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I officially reached "my number" that I've been targeting as a minimum for retirement (based on the 4% draw rate) last week. I'm 58. But I'm still working, for a couple of reasons: a) I keep thinking we are due for a significant market downturn in the near future and that wouldn't be a good thing for a new retiree so I want some extra cushion in my "number" (note: I've been wrong about this expectation for at least four years running now) , and b) Living on the 4% draw would be livable but a little thinner than I want, until I start drawing social security, at which point I should be fine and dandy, even if I started with the lowest monthly amount at age 62.

I'm pretty obstinate about #a above for a variety of reasons, but #b is one that I'm wondering about and would like to develop some sense of how flexible I could be. I know I should be able to draw something more than 4% for a few years, until I start receiving social security. Does anyone have a good system for computing how much extra draw I could take on a 3 to 5 year basis before starting SS? Compute a present value for the Social Security, and add that to my current investment value, and then compute 4% on the new total (and subsequently when I start to draw SS, that would reduce what I take from my investments)?

Hope that makes sense.
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Have you tried plugging different scenarios into FireCalc?
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Does anyone have a good system for computing how much extra draw I could take on a 3 to 5 year basis before starting SS? Compute a present value for the Social Security, and add that to my current investment value, and then compute 4% on the new total (and subsequently when I start to draw SS, that would reduce what I take from my investments)?

That doesn't make sense.

Your Social Security benefit can't reasonably be reduced to a present value. Oh, you can do the math...but the answer is mathematically correct but logically nonsense. SS is just an income stream.

And here's an example of what I complained about the other day, that people have heard so much about "4%" that they try to apply it in situations where it doesn't apply.
The "4% rule" is the amount you can take annually--adjusted for inflation--from a annually balanced 60/40 portfolio, and have 97% probability that the portfolio will not run out of money for 30 years.
</soapbox>

Here's how to figure what you asked about:
1) Your income need is (will be?) $X per month.
2) SS & pension will provide you $Y per month.
3) Therefore your necessary withdrawal from your retirement portfolio is $X-$Y. Call this $Z
4) Thus, your retirement portfolio needs to be 25 * $Z at the time when you start collecting your SS and pension benefits. Call this $P2 (read: portfolio value when you start collecting.) ($P2 * 4% == $Z)

5) Go to firecalc and plug in different draw percentages for a 5 year period. Then look at the range of ending portfolio values, especially the average. Such as this: https://firecalc.com/index.php?wdamt=6000&PortValue=1000...

A 6% draw has an average value after 5 years almost equal to the starting value. Problem is, the low is 34%. How lucky do you feel? A 4% draw has average of 112% and low of 43%. It's up to you.

Another problem is that almost one-third (31%) of all 5 year periods have a lower ending balance than the initial balance. So 1/3rd of the time, 4% draw is too much. You need to decide if that's an acceptable risk.

6) In conclusion, figure out what your portfolio value needs to be when you start collecting (step 4). That's what the portfolio value needs to be 5 years before you start. (Call this P1).
Conveniently, at 4% SWR, P1 == P2 and _all_ portfolio withdrawals (both before you start collecting SS and after you start collecting) will follow the same 4% withdrawal rule.

So...the sad news is that you cannot (safely) take a larger draw on your portfolio before you start collecting SS and pension.

OTOH, if your P1 portfolio is much larger than P2, then you are fine. But you also don't need the extra draw. But people usually only ask about an extra draw if they actually need it.

Bummer.


Oh....and start SS at 62, don't defer to 70.
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Living on the 4% draw would be livable but a little thinner than I want, until I start drawing social security, at which point I should be fine and dandy, even if I started with the lowest monthly amount at age 62.

How about this:
Your total assets are divided into Amount #1 and Amount #2.
Amount #1: You take 4% of that amount starting when you retire.
Amount #2: The total amount of money you need between now and when you take social security to cover the difference between 4% of amount 1. So, Amount #1 is your ongoing portfolio, and Amount #2 is essentially the equivalent of SS times however long you *aren't* taking SS. You can either assume Amount #2 grows at zero percent, or model it as a CD ladder, but it should probably be "no risk" since you need it imminently.

