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kmiao1,

You wrote, This is exactly what I'm referring to. How much is "comfortably above what one needs"? What are people doing percentage-wise to make sure they are in this "comfort" zone? 20%?

I currently spend about $50K/year. If I figured $50K would cover all my living expenses in retirement I am done already. It could be very high or very low, as I am about to discuss.

But you see, I have a dilemma ... or two. The big one is health insurance. My employer currently pays for my insurance. And the Republicans are trying to kill ACA. And I've been in a position before where I couldn't get insurance, except through the Texas State High Risk Pool. And it was very, very expensive and didn't cover very much. If I had to go such a path and had to adjust those costs against medical inflation, I could be looking at an additional $24K/year between my retirement date and age 65.

Another way to look at it is, I have at least a $250K risk lying in front of me. And it's fairly short-term. That is the main reason I'm not retired today - I'm working on that last $250K for just-in-case.

Okay. I might save up a little extra "play money" while I'm at it. So my starting buffer will be an extra 20-25%. Maybe. Kind'a. Sort-of.

My target date is presently in 2020 with an option to delay until 2022 if the markets tank before I say bye.

And if it looks like I won't need any of that extra buffer after a few years? Who knows? Travel around the world? Buy a vacation house in Asia or Europe? Oh yeah. I'll definitely want to get me one of those self-driving Teslas too at some point. Maybe a Model S.

Of course even that's probably fudging it. If things go as currently planned, I'll be selling my house and moving in with my girlfriend. That cuts my retirement costs down to only $26K/year and frees up enough equity to cover all of my buffer requirements ... except that it's not in me to NOT plan for worst-case scenarios, so I have to plan for what happens if my girlfriend dies on me right after I retire. I won't own the house, that leaves me in need of housing, etc., etc., etc...

But based on the most probable outcome with expenses of just $26K/year, I'm going to have a buffer of something like 140%. Or put another way, a withdrawal rate of around 1.7%. Oh yeah. That doesn't even account for the impact of Social Security years from now. My current (default) plan has me starting at age 67. I'll be eligible for close to the max, or about what? $32K/year in today's dollars? That means starting at age 67 I should actually have a negative withdrawal rate...

Does that make my savings buffer undefined?

Having explained all of this, I sound really paranoid. Maybe I should just retire now? At a minimum, it's past my bed time. ;-)

- Joel
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Well, it's always good to start with a budget....
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I get the budget part, but no one controls the market. The point is that the 4% SWR is supposed to take into account a high level of sustainable draws over past cycles for a, e.g., 30 period. So in theory, you can figure out your pot of assets, calculate the 4% draw amount, and then annually adjust that number by inflation. But stuff happens, and the question is at what point do you recognize a problem?
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"I'm not sure if this has been covered already, but I was wondering, once you retire, you have to worry about inflation and sequence of return risks, etc..., but at what point do you throw in the towel and then go back to work or employ plan Bs?"

IF you have saved and start your retirement taking 4% of your diversified assets each year........you shouldn't have to ever throw in the towel and go to Plan B.

For many people, they will be getting SS - most people in fact, that will provide a good portion of their needed 'income' in retirement.

We will assume you had an accurate budget when you retired so you know what your annual spending and income would be when you retired.

- -----

"That is, at what point do you know you have a problem? "

When 4% plus inflation isn't enough to keep your checkbook balanced! When you are spending more than you are getting in income.

Yes, at points, you may be taking 7% out of your nest egg - if you happen to hit a bad market drop soon after retirement

However, in all of financial history (120 years), every 30 year period has successfully allowed a 4% SWR.

- -----


"For example, if you're drawing 4% and there's a bear market, is the problem when your 4% (plus inflation adjustments) hits, say 7% of the base that you know you have a problem? What have people been doing to gauge the risk?"

Not much. the SWR at 4% will survive any future period as long as it is no worse than any 30 year period in history - which includes a whole bunch of recessions and depressions. And world wars.

- - ----

You can always have a plan B. You can always plan on maybe part time work if you are concerned. You might also be able to trim expenses in 'lean times'.

If you are just about barely squeaking by at planned 4% SWR you might want to reconsider your retirement date to accumulate more assets before retirement.



t
t.
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but at what point do you throw in the towel and then go back to work or employ plan Bs?

Never.

1) There is no "going back to work". Once you leave your relatively high-paying job, you are done. You can't get back there. It's one of those type of ground that Sun Tzu mentioned -- you are safe while you are there, but once you leave you can not get back to it.

And Walmart is getting rid of the Greeters at most of their stores, so that fallback is no longer available.


2) Plan B? Plan B is for when Plan A has failed. Plan B is "if we do this then maybe we can still get out alive."
But what to do in the case of dwindling assets had better be part of your Plan A.

