Author Topic: Retired Spending - When to increase it?  (Read 2249 times)

nippycrisp

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Retired Spending - When to increase it?
« on: February 11, 2021, 03:50:56 PM »
I did a half-assed search for this question being posted previously but didn't find it.

I've been FIREd for about two years now. I'm familiar with the 4% rule, and have also followed the more detailed analyses of what's considered an absolutely bedrock SWR. Based on my research, I'm pretty convinced that anything below 3- or 3.25% is unnecessarily tight-fisted, and the 4% is usually OK.

Before retiring, I budgeted a certain monthly amount ($2,500 in my case) for spending, multiplied it by twelve and worked backwards to a 4% SWR-sufficient nest egg. I hit that number, added a little more for safety margin, then left the workforce.

Since then, things didn't quite follow the script. Since retiring, mostly good things have happened (financially; I lived through 2020 with everyone else;). I've earned some money and spent less than anticipated. There have been no major expenses (planned or unplanned), Covid has limited my travel, and the market run-up has continued. As a result, my spending has been sub 2% for a couple of years now and, even for normal times, funding my normal life now falls way below that 3-3.25% rate.

Tl;dr money is piling up and my spend rate is now well below a reasonable SWR. Resetting it to current investment levels would be a big increase, like a +50% bump in the budget. I don't want to get soft, money-wise, but I also don't want to scrooge my way to old age when I could have been driving a used Tesla.

The question is kind of the opposite of the "Do I need to go back to work" problem: In this situation, how long do you wait before increasing spending? And to what level do you jack it up?

Philosophical opinions on ongoing adjustments also welcome. Currently thinking of current-year invested assets multiplied by 3-3.5% as a rough guideline for annual spending, adjusting at the start of each year (or just staying lean, if a really major reversal brought the WR up really high).

Snowflake details: I'm relatively early in and relatively young (early forties). I'm childfree, so I'm either blowing it or it's going to some random charity or cat rescue. SO still works and makes a shitload, but finances totally separate, barring emergency.

2sk22

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Re: Retired Spending - When to increase it?
« Reply #1 on: February 11, 2021, 04:02:07 PM »
Spending money is surprisingly harder than you think if your goal is to spend it in a way that actually increases your happiness.

Consider spending money improving your immediate surroundings. I started my retirement by spending a lot of money to fix numerous problems in my house. Specifically, I needed more space for my hobbies and a proper study. Now that its over, I am really enjoying the result.

Moustachienne

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Re: Retired Spending - When to increase it?
« Reply #2 on: February 11, 2021, 04:21:06 PM »
This is a great question and we have the same problem.  We intended to draw down assets to 0 by age 99, give or take, but are currently living very well and not drawing down at all in our mid-sixties.  This is partly due to some unexpected inheritance but mostly due to investments doing well and our WR rate staying at 3.4%.  We have no children and no intentions of leaving an estate. So we have been spitballing how to increase our spending in meaningful ways.  At our age we can do this now as we only have 30ish years to go and plenty of assets. Our main plans so far:

1. Improve our house and property.  Like sk22 says, there is a great happiness payoff in improving your space to optimize your use of it.
2. Develop a serious philanthropy plan and make big donations to causes/services/people we want to support.
3. Review our life goals to see if there's anything we want to tweak and if more money would be called for.

I know that the original question is WHEN to make any spending changes but I think the answer is very linked to WHAT you want to spend more on.

nirodha

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Re: Retired Spending - When to increase it?
« Reply #3 on: February 11, 2021, 04:34:13 PM »
I think you are looking for a variable withdrawal strategy. Using a fixed percentage (opposed to an inflation adjusted fixed amount) is a very simple implementation. There are better models out there, if you search the key phrase.

secondcor521

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Re: Retired Spending - When to increase it?
« Reply #4 on: February 11, 2021, 05:31:07 PM »
Old article but still one of my favorites:

https://retireearlyhomepage.com/popr.html

(Try to ignore the mid-1990's web formatting and focus on the actual content.)

If you think 3.25% is safe enough, then in your shoes I'd "retire again and again" each year, resetting to either 3.25% of the new balance or 3.25% of the-old-balance-plus-inflation, whichever is less.

If my budget were tight, I'd pick whatever rate (3.25% or whatever) that I thought was 100% safe.  If you have a 100% safe rate, then SORR becomes a non-issue.

As a practical matter, since your budget is not tight, then you could go a bit higher than your 100% safe rate, electing to pull back if needed.

You might also look at the Bogleheads VPW method and see if you like that.

