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Old 11-06-2013, 08:23 AM
 
Location: NoVA
41 posts, read 50,499 times
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I've been around a few different investing/retirement forums, and a lot of the advice focuses around the idea of a fixed Safe Withdrawal Rate (SWR). Typical rule of thumb is 4% SWR (from the Trinity Study) for a 30yr retirement period. Other people talk about 3-3.5% SWR for "earlier" retirees, to protect the longevity of their portfolios.

Is anyone in the planning stages of retirement that toys with the idea of Variable withdrawal strategies? Or specific decision rules to their spending? Everyone talks about "cutting back" in the lean market years... but does anyone have any strict rules about it? I'd be especially interested in folks actually in retirement who use strict rules.

A popular retirement calculator, Firecalc, has the option to use "95% Rule" from Work Less, Live More. This basically says that if the market drops, and that 4% of your portfolio is way less than it was last year, that you can withdraw no less than 95% of the previous year. This naturally limits withdrawals during bad periods.

Another retirement calculator, cFIREsim, gives a couple options under the "Adjust Spending" menu at the top. You can do a straight up "% of portfolio" with specified Floor and Ceiling values, you can use MarketWatch's Henry Hebeler's Autopilot method, and they also depict a very complicated set of rules made up by two economists (Guyton/Klinger).

I've always found it against human nature to set a very specific spending level, and say you're going to stick with it... and a lot of these other methods just make sense for the longevity of your portfolio.

Thoughts on these or other strategies?
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Old 11-06-2013, 08:39 AM
 
Location: Florida -
8,764 posts, read 10,845,692 times
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We haven't had to drawdown IRA's for income yet. However, with limited tax write-offs, RMD's kicking-in soon ... plus an actuarial need to start drawing-down an IRA-based annuity, my plan is to try to regulate withdrawal income against tax brackets. But, like you, I'm also looking for alternatives and open to suggestions.
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Old 11-06-2013, 08:43 AM
 
Location: NoVA
41 posts, read 50,499 times
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Quote:
Originally Posted by jghorton View Post
We haven't had to drawdown IRA's for income yet. However, with limited tax write-offs, RMD's kicking-in soon ... plus an actuarial need to start drawing-down an IRA-based annuity, my plan is to try to regulate withdrawal income against tax brackets. But, like you, I'm also looking for alternatives and open to suggestions.
It sounds like you're more in the situation of having much more money that needed to sustain your current lifestyle, and just need some tax optimization. I think the idea of some of the variable strategies is to get the most money out of your portfolio for the least risk of ruin. (Can you even have both? ha!)
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Old 11-06-2013, 09:08 AM
 
29,782 posts, read 34,871,258 times
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Quote:
Originally Posted by psuindc View Post
It sounds like you're more in the situation of having much more money that needed to sustain your current lifestyle, and just need some tax optimization. I think the idea of some of the variable strategies is to get the most money out of your portfolio for the least risk of ruin. (Can you even have both? ha!)
Like Horton our pensions and SS cover our expenses plus. However withdrawal rates v accumulation amounts are both in play with us. I am constantly reminded how things have changed over the last decade plus. In the late 90's the focus was on safe withdrawal rates while maintaining principle balance adjusted for inflation. That was back in a very much higher interest rate period. Now the focus is more on not out living your balance. I am a child still of that previous era. My response to the OP question is that with the current policy uncertainty in DC regarding Taxes, SS, Medicare etc withdrawal rates will need to be flexible to reflect best practices for your situation. Means testing will encourage withdrawals from tax sheltered investments more a decision of minimizing being subjected to and less one of just minimizing taxes. I personally am in wondering the wisdom of timing SS at 70 along with MRD's on top of pensions and SS. So folks like Horton and me have multiple possible issues to factor in. Accountants are great but they can't read the minds of DC any better than ...........
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Old 11-06-2013, 09:13 AM
 
71,595 posts, read 71,751,865 times
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I happen to like a variable plan since few can take a big decrease in income in bad market years.

bob clyatts method works well.

every year end look at your balance . you can take 4% of it the following year . if markets fell take 95% of what you took the previous year or 4% of the new year ,which ever is higher . that's it, nothing else to know .

it is based on about a 50/50 mix though.

there is no inflation proofing as it takes care of itself.

back testing the method passed every rolling 35 year time frame .

Last edited by mathjak107; 11-06-2013 at 09:58 AM..
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Old 11-06-2013, 09:19 AM
 
29,782 posts, read 34,871,258 times
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Quote:
Originally Posted by jghorton View Post
We haven't had to drawdown IRA's for income yet. However, with limited tax write-offs, RMD's kicking-in soon ... plus an actuarial need to start drawing-down an IRA-based annuity, my plan is to try to regulate withdrawal income against tax brackets. But, like you, I'm also looking for alternatives and open to suggestions.
At some point will you kick the spending budget up to address the increased income? Will that impact the consistency of your drawdown?
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Old 11-06-2013, 10:15 AM
 
2,912 posts, read 3,550,189 times
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Quote:
Originally Posted by mathjak107 View Post

every year end look at your balance . you can take 4% of it the following year . if markets fell take 95% of what you took the previous year or 4% of the new year ,which ever is higher . . . back testing the method passed every rolling 35 year time frame.
People should be very skeptical about these kinds of cute algorithms for adjusting withdrawal rates -- they are based on little more than data dredging.

Consider the following: suppose I think that I have a couple hundred really good ways, chosen haphazardly, to adapt my portfolio withdrawal rate, and I back-test each one against historical data. Sure enough, one particular algorithm seems to work. Now we have Hamish Forbes's method, which passes in every rolling 35 year time frame. Doesn't mean a darn thing. It's nothing but a classic case of data dredging.

Last edited by Hamish Forbes; 11-06-2013 at 10:36 AM..
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Old 11-06-2013, 11:06 AM
 
Location: Alaska
5,356 posts, read 16,349,090 times
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Our withdrawal strategy will be variable, with a larger percentage being taken out at the beginning. Once SS and my wife's pensions start, income will be enough that our required for expenses withdrawal rate will go to 0% for 15+ years, with inflation being the only reason to start withdrawing again. Overall, we'll average in the 3-4% withdrawal range. Over this period, we will be converting our traditional IRA to a Roth IRA, as long as it makes sense to do so.
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Old 11-06-2013, 11:14 AM
 
71,595 posts, read 71,751,865 times
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Quote:
Originally Posted by Hamish Forbes View Post
People should be very skeptical about these kinds of cute algorithms for adjusting withdrawal rates -- they are based on little more than data dredging.

Consider the following: suppose I think that I have a couple hundred really good ways, chosen haphazardly, to adapt my portfolio withdrawal rate, and I back-test each one against historical data. Sure enough, one particular algorithm seems to work. Now we have Hamish Forbes's method, which passes in every rolling 35 year time frame. Doesn't mean a darn thing. It's nothing but a classic case of data dredging.
Well I wouldn't dismiss the Hamish forbes method totally if it had good results through many scenerios spanning many decades ...

like I say it may not tell us what will work for sure off in the future, but it certainly will tell us what didn't work up to date and had a high failure rate already.

you may not want to use the stuff that didn't work right out of the starting gate and that is the real value in all these methods that back tested fine..
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Old 11-06-2013, 01:02 PM
 
2,912 posts, read 3,550,189 times
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^^ This entire approach has been thoroughly discredited. See for example, http://corporate.morningstar.com/ib/...Portfolios.pdf

Anything based on the 4% SWR myth or on tweaking the 4% SWR myth is obsolete thinking.
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