Hence, all the various variable withdrawal strategies are part of Plan A, not Plan B.


t had it right: If you are just about barely squeaking by at planned 4% SWR you [should] accumulate more assets before retirement.
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kmiao1 asks,

I'm not sure if this has been covered already, but I was wondering, once you retire, you have to worry about inflation and sequence of return risks, etc..., but at what point do you throw in the towel and then go back to work or employ plan Bs? That is, at what point do you know you have a problem? For example, if you're drawing 4% and there's a bear market, is the problem when your 4% (plus inflation adjustments) hits, say 7% of the base that you know you have a problem? What have people been doing to gauge the risk?

</snip>


You're looking for an event that is worse than anything we've seen since the American Civil War of the 1860's. Something worse than World War II, the Stock Market Crash of 1929 and the Great Depression, or the Great Inflation of the 1970's.

I've been following the 4% rule since 1994. I did this analysis about 15 years ago.

Retiring at the Worst of Times.
http://www.retireearlyhomepage.com/worstre.html

</snip>


If you don't happen to retire on the eve of the next Great Depression, your biggest problem with the 4% rule will be deciding whether to buy a boat or an airplane to soak up the excess cash flow.

2016 Update: Real-Life Retiree Investment Returns
http://www.retireearlyhomepage.com/reallife17.html

</snip>


intercst
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For example, if you're drawing 4% and there's a bear market, is the problem when your 4% (plus inflation adjustments) hits, say 7% of the base that you know you have a problem? What have people been doing to gauge the risk?

I'll add my $0.02 to the thread.

To help mitigate the starting retirement at the worst time possible, have your first 3-5 years of your 4% sitting in cash/money market/CDs.

JLC
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JLC writes,

To help mitigate the starting retirement at the worst time possible, have your first 3-5 years of your 4% sitting in cash/money market/CDs.

</snip>


Good advice, but most retirees are already doing that.

If you retire with a 60% stock/40% fixed income portfolio you have 10 year's worth of living expenses in cash/bonds/CDs. Even a 75% stock allocation leaves you with more than 6 year's worth of spending in fixed income.

intercst
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So what have people been using as a buffer so that they arent so close to the line? I was thinking 20 to 40% over my comfortable retirement draw. I'd keep 1/2 as part of my portfolio and 1/2 as cash out side the portfolio as a safety bucket to draw on in case of a market downturn.
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kmiao1 asks,

So what have people been using as a buffer so that they arent so close to the line? I was thinking 20 to 40% over my comfortable retirement draw. I'd keep 1/2 as part of my portfolio and 1/2 as cash out side the portfolio as a safety bucket to draw on in case of a market downturn.

</snip>


There's already a huge buffer built into the 4% rule. Adding another 20% to 40% on top of that just increases the likelihood you'll be the richest guy or gal in the graveyard. What's the point in that?

intercst
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The buffer is in case my budget is wrong or unexpected costs arise or i decide that i want to splurge more. As was said before, once i leave my career i likely cannot get the same salary etc... once i retire. So a buffer makes sense.
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So what have people been using as a buffer so that they arent so close to the line?

I think the 4% rule IS the buffer.

I'd say that if you're that concerned about it, maybe take another look at your anticipated expenses in retirement. Maybe you're subconsciously recognizing that you might be underestimating what you'll really need.

Me, I think I have a pretty good handle on future needs.... except for not knowing how much I'll probably have to help my brother. So I've added about 15% to my "number." That may be the kind of buffer you're talking about?

Plug the numbers into FireCalc, too. That'll tell you what percentage of time your plan would fail, based on history.
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I'd keep 1/2 as part of my portfolio and 1/2 as cash out side the portfolio as a safety bucket to draw on in case of a market downturn.

</snip>


Money and financial assets are fungible. The math behind the problem doesn't care what bucket you keep your retirement stash in. You own "X" amount of retirement funds no matter where it's placed.

A guy just won the Nobel Prize in Economics for his 30 years of work showing that this kind of mental accounting is nonsense even though the vast majority of the population does it.

https://www.bloomberg.com/view/articles/2017-10-09/thaler-ch...

intercst
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Correct me if I'm wrong, but I believe most or all of the studies of the 4% safe withdrawal rate are based on being invested in market indices. So one point to be aware of is that if you're not invested in market indices and in an asset allocation comparable to the studies, you're dealing with a different and possibly more volatile kettle of fish, and may not necessarily be as safe as the studies show. Or you may be better off if you're a better (or luckier) investor.

