as a way for him to give back.

[Catbert]

With regard to your stock concentration, I agree with everyone that says you need to diversify.  I'm assuming that you have lots of capital gains to pay if you sell them so you may need to take several years to get to 5% or even 10% concentration.  Some ways to do this:

*sell what's in tax shelter accounts to buy mutual funds.
*Don't reinvest dividends back into these stocks(if you are currently)
*Set up a donor advised charitable thing-y so you can do your charitable contributions with appreciated stock rather than cash
*Figure out how much you can sell yearly without the capital gains blowing up your tax return or ACA premiums
*Select the shares to sell so manage the amount of capital gains you'll have to pay

[Laura33]

So to answer the original question, you count from when you start drawing on your portfolio, not from when you stop working (as your portfolio doesn't care whether you work or not, it cares only that it is being left alone to grow).  But what counts as the "portfolio" you are drawing from?  Well, that is the same collection of assets they were looking at in the Trinity study -- i.e., a split of stocks and bonds; I don't think it included any cash holdings.  Therefore, since you have been living on that $250k cash for the past four years, and that cash is not really part of what "counts" for the 4% rule, you start with the $2.5M value of your investments when you ran out of cash and began drawing down from the investments instead.  (Basically, the cash from the business sale has been substituting for your salary for the last four years)

That said, I am also a fan of buckets.  I would want to know that my basic expenses are covered no matter what, and then adjust my extras and luxuries based on how my overall portfolio is doing.  So I too would probably base my "basic" withdrawal on say $1.5M, and then base the luxuries on 3-4% of whatever is left over (which could fluctuate).