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  • Drawdown strategy

    I’ve been researching drawdown strategies lately. I find the idea of withdrawing a certain percentage each year instead of a certain amount (such as the 4% rule) to be very intriguing. I think withdrawing 5% every year regardless of an up or down year would be doable. You’d never run out of money. It’s kind of like how I live now. Any given year, I can make 40% difference in income so I am used to adapting to a large flux in spending.

    Does any retirees on here follow this practice now and what’s your thoughts?

  • #2
    Go look up the William Bengen original report and subsequent commentary.  It is the most relevant.

    Comment


    • #3


      I find the idea of withdrawing a certain percentage each year instead of a certain amount (such as the 4% rule) to be very intriguing.
      Click to expand...


      im confused. i think you are saying the same thing. 4% is a certain percentage each year.


      I think withdrawing 5% every year regardless of an up or down year would be doable.
      Click to expand...


      did you read the trinity study? see page 52.

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      • #4
        The 4% rule is withdrawing 4% of your initial amount and then adding an adjustment for inflation each year to the amount. You don’t withdraw 4% of your nest egg every year. It’s based on the starting amount.

        I’m referring to withdrawing 5% of your account value each year.

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        • #5




          I’m referring to withdrawing 5% of your account value each year.
          Click to expand...


          then you literally cant run out of money.

          as long as that number is <99.999999% the value will always be >0

          you might not have much money to spend.

           

          so how do we help with your question?

          Comment


          • #6
            That’s the point. You never run out of money. Some years you’ll have more, some years less. My only question is if there is any retiree out there following this withdrawal strategy and how do they like it?

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            • #7
              It is somewhat of a tighten your belt exaggeration.
              Good/normal years you will spend a little more. Bad years far less. I don't think I would be able to cut my spending in half. I would rather even it out like the 4% rules does.

              I also do not plan to withdraw x% and try to make it last or spend it up by the end of the year. I see it as more of a guide to keep you on the right path so you don't blow it all in the first decade

              Comment


              • #8
                Level SPIA or DIA along with SS to cover known expenses, index funds to hedge inflation, buy more SPIA if/when needed.

                Comment


                • #9
                  You could build up a large cash reserve on the years your 5% produces excess of what you need. Then you could tap the cash reserve during those years when your 5% isn’t quite enough.

                  Say you choose $400,000 to live on. If you have a $10 mil nest egg, you take out your 5% which is $500,000. You spend $400k and save 100k. If we have a terrible year and your account drops to $7 mil, you take out $350,000. You then use $50,000 from the cash reserve to make up the gap if you need to. I would probably just curb expenses for the year myself. Carry that forward and be flexible. Add a little inflation adjustment here and there. Sounds doable to me unless I’m missing something.

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                  • #10
                    Theoretically, you could even go higher.

                    Run some simulations on portfolio visualizer (select fixed withdrawal percentage):

                    https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResults

                    Comment


                    • #11
                      From Wade Pfau: "This paper outlines a different way to think about building a retirement income strategy that dramatically moves away from the concepts of safe withdrawal rates and failure rates. The focus is how to best meet two competing financial objectives for retirement: satisfying spending goals and preserving financial assets."

                      https://www.onefpa.org/journal/Pages/A%20Broader%20Framework%20for%20Determining%20an%2 0Efficient%20Frontier%20for%20Retirement%20Income. aspx

                      His conclusion: Retirement income portfolios containing bonds, variable annuities, or inflation protected income annuities are sub-optimal. Compared to other allocations, combinations of stocks and level SPIAs satisfy the highest percentage of lifetime spending needs, and also preserve the highest amount of assets at death.

                       

                       

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                      • #12
                        I am the opposite.  I will not retire until I can live on dividends, rental or passive incomes (0% withdraw).  I do not want to crawl back to work when I run out of money after retirement, or depend on any charity or SS to live.  I will leave the principle alone while I live and give it to charities or kids once I die (tax free for sure).

                        Comment


                        • #13
                          https://www.kitces.com/blog/dynamic-retirement-spending-small-but-permanent-variable-adjustments/

                          https://crr.bc.edu/briefs/can-retirees-base-wealth-withdrawals-on-the-irs%e2%80%99-required-minimum-distributions/

                          The problem withdrawal strategies is success or failure depends on your investment results over 30 - 40 years.

                          Most AA discussions include risk tolerance and risk capacity in portfolio composition. Just as there is no perfect portfolio, there is no perfect withdrawal plan.

                          Your AA will tend to be impacted by your emotions once you contemplate or start withdrawals. Rebalancing a portfolio to a plan is similar to adjusting a withdrawal strategy. It should probably be part of your IPS.

                          My only caution is to focus on dollars in the portfolio and dollars in withdrawals. Dividends, annuities, and price appreciation are all spendable. I personally haven’t finished. The direction is a variable adjustment portfolio up/down > 10% adjust the withdrawal by x%. permanently then continue on with annual inflation adjustment. This ignores household spending, spending would be addressed separately. Excess kept in EF for spending.If that sucker keeps growing, I won the game on the withdrawal plan. If not, attack the spending for the remaining years.

                          Comment


                          • #14




                            https://www.kitces.com/blog/dynamic-retirement-spending-small-but-permanent-variable-adjustments/



                            The problem withdrawal strategies is success or failure depends on your investment results over 30 – 40 years.

                            Most AA discussions include risk tolerance and risk capacity in portfolio composition. Just as there is no perfect portfolio, there is no perfect withdrawal plan.

                            Your AA will tend to be impacted by your emotions once you contemplate or start withdrawals. Rebalancing a portfolio to a plan is similar to adjusting a withdrawal strategy. It should probably be part of your IPS.

                            My only caution is to focus on dollars in the portfolio and dollars in withdrawals. Dividends, annuities, and price appreciation are all spendable. I personally haven’t finished. The direction is a variable adjustment portfolio up/down > 10% adjust the withdrawal by x%. permanently then continue on with annual inflation adjustment. This ignores household spending, spending would be addressed separately. Excess kept in EF for spending.If that sucker keeps growing, I won the game on the withdrawal plan. If not, attack the spending for the remaining years.
                            Click to expand...


                            Sequence of returns is a serious concern. I'll be much more conservative in the 5 years leading to and first 5 of retirement. I'll likely be piling into an appropriate percentage of bonds the last years of working to mitigate some volatility and smooth out the early withdrawals (bonds allow a more consistent draw but decrease overall nest egg), but move towards more aggressive as time goes on (I hope, we'll see).

                            Comment


                            • #15
                              I think it’s hard to know how you will feel about not having income until you actually get there.  Especially if you are really young.  You are managing health care expenses for potentially 15 years if you retire at 50.  Possibly for yourself and spouse.  Possibly for kids if you had kids at late age.  Possibly college expenses.

                              additionally, many who retire young would want to enjoy their early retirement years with travel.  Expenses may go up considerably during the early retirement years and not neatly fit into the 5% proposal or 4%, but as house gets paid off, Medicare kicks in, not supporting kids, traveling less, lower utilities, less money on clothes, etc etc— potentially the expenses could be widely asymmetric and 7% early spending could be easily balanced with 3% later spending, depending on how things go.  Eventually social security and RMDs kick in, and your income might increase dramatically later in life.

                              it may make sense to consider an annuity to mitigate some of the risks with a 5% proposal.

                              when eventually when two become one, the ability to transfer money from 403 to Roth at low brackets will diminish, and the optimal strategy could change, altering your proposed drawdown from 403.

                              Laws could change.  stretch IRA laws could change

                              lots of different ways it could go.

                              Or i could be overthinking it.  

                               

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