But sequence of returns is key. Personally I plan to use the 4% safe withdrawal rate as a strong guideline, but I'll go up or down some probably by the seat of my pants depending on investment performance, particularly trimming back if there's bad performance in the first few years. I'll have my mortgage paid off, which should give me a good ability to trim back on expenses if I need to. And while I wouldn't expect (or even want) to get a job back like the one I will leave, I do expect there will be opportunities to make some money here and there if I need to.

What I'd really like to do is set up a "discretionary fund" to use for expenses over and above my basic needs, and also a "replacement fund" to save for things like cars and major home repairs. I would contribute to those each year out of the 4%, but if I didn't spend it all it would carry over to the next year and be available to use then, or at a time when investments were down and I didn't want to draw the full 4%. I haven't figured out exactly how I would do that yet, but I will likely come up with some arrangement.
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The buffer is in case my budget is wrong or unexpected costs arise or i decide that i want to splurge more. As was said before, once i leave my career i likely cannot get the same salary etc... once i retire. So a buffer makes sense.

I know what you're talking about. The position that "4% is the buffer" just relates to normal ongoing expenses (which would include treats along the way. The old "miscellaneous" category.) But doesn't, because it can't, anticipate emergencies. What I did was audit my previous life and wrote down all the "emergencies" I had had over the years. Then I just came up with some number of dollars that seemed reasonable without being too panicky or hand-wringy and just put that much money aside. Or you could include it in your investments and just mentally wall it off. Your 4% draw at that point would actually be less than 4% of your total.

You sort of have to know yourself from the inside to know which would work
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The buffer is in case my budget is wrong or unexpected costs arise or i decide that i want to splurge more. As was said before, once i leave my career i likely cannot get the same salary etc... once i retire. So a buffer makes sense.

No, it does _not_ make sense. Not financially. Your "buffer" is your entire portfolio.

Truthfully, the buffer is, as intercst said, already built in to the 4% SWR.

In a sense, your buffer is that you don't retire on a shoestring.
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I suppose that, if one retires with a portfolio such that the 4% is barely able to cover living expenses, then one doesn't have much buffer, but, by the same token, then one also has nothing with which to fund a buffer. If one has more, better to have it in the portfolio and growing.

Conversely, if the 4% is comfortably above what one needs, then there is no need for a buffer because the portfolio is the buffer.
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What I'd really like to do is set up a "discretionary fund" to use for expenses over and above my basic needs, and also a "replacement fund" to save for things like cars and major home repairs. I would contribute to those each year out of the 4%, but if I didn't spend it all it would carry over to the next year and be available to use then, or at a time when investments were down and I didn't want to draw the full 4%. I haven't figured out exactly how I would do that yet, but I will likely come up with some arrangement.

Go read that link about "mental accounting". And the bit about your portfolio being *all* your money, regardless of location.

I will admit that when I retired I had the same idea as you. Then I took pencil & paper and ran through a few scenarios --- and realized that it was nonsense...it was just pushing around figures on paper.

Car fund, roof fund, furnace fund....Ok, so a couple or three year in the funds are half full ---- and you suddenly need a new car. Not enough money in the car fund...so you, what?, have the car fund borrow money from the roof fund, and then start paying back the loan? Couple years later, you need a new roof...but the roof fund doesn't have enough money because the car fund hasn't completely paid its loan back. So the roof fund has to borrow money from the furnace fund.
..... That's as far as I got...that was the point where I realized it was nonsense.

On the flip side, suppose your various funds get topped off. Now where do you put the money that doesn't need to go into these funds? Leave that money in the portfolio, right?

When you think it all through, the money should all stay in the portfolio. If you feel you need a significant cash allocation, be upfont and explicitly declare that. That is what these side funds really are, you are just fooling yourself by calling them a separate fund that isn't part of your portfolio.


I haven't figured out exactly how I would do that yet, but I will likely come up with some arrangement.
Right. You haven't quite "figured out exactly how" because it's just pushing around figures on paper, and isn't a real thing.

What I do is determine my annual withdrawal target each year, and each month withdraw what I need, and keep a running average of the amount withdrawn. (Note that I don't track our spending. I track our withdrawals. Much easier.)
If that gets too much more than my target, we cut down on the spending. If it gets too much below my target, we can spend more. Like buy the top tier car model instead of a lower tier.

This way, when a really large expense comes along, be it an emergency need like a new roof, or a discretionary thing like super deal on an expensive thing like a world cruise, it is automatically handled and fits in. It is not necessary to scrimp now so you can buy an expensive thing later. You can buy the expensive thing now and scrimp later.
Just so long as your actual draws don't get too far out of whack from your target draws.
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I suppose that, if one retires with a portfolio such that the 4% is barely able to cover living expenses, then one doesn't have much buffer, but, by the same token, then one also has nothing with which to fund a buffer. If one has more, better to have it in the portfolio and growing.

