Author Topic: Planning for a 6% Withdrawal Rate. Am I Crazy?  (Read 21119 times)

MickeyMoustache

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #50 on: April 07, 2016, 06:18:55 AM »
This may have been asked somewhere, but do you expect to generate ANY income during your time?  For example, if I FIREd today, I would expect 5-10k cash income per year from hobbies as well as my habit of buying & selling things.  That's about 1/4-1/3 of my expected expenses come retirement, which isn't too shabby!

boarder42

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #51 on: April 07, 2016, 06:28:21 AM »
thats the boat i'm in too Mickey.  i scalp tickets and churn craigslist items that people are under selling. pretty easy to make profits there.

forummm

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #52 on: April 07, 2016, 07:56:44 AM »
I've done a lot of historical modeling. If I only pull from it when the market return was positive in the prior year I can typically withdraw $27k about 20 years out of 30. The amounts are kind of arbitrary.

I'd like to hear more about this--how did you model it, specifically?

I made a giant spreadsheet that includes every 30 year period starting from 1926. I invest in the S&P 500, adjust for inflation, and on January 1 if the S&P 500 return was >0 the prior year, I spend inflation adjusted $X from the portfolio. Then I have stats on the number of periods where I ran out of money before 30 years, and the number of years in each period where I got to spend money. And I did this for a number of different values of X. I found that for my tastes a 9% WR following that rule (so only taking out that 9% about 2/3 of years) worked the best. Spreadsheet attached. It's been a long time since I looked at this but I think the 2 main sheets are the same except in one I was doing constant dollars and the other was not. The results tab is a compilation of many different WRs. I also tried a rule where I would take a distribution unless there was a 10% drop the prior year but didn't prefer to go with that. Min and Max are the number of distributions during a 30 year period, or the ending portfolio balances. I stop taking distributions if the account balance goes below 0.

forummm

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #53 on: April 07, 2016, 07:59:42 AM »
This may have been asked somewhere, but do you expect to generate ANY income during your time?  For example, if I FIREd today, I would expect 5-10k cash income per year from hobbies as well as my habit of buying & selling things.  That's about 1/4-1/3 of my expected expenses come retirement, which isn't too shabby!

I have no expected income other than jobs I might take. I do not plan to have jobs. But there could be something interesting that would come up that I would do. I hate buying and selling things for example. :) But I could see myself teaching a class or doing some research or working for a cause I was interested in (perhaps volunteer), etc. I'd prefer to not need the money.

arebelspy

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #54 on: April 07, 2016, 08:25:57 AM »
Oooh..  This is neat!

I may have to spend more time on this.

So if I'm understanding this (using the second page), this is saying if you withdraw 6% (6k from a 100k portfolio) over a 30 year period whenever the market wasn't negative the year before, historically you'd have withdrawn 6k at least 18 times, up to 25 times (median of 22 times).  Out of 59 30-year periods, 3 times you'd have run out of money, but 56 times you'd have some money left, and the median amount you'd have left, in real dollars, would be $379,731?

Do you know why sheet 2 has an extra failure over sheet 1?
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arebelspy

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #55 on: April 07, 2016, 08:37:37 AM »
You know not what you've done!

Prepare yourself for an onslaught of stupid questions!  :D

There's a year (1970) with a 4.01% return.

If I set the threshold just below that (so I include a withdrawal that year, say 4.00%), I get 3 failures.  If I set it right above (say, .0411) so I don't include a withdrawal that year, it drops to 0 failures.

How can withdrawing that one year, or not, change from 0 failures to 3, or vice-versa?  Shouldn't a single year just provide a single failure?  :)
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arebelspy

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #56 on: April 07, 2016, 09:22:51 AM »
Okay, I just spent way too much time playing with that.

Fun!

It hit me anew how stupid (in a good way) it is I could withdraw $3500 every single year from a 100k portfolio (3.5%), regardless of what the market did the previous year, and I'd never have run out of money, and the median amount I'd be left with was almost 5X (in real dollars!) what I started with.

I mean, duh, we know a 3.5% WR hasn't failed historically (with this data set), but wow.  That's just so silly.
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forummm

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #57 on: April 07, 2016, 09:33:35 AM »
Oooh..  This is neat!

I may have to spend more time on this.

So if I'm understanding this (using the second page), this is saying if you withdraw 6% (6k from a 100k portfolio) over a 30 year period whenever the market wasn't negative the year before, historically you'd have withdrawn 6k at least 18 times, up to 25 times (median of 22 times).  Out of 59 30-year periods, 3 times you'd have run out of money, but 56 times you'd have some money left, and the median amount you'd have left, in real dollars, would be $379,731?

