Author Topic: Withdrawal Strategy - Something Flexible?  (Read 1429 times)

embwbam

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Withdrawal Strategy - Something Flexible?
« on: March 21, 2020, 05:49:41 PM »
Hi there, I stopped working and started living on a post-FIRE budget last year, but I don't really have a good plan yet (I only just learned that the 4% rule is inflation rather than market adjusted). I'm 37.

My first impulse is to create a plan that lasts forever, and increases as time goes on. You know those games where you can choose to either build an army and win quickly, or invest in more economy so eventually you're so rich you can build the biggest army ever and steamroll the bad guys? I choose the latter every time. It feels like the right way to win (even when it's stupid!). I'm ok ending up with a bunch of money or donating it right when I die. I'm ok cutting expenses in lean years.

Main Question: What system would you use to have your NW keep increasing but to conservatively take advantage of it as it goes up? 4% with Guyton-Klinger rules?

2. What do you do if you earn more money? I have 770k right now (1M before Covid made things fun), but I will receive another $300k over the next 1-2 years. I might consult for someone at some point or have a project bring in money in the future. If I add the extra money to my nest egg instead of spending/saving it, how do I adjust my withdrawal rate?
3. Related to the above, I feel like I need to restart my SWR since I set it last year and the markets tanked so hard. Do you agree?
4. If I don't spend all of my yearly withdrawal, should I save it or reinvest it? How do you take advantage of those savings?
5. Is it better to keep a 90/10 allocation if I can stomach it? What are the downsides? What kinds of rules compensate for this?
6. Finally: Is this goal pathological? Should I let it go and do something different?

Any and all feedback greatly appreciated. Thanks for all the help and inspiration along the way!
« Last Edit: March 21, 2020, 05:52:32 PM by embwbam »

ysette9

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Re: Withdrawal Strategy - Something Flexible?
« Reply #1 on: March 21, 2020, 08:41:06 PM »
Hi there, I stopped working and started living on a post-FIRE budget last year, but I don't really have a good plan yet (I only just learned that the 4% rule is inflation rather than market adjusted). I'm 37.

My first impulse is to create a plan that lasts forever, and increases as time goes on. You know those games where you can choose to either build an army and win quickly, or invest in more economy so eventually you're so rich you can build the biggest army ever and steamroll the bad guys? I choose the latter every time. It feels like the right way to win (even when it's stupid!). I'm ok ending up with a bunch of money or donating it right when I die. I'm ok cutting expenses in lean years.

Main Question: What system would you use to have your NW keep increasing but to conservatively take advantage of it as it goes up? 4% with Guyton-Klinger rules?

2. What do you do if you earn more money? I have 770k right now (1M before Covid made things fun), but I will receive another $300k over the next 1-2 years. I might consult for someone at some point or have a project bring in money in the future. If I add the extra money to my nest egg instead of spending/saving it, how do I adjust my withdrawal rate?
3. Related to the above, I feel like I need to restart my SWR since I set it last year and the markets tanked so hard. Do you agree?
4. If I don't spend all of my yearly withdrawal, should I save it or reinvest it? How do you take advantage of those savings?
5. Is it better to keep a 90/10 allocation if I can stomach it? What are the downsides? What kinds of rules compensate for this?
6. Finally: Is this goal pathological? Should I let it go and do something different?

Any and all feedback greatly appreciated. Thanks for all the help and inspiration along the way!
What was your withdrawal rate before the current crash and what is it now?

How much flexibility do you have in your spending?

I’d recommend you just spend a bunch of time playing around with cFIREsim to get a feel for yourself of how robust your plan is. I have done a bunch of scenarios for us with adjusting the asset allocation, withdrawal amount, adding or subtracting social security and my pension, modeling mortgage payoff and more. I’ve found that certain things can help make a plan more robust such as being willing to adjust spending down by -10% in bad years, by starting retirement with a high % of bonds and slowly increasing the stock percentage back up (“bond tent” or “reverse equity glide path” as it is called), and by keeping a mortgage in retirement as opposed to laying it off early (true for these low interest rate times).

If your goal is to die with the most toys then you need to 1) have a withdrawal strategy that is robust enough in the first ten years of retirement to get you past the sequence of returns risk and 2) have enough stocks later in your retirement to outstrip inflation and then build wealth like crazy.

embwbam

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Re: Withdrawal Strategy - Something Flexible?
« Reply #2 on: March 22, 2020, 08:22:21 AM »
Really interesting thoughts on having a robust plan early to get past the sequence of returns risk, thanks!