Conversely, if the 4% is comfortably above what one needs, then there is no need for a buffer because the portfolio is the buffer.


BINGO!!
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If you don't happen to retire on the eve of the next Great Depression, your biggest problem with the 4% rule will be deciding whether to buy a boat or an airplane to soak up the excess cash flow.

We retired right in the teeth of the 2008/2009 crash. They say that the sequence of return disaster scenario is a crash in the first 15 years of retirement. Well, we got it in the 2nd year.


...our biggest problem with the 4% rule will be deciding whether to buy a boat or an airplane to soak up the excess cash flow.

A couple of years before we pulled the ripcord I ran thru the 401K/IRA/retirement planner scenario software that my employer provided. At dinner, I told my wife that it said that we would die with somewhere between $10,000,000 and $0 -- most probably in the $4M-$6M range, with $0 being extremely unlikely.
She said, well if worse comes to worst ... we had $0 when we got married so the worst outcome would be no worse than when we began. Glad I married that gal.

That lopsided upside/downside outcome is why I really like the variable withdrawal strategies. I prefer the Guyton-Klinger method, but there are plenty of others.
The whole idea is to clamp down on your withdrawals in the unlikely scenario of a crash, but allow you to substantially increase in the most likely scenario of a growing portfolio.
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To help mitigate the starting retirement at the worst time possible, have your first 3-5 years of your 4% sitting in cash/money market/CDs.

JLC---You lost me on that one---If someone is drawing 4% to pay bills and live on---How is that first 3-5years of 4% money supposed to get put into cash/money market/CDs? How does he pay his bills?



If he doesn't need the money to live on---Why is he withdrawing it from his portfolio and putting it in CDs etc?

b&w
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"I suppose that, if one retires with a portfolio such that the 4% is barely able to cover living expenses"...

Living expenses have to include allowances for new/replacement cars....when/if they die, for routine car repairs and maintenance, for house repairs and replacing appliances as they age. And house maintenance like air filters, a/c check ups , heating system checkups, replacing a compressor every 10-15 years - if you have a pool, annual operating costs plus pool repairs......

Likely your insurance on on a car will go up as you age. more at 70. Even more at 80.

Medicare takes a bit out of your income.....

and of course, real estate taxes go up each year for most..... some places they are 'frozen' at 65.

You'll also likely need more dental care and vision care...... not covered by Medicare.....

On the other hand, the clothing budget can go way down.


t.
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What I'd really like to do is set up a "discretionary fund" to use for expenses over and above my basic needs, and also a "replacement fund" to save for things like cars and major home repairs. I would contribute to those each year out of the 4%, but if I didn't spend it all it would carry over to the next year and be available to use then, or at a time when investments were down and I didn't want to draw the full 4%. I haven't figured out exactly how I would do that yet, but I will likely come up with some arrangement.

You are supposed to be in retirement. You are supposed to be enjoying the balance of your life. You have all this money sitting around in portfolios and buckets and you are taking from the left pocket and putting it in the right pocket--For what --It is all your money. If your roof leaks--Fix the damn thing--Write a check ,then go buy a new car and enjoy what time you have left. Because if you don't--because you are too cheap, your heirs will fix their roof with your money and buy a new car with your money and enjoy their life because they won't have any buckets.

b&w
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"Conversely, if the 4% is comfortably above what one needs, then there is no need for a buffer because the portfolio is the buffer."

"BINGO!"

This is exactly what I'm referring to. How much is "comfortably above what one needs"? What are people doing percentage-wise to make sure they are in this "comfort" zone? 20%?

Regards,

Ken
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If you spend based on what you have, then you don't need to worry about how safe your buffer is. If you look at the projections, if you take out 4% of the starting amount, most of the outcomes end up with way more than you need. So, if you are close, monitor closely and perhaps take as little as you need to leave more to grow. But, don't get so paranoid that you fail to notice that it is likely that you will soon have a good cushion and really shouldn't be stressing at all.
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How much is "comfortably above what one needs"? What are people doing percentage-wise to make sure they are in this "comfort" zone?

Good subject for discussion.

What I did was some figures on the back of an envelope, before I retired.
We were living comfortably on our current income, so I figured out what our spendable income was.

Salary minus FICA minus 401K & IRA contributions.
Also minus the difference between our current real-estate tax and what the tax would be after we moved out of Illinois. $15,000/yr vs. $2500/yr.
Also minus the difference between health insurance premiums before and after going on Medicare.

*That* was the income figure we needed to maintain our lifestyle. Figure post-retirement income. Pension, Social Security, etc. and subtract that.
That's the shortfall--the amount you need to withdraw from your portfolio.

