Author Topic: Safe Withdrawal Rate or "Are We There Yet?"  (Read 2865 times)

rolliefingers

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Safe Withdrawal Rate or "Are We There Yet?"
« on: July 17, 2013, 04:33:15 PM »
Like many of us here, my wife and I are extremely interested in early retirement.  I have gone through the excellent FireCalc exercise and have a few stats and questions so some of the Pros here can shed some light on the exciting, yet somewhat scary, possibility of early retirement.  4% draw down seems dangerous to me and I would like to know what others think with our scenario.

Me:  40
Wife: 31
Assets:  $1.25MM invested in 85/15 portfolio
Attempting to sell McMansion to recoup $215k in equity and buy smaller home outright (we live in very affordable city)
No children at this point, yet planning for one (soon)
Cost of Living:  $50,000/year with McMansion; $18,000/year without (hence the lust to sell home)
FireCalc, even with Megahome in tow, is pretty favorable now for 50k per year for 50 years (85% with constant spend; 99% with Bernicke's rules)

My specific questions regarding ER are as follows:

1.  How are you drawing down your assets?  (Taxable account, then IRA down the road, I imagine)
2.  Taxes:  Are there any tips regarding minimization of taxes when drawing down?  This is an elementary question, but when drawing down the taxable account, do you only pay tax on capital gains?  I understand IRA/401k is tax deferred and will be paid much later.
3.  Portfolio:  did you change your mix of equities to fixed drastically? 
4.  Inflation:  how do you guys account for inflation in your annual withdrawal?  Does the amount you take out reflect inflation, which I assume it does, or do you stick with the original set amount, which seems absurd but I need to ask?
5.  Health Insurance:  how do you currently handle health insurance in early retirement?  How much is it costing for couples?
Note:  I do not claim to be a proponent of the new healthcare law.  In fact, it is in part driving my decision for early retirement.  It does seem, ironically, that low cost health plans will be available to those with "lower incomes."  $50K between my wife and I ought to qualify as low (until they begin culling our portfolios).

Thanks a million for anyone who has slogged through my post and can offer any pearls of wisdom.  If you have been in ER for a while and managed to slip out of the corporate world early, then let me know how this has gone for you.  How did your peers react? 
« Last Edit: July 17, 2013, 04:55:31 PM by rolliefingers »

matchewed

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Re: Safe Withdrawal Rate or "Are We There Yet?"
« Reply #1 on: July 17, 2013, 04:46:17 PM »
1. You can do it a couple of ways. Yes you can draw down on taxable accounts until you hit traditional retirement age, if you have enough in taxable. Or you can do a 72(t). Or a Roth Pipeline method. Or you can just take the penalty hit and pull from your tax deferred accounts.

2. I would minimize the taxes. But it all depends on how much you have in which investment vehicle.

3. I wouldn't change drastically. But in my case for example I'd probably switch to an 80/20 or 75/25 mix as the bonds would help reduce the swings from equities.

4. I wouldn't calculate inflation in annual withdrawal. I would just figure out how much do I need to live on this year.

5. I'm assuming you're in the US. With the ACA starting to kick in you're going to need to do some research.

Note I haven't moved on to FIRE yet. I'm not sure how much of the other board members have either but I think it's still a relatively small percentage.

Nords

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Re: Safe Withdrawal Rate or "Are We There Yet?"
« Reply #2 on: July 20, 2013, 06:13:41 PM »
4% draw down seems dangerous to me and I would like to know what others think with our scenario.
FireCalc, even with Megahome in tow, is pretty favorable now for 50k per year for 50 years (85% with constant spend; 99% with Bernicke's rules)
I think you've just shown that it's 1%-15% dangerous.  What's the success rate wiithout the Megahome (and with the extra equity in your investments)?

FIRECalc and other retirement calculators rarely handle the variable spending in retirement.  For example, you might decide to cut your spending during a recession, and you might even decide to take a part-time minimum-wage job or turn a hobby into an income stream. 