If you really get fancy, you can model the amount needed at retirement depending on changing:
-Retirement age
-When you take social security
Of course, you would model what age you live to, so there's bound to be some error. But, I'm more worried about running out of money than maximizing what SS pays me.

I'm doing something like that to model retirement at age 61:
61-65: Includes High cost health insurance
65-67: Includes Medicare
67: Includes Medicare plus social security
68+: Includes Medicare plus social security plus spouse's SS

So, I need a significant portion of "no risk" money at age 61.
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I'm sure Ray will disagree, but there's nothing easier to model than a known set of cash flows.

Using an anonymous annuity quote aggregator (so they're probably optimistic) 100k will get you about 1700 a month for 5 years - close enough to your social security age. That won't be adjusted for inflation, but we're also talking about only 5 years. So close enough.

Adjust the investment and monthly payment to approximate your Soc Sec benefit. Then subtract the cost of that annuity out of your investments and take 4% from what's left. For example, if you actually would get 1700 a month from Soc Sec, reduce your assets by 100k and use the remaining amount to determine your withdrawal rate. Then add the 1700 per month to that for your withdrawals until Soc Sec kicks in. At that point, reduce your withdrawals by 1700 a month and carry on.

Probably not a perfect model, but it's at least a place to start.

--Peter
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Have you tried plugging different scenarios into FireCalc?

Excellent idea, thanks! I totally forgot about that one. On the heels of one of the longest bull markets in history, I'm going to guess that we are more likely closer to the realm of the worst time periods to begin retirement draws than we are to the best. At least, that's how I'm placing my bet, and why I will continue to work probably another year at least. If I'm wrong and end up with a lot of extra money, I will gladly leave it to family and charities.
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So...the sad news is that you cannot (safely) take a larger draw on your portfolio before you start collecting SS

I think you could, provided you counter-balance it by taking a smaller draw on your portfolio after you start collecting SS. That's the calculation I'm trying to get at.
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Using an anonymous annuity quote aggregator (so they're probably optimistic) 100k will get you about 1700 a month for 5 years - close enough to your social security age. That won't be adjusted for inflation, but we're also talking about only 5 years. So close enough.

Adjust the investment and monthly payment to approximate your Soc Sec benefit. Then subtract the cost of that annuity out of your investments and take 4% from what's left. For example, if you actually would get 1700 a month from Soc Sec, reduce your assets by 100k and use the remaining amount to determine your withdrawal rate. Then add the 1700 per month to that for your withdrawals until Soc Sec kicks in. At that point, reduce your withdrawals by 1700 a month and carry on.

Probably not a perfect model, but it's at least a place to start.


Thanks--like that idea! I'm just looking for the ballpark.
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Carpian writes,

<<So...the sad news is that you cannot (safely) take a larger draw on your portfolio before you start collecting SS>>

I think you could, provided you counter-balance it by taking a smaller draw on your portfolio after you start collecting SS. That's the calculation I'm trying to get at.

</snip>


There's a fairly large body of research that shows retirees have extra spending in the first few years of retirement as they do expensive activities like travel that they lacked the time to do while working. Then adopt a less expensive, more sedate lifestyle in later years. Spending again spikes in the final years of life do the medical costs.

What you might do is model a bare bones lifestyle and then throw $100,000 (pick a number) worth of hobbies and travel into the first 5 years of retirement and see how that pencils out.

intercst
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What you might do is model a bare bones lifestyle and then throw $100,000 (pick a number) worth of hobbies and travel into the first 5 years of retirement and see how that pencils out.

