Critique my FIRE withdrawal plan

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Critique my FIRE withdrawal plan

Post by southernlucky »

UPDATE: Thank you to everyone that has provided feedback! I tried to respond to each one as applicable in the thread below. Your comments have provided a lot of good points and ideas for me consider further. That was exactly what I needed. I will now go away to do some more homework and revisit my plan. :)


Hi. Thank you in advance for your feedback. I am considering financial independence/retire early (FIRE). Below is my *draft* withdrawal plan and questions for the community:

Age 55. Single. No kids. No debt.
Savings 34x annual withdrawal (12x taxable, 22x tax deferred). Use different balanced funds with total market index funds.
$100K/yr withdrawal until age 67 for full social security. $80K/yr afterwards. +44 years lifespan.
Annual withdrawals easily cover expected expenses including taxes, medical/dental insurance, housing, food, etc.
Use modified bucket approach which results in rising equity glide path from ~37% stock to ~60% stock (my max risk tolerance).

Bucket 1 (12.0x): first 12 yrs, withdraw 1/n where n=12, 11, 10, etc. 20% stock/80% bond fund.
Bucket 2 (12.5x): next 14 yrs, withdraw 1/n where n=14, 13, 12, etc. 40% stock/60% bond fund.
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.

If I did my tvm/pmt calculations correctly the above appears to work assuming -2% real return for stocks and +0.5% real return for bonds for the first 12 yrs and +5% real return for stocks and +1% real return for bonds afterwards.

Despite the criticism of buckets and its mental accounting, I like them. It helps me sleep at night and spending down each in order creates a rising equity glide path (aka bond tent) which might be favorable in some market situations. The automatic rebalancing of the all-in-one funds keeps me from tinkering too. Finally, the 1/n method for each bucket resets withdrawals and ties them to performance.

Questions:
1. What major issues or concerns do you foresee with the above plan?
2. If you had to use a similar approach, how would you modify it to make it better?
3. Do you know anyone that has used a similar bucket/rising equity approach and what was their experience with it?
Last edited by southernlucky on Wed Oct 20, 2021 8:24 am, edited 2 times in total.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Critique my FIRE withdrawal plan

Post by aristotelian »

I am confused, do buckets 1, 2, and 3 correspond at all to pretax/taxable/Roth? Otherwise how will you keep the buckets separate from one another? It seems like your withdrawal plan is focused on risk (which makes some sense) but ignores tax efficiency.

You might take a look at Variable Percentage Withdrawal which is based on a similar principle and probably has similar results.

Seems to me biggest risk is longevity. Your 1/n withdrawal strategy is aimed at completely exhausting each bucket, so this has you withdrawing essentially 100% of your portfolio at age 99. If you live any longer you will be screwed.
User avatar
Ben Mathew
Posts: 2720
Joined: Tue Mar 13, 2018 11:41 am
Location: Seattle

Re: Critique my FIRE withdrawal plan

Post by Ben Mathew »

Amortization based withdrawal (ABW) implements the 1/n type withdrawals that you are considering, but with adjustments for expected portfolio growth (r) and desired withdrawal growth (g).

Rising equity glide paths concentrate equity risk in later years and makes sequence of return risk worse (not better, as is sometimes thought). Consider instead a fixed asset allocation combined with ABW withdrawals, as implemented by TPAW. This diversifies risk across time, minimizing sequence of return risk.
Total Portfolio Allocation and Withdrawal (TPAW)
loukycpa
Posts: 735
Joined: Wed Aug 05, 2020 9:52 am

Re: Critique my FIRE withdrawal plan

Post by loukycpa »

So it sounds like overall you have about $3M portfolio, and will start with about $1.1M in equities and $1.9M in bonds?
"The safe assumption for an investor is that over the next hundred years, the currency is going to zero." - Charlie Munger
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

Deleted (I'm figuring out the editing tools)
Last edited by southernlucky on Tue Oct 19, 2021 2:21 pm, edited 1 time in total.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

loukycpa wrote: Tue Oct 19, 2021 1:42 pm So it sounds like overall you have about $3M portfolio, and will start with about $1.1M in equities and $1.9M in bonds?
Yes, ~37% stock to start with but increasing to 60% stock in the later part of retirement.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

aristotelian wrote: Tue Oct 19, 2021 1:32 pm I am confused, do buckets 1, 2, and 3 correspond at all to pretax/taxable/Roth? Otherwise how will you keep the buckets separate from one another? It seems like your withdrawal plan is focused on risk (which makes some sense) but ignores tax efficiency.