I agree with @2sk22, though.  Spending more may very not well buy you any more happiness.  I'm bopping along at a 1.3% net WR in retirement, perfectly content, and not really finding spending very easy, much less spending that increases my happiness.  The few things that do seem to work are spending money on my kids, charity, and paying to make problems go away.

nirodha

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Re: Retired Spending - When to increase it?
« Reply #5 on: February 11, 2021, 07:55:57 PM »
Here's a good discussion of variable withdrawal strategies:

https://earlyretirementnow.com/2017/03/15/the-ultimate-guide-to-safe-withdrawal-rates-part-11-criteria/

Blindly following a % based strategy, if you have a volatile portfolio, leads to an equally volatile income.

bmjohnson35

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Re: Retired Spending - When to increase it?
« Reply #6 on: February 11, 2021, 09:15:46 PM »

Two years isn't very long. We are in strange times economically.  We are in the longest bull run in American History.  We still don't know the full economic consequences of Covid and/or the impact of the Biden administration.  Once we get on top of Covid and life becomes more like it used to be, you will likely spend more naturally.  Looking into variable withdrawal strategies makes sense as well.

reeshau

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Re: Retired Spending - When to increase it?
« Reply #7 on: February 11, 2021, 10:30:38 PM »
We are in the longest bull run in American History. 

Not to take away your from your main point, but this is not true.  2020 had a significant bear market and had a US and global recession.  There is, of course, a "blink and you miss it" quality to them, but they both count by longstanding definitions.

Ladychips

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Re: Retired Spending - When to increase it?
« Reply #8 on: February 12, 2021, 05:01:02 AM »
I've asked this question before and received some excellent information from the brilliant people on the forum.  In particular, I think @maizefolk had the most specific/relevant answer.

Check it out (this link and the other thread linked inside it). https://forum.mrmoneymustache.com/ask-a-mustachian/follow-up-to-'how-do-you-know-when-you-can-increase-your-withdrawal-rate'/msg2641468/#msg2641468

Good luck!

soccerluvof4

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Re: Retired Spending - When to increase it?
« Reply #9 on: February 12, 2021, 05:18:36 AM »
" Resetting it to current investment levels would be a big increase, like a +50% bump in the budget. I don't want to get soft, money-wise, but I also don't want to scrooge my way to old age when I could have been driving a used Tesla."

I don't think you should be a scrooge on your way to old age as that is now what being fire'd should be about.

A simple way would take your 4% withdrawal while the market is climbing and build up a little more cash position in case we see a sideways market and spend some. When the market drops live off your cash and withdraw less. As others have mentioned I too have been addressing things more aggressively in my surrounding making nice for the long term that say I had planned to do over 5-10 years. And I have more cash than usual for reasons I mentioned. A lot is math and a lot is whatever lets you sleep at night as well as making your stash last. So 2.5-3 withdrawal when markets dropped and 5-5.5 when Market is running just an example. 

HenryDavid

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Re: Retired Spending - When to increase it?
« Reply #10 on: February 12, 2021, 09:06:07 AM »
We increase spending in line with values.
During Covid we support local businesses at some expense to ourselves, because we want them to survive. Buying costly coffee beans from a café we can’t go into, since we don’t do indoor dining for now, because we want it there after covid for very occasional visits. Getting take out from restaurants our friends own, where we might go once or twice a year normally. But they’re struggling now.
We upped spending for enviro reasons also. Buying local produce though it costs more. Organic etc. though it costs more. Renewable sourced electricity costs more, for now, though that may change.
Also donating more to local agencies for homeless people.
We’re not gonna get happier by spending $ on ourselves, at this point. But where we see something worthwhile and can afford it, we don’t worry about that kind of spending just to say “we’re frugal.” It’s all about alignment with values.

jeroly

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Re: Retired Spending - When to increase it?
« Reply #11 on: February 12, 2021, 09:40:24 AM »

You might also look at the Bogleheads VPW method and see if you like that.


I second this idea.  It's a good spreadsheet that includes whatever assumptions about SS, pensions, asset allocations, and market crashes you want to include.  I think the default calculations include what the effects would be of a 50% market crash on your available spending, but you can tinker and see how much it would crater your withdrawals under, say, a 90% crash scenario (spoiler alert:  if you're in say a 50-50 AA, with $1MM in financial assets, and expect $30K/yr in SS starting at age 70, it recommends making a withdrawal of $53K but being prepared to live on $35K should the market drop 90%, assuming average returns of 5% for stocks and 1.9% for bonds).

chevy1956

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Re: Retired Spending - When to increase it?
« Reply #12 on: February 12, 2021, 02:41:39 PM »
This is a tough one. I could increase my spending now but I don't want too because I want my money too last. So I'm retired on a budget with a WR of about 5%. If I get down to a sub 4% WR I will probably increase spending especially because I can't see this happening for say 5 years. I think by that time I'll have some options to spend more money.