Do you know why sheet 2 has an extra failure over sheet 1?

Yes, I think that's right. And no, I'm not sure why there's an extra failure. I can't remember what motivated me to handle the inflation in two different ways. I could easily be doing something not quite right like adjusting for inflation for the payment earlier than the portfolio is or some other goofy thing like that.

forummm

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #58 on: April 07, 2016, 09:44:13 AM »
You know not what you've done!

Prepare yourself for an onslaught of stupid questions!  :D

There's a year (1970) with a 4.01% return.

If I set the threshold just below that (so I include a withdrawal that year, say 4.00%), I get 3 failures.  If I set it right above (say, .0411) so I don't include a withdrawal that year, it drops to 0 failures.

How can withdrawing that one year, or not, change from 0 failures to 3, or vice-versa?  Shouldn't a single year just provide a single failure?  :)

It looks like there are some years with 1970 or 1994 (1.32% return) in their path (e.g. I see 1967 and 1968) where skipping the 1970 withdrawal is just enough to make them run out of money at the end (be a few grand in the hole). So 1968 ends with -2558 and 18 withdrawals along the way. But if you skip 1970 and 1994 (changing the threshold to 4.2 puts both below it) then you get a final balance of $12k and increase to 22 withdrawals. Further evidence that not spending money sooner increases the amount to can take later (when it's invested in something that has a positive return).

forummm

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #59 on: April 07, 2016, 09:53:38 AM »
Okay, I just spent way too much time playing with that.

Fun!

It hit me anew how stupid (in a good way) it is I could withdraw $3500 every single year from a 100k portfolio (3.5%), regardless of what the market did the previous year, and I'd never have run out of money, and the median amount I'd be left with was almost 5X (in real dollars!) what I started with.

I mean, duh, we know a 3.5% WR hasn't failed historically (with this data set), but wow.  That's just so silly.

Yeah. You can either be very secure in taking a very low WR constantly (which means saving a lot more) or you can be very flexible in your spending and end up with a lot more spending power over time. Hence the 2 funds. I decided not to be flexible about whether we have money to eat or for electricity or health insurance, etc. But I can totally be flexible about when we spend 6 months in Europe or move money into a savings account for a predictable but non-typical near-term expense (like braces or space camp or a car).

arebelspy

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #60 on: July 23, 2016, 03:56:27 AM »
I'm just bumping because this spreadsheet is amazing and it's a crime that' it's only been downloaded 9 times.

Just FYI to everyone.

:)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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SwordGuy

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #61 on: July 23, 2016, 08:14:04 AM »
But cars and home repairs and medical expenses are hard to predict.

That is not true for most people most of the time.

A roof on a house has an average life span.   If it's 30 years, then you need to save and invest 1/30th the cost of a new roof each year.   Ditto for HVAC systems, water heaters, paint, etc. 

Same for a car.   

People's medical costs are more variable, but the same principle still holds.  Assume one or both of you will need an operation on something and make sure your insurance will cover the portion of the expense you can't handle. 

ender

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #62 on: July 23, 2016, 08:27:04 AM »
Yeah. You can either be very secure in taking a very low WR constantly (which means saving a lot more) or you can be very flexible in your spending and end up with a lot more spending power over time. Hence the 2 funds. I decided not to be flexible about whether we have money to eat or for electricity or health insurance, etc. But I can totally be flexible about when we spend 6 months in Europe or move money into a savings account for a predictable but non-typical near-term expense (like braces or space camp or a car).

I'm glad you are looking at this - I think that one thing people consistently don't appreciate is the rates of success for FIRE if you are remotely flexible in a SWR plan.

Blindly spending X% a year vs intelligently doing so? Such a huge difference in historical success.

Playing with Fire UK

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #63 on: July 23, 2016, 08:35:19 AM »
I'm just bumping because this spreadsheet is amazing and it's a crime that' it's only been downloaded 9 times.

Just FYI to everyone.

:)

Thanks, I'd missed this first time around. Thanks ForuMMM for sharing.

boarder42

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #64 on: July 23, 2016, 09:53:31 AM »
Yeah. You can either be very secure in taking a very low WR constantly (which means saving a lot more) or you can be very flexible in your spending and end up with a lot more spending power over time. Hence the 2 funds. I decided not to be flexible about whether we have money to eat or for electricity or health insurance, etc. But I can totally be flexible about when we spend 6 months in Europe or move money into a savings account for a predictable but non-typical near-term expense (like braces or space camp or a car).

I'm glad you are looking at this - I think that one thing people consistently don't appreciate is the rates of success for FIRE if you are remotely flexible in a SWR plan.

Blindly spending X% a year vs intelligently doing so? Such a huge difference in historical success.