You might take a look at Variable Percentage Withdrawal which is based on a similar principle and probably has similar results.

Seems to me biggest risk is longevity. Your 1/n withdrawal strategy is aimed at completely exhausting each bucket, so this has you withdrawing essentially 100% of your portfolio at age 99. If you live any longer you will be screwed.
I am confused, do buckets 1, 2, and 3 correspond at all to pretax/taxable/Roth?
--No. The proposed first bucket is all in taxable for easy access prior to 59.5 and SSI starting. The 2nd and 3rd buckets are in tax-deferred accounts.

Otherwise how will you keep the buckets separate from one another?
--I realize not optimum but was thinking to use different balanced funds like the LifeStrategy series from Vanguard. For example, the first bucket could be all LifeStrategy Income Fund (VASIX). The second bucket could be all LifeStrategy Conservative Growth Fund (VSCGX). The third bucket could be all LifeStrategy Moderate Growth Fund (VSMGX). Each fund would initially contain the desired x amount of withdrawals. Therefore, I would spend all of the VASIX fund during first 12 years and then switch to spend all the VSCGX funds during the next 14 years, etc.

It seems like your withdrawal plan is focused on risk (which makes some sense) but ignores tax efficiency.
--You are right, stock risk during the first years of FIRE is a big concern for me so the "buckets" help me mentally deal with it. I agree this is not optimal for tax efficiency but I need to tap my taxable accounts until age 59.5 anyway and I already know I will likely *not* rebalance on my own when needed if I split my stock and bond holdings into separate funds as I could not pull the trigger to rebalance in March/April 2020.

You might take a look at Variable Percentage Withdrawal which is based on a similar principle and probably has similar results.
--I have looked at the VPW wiki and like it too but was leaning towards my bucket and 1/n approach for the possible benefit of a rising equity glide path.

Seems to me biggest risk is longevity. Your 1/n withdrawal strategy is aimed at completely exhausting each bucket, so this has you withdrawing essentially 100% of your portfolio at age 99. If you live any longer you will be screwed.
--That is true and a good point. I have not addressed that issue in my plan. I know the VPW wiki recommends to consider annuitizing some funds at 80+ to protect against living past 100. I need to think about that some more.

Thank you for your comments!
Last edited by southernlucky on Tue Oct 19, 2021 3:03 pm, edited 1 time in total.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

Ben Mathew wrote: Tue Oct 19, 2021 1:41 pm Amortization based withdrawal (ABW) implements the 1/n type withdrawals that you are considering, but with adjustments for expected portfolio growth (r) and desired withdrawal growth (g).

Rising equity glide paths concentrate equity risk in later years and makes sequence of return risk worse (not better, as is sometimes thought). Consider instead a fixed asset allocation combined with ABW withdrawals, as implemented by TPAW. This diversifies risk across time, minimizing sequence of return risk.
Thanks! I have looked at the ABW wiki too and I like it also and was trying to incorporate aspects of it into a bucket approach for my withdrawal plan.

When I read Kitces and Pfau I got the impression the rising equity path *might* be beneficial during the early years of retirement as it provides a bond tent. I know that when I manually model something similar on Portfolio Visualizer website starting from 2000 my bucket concept seems to do better than a static allocation. Of course, if I shift the starting date 1-2 years in either direction the results do change so it is very time dependent.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
sailaway
Posts: 8215
Joined: Fri May 12, 2017 1:11 pm

Re: Critique my FIRE withdrawal plan

Post by sailaway »

It looks like you may benefit from Roth conversions. Have you run any of those calculations?
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Critique my FIRE withdrawal plan

Post by vanbogle59 »

southernlucky wrote: Tue Oct 19, 2021 1:05 pm Age 55. Single. No kids. No debt.
...
Bucket 1 (12.0x): first 12 yrs, ...
Bucket 2 (12.5x): next 14 yrs, ...
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.
All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
loukycpa
Posts: 735
Joined: Wed Aug 05, 2020 9:52 am

Re: Critique my FIRE withdrawal plan

Post by loukycpa »

I am considering using bond tent strategy as well.

I would keep it a bit simpler I think. You could start off with 60% in VSMGX (or VBIAX if you prefer domestic only). 40% in VBTLX (or your preferred bond fund - perhaps 5 years of expenses in a short term bond fund). Draw down VBTLX position over the first 12 years to bridge you to SS.