The tough part of this question though is increasing spending to increase happiness. This isn't easy. I would eat out more with my wife. I would probably also look to try some activities that are costly such as surfing. I would also renovate the house more and get professionals to do it rather than myself and my wife.
« Last Edit: February 12, 2021, 02:43:44 PM by chevy1956 »

exit2019

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Re: Retired Spending - When to increase it?
« Reply #13 on: February 14, 2021, 01:56:56 PM »
IMHO, if you want to have a floating WR, do so.

There are dozens of options for how to manage a floating rate, most of which take into account changes to your portfolio value and some which do that but are conditioned on market valuations.  But you need to acknowledge that floating cuts both ways - you will need to reduce spending when the market performance is poor or negative because otherwise you are just ratcheting up your likelihood of your portfolio failing due to sequence risk.

FWIW, if I can ever actually get myself to stop saying yes to retention packages and pull the trigger, we will be using a Case-Shiller PE Ratio-derived floating WR.  The reason is that conditioning your WR on market performance and valuations is a good way to mitigate sequence risk.  I've been running a CAPE10-based virtual budget for the last four years in preparation for exiting so we're comfortable with the (smoothed) ups and downs.

Since you're considering floating, I'd just point out that a valuations-aware model like the CAPE10 approach would not suggest ratcheting up your spending too much.  Using 1% intercept, a CAEY weight of 0.5 and the current CAPE10 of 35.83, the suggested rate would be 1.0%+0.5/38.53 = ~ 2.3% per year. With a 1.75% intercept, 3%. Not far from where you are now.

bmjohnson35

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Re: Retired Spending - When to increase it?
« Reply #14 on: February 14, 2021, 06:32:40 PM »

I must be even more conservative than I thought.  I just filled in the Bogleheads VPW spreadsheet and it's suggesting a withdrawal rate double our current rate.  I didn't even include our cash on hand and some various acts adding up to an additional $150k. 




jeroly

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Re: Retired Spending - When to increase it?
« Reply #15 on: February 15, 2021, 08:21:47 AM »

I must be even more conservative than I thought.  I just filled in the Bogleheads VPW spreadsheet and it's suggesting a withdrawal rate double our current rate.  I didn't even include our cash on hand and some various acts adding up to an additional $150k.

Even if you don't wind up spending any more than you would have otherwise,  I think that the VPW spreadsheet is very reassuring.
Under normal circumstances I don't have any interest in spending more than I currently do, but worry about the effect of some extraordinary expense impacting my retirement savings.

The way I personally use the BH VPW spreadsheet is as follows:

- Put my #'s into the spreadsheet and come up with the 'permissible' withdrawal amount.
- Make my usual, smaller, withdrawals but put the excess into a separate bucket that functions as a 'slush fund.'
- The next year, calculate my 'permissible' amount based on my actual account values minus the balance of that bucket

Example:  Say you have $1 million at age 60, expect $2,000/month from SS at age 70, and have a 60/40 asset allocation.
The VPW worksheet estimates you can withdraw $61,367 for the year.
Now let's say you actually withdraw $50,000 over the course of the year, and your net worth rises to $1,020,000 over the course of the year.
Your slush fund is $61,367-50,000=$11,367.
The next year, you put in the numbers of $1,020,000-(11,367)=$1,008,633 and the calculator projects an allowable withdrawal of $63,015.
You would also have that slush fund available to spend in its entirety, so you could spend up to $71,382 if necessary and still be 'on schedule' to not run out of money early.

In my case, I've done this for three years and build up a slush fund of around $100k.  If I had an impulse purchase (e.g. wanting to replace my 16-year-old car ahead of schedule) or wanted to make extra donations or gifts, I wouldn't be too anxious about spending too much as long as it was less than the slush fund value. 

bmjohnson35

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Re: Retired Spending - When to increase it?
« Reply #16 on: February 15, 2021, 08:34:11 AM »

I must be even more conservative than I thought.  I just filled in the Bogleheads VPW spreadsheet and it's suggesting a withdrawal rate double our current rate.  I didn't even include our cash on hand and some various acts adding up to an additional $150k.

