Safe Withdrawal rate

[stephen902]

Say you set your SWR at 4%. Do you take it out at the start of the year and budget? Do you do it monthly (4%/12)? Do it just play it by ear and keep an eye on things? What do you think is optimal?

In terms if slush fund, like major repairs or unexpected short term costs, do you keep anything in reserve or just make it up as time goes on?

Thanks for opinions.

[SwordGuy]

Having a 3 month buffer allows you to avoid selling when a short term hit to market prices comes thru -- think March 2020.   Plus it lets you cover an occasional big expense.  I could see a 6 month buffer, but not more unless you're using it as a sequence of returns problem early in retirement.


Time in market beats timing the market.   We learned that while investing.   Why would it be any different after you retire once you have a buffer in place?   

[ender]

Time in market beats timing the market.   We learned that while investing.   Why would it be any different after you retire once you have a buffer in place?

I don't know if this was intended to be hypothetical or not.

But when accumulating, you are optimizing for total returns, regardless of timing. All that matters is what your CAGR is and when you contribute.

However once you are retired, you're no longer optimizing for that - you want consistency more than total returns. Rate of return historically has killed way less FIRE scenarios than sequence of returns.

So it makes sense you'd be considering a different risk model.

[maizefolk]

Most published studies assume selling once per year, using that to cover your expenses for the entire year, and then sending another year's worth of stocks/bonds.

If you sell 1/12th as much once a month, on average your money is staying in the market an extra six months, which helps your success rate and means you'll probably end up with slightly more money at the end of your life than selling once per year, although the difference is relatively modest.

[MissNancyPryor]

I fill the rain barrel once a year, in December.  I do get small interest and dividends coming all year but any stock selling will be the end of the year.  I have a lot of VWUAX which distributes large capital gains payments in December and when that amount is finally revealed I can easily determine what to sell to control my taxable income.  Doing it this way also eliminates the hassle of filing quarterly tax payments.     

I keep 2 years of fat FIRE expenses on hand in cash.  When a market disaster happens I can go a long time without having to sell anything and let things recover.  If I had an emergency I would draw from that pile. 

That may seem like a lot but it is only about 4% of my wealth and the comfort it provided (along with the paid off house) during Coronageddon was an excellent test of my system.  I am currently living large on a 2% WR and doing things this way means I never have to wonder about The Top or some looming crash and bubble bursting.     

[terran]

I fill the rain barrel once a year, in December.

This makes sense from a tax perspective if nothing else as the middle-end of December is when you'll know exactly what all of the dividends and capital gains distributions will be so you can target exact tax thresholds by realizing capital gains and/or making Roth conversions.

[sabanist]

Im sure this has been discussed but i did a search for safe withdrawal rate and got this thread, and the topic is relevant to my question

If you do withdraw only once per year, why not just withdraw what the market gain was that particular year?  In good years you are flush and bad years you tighten the belt?

Wouldnt your principle be relatively constant if you did that?

Ex: i retire with 1mil and after the first year the market has returned 12pct, making the bAlance 1120000

I take a 120000 withdrawal.

Whats the problem there?

[uniwelder]

Im sure this has been discussed but i did a search for safe withdrawal rate and got this thread, and the topic is relevant to my question

If you do withdraw only once per year, why not just withdraw what the market gain was that particular year?  In good years you are flush and bad years you tighten the belt?

Wouldnt your principle be relatively constant if you did that?

Ex: i retire with 1mil and after the first year the market has returned 12pct, making the bAlance 1120000

I take a 120000 withdrawal.

Whats the problem there?

There will be years when your investments will go down in value. If you lose 10% the following year, are going to have 100k on hand to put back in to replace the principal?

[sabanist]

No. But i think all brokerages give you a breakdown of inv gain and loss

In black years, If you stay within the gained amount then theoretically your principle should remain tbe same

In years where the market ends in the red. You revert to the standard 4pct rule

[maizefolk]

No. But i think all brokerages give you a breakdown of inv gain and loss

In black years, If you stay within the gained amount then theoretically your principle should remain tbe same

In years where the market ends in the red. You revert to the standard 4pct rule

And that's where the problem comes in.

Withdrawing only the principal is fine (you just have to be prepared to withdraw nothing in down years).

But using the 4% rule in down years and all gains in good years gets you into a lot of trouble awfully quickly.

The reason the 4% rule works is that you build up a buffer against loses in good years that come before bad years, and use the years of good returns that come after bad years to make good the damage to your principal.

[yachi]

Im sure this has been discussed but i did a search for safe withdrawal rate and got this thread, and the topic is relevant to my question

If you do withdraw only once per year, why not just withdraw what the market gain was that particular year?  In good years you are flush and bad years you tighten the belt?

Wouldnt your principle be relatively constant if you did that?

Ex: i retire with 1mil and after the first year the market has returned 12pct, making the bAlance 1120000

I take a 120000 withdrawal.

Whats the problem there?

There will be years when your investments will go down in value. If you lose 10% the following year, are going to have 100k on hand to put back in to replace the principal?

+1.  The 4% comes from this study: https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf
It aims to keep your spending constant, and maximized.  Why not spend all of year's stock market gain?  Because some of it is transient and the market will take it back.

Say you set your SWR at 4%.

That's not how it works.  OP means, say you set your WR at 4%.  You don't get to decide the SWR, the markets do that.  SWR = Safe Withdrawal Rate,  WR = Withdrawal Rate. 

No. But i think all brokerages give you a breakdown of inv gain and loss

In black years, If you stay within the gained amount then theoretically your principle should remain tbe same

In years where the market ends in the red. You revert to the standard 4pct rule

The 4% plan needs periods of outsized gains to make up for periods of outsized losses, and increased inflation.  If you steal the outsized gains, you can't expect the 4% plan to succeed.