Withdrawal rate to die with zero

[noblesavage]

Hello all,

I’m looking for a withdrawal calculation/formula, akin to the 4% rate, but which enables calculating a withdrawal rate so that in X years I end with zero dollars.

For example, if Jim retires at 50 with 1 million dollars and expects to live another 30 years, what is the best way to calculate his withdrawal rate to expire at 80 years of age with no money. It is like a reverse amortised mortgage, but just needs to factor in that Jim’s principal will be simultaneously shrinking (as he spends) and growing (as his investments advance at say 7% per year).

I guess what I’m asking is that I don’t want to get to the very end and think, oh, I could have spent way more, donated way more, instead be left with lots of unspent money at the end. Any ideas? I have looked around the forums and cannot see this, but please guide me if the answer is around somewhere.

[seattlecyclone]

In some sense that's what the 4% rule already is: the amount you can safely spend and maybe end up with basically nothing but probably not less than that.

The thing is that there's so much variability in investment returns that you can't come up with a withdrawal strategy likely to end up with exactly nothing. It's more like a bell curve. For any withdrawal strategy you might have an expected value, with some likelihood of ending up pretty close to that value, but a pretty big probability of ending up much higher or lower than that.

What the SWR research tries to do is find the bell curve where zero is sufficiently far to the left side of that bell curve that you're very unlikely to fall below there. You could take a higher withdrawal rate and move zero closer to the middle of the bell curve, but by doing that you're also greatly increasing the chance of ending up broke well before death.

[bacchi]

The Bogleheads VPW spreadsheet does this.

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

There's no floor with this method, though.

[MDM]

I’m looking for a withdrawal calculation/formula, akin to the 4% rate, but which enables calculating a withdrawal rate so that in X years I end with zero dollars.

For example, if Jim retires at 50 with 1 million dollars and expects to live another 30 years, what is the best way to calculate his withdrawal rate to expire at 80 years of age with no money. It is like a reverse amortised mortgage, but just needs to factor in that Jim’s principal will be simultaneously shrinking (as he spends) and growing (as his investments advance at say 7% per year).

=PMT(7%,30,1000000,0,1) in Excel gives $75,314.40 as the annual withdrawal amount (negative number) on 1-Jan to meet your goal.  Of course, that assumes everything is constant and there is no inflation.

Or see table 3 in the Trinity study (https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf), where a 7% inflation-adjusted withdrawal rate has a 50/50 (ok, 49/51) chance of success for a 75/25 stock/bond asset allocation.  You pays your money and you takes your chance.

[Metalcat]

But...that's not really how it works.

The 4% rule is a very rough estimate when compared to the conditions of reality, you could end up with very little at the end or you could end up with excess. Also, no one actually spends exactly their chosen WR+estimated inflation year over year down to the penny until they die, so it doesn't even make sense.

Besides, all of this is really more about minimizing SORR in the early years, so perhaps calculate a rough value of what you can "safely" withdraw in early retirement, live like that for awhile, and then revisit your calculations once you have fewer anticipated years left and then loosen the pursestrings depending on what reality has actually done to your nest egg.

For example, at a 5% WR, SORR could either leave you with way more money than you need or way too little to get through the next decades.

Reality will have far more impact on how much money you end up with than a rough calculation you did decades before you died. Don't overthink the 4% rule, you can run as many simulations as you want, but they won't predict your future.

[happy]

The problem is that you don't know when you will die.

[rab-bit]

First year withdraw 1/30 of your balance, second year 1/29, third year 1/28...

You'll end up with exactly $0 after 30 years, but the amounts withdrawn won't be constant. If that's what you're after, then there is no way to know in advance unless you know what your investment returns will be. If you want a constant inflation-adjusted amount then you would need to know the future inflation rates as well.

[Rdy2Fire]

The problem is that you don't know when you will die.

HA!! I was thinking the exact same thing when I read the thread title..