Even if you don't wind up spending any more than you would have otherwise,  I think that the VPW spreadsheet is very reassuring.
Under normal circumstances I don't have any interest in spending more than I currently do, but worry about the effect of some extraordinary expense impacting my retirement savings.

The way I personally use the BH VPW spreadsheet is as follows:

- Put my #'s into the spreadsheet and come up with the 'permissible' withdrawal amount.
- Make my usual, smaller, withdrawals but put the excess into a separate bucket that functions as a 'slush fund.'
- The next year, calculate my 'permissible' amount based on my actual account values minus the balance of that bucket

Example:  Say you have $1 million at age 60, expect $2,000/month from SS at age 70, and have a 60/40 asset allocation.
The VPW worksheet estimates you can withdraw $61,367 for the year.
Now let's say you actually withdraw $50,000 over the course of the year, and your net worth rises to $1,020,000 over the course of the year.
Your slush fund is $61,367-50,000=$11,367.
The next year, you put in the numbers of $1,020,000-(11,367)=$1,008,633 and the calculator projects an allowable withdrawal of $63,015.
You would also have that slush fund available to spend in its entirety, so you could spend up to $71,382 if necessary and still be 'on schedule' to not run out of money early.

In my case, I've done this for three years and build up a slush fund of around $100k.  If I had an impulse purchase (e.g. wanting to replace my 16-year-old car ahead of schedule) or wanted to make extra donations or gifts, I wouldn't be too anxious about spending too much as long as it was less than the slush fund value.

That makes sense.  It's always nice to have a simple objective tool to assist with financial decisions.  We are only one year into early retirement, so I will likely be overly conservative for a few more years, but your approach is a nice way to prepare for future large purchases and extraordinary vacations.

yachi

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Re: Retired Spending - When to increase it?
« Reply #17 on: February 15, 2021, 03:18:15 PM »
The 4% rule uses historical inflation and stock market data.  A lot of periods are successful with much higher withdrawal rates, but some are not.  I don't think 2 years is long enough to estimate if you're likely to be on a period where 4% was too low when you ER'd. 

You can model what it looks like to spend an equal percentage of your balance each year in FIRECalc using the "Percentage of Remaining Portfolio" spending model.  I wish it provided the value of your lowest yearly spending.  Instead, it provides a graph of your yearly spending.  Using all the standard inputs (30 years, 4% initial withdrawal rate) with the "Percentage of Remaining Portfolio" selected, you can see your initial withdrawal of $30,000 becomes $13,000 in certain cases.

Because of the above, I would hesitate to adjust your spending rate based just on the market changes.  But that doesn't apply to your job earnings and spending habits.  I think you can safely spend your earnings and whatever is left to spend for your normal SWF.  So if you calculated your SWF was 30K, and you made 20K at your job, but only spend 25K.  I'd say you can withdrawal the last 5K from your portolio and the 20k you made at your job and spend 25K on something this year.

In general I think you'd want to see a bear market, followed by a recovery to wherever you were in the cycle before adjusting your spending.  So maybe give it 10 years following your SWF+inflation adjustments.

lutorm

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Re: Retired Spending - When to increase it?
« Reply #18 on: February 17, 2021, 09:59:32 AM »
I'm with yachi here. The reason we talk about SORR for the 4% rule being concentrated in the first years after FIRE is because that's when it has not built up a substantial buffer to a downturn. After the first 5-10 years, the 4% rule will usually survive even a severe downturn precisely because you accumulated a large buffer if the first years were normal years. If you continually reevaluate your spending to be 4% of the current portfolio, you are doing one of two things:
  • You're using a "4% of portfolio" WR, which means you'll never run out of money but might end up with an uncomfortably, or potentially unlivably, low WR if your portfolio dips.
  • If you're just re-anchoring your "4% rule" fixed WR every years because your portfolio has increased but intend to fix it if it goes down, you are essentially guaranteeing that when that stops, you are entering a downturn which will maximize your risk of your portfolio going broke because of SORR.

To put it another way, if you calculate your historical survival rate for your WR after doing what you're doing, you will not get an accurate picture from looking at all the histories. Because you have used historical data when setting your WR (portfolio increased by x amount the y years before setting it to 4%), you must only look at the historical record that matches that prior, and those histories will be more likely to encounter an early portfolio drop and will likely have a larger fraction of failures than the general population.

I think you can approximate your situation in cFIREsim by running a Guyton-Klinger withdrawal strategy and only saying you'll increase the WR if the portfolio goes up. Try it and see what happens.