Yes! Got my one-way ticket to Costa Rica. Retire in 1 month 10 days!
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<"So...the sad news is that you cannot (safely) take a larger draw on your portfolio before you start collecting SS"

I think you could, provided you counter-balance it by taking a smaller draw on your portfolio after you start collecting SS. That's the calculation I'm trying to get at.

Well, another thing that I thought of after hitting submit is the saying that you should NOT invest money that you'll be needing in the next few years. The short-term fluctuations in the market are huge. If you invest $X now, there's a 30% chance that in 5 years the investment will be less than $X.

Ah...taking a larger draw sometimes and a smaller draw sometimes already has a name----Variable Withdrawals. Based on portfolio returns and fluctuations in portfolio value.

You can't take a large draw now and plan to offset it by taking a smaller draw later. Because the "safe" draw amount depends on the statistics of the portfolio, historically.
Consider the case where you take an 8% draw for 5 years and plan to offset that by taking 3% afterwards.

Firecalc show the worst-case portfolio balance at the end of 5 years as only 25% of the initial value.

So you start off with $100K, take 8% for 5 years, now you have $25K. You go from $8000/yr (8% of $100K) to $750/yr (3% of $25K).

The risk is too great. Sometimes there is no way to do what we want to do.
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So you start off with $100K, take 8% for 5 years, now you have $25K. You go from $8000/yr (8% of $100K) to $750/yr (3% of $25K).

The risk is too great. Sometimes there is no way to do what we want to do.


But if you were drawing the $8000 because you were going to start getting $8000 in income from another source, like SS, after 5 years, you are still $750 a year better off than when you were drawing the $8000. And if you have other sources of income, like a pension that you were drawing on the entire time, then things might still be okay.

It depends on what your objective is.

AJ
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What you might do is model a bare bones lifestyle and then throw $100,000 (pick a number) worth of hobbies and travel into the first 5 years of retirement and see how that pencils out.

Remember, this is from a guy who retired rich long before his hair turned gray. His advice may be tainted by this experience, so his advice may not be completely applicable to more normal situation.


But anyway, we are on our 13'th year of retirement (yes, I retired early too--just not as early as him), and we have just now cut down to taking only 2 cruises a year. So I'd modify his advice from "first 5 years of retirement" to "until you get to a mid-70 age".

I always say that there are some categories of question where, if the immediate answer is not "Yes" then the correct answer is "No". If you even have to think about it and then come up with "Yes", the true answer is "No".

The biggest risk here is that you retire on a shoestring by fiddling with computations and formulas and assumptions until you get a "Yes I can retire" answer. (We used to call this torturing the numbers until they say what you want.) .... And then discovering that the world didn't work out as you hoped.

Lots of people got this lesson good and hard in the dot-com meltdown.

You need to decide how much risk you are willing to take. Lots of people back then minimized or ignored the risk they were taking.....and wound up trying to re-enter the job market looking for a high-paying job at 55 years old.

Spend a few hundred dollars and take your figures to a by-the-hour financial advisor and ask for his professional take.
The answer you need is, "Pfft, what do you need me for?"[*]

If he says, "Lord willing and the creek don't rise" .....

===============================
[*] We got this with one. With another one, he wouldn't even take our money after spending a hour with us.
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Oh....and start SS at 62, don't defer to 70.

Ummm.....no. Case by case. YMMV.

PSU
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Ummm.....no. Case by case. YMMV.

I think he was speaking to a specific case. Do you disagree with him on this case with what was detailed? I'm curious. thanks
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Iamspouse started immediately taking SS when she retired 1/31/19. I have not started taking my SS since I retired 12/31/18. Here's why:

https://www.kitces.com/blog/why-it-rarely-pays-for-both-spou...
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I think he was speaking to a specific case. Do you disagree with him on this case with what was detailed? I'm curious. thanks

Since the OP was specifically talking about the time frame between 58 when he retires and 62 when he collects SS, Ray's comment didn't pertain to this specific case because the OP wasn't planning to delay to age 70. Therefore, I took it as a general comment which he has stated on more than one occasion.

PSU
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