What was your withdrawal rate before the current crash and what is it now?

I set my budget to 4% of 700k, with 150k set aside for a future home purchase, 80k set aside for large expenses. So last year that was around 920k in the markets at 90/10 stocks/bonds. It's now down to $688k. I have 300k coming in passively over the next year from an old client.

I'm not actually withdrawing yet, but I'm not working, so I want to figure this out and start getting ahead.

How much flexibility do you have in your spending?

A lot. The budget included $1000/mo for discretionary purchases. I would be sad to lose all of this, but I could trim the fat without much problem.

So I have room to maneuver, but I would love some concrete suggestions on how to react when the market goes down like this.


bmjohnson35

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Re: Withdrawal Strategy - Something Flexible?
« Reply #3 on: March 22, 2020, 07:14:51 PM »

It helps if you know exactly how much you are spending now.  Once we were debt free and moved into a home that we would live in for a while, we tracked our expenses closely.  We Fired with full yr expenses pulled in January.  This means we won't pull again until around Jan next year.  How much and how often will depend on the state of the economy and our investments at that time.  We have around 3 yrs of expenses in cash as well, so we don't have to draw off investments if the economy is still in the dumper.  It really depends on your personal situation. 

BJ

Classical_Liberal

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Re: Withdrawal Strategy - Something Flexible?
« Reply #4 on: March 22, 2020, 07:59:51 PM »
I use a 4.8%WR (.004 monthly), I do this due to expenses associated with investing, basically giving me about a 5%WR.  I also have a "floor", meaning I will withdraw enough for inflation adjusted basic living expenses no matter what. 

This works for me as I have intermittent income that can be used to pay for extras, and my floor spending is very low by this forum's standards. I'm also relatively young at 43, so have 20 more years of potential work time.  Plus I'm only 25 or so years from a SS check that will fund basic living expenses even at the 72% rate it's currently solvent for.  It insures my portfolio never drops below a SHTF number, and can be "topped off" with fulltime work, if I choose to do so for lifestyle reasons at a future date.

A similar, more generic approach to this in on bogleheads. Given each person's situation is so individualized, I tend to think it's better to look at your entire situation and make your own rules. Take into account how you invest, SWAN, if you think you have the personality that will lend you towards earning money again, age, pensions, etc.

bacchi

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Re: Withdrawal Strategy - Something Flexible?
« Reply #5 on: March 22, 2020, 08:25:31 PM »
McClung's "Living Off Your Money" looks at several withdrawal rules/plans and runs both historical and Monte simulations on them. I don't recall where Guyton landed but there are better solutions for withdrawal strategies.

embwbam

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Re: Withdrawal Strategy - Something Flexible?
« Reply #6 on: March 23, 2020, 11:31:40 AM »

It helps if you know exactly how much you are spending now.  Once we were debt free and moved into a home that we would live in for a while, we tracked our expenses closely.  We Fired with full yr expenses pulled in January.  This means we won't pull again until around Jan next year.  How much and how often will depend on the state of the economy and our investments at that time.  We have around 3 yrs of expenses in cash as well, so we don't have to draw off investments if the economy is still in the dumper.  It really depends on your personal situation. 

BJ

I'm living off a 2600/mo budget while I wait for those last checks to roll in. I have wiggle room and can reduce it if needed. I live in a converted van (hence having some housing money set aside for later years).

You keep 3y of expenses in cash, but you count that as part of your net worth, not your expenses, right? Assuming the markets stayed bad, I'm assuming you would pay yourself out of that 3y until it was gone, then start selling. If the markets recovered would you refill that to 3y?

ysette9

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Re: Withdrawal Strategy - Something Flexible?
« Reply #7 on: March 23, 2020, 02:15:43 PM »
McClung's "Living Off Your Money" looks at several withdrawal rules/plans and runs both historical and Monte simulations on them. I don't recall where Guyton landed but there are better solutions for withdrawal strategies.
Another plug for this book. It is a dense academic tome but has amazing insights.

embwbam

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Re: Withdrawal Strategy - Something Flexible?
« Reply #8 on: March 24, 2020, 12:29:16 PM »
I ordered the book! Thanks all. That will be a nice way to get educated and come up with a plan.