Multiply that by 25, to get the amount which it is 4% of.

Compare that with the portfolio balance. If it is close to the portfolio balance, then you are skating on the edge.

Now, how much more percentage-wise do you need to be "comfortable"?

Pretty much everybody agrees that, if they deem 4% SWR to not sufficiently safe, then 3% *is* safe.
3% is 25% less than 4%. So...a portfolio that is 25% more than the required portfolio balance figure you got above is a wide safety margin.

Firecalc says that a 75/25 portfolio with 4% SWR has a 95% success rate (5% failure rate).
At those success rates the failure rates start to get dominated by other things than the investment portfolio. War, epidemic, meteor, etc.

Firecalc says that 3% SWR has a 100% success rate.
Also that 3.5% SWR has 100% success rate.

These would imply that a portfolio 10%-15% higher than the above minimum is all you need.

I think the basic True Answer is like the answer to the question about if you can afford a yacht.
If you don't know that you can---then you can't. Because if you _can_ afford a yacht, then you *KNOW* you can.
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You are supposed to be in retirement. You are supposed to be enjoying the balance of your life. You have all this money sitting around in portfolios and buckets and you are taking from the left pocket and putting it in the right pocket--For what --It is all your money.

It's just how I think when it comes to money. It works well for me. When I retire, I don't expect to have so much money that I won't need to track how I'm doing vs. my budgeting (for both expenses and investment returns). If I do, or if I get to that point later (as it sounds like many people on this board have), then yes, I won't worry about it. But until I get to that point, I'm going to track things so I can recognize if I'm headed for trouble, and/or feel comfortable when I do splurge.

If your roof leaks--Fix the damn thing--Write a check ,then go buy a new car and enjoy what time you have left. Because if you don't--because you are too cheap, your heirs will fix their roof with your money and buy a new car with your money and enjoy their life because they won't have any buckets.

In my case, it would actually make me happy to leave money to my heirs to fix their roofs and buy new cars. In fact, I hope to do it. This year I bought a new car, a hot tub, and paid down a good chunk of my mortgage with inherited money. I've gotten a lot of help from my family--financially and otherwise--and I hope to be able to pass some of that along.
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"This is exactly what I'm referring to. How much is "comfortably above what one needs"? What are people doing percentage-wise to make sure they are in this "comfort" zone? 20%?

Regards,

Ken "


---

Before I retired, I did lots of budgeting......

I came up with 3 budgets for retirement and catasphoic markets

First, you start with the assumption you will get SS.....so after SS kicks in, it can provide a big chunk of your income. In my case, being single, half of my 'bare survival' budget. I did retire at 52.5, so I had a lot of years before SS - at least 10 - and likely 15 to 'full retirement' for SS.

So let us take some hypothetical numbers.

Back then 18 years ago my 'bare minimum' budget included staying in my current home (already paid off) and one car. I'd have to sell one. No cable TV, no magazines, no newspaper. No charitable donations and not buying a whole lot of stuff other than food and bare minimum replacement clothes. Not a lot of travel, if any. Let us say that was about $33,000 a year at the time, and did include some replacement money into the 'car replacement fund' and 'emergency fund' for things happening at the house like appliance dies, plumbing problem, heat problem, etc. No eating out - or maybe once a month. (SS would pay more than half when it kicked in - in fact, pay 2/3rds plus), I did have a $5000 a year pension from a former job way back when.

--

The mid level budget - added in second car, eating out a few times a week, domestic travel here and there - bargain fares and motels, etc. Magazine subscriptions and newspaper and cable TV. Let's say that was $45,000 a year. after 66, SS would pay more than half. That was probably what I was spending while working. I saved over half my income after taxes. re-invested all my portfolio gains.

Then there was the high level budget. Lots of travel, eating out, buying ham radio goodies. Let's say that was $60K plus. SS would pay a bit more than a 1/3rd after a while.

- - ----

Now, if you are married, your housing cost is likely a lot lower per individual if you have a house - and both worked and get SS when they retire. Heck, for many mid to high income earners, they'll be collecting $50K plus a year in SS. Wait till 70 and it would be $65K a year.

- -- --

I ran all sorts of scenarios with different inflation numbers, with different returns for stocks and bonds - probably 50-60 iterations.

Turns out I had saved enough that I'd be happily well over the middle budget in just about every situation for 30 years plus. More than enough for the high level budget.

Now, turns out I likely didn't spend enough. there wasn't all that much money in the IRA when I retired. Lived off dividends and interest and didn't have to sell anything other than taking a few gains when companies got bought out.....and most of those I re-invested> Well, the IRA did very very well, and now that RMD has kicked in - I got a whole chunk of extra money to spend - or not.