And as I mentioned earlier swr can be reasonably predicted with the inverse of the shiller pe for 30 years. Multiple by 0.9995 to get the number that lasted indefinitely.

So when forummm retires he should be able to tell what is reasonable. I'm hoping for a flat market for the next 5 years. Would lower the shiller into the 6% zone most likely.

forummm

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #65 on: July 23, 2016, 06:08:10 PM »
An update: Retire-Canada suggested that I was being too conservative (giving up risk management flexibility by not modeling things in one bucket. I've spent a lot of time the past few months running over 100 cFIREsim scenarios. I save my inputs and then change some of the variables. At first I tried to use the built-in variable spending function but I found that it miscalculates failures (if the formula causes you to drop below your minimum spend that's not counted as a failure). And it doesn't use the kind of variable spending that I plan to use with Fund 2 (cFIREsim ratchets up and down the spending incrementally year-over-year based on market returns while I want to only spend from that fund in good years, and probably a lot of money in those years, while spending zero from it in down years). My spreadsheet above gives an example of the approach I might take with the variable spending. I won't rigidly spend exactly $27k in each and every good year. But I'm guessing it will be something like that.

Since we're still some years away from hitting a good FIRE target, it's hard to be precise. But I have lots of scenarios that include paying for college and not, having some part time jobs in the future and not, quitting work a little earlier vs OMY, etc. Given the various levels of safety (like cutting back spending, completely stopping optional spending, getting part time jobs, etc), I think 75% or 80% success is relatively safe even with the expected low returns going forward. I look at the individual years where those scenarios fail and you can usually tell pretty early on you're heading for trouble. So there's time to get a job later.

It obviously varies depending on the exact scenarios I use. But I still get a starting portfolio value similar to what I was using with my 3 fund approach.

LAL

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #66 on: July 23, 2016, 06:18:36 PM »
Thanks for the spreadsheet.  My biggest worry about FIRE with kids is the medical costs.  This year buying our insurance has been ridiculous.

forummm

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #67 on: July 24, 2016, 03:15:33 PM »
Thanks for the spreadsheet.  My biggest worry about FIRE with kids is the medical costs.  This year buying our insurance has been ridiculous.

Yeah. About 30% of my base budget is for medical. I'm assuming that I'll have to pay out of pocket for insurance. I can't rely on current healthcare policy staying as is for 30 years since our healthcare system is such a mess. If I end up paying less, then that's another level of safety and I almost certainly will have more money than I need.

mustachianteacher

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #68 on: July 24, 2016, 03:45:45 PM »
yes dont tell them that defeats the purpose of ths.

I dont see this as tough love.  It is a very valuable stepping stone for a kid to cross and understand how to budget and finance.  My parents gave me 2k per year.  i made up the rest getting scholarships and working in the summer and came out debt free.  I may do a hybrid approach like this, if my kids arent intelligent enough to get scholarships to the level me and my brother did.   offer 2k equivalent in support with the intention of paying off any debt they have to take out.

if you just flat out tell you're kids you're paying for their college what do they learn about money.  mommy and daddy pay for things.  thats it.

I learned about money LONG before I was in college. I think if they're only just learning about money in college, it's way too late for them.

My parents paid my way through college, but I still got campus jobs and internships for spending money and work experience (and VERY small Roth IRA contributions, but hey it's something, I guess). Graduated with no debt when almost all of my classmates had debt--made me appreciate my parents' planning and sacrifice even more.

Of everything my parents did for me, two stand out as contributing to my current success in life: reading to me every night as a child and paying for my education as an adult.

i'm not saying this is the first time the should learn about money but if when you go away to school you really start the first step towards managing your own finances outside of the watch of you parents. 

just flat out paying for it IMO is bad, maybe its b/c of the kids i've seen that have had this were from a family that were bad at managing money so they still learned nothing.  Just think its good for them to understand what they are getting for their money not my money. managing your own finances in college, paying your own bills, etc. is a very valuable life experience.   

Yeah, I have mixed feelings about it too. Even paying off their loans afterwards. I think early career financial discipline is valuable and better achieved by having to pay off loans. But I have a long time to decide and want to have much less time to save whatever I might contribute.

There's another way, which is what we will probably do with our daughter:

At the start, we will tell her that we can afford to contribute X per year or Y total, and that she will need to make up the rest with loans and a job. (This is basically what my parents did, and it guided my decision about which university to attend so that I could stay within their budget without having to take out loans and working just for spending money.)

Then, upon graduation, we will either pay off the loans, or we'll make sizable contributions to help her pay them off much faster than she'd be able to on her own.

