Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
The classic, brainless way of withdrawing money is pretty much that - you calculate the dollar amount of 4% (or whatever your withdrawal rate is) of your total assets on the day that you retire (or close to it). You adjust that amount for inflation every year and withdrawal that amount. So the 4% is only actually done the first year. Every year after that is a constant, real (i.e., adjusted for inflation) dollar amount.
Inflation comes from the Bureau of Labor Statistics. It is called CPI-U (for urban).
Note that there are many ways of taking withdrawals. Another popular method is to take a percentage every year, not just the first year. It has the advantage that you will never run out of money. But your withdrawals might get very small as your assets shrink.
Another technique is to take a percentage, but have a floor that is an inflation adjusted dollar amount. It has the advantage of matching the withdrawal roughly to how well your portfolio is doing. When the economy is booming you can take out more, when there is a recession, you take out less, but never less than an amount set by the floor. This is the method I use. The floor is my minimum budget we can live on with no discretionary spending.
And yes, people are actually doing this.
OK so I guess you know people that are doing it. For how many years?
And lets
We are retired and use a variable method. It has never failed historically out to 40 years and has a 100% sucees rate.
We take our actual balance each year on jan 1 and set a maximum budget of 4% of it . If markets are up we get a bigger budget . If markets are down we take 4% or 5% less than the year before , which ever is higher.
That rewards you in up years yet keeps you from taking a big pay cut in the down years. If markets are down again the following year repeat the process.
All income comes from the portfolio. We set a side two years cash. One year gets spent down and one year is held in reserve. Dividends are reinvested now but when we have to refill that 2nd year they will be channeled in to building up that 2nd years reserve . Trying to run off current year's distributions are to hard.
Our fund dividends and distributions can run from 29k to 69k a year so it is much to hard to try to plan around spending them directly.
We find it much easier to buffer the income flow than hit shortfalls as dividends cut or suspended just at the worst possible times and first have to fill shortfalls by selling things.
I like it a lot because it is real time and all inflation adjusting is built in to the process.
Last edited by mathjak107; 09-16-2016 at 04:11 AM..
We are retired and use a variable method. It has never failed historically out to 40 years and has a 100% sucees rate.
We take our actual balance each year on jan 1 and set a maximum budget of 4% of it . If markets are up we get a bigger budget . If markets are down we take 4% or 5% less than the year before , which ever is higher.
That rewards you in up years yet keeps you from taking a big pay cut in the down years. If markets are down again the following year repeat the process.
All income comes from the portfolio. We set a side two years cash. One year gets spent down and one year is held in reserve. Dividends are reinvested now but when we have to refill that 2nd year they will be channeled in to building up that 2nd years reserve . Trying to run off current year's distributions are to hard.
Our fund dividends and distributions can run from 29k to 69k a year so it is much to hard to try to plan around spending them directly.
We find it much easier to buffer the income flow than hit shortfalls as dividends cut or suspended just at the worst possible times and first have to fill shortfalls by selling things.
I like it a lot because it is real time and all inflation adjusting is built in to the process.
Does the Jan 1 actual balance include the 2 years of cash?
If you budget 4% and do not spend it all where the the excess go?
If you budget 4% and a major expense come up how to you make the money available for that expense assuming the 4% budget cannot handle it? Maybe a new car.
Over a number of years of bad markets reducing the 4% every year may not allow enough for your lifestyle. How far do you cut back?
Does the Jan 1 actual balance include the 2 years of cash?
If you budget 4% and do not spend it all where the the excess go?
My scheme is "use it or lose it". If I don't spend the withdrawal (and I usually don't because the withdrawal includes allowances for unforeseen expenses, which don't happen most of the time), it goes back into the investment pool.
Quote:
If you budget 4% and a major expense come up how to you make the money available for that expense assuming the 4% budget cannot handle it? Maybe a new car.
The withdrawal amount is designed to handle it. I set my amount by a budget I have. It is crazy to say "I am going to withdrawal 4% of my portfolio every year because that's what some rule tells me I can do". You need to figure out what amount to withdrawal based on a budget. The budget includes allowances for a new car, a new roof, replacing a water heater, etc. Most years those expenses don't happen, so the unspent money stays invested, earning return, for the day that I need it. [edit] So, when I need it, I just take it out of the portfolio.
Quote:
Over a number of years of bad markets reducing the 4% every year may not allow enough for your lifestyle. How far do you cut back?
Your budget tells you. In the budget we have bottom-line expenses and we have discretionary spending (trips, going out, etc.). We cut out the discretionary and go down to the bottom-line budget when we have to. That is our floor.
Last edited by TwoByFour; 09-16-2016 at 02:21 PM..
Does the Jan 1 actual balance include the 2 years of cash?
If you budget 4% and do not spend it all where the the excess go?
If you budget 4% and a major expense come up how to you make the money available for that expense assuming the 4% budget cannot handle it? Maybe a new car.
Over a number of years of bad markets reducing the 4% every year may not allow enough for your lifestyle. How far do you cut back?
OK I know the number work on paper.
there is one years worth of cash left at the end of the year petty much . so yes , whatever is left is part of the balance for figuring next years goal posts ..
we keep what i call a cup on the side of the cash buckets with about 50k in it for emergency's we can't cover with the regular budget .
we made sure when we planned our life style discretionary income was at least 40-50% of the budget since we like going places and doing things . we can easily cut the budget .
there is one years worth of cash left at the end of the year petty much . so yes , whatever is left is part of the balance for figuring next years goal posts ..
we keep what i call a cup on the side of the cash buckets with about 50k in it for emergency's we can't cover with the regular budget .
OK a jumbo cup with 50k should work for big time expenses even a car.
So is the 50k part of the number the 4% withdrawal is based on?
Where does the money come to fill it up if some or all of it is used?
no the cup is not . remember any money committed to generating income has the potential to eventually go to zero trying to keep the income stream constant .
any money you want for sure , should not be part of the balance used for income generation .
if money is eventually needed than depending if markets are up or down equity's or bonds will refill . by delaying ss i can spare money to put back in the cup and refill the portfolio later with the bigger ss check
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
