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Author: dgthepiper Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 169  
Subject: Withdrawal Rates Date: 8/22/1999 12:11 PM
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I have read quite a number of articles about withdrawal rates that are 'safe'. One thing I have not seen discussed is tax implications.

One of the first things they all do is question 'How much do you need?'. My question is if this is an after tax number. Personally, I can determine my after tax requirements much easier than my before tax requirements.

Most of my money is not in tax defered accounts. This means I will incur a tax liability every year depending on how much trading I do. (I practice buy and hold mostly, but there is always some selling.) Does my tax hit come out of my 4% withdrawel rate or is this in addition to my withdrawel?
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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84 of 169
Subject: Re: Withdrawal Rates Date: 8/22/1999 12:56 PM
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dgthepiper asks,

Does my tax hit come out of my 4% withdrawel rate or is this in addition to my withdrawel?

To be on the safe side, I'd include my tax payment in the 4% withdrawal. Of course, some people would argue that some of the taxes they owe are due to trading in thier taxable account rather than withdrawing money for living expenses. If that's the case, maybe the way to handle it is to determine your annual living expenses, then "gross up" the amount for the taxes due.

intercst

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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 85 of 169
Subject: Re: Withdrawal Rates Date: 8/22/1999 3:27 PM
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I have read quite a number of articles about withdrawal rates that are 'safe'. One thing I have not seen discussed is tax implications.

One of the first things they all do is question 'How much do you need?'. My question is if this is an after tax number. Personally, I can determine my after tax requirements much easier than my before tax requirements.

Most of my money is not in tax defered accounts. This means I will incur a tax liability every year depending on how much trading I do. (I practice buy and hold mostly, but there is always some selling.) Does my tax hit come out of my 4% withdrawel rate or is this in addition to my withdrawel


My impression is that most of the writings are before tax. Also, the mix of stocks used and the expense ratio may not be close to what you have done.

The more I read and play with the numbers the higher I can get my withdrawl rate. I think a safe rate is about 6% for me. I use to think it was 4%. Problem is it is a gut feeling and who wants to be wrong?

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Author: vargaj Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 86 of 169
Subject: Re: Withdrawal Rates Date: 8/22/1999 10:40 PM
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I'm with you. 4% is way too low. I'm planning on 6% until SS kicks in, at which time I switch to 5%.

Joe Varga

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Author: GrayWulff Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 87 of 169
Subject: Re: Withdrawal Rates Date: 8/22/1999 11:53 PM
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4% to 6% is the qreat question. It depends on how long you expect your capital to last, and what probablility of being pinched you are willing to live with.

My simulations show that starting with 4%, increasing it 3% every year for inflation (i.e. $1,000,000 capital; 40,000 first year; 41,200 the second year; etc.) will give you a 95% or better chance of never dipping into your capital. (Mrs. W plans to live forever.) As you increase that initial draw frow 4% to 5% or higher the likelyhood of not dipping into capital decreases to 90% or much less.

I assume a 1% per month return on stocks with a 3% standard deviation. That's about what the S&P500 have done over the past 25 or 30 years.

Here's the good news. If the assumptions hold, you will probably be able to increase your draw by more than 3% after 6-7 years, even if the first few are bummers. After all, on average you are using only 7% (4% to spend and 3% to grow your capital for inflation) that leaves 5% to take care of the bad years. After a while, say 5 to 10 years, that 5% wins the battle and you will have quite a cushion.

Cheers,
GW

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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 88 of 169
Subject: Re: Withdrawal Rates Date: 8/23/1999 8:13 PM
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4% to 6% is the qreat question. It depends on how long you expect your capital to last, and what probablility of being pinched you are willing to live with.

My simulations show that starting with 4%, increasing it 3% every year for inflation (i.e. $1,000,000 capital; 40,000 first year; 41,200 the second year; etc.) will give you a 95% or better chance of never dipping into your capital. (Mrs. W plans to live forever.) As you increase that initial draw frow 4% to 5% or higher the likelyhood of not dipping into capital decreases to 90% or much less.

I assume a 1% per month return on stocks with a 3% standard deviation. That's about what the S&P500 have done over the past 25 or 30 years.

Here's the good news. If the assumptions hold, you will probably be able to increase your draw by more than 3% after 6-7 years, even if the first few are bummers. After all, on average you are using only 7% (4% to spend and 3% to grow your capital for inflation) that leaves 5% to take care of the bad years. After a while, say 5 to 10 years, that 5% wins the battle and you will have quite a cushion.



The real risk is that you have a couple of bad investment years as soon as you retire. Once you pass the first few years you are right in that you will have a very good cushion. You could safely increase your withdrawl rate at this point.

The problem is that its the first few years that I will be able (physicaly) to do a lot and I would like to "over spend" at the start of retirement.

I think I will set aside an "over spending" account for say the first five years. I will not count this money toward normal retirement expenses. This money would be for extended travel and entertainment.

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Author: GrayWulff Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 89 of 169
Subject: Re: Withdrawal Rates Date: 8/23/1999 10:30 PM
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I think I will set aside an "over spending" account for say the first five years. I will not count this money toward normal retirement expenses. This money would be for extended travel and entertainment.

That sounds reasonable.

Our plan is to take on a few small consulting assignments. There are a lot of temporary employment agencies out there that just love early retirees.

If the market does well, we won't work. If it does badly, we'll work 3 to 6 months a year for the first few years. Then as SS kicks in we can truly retire.

Cheers!
GW

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Author: dgthepiper Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 90 of 169
Subject: Re: Withdrawal Rates Date: 8/24/1999 7:19 AM
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An overspending account sounds like a good idea. I plan to keep 3 years living expenses in cash and not include it in the withdrawal rate calculation. This allows me to limit my withdrawals to times when the market is up and let it ride for a couple of years if necessary.

I think the most vulnerable time is the first 3 to 5 years of retirement. If the market holds up then the increase should make the safe withdrawal rate above what is needed. I hoping my 3 year 'slush fund' will serve as insurance against a crash immediately after I retire. I would hate to have to go back to work!


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Author: SteveHinchey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 91 of 169
Subject: Re: Withdrawal Rates Date: 8/24/1999 8:20 AM
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"An overspending account sounds like a good idea. I plan to keep 3 years living expenses in cash and not include it in the withdrawal rate calculation. This allows me to limit my withdrawals to times when the market is up and let it ride for a couple of years if necessary.

I think the most vulnerable time is the first 3 to 5 years of retirement. If the market holds up then the increase should make the safe withdrawal rate above what is needed. I hoping my 3 year 'slush fund' will serve as insurance against a crash immediately after I retire. I would hate to have to go back to work!"

The cash cushion is sadly a neglected vehicle nowadays. Since the equities markets are volatile and unpredictable in the short-term, cash for living expenses should be everyone's first priority as soon as they are employed. Cash management accounts are a great vehicle for retirees, especially in the early stages of retirement when withdrawal schedules and tax implications are still in the testing stages. It would be nice to spread the word to today's younger investors that cash isn't "Dead Money", but rather Available At All Times. I've set up the Personal Savers Plan & Ideas board in the Speaker's Corner for topics concerning new investors as well as seasoned investors with no savings habits. It would be great to have some of the contributors on this board share some insight there as well.


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Author: vargaj Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 92 of 169
Subject: Re: Withdrawal Rates Date: 8/24/1999 11:51 AM
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I like the overspending account approach, but I don't think I have sufficient funds for one, so I'm falling back on plan B: Send my wife out to work.

Joe Varga

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