Jim retires at 50 with 1 million dollars, Jim gets hit by a car the next day, Jim's expectations were wrong :) 

[Hvillian]

Like others have said, you will have to make quite a few very important assumptions to do the calculation.  It is unlikely that your assumptions for investment returns or date of death will be that close to reality.

You could put all of the money into an annuity.  This would result in equal (or inflation adjusted) payments for life, and $0 left at death.

[Rdy2Fire]

The problem is that you don't know when you will die.

HA!! I was thinking the exact same thing when I read the thread title..

Jim retires at 50 with 1 million dollars, Jim gets hit by a car the next day, Jim's expectations were wrong :)

Or...Jim spends all his money by age 80. Jim lives to 100.

I always wondered how this could be calculated too. As a single person with no dependents any left over money is getting donated to a charity when I die so it doesn't matter but would be interesting to see what the annual spend would be. Personally I guess it would be a fixed amount each year for drawdown plus taking the interest earned that year off the top (the hooker and blow money).

Exactly.. Then again Jim could plan accordingly if he plans his death date as well; maybe death by hookers & blow :)

[oldladystache]

spend all your money on an immediate annuity. as long as you make sure to spend it as fast as it comes in you can die with zero.

[slappy]

spend all your money on an immediate annuity. as long as you make sure to spend it as fast as it comes in you can die with zero.

Just make sure it has a COLA or you could still end up in the hole in your later years.

[RetireAbroadAt35]

Hello all,

I’m looking for a withdrawal calculation/formula, akin to the 4% rate, but which enables calculating a withdrawal rate so that in X years I end with zero dollars.

Easy!  Your new withdrawal rate is 50% of your current stache per year, each year until the year you want to die.  That year you spend 100%.

[Padonak]

Buy an annuity?

[MDM]

Buy an annuity?

I don't know anything about annuities but if you die young don't your heirs get back any remainder left? Also isn't the amount fixed for life - however long that is? Sounds like the OP wants to make sure they go thru all their money in an allotted time not set up a steady income stream for life which I think an annuity does.

It's possible the annuity suggestions were made at least somewhat in jest.

In most annuities, once annuity payments have started the contributed money is gone to the insurance company that then (assuming it stays solvent) pays the steady income stream.  There are exceptions such as "period certain" annuities, but in general annuitizing one's total net worth is a way to have a withdrawal rate that, if spent as fast as it comes in, guarantees once will die with zero.

"Never let someone sell you an annuity" is a very good rule of thumb.  That's different from doing one's own due diligence to investigate Single Premium Immediate Annuities and perhaps choose to buy one of those later in life with some fraction of one's net worth.

[BicycleB]

Hello all,

I’m looking for a withdrawal calculation/formula, akin to the 4% rate, but which enables calculating a withdrawal rate so that in X years I end with zero dollars.

For example, if Jim retires at 50 with 1 million dollars and expects to live another 30 years, what is the best way to calculate his withdrawal rate to expire at 80 years of age with no money. It is like a reverse amortised mortgage, but just needs to factor in that Jim’s principal will be simultaneously shrinking (as he spends) and growing (as his investments advance at say 7% per year).

I guess what I’m asking is that I don’t want to get to the very end and think, oh, I could have spent way more, donated way more, instead be left with lots of unspent money at the end. Any ideas? I have looked around the forums and cannot see this, but please guide me if the answer is around somewhere.

Then think something else when you die. How much fun you had reading our answers, for example, or how glad you are that you once fell in love. Problem solved!

Or find so many donations that you can't do them all, then put the "next ones in line" into your will (or form a trust to make them the beneficiary of your accounts). When you die, the remaining funds will still go to a cause you cared about.

As others have pointed out, just know your death date in advance and plan accordingly. All you need to know then is the future rate of return on your investments and the calculation is easy.

PS. Welcome to the forum. :)

[RetireAbroadAt35]

So if someone has a million bucks in their stash they have to spend approx $500k the first year? Gonna buy ALL the shiny things ;-)!

Yep, you've got it!  One of the selling points of my plan is just how awesome it is in years 1 & 2.