I remember REALLY appreciating the frank talk about what they could afford right at the get-go, and I was very grateful for their support. There were never any tricks or surprises, and it was up to me to manage expenses. Their budget covered tuition and housing, but everything else was up to me: books, food, clothes, fun, etc.

They took the same approach and used the same dollar amount with my brother, but he decided to attend a very expensive private school, and he used all the money within 2 years, after which he took on huge loans. It was a calculated gamble, though, because the field in which he works cares about which school he attended, and he immediately started earning a huge salary that enabled him to pay off the loans pretty quickly.
« Last Edit: July 24, 2016, 03:47:22 PM by msjd123 »

forummm

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #69 on: July 24, 2016, 04:52:10 PM »
Yeah, I have some time to figure out how to handle the college thing. Hopefully the college model will be transformed by the availability of MOOCs that are essentially free to deliver. You'll need some expense to test people and make sure they actually studied and learned something. Universities have gotten too expensive and the availability of cheap/free alternatives is going to change that market.

But I didn't get a penny from my parents and I think that was helpful for teaching me a lot of life lessons. It didn't feel great at the time. But learning something valuable is often uncomfortable--and often necessarily so.

LAL

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #70 on: July 24, 2016, 07:23:02 PM »
It's not just medical the way the US is going it's really hard to predict if we are moving to a socialized system or a complete pay as you go. If that happens it will make retiring early very scary.

BeanCounter

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #71 on: July 25, 2016, 10:42:45 AM »
Um. wow. that spreadsheet up thread is amazing. Thank you!

forummm

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #72 on: July 26, 2016, 12:18:02 PM »
Um. wow. that spreadsheet up thread is amazing. Thank you!

<tip of the top hat>

andy85

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #73 on: July 26, 2016, 12:35:28 PM »
sweet spreadsheet. I have something extremely similar except i dont have historical inflation rates (just 1 inflation input), but i have a s&P and 10yr bond allocation option. I am going to take some time reverse engineering yours and see if i can improve mine. spreadsheets are so fun. thanks for the bump ARS...missed this the first time around.

nerds

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #74 on: July 31, 2016, 06:41:49 AM »
Yeah, this probably deserves to go to the top again.

arebelspy

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #75 on: August 04, 2016, 05:10:50 AM »
Spreadsheet ends with 2013 data--what was return and inflation for 2014 & 15?
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chasesfish

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #76 on: August 04, 2016, 05:29:55 AM »
ForumMMM - This was a really insightful post.  I think you have a solid way of looking at this and its not really different than others who pool the money.

We're in a similar situation, I keep running the numbers and it ultimately depends on where I want to move to as part of Early Retirement.  I'm currently in Dallas, TX and wouldn't stay here.   I worked in Atlanta for a while and wouldn't mind moving out to the far suburbs, except the education can be hit or miss in GA.   Some places will work on a $1.1mil NW, others take $1.6mil and a lot of it depends on housing cost and other associated expenses with the location.

One point I'd make - You don't have to buy the house with cash, you can buy it and qualify for a mortgage as a 2nd home a few months before you retire.  Its entirely up to you on what make you more comfortable, its probably slightly more economical in retirement to have a 4%, 30 year mortgage and invest the difference.  There's also no substitution for a free and clear house for some people.

andy85

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #77 on: August 04, 2016, 06:05:38 AM »
Spreadsheet ends with 2013 data--what was return and inflation for 2014 & 15?
this is what i use, although they are slightly different from the returns in his spreadsheet

s&P http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
inflation/cpi http://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx

« Last Edit: August 04, 2016, 06:07:36 AM by andy85 »

forummm

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Re: Planning for a 6% Withdrawal Rate. Am I Crazy?
« Reply #78 on: August 05, 2016, 12:21:57 PM »
Spreadsheet ends with 2013 data--what was return and inflation for 2014 & 15?
this is what i use, although they are slightly different from the returns in his spreadsheet

s&P http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
inflation/cpi http://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx

I don't recall what my data source was. But the returns are pretty close to these. If you have a data source you prefer, you can simply overwrite that data in the C and D columns and the entire sheet updates.

One point I'd make - You don't have to buy the house with cash, you can buy it and qualify for a mortgage as a 2nd home a few months before you retire.  Its entirely up to you on what make you more comfortable, its probably slightly more economical in retirement to have a 4%, 30 year mortgage and invest the difference.  There's also no substitution for a free and clear house for some people.

Yes, with a low interest long term fixed rate mortgage, it is historically better (by a small amount) to keep the mortgage (inflation hedge as well as the difference in returns vs interest). I'm not certain we'll necessarily have the same house the whole time post retirement. And we may not be able to get a mortgage if we happen to move at a point where we don't have jobs. I'm using this separate fund to be more conservative.