I did start out with a five year rolling CD ladder - kept that going for 10 years - five year CDs, with one coming due each year and renewing. When we hit 1% interest rates I moved most of that money to bond funds and REITs.

- ----

If you are having to take 7% from your portfolio, it is probably time to re-assess your spending and maybe downsize your 'living'. Especially if it hits early in retirement.

t
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Thanks everyone for this illuminating discussion. I think I have a better sense of all and will keep this thread in my files to remind myself what a wonderful community there is on this board. I hope this thread will help others who might be thinking about this topic as well.

Kind Regards,

Ken
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"These would imply that a portfolio 10%-15% higher than the above minimum is all you need."

Rayvt,this is what I was looking for. Paul Merriman recently wrote an article in AAII entitled, Solving the Problem of Retirement (http://www.aaii.com/journal/article/solving-the-problem-of-r...). He suggested we diversify (check), have a variable distribution strategy (check--plan to use an endowment approach to drawing, but starting off with the 4% amount), and save more (okay, but he seemed to suggest saving another 50% above what we'd need, which is a little ridiculous, but I get the point). The problem is you need a buffer to build in over your budget. The question is how much. Here, the concept is a comfortable margin, and you are suggesting 10-15%, which resonates because it's based on FIRECALC (darn, why didn't I think of that).

Regards,

Ken
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kmiao1,

You wrote, This is exactly what I'm referring to. How much is "comfortably above what one needs"? What are people doing percentage-wise to make sure they are in this "comfort" zone? 20%?

I currently spend about $50K/year. If I figured $50K would cover all my living expenses in retirement I am done already. It could be very high or very low, as I am about to discuss.

But you see, I have a dilemma ... or two. The big one is health insurance. My employer currently pays for my insurance. And the Republicans are trying to kill ACA. And I've been in a position before where I couldn't get insurance, except through the Texas State High Risk Pool. And it was very, very expensive and didn't cover very much. If I had to go such a path and had to adjust those costs against medical inflation, I could be looking at an additional $24K/year between my retirement date and age 65.

Another way to look at it is, I have at least a $250K risk lying in front of me. And it's fairly short-term. That is the main reason I'm not retired today - I'm working on that last $250K for just-in-case.

Okay. I might save up a little extra "play money" while I'm at it. So my starting buffer will be an extra 20-25%. Maybe. Kind'a. Sort-of.

My target date is presently in 2020 with an option to delay until 2022 if the markets tank before I say bye.

And if it looks like I won't need any of that extra buffer after a few years? Who knows? Travel around the world? Buy a vacation house in Asia or Europe? Oh yeah. I'll definitely want to get me one of those self-driving Teslas too at some point. Maybe a Model S.

Of course even that's probably fudging it. If things go as currently planned, I'll be selling my house and moving in with my girlfriend. That cuts my retirement costs down to only $26K/year and frees up enough equity to cover all of my buffer requirements ... except that it's not in me to NOT plan for worst-case scenarios, so I have to plan for what happens if my girlfriend dies on me right after I retire. I won't own the house, that leaves me in need of housing, etc., etc., etc...

But based on the most probable outcome with expenses of just $26K/year, I'm going to have a buffer of something like 140%. Or put another way, a withdrawal rate of around 1.7%. Oh yeah. That doesn't even account for the impact of Social Security years from now. My current (default) plan has me starting at age 67. I'll be eligible for close to the max, or about what? $32K/year in today's dollars? That means starting at age 67 I should actually have a negative withdrawal rate...

Does that make my savings buffer undefined?

Having explained all of this, I sound really paranoid. Maybe I should just retire now? At a minimum, it's past my bed time. ;-)

- Joel
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What I did was some figures on the back of an envelope, before I retired.
We were living comfortably on our current income, so I figured out what our spendable income was.

Salary minus FICA minus 401K & IRA contributions.
Also minus the difference between our current real-estate tax and what the tax would be after we moved out of Illinois. $15,000/yr vs. $2500/yr.
Also minus the difference between health insurance premiums before and after going on Medicare.

*That* was the income figure we needed to maintain our lifestyle. Figure post-retirement income. Pension, Social Security, etc. and subtract that.
That's the shortfall--the amount you need to withdraw from your portfolio.


You did a more complicated approach, I think, that the approach that I have taken. I track all our expenses in Quicken, so I used that as the basis for a retirement spending plan, and then I added in a bunch of things to cover retirement activities. I actually have us spending 40% *more* in retirement than we spend now.

This includes the expenses for the current house, which is our high-water mark since we do plan to downsize. That just means we'll have more money than we need, but it also gives us that buffer that folks are discussing in this thread.