I would think the result would end up being much the same.
Last edited by loukycpa on Wed Oct 20, 2021 1:21 am, edited 6 times in total.
"The safe assumption for an investor is that over the next hundred years, the currency is going to zero." - Charlie Munger
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

sailaway wrote: Tue Oct 19, 2021 2:37 pm It looks like you may benefit from Roth conversions. Have you run any of those calculations?
Thanks for the suggestion. I have not modeled any ROTH conversions. I need to read up on how to do those from the wiki.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

vanbogle59 wrote: Tue Oct 19, 2021 2:44 pm
southernlucky wrote: Tue Oct 19, 2021 1:05 pm Age 55. Single. No kids. No debt.
...
Bucket 1 (12.0x): first 12 yrs, ...
Bucket 2 (12.5x): next 14 yrs, ...
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.
All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
Correct. I *think* I could handle the 60/40 later in life with SSI available. However, I might be kidding myself. I need to think about that some more...
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

loukycpa wrote: Tue Oct 19, 2021 3:27 pm I am considering using bond tent strategy as well.

I would keep it a bit simpler I think. You could start off with 60% in VSMGX (or VBIAX if you prefer domestic only). 40% in VBTLX (or your preferred bond fund - personally I might split with a short term bond fund in the current environment). Draw down bond position over the first 26 years.

I wouldn't think the result would end up being much the same.
That is a good idea too and would be easy to implement. Let me think about that some more. Thanks!
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
DVMResident
Posts: 1814
Joined: Mon Aug 01, 2011 8:15 pm

Re: Critique my FIRE withdrawal plan

Post by DVMResident »

OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
What is your bond allocation?

---
vanbogle59 wrote: Tue Oct 19, 2021 2:44 pm
southernlucky wrote: Tue Oct 19, 2021 1:05 pm Age 55. Single. No kids. No debt.
...
Bucket 1 (12.0x): first 12 yrs, ...
Bucket 2 (12.5x): next 14 yrs, ...
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.
All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
User avatar
Ben Mathew
Posts: 2720
Joined: Tue Mar 13, 2018 11:41 am
Location: Seattle

Re: Critique my FIRE withdrawal plan

Post by Ben Mathew »

southernlucky wrote: Tue Oct 19, 2021 2:34 pm
Ben Mathew wrote: Tue Oct 19, 2021 1:41 pm Amortization based withdrawal (ABW) implements the 1/n type withdrawals that you are considering, but with adjustments for expected portfolio growth (r) and desired withdrawal growth (g).

Rising equity glide paths concentrate equity risk in later years and makes sequence of return risk worse (not better, as is sometimes thought). Consider instead a fixed asset allocation combined with ABW withdrawals, as implemented by TPAW. This diversifies risk across time, minimizing sequence of return risk.
Thanks! I have looked at the ABW wiki too and I like it also and was trying to incorporate aspects of it into a bucket approach for my withdrawal plan.

When I read Kitces and Pfau I got the impression the rising equity path *might* be beneficial during the early years of retirement as it provides a bond tent. I know that when I manually model something similar on Portfolio Visualizer website starting from 2000 my bucket concept seems to do better than a static allocation. Of course, if I shift the starting date 1-2 years in either direction the results do change so it is very time dependent.
If you are using flexible amortization based withdrawals, then simulations based on inflexible SWR withdrawals will be misleading. I simulate ABW withdrawals here, and show that the fixed asset allocation would respond very well to a poor sequence of returns. That's what the math suggests, and that's what happens in the simulations.
Total Portfolio Allocation and Withdrawal (TPAW)
wrongfunds
Posts: 3187
Joined: Tue Dec 21, 2010 2:55 pm

Re: Critique my FIRE withdrawal plan

Post by wrongfunds »

DVMResident wrote: Tue Oct 19, 2021 4:06 pm OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
What is your bond allocation?

---
vanbogle59 wrote: Tue Oct 19, 2021 2:44 pm
southernlucky wrote: Tue Oct 19, 2021 1:05 pm Age 55. Single. No kids. No debt.
...
Bucket 1 (12.0x): first 12 yrs, ...
Bucket 2 (12.5x): next 14 yrs, ...
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.
All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
Kitches recommends increasing the stock allocation as you grow older. His reasoning was that if you end up in bad SORR situation, you need high enough stock allocation ratio to bail you out as you come out of the other side of SORR. And if you don't end up in bad SORR situation, then you have it made anyways.
printer86
Posts: 416
Joined: Mon Apr 25, 2016 8:45 am

Re: Critique my FIRE withdrawal plan

Post by printer86 »

I'm not sure how your taxable and tax advantaged accounts are comprised, but the devil is in the details when it comes to planning a successful withdrawal strategy. There is more than just risk management involved here. There's also taxes and healthcare premium management to consider.