Instead of forcing FIRECalc to go to 100%, work on the 1%-15%.  One way to do this is to put together your rock-bottom minimum spending level.  This would be the level at which you don't have to eat cat food yet are limited to a $50/month restaurant budget.  The level at which you'd sell the car and depend on bicycles & public transportation.  The level at which you'd rent out rooms to college students.  Let's say that level is $25K/year.  Then buy a single-premium fixed annuity to generate that $25K/year.  Or buy a SPIA now that generates $10K/year and consider buying more SPIAs from other insurance companies in a few more years.

1.  How are you drawing down your assets?  (Taxable account, then IRA down the road, I imagine)
Yep.

2.  Taxes:  Are there any tips regarding minimization of taxes when drawing down?  This is an elementary question, but when drawing down the taxable account, do you only pay tax on capital gains?  I understand IRA/401k is tax deferred and will be paid much later.
Your taxes should be part of the $18K-$50K annual spending that you're entering into FIRECalc and most other retirement calculators.  So you might actually be spending $20K-$60K.

Part of your portfolio will probably always be dividend/interest income and part will always be cap gains.  Just try to make it long-term capital gains. 

Your portfolio is probably already fairly tax-efficient, but you could look for tax-efficient mutual funds/ETFs or shift your asset allocation growth stocks (no dividends) or tax-free bonds.  The problem with a tax-focused strategy is that you pass up assets which might still have higher after-tax returns than your tax-efficient assets.

3.  Portfolio:  did you change your mix of equities to fixed drastically? 
No.  However even as we get older, my spouse and I are getting less interested in dealing with volatility.  You could plan to move from 85/15 to 80/20 over the next five years by taking cap gains and not selling any of the "15" part.  You could also start building up more cash (two years' expenses or more) to live on through a recession, and that way you'd probably avoid selling equities at a loss.

4.  Inflation:  how do you guys account for inflation in your annual withdrawal?  Does the amount you take out reflect inflation, which I assume it does, or do you stick with the original set amount, which seems absurd but I need to ask?
Believe it or not, we don't.  We assume next year's spending will be a lot like this year's spending.  That works great for mortgages and groceries and personal electronics, and perhaps not so well for gasoline or health-insurance premiums or travel.

You should stay invested in assets which preserve their value relatively well with inflation:  stocks, I bonds, TIPs, rental property.  You don't have to stay 85% in stocks but you probably do not want to drop below 25%. 

Let FIRECalc and other retirement calculators handle inflation however they want to handle it.  If you get a choice, pick a number around 3%.  But keep in mind that you'll be able to do your own maintenance & repairs, shop for bargains, and spend only on the things that bring you value. 

5.  Health Insurance:  how do you currently handle health insurance in early retirement?  How much is it costing for couples?
I'm no help here-- I'm retired military with Tricare.  However many early retirees take out a high-deductible plan from websites like eHealthInsurance.com.  Keep in mind that you'll have more time in retirement to focus on staying healthy, so it's possible that your "routine" healthcare expenses (medications, copayments) will actually drop.

Thanks a million for anyone who has slogged through my post and can offer any pearls of wisdom.  If you have been in ER for a while and managed to slip out of the corporate world early, then let me know how this has gone for you.  How did your peers react?
In assorted ways ranging from support to outright denial.  Our friends & family were happy for us, our co-workers were skeptical, and 11 years later my father-in-law is still pretty sure that I'm going to put his only grandchild under a highway overpass.

This blog is oriented toward military, but the advice in these posts is applicable to everyone:
http://the-military-guide.com/2010/10/14/myths-of-military-retirement-and-early-retirement/
http://the-military-guide.com/2010/10/20/financial-myths-of-retirement-part-2-of-2/

Lans Holman

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Re: Safe Withdrawal Rate or "Are We There Yet?"
« Reply #3 on: July 20, 2013, 07:08:42 PM »
  It does seem, ironically, that low cost health plans will be available to those with "lower incomes."

How is that ironic?  That's kind of the whole point.  Or do you mean it's ironic that you would qualify?

Nice avatar btw.  Truly one of the great mustaches of all time.