Since we do have all that discretionary spending, that also gives us places to cut back if we feel the need.

As far as expenses that people are terming "emergency expenses", I put a $10k line item in the planning budget that would cover things like new cars, new roof, etc. over the years. This is just an easy way for me to plan for those expenses, but as has been noted, they occur when they occur, and as long as there is money in the plan, they will be covered.

When I retire next year, I will still track our expenses (I'm kind of anal like that) in Quicken, but as you have noted, you really only need to manage to the bottom line, which is how much is being withdrawn. It just makes it easier for me to deal with that if I know what makes up the bottom line, but it really makes no difference which line the money was initially allocated to.

I do have a different question (and will start another thread) on the accounting for the first partial year. I think and plan in calendar years, but I am retiring at the end of May, so I want to make sure I've accounted for that properly.

I'll start a different thread for that question.
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JLC---You lost me on that one---If someone is drawing 4% to pay bills and live on---How is that first 3-5years of 4% money supposed to get put into cash/money market/CDs? How does he pay his bills?

How does he pay his bills? With the exception of CDs, his cash could be sitting in a checking, savings, or money market account from which he could simply write a check or do an online transfer.

As others have pointed out, this 3-5 years could be considered part of there fixed income for their asset allocation model.

This 3-5 year amount is simply to help with the "freaking out" of the worst case scenario. You retire, portfolio drops 30% the next day. You could simply draw from this cash to pay bills. Give time for the equities to recover. Sure the 4% SWR accounts for this, but human nature is human nature.

JLC
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once you retire, you have to worry about inflation and sequence of return risks, etc..., but at what point do you throw in the towel and then go back to work or employ plan Bs? That is, at what point do you know you have a problem? For example, if you're drawing 4% and there's a bear market

Obviously, there's a big catch in going back to work. You probably left the "working for money" job at your peak skill set and earning ability, and years later will be faced with fewer contacts and less familiarity with what it takes to do what you used to do (if you choose to go back to your original line of work). So, it's better to work an extra year at the end of your career than to have to pick up "working for money" later (if you have the choice, which we sometimes don't).

Some other questions before "Do I have to go back to work" are:
-Is *all* of your retirement income "at risk?" Do you have any annuity, pension social security, etc., money coming in from outside your investment portfolio? What portion of your budget do they cover?
-Do you have expenses you can control to a high extent? Besides saving a little on groceries or utilities (by putting the thermostat to a less comfortable setting), can you skip a boat/auto/snowmobile/jet-ski upgrade and keep what you have a few more years? Can you travel to the Grand Canyon instead of Europe?
-Do you have some "sure would hate to implement" emergency backup plans? I really don't want to screw with a reverse mortgage when I'm retired, but the availability of doing so puts an additional buffer between me having to go live with my kids in a worst case situation, or having to work so long that I have a 3% withdrawal rate.

Remember also that the 4% rule accounts for severe draw downs...in all but the those terrible cases, the safe rate would have been significantly higher if you knew the future.
CAVEATS:
1. It's all based on the future not being any worse than the worst of the past.
2. It's also based on having the asset allocation of the study. You can't just be 100% in some high-volatility ETF or all in bonds (because of greed in the first case or fear in the second).
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This 3-5 year amount is simply to help with the "freaking out" of the worst case scenario. You retire, portfolio drops 30% the next day. You could simply draw from this cash to pay bills. Give time for the equities to recover. Sure the 4% SWR accounts for this, but human nature is human nature.

30% drop the day after retirement is not the end of the world. If you have $100,000 in assets you would be withdrawing $4,000-If the portfolio dropped 30% you would have $70K and 4% of $70K would give you $2,800 to withdraw. If you are invested in income securities there is a strong possibility that the income will be exactly as before with no disruption. if your portfolio is earning 4% per annum you could be withdrawing the same $4,000 income and letting the principal remain untouched and allowing it to recover to the former $100,000 and higher as time goes on.

I decided years ago that the income portion of the market is more stable than the capital gain portion ---So I geared my portfolio towards securities with growing income. Then as the income grew I reached the point where I had excess income above my spending needs That excess income was invested and created still more income to reinvest. The growing security income helped push portfolio value up and the increased income bought more shares that further propelled portfolio growth. All this was done without relying on capital gains which mostly rely on market sentiment (bullish or bearish) and might or might not be there when you want it

b&w
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TheBreeze, My comments are below:

"Some other questions before "Do I have to go back to work" are:
-Is *all* of your retirement income "at risk?" Do you have any annuity, pension social security, etc., money coming in from outside your investment portfolio? What portion of your budget do they cover?"

Answer - No. I figure between Pension and SS (wife and me), that should mostly cover the basics, but I have two kids (4 and 5), and so there are extra expenses that are nice to have, but can be scaled back if absolutely necessary.

"-Do you have expenses you can control to a high extent? Besides saving a little on groceries or utilities (by putting the thermostat to a less comfortable setting), can you skip a boat/auto/snowmobile/jet-ski upgrade and keep what you have a few more years? Can you travel to the Grand Canyon instead of Europe? "

Answer - Yes. We can do staycations, and a lot of purchases can be deferred, but it's all about quality of life in retirement. Still, the kids want your time, not fancy stuff, in the end.

"-Do you have some "sure would hate to implement" emergency backup plans? I really don't want to screw with a reverse mortgage when I'm retired, but the availability of doing so puts an additional buffer between me having to go live with my kids in a worst case situation, or having to work so long that I have a 3% withdrawal rate."

Answer - Do have a fully paid off home, that we could sell, but that's many years away, and yes could go reverse mortgage if we have to. Other than that, it's as you say, work a little longer to get to a more "comfortable" state. The issue is always the unknown, and being prepared to walk through the retirement door when the time is right, so need to get to the comfortable level.
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For example, if you're drawing 4% and there's a bear market, is the problem when your 4% (plus inflation adjustments) hits, say 7% of the base that you know you have a problem? What have people been doing to gauge the risk?

Unfortunately, there is not an easy answer to this.

If you began with a household cash-flow analysis that says you require 4% to be withdrawn each year, growing by, say, 3% per each successive year to keep up with inflation, then each year the % withdrawal requirement will increase. At this rate 10 years into retirement would be a 5.2% withdrawal of your original savings amount. The risk comes from the market taking a dive in one year and then a series of years with low market returns, which is the kind of market John Bogle is predicting

https://www.cnbc.com/2017/03/22/jack-bogle-believes-the-stoc...

So what you can do to see how this might affect your portfolio survivability over your retirement years is to construct an Excel SS that maps this out, and so some what-ifs on market returns.

Consider that since August 1957, there have been 9 economic recessions, or about one every 6.5 years. When I construct an Excel SS using historic S&P 500 returns as a guide, with a negative return every 6 to 7 years and run this over the next 40 years such that the average of these returns is 4%, I notice a couple of things. Most important is when the large negative returns happen relative to the beginning retirement date...the sooner the more likely the household will be to run out of money. But even if I delay the first large negative year to, say, year 5, the household still runs out of money at about year 26-30. The only remedy to this is for the portfolio to hold a larger % of bonds, thus greatly reducing the swings in return rates per year, although the trade off is that you'll miss the high returns of the economic expansion years.

The other way to manage this is to invest for income only, where portfolio valuation doesn't matter, but instead the dividend sustainability and reliability replace market valuation as the primary risk.

BruceM
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The other way to manage this is to invest for income only, where portfolio valuation doesn't matter, but instead the dividend sustainability and reliability replace market valuation as the primary risk.

Don't you need substantially more money to go that route? In other words, to replace the equivalent of a 4% SWR with 2% dividends (or whatever the number is) from dividend paying stocks, you'd need twice as much in stocks.
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Interestingly, I came across a Bill Bengen article that gives a loose guideline on when you know you have a problem: https://www.fa-mag.com/news/how-much-is-enough-10496.html

On when should you consider reducing expenses? At what withdrawal rate should a client first consider reducing his spending? Informal rule: Take some pre-emptive action, no matter how mild, when the current withdrawal rate first exceeds the initial (or expected) withdrawal rate by 25%.

Corollary rule: If, despite initial action, withdrawal rates continue to rise, take more aggressive action

So if you start with 4%, and the draws wind up about 5% of your portfolio, you should start to throttle back your expenses. And, if it continues to go up after you throttled, then get more aggressive on the expense cutting side. These are nice guideposts to consider.
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Corollary rule: If, despite initial action, withdrawal rates continue to rise, take more aggressive action

A more aggressive action could also probably be to upgrade your portfolio so that your portfolio is not decreasing as much. You also could use more income stocks that are maintaining or increasing their distributions. IMHO the income portion is usually much more stable than declining share price in a market sell off. In market selloffs more shares drop in price. Most of those shares continue paying the dividends on schedule and a good amount could even increase the payout even if prices are temporarily dropping with the market.

You have to remember share prices in general drop when the public and outside institutions
THINK SOMETHING IS WRONG IN THE MARKET AND SELL(Not necessarily wrong with the company). Dividends and distributions are declared and increased periodically when Management of a Specific company KNOWS THAT THINGS ARE IMPROVING AND GOING WELL IN THE COMPANY.

I believe most money is made during and after downturns buying what other people have thrown away.

b&w
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