You and I are in similar situations. I'm slightly older and part of a two person household.

I retired last year, and like your plan, we are relying on our taxable account until we claim SS. However, our taxable account is 62% equities bought during the course of the last 15 years. Some with high unrealized gains. The balance of our taxable account is in savings and CD's. The cash component allows us to sleep at night.

My pre-SS plan each year is to fund our living expenses with a combination of cash and stock sales. Each year, I sell enough stock to fund 50% of our annual expenses. This process will allow us limit our capital gains and stay under the ACA income threshold. It will also allow us to do some ROTH conversions along the way.

Our tax deferred accounts are invested 65/35. Somewhere between 10 and 13 years from now I will use these funds to supplement our SS income.
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

DVMResident wrote: Tue Oct 19, 2021 4:06 pm OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
What is your bond allocation?

---
vanbogle59 wrote: Tue Oct 19, 2021 2:44 pm
southernlucky wrote: Tue Oct 19, 2021 1:05 pm Age 55. Single. No kids. No debt.
...
Bucket 1 (12.0x): first 12 yrs, ...
Bucket 2 (12.5x): next 14 yrs, ...
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.
All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
--Agree inflation is a risk. The proposed 1/n approach from each bucket earmarked for x yrs may indeed not keep up. I'm worried about taking on too much stock though and jeopardize my SWAN. It is a tough trade-off/balancing act.

What is your bond allocation?
--For the overall portfolio it would start about ~63% bonds. But, each bucket with x yrs of funded withdrawals would have different bond allocations. My idea was the first bucket would be 80% bonds, second bucket would be 60% bonds and last bucket would be 40% bonds.

This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.
--That is what I am trying to accomplish but may be over thinking/complicating it.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
--Thanks. I've read some articles by Kitces and Pfau already and probably need to look for others.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Critique my FIRE withdrawal plan

Post by aristotelian »

southernlucky wrote: Tue Oct 19, 2021 2:20 pm
aristotelian wrote: Tue Oct 19, 2021 1:32 pm I am confused, do buckets 1, 2, and 3 correspond at all to pretax/taxable/Roth? Otherwise how will you keep the buckets separate from one another? It seems like your withdrawal plan is focused on risk (which makes some sense) but ignores tax efficiency.

You might take a look at Variable Percentage Withdrawal which is based on a similar principle and probably has similar results.

Seems to me biggest risk is longevity. Your 1/n withdrawal strategy is aimed at completely exhausting each bucket, so this has you withdrawing essentially 100% of your portfolio at age 99. If you live any longer you will be screwed.
I am confused, do buckets 1, 2, and 3 correspond at all to pretax/taxable/Roth?
--No. The proposed first bucket is all in taxable for easy access prior to 59.5 and SSI starting. The 2nd and 3rd buckets are in tax-deferred accounts.

Otherwise how will you keep the buckets separate from one another?
--I realize not optimum but was thinking to use different balanced funds like the LifeStrategy series from Vanguard. For example, the first bucket could be all LifeStrategy Income Fund (VASIX). The second bucket could be all LifeStrategy Conservative Growth Fund (VSCGX). The third bucket could be all LifeStrategy Moderate Growth Fund (VSMGX). Each fund would initially contain the desired x amount of withdrawals. Therefore, I would spend all of the VASIX fund during first 12 years and then switch to spend all the VSCGX funds during the next 14 years, etc.

It seems like your withdrawal plan is focused on risk (which makes some sense) but ignores tax efficiency.
--You are right, stock risk during the first years of FIRE is a big concern for me so the "buckets" help me mentally deal with it. I agree this is not optimal for tax efficiency but I need to tap my taxable accounts until age 59.5 anyway and I already know I will likely *not* rebalance on my own when needed if I split my stock and bond holdings into separate funds as I could not pull the trigger to rebalance in March/April 2020.

You might take a look at Variable Percentage Withdrawal which is based on a similar principle and probably has similar results.
--I have looked at the VPW wiki and like it too but was leaning towards my bucket and 1/n approach for the possible benefit of a rising equity glide path.

Seems to me biggest risk is longevity. Your 1/n withdrawal strategy is aimed at completely exhausting each bucket, so this has you withdrawing essentially 100% of your portfolio at age 99. If you live any longer you will be screwed.
--That is true and a good point. I have not addressed that issue in my plan. I know the VPW wiki recommends to consider annuitizing some funds at 80+ to protect against living past 100. I need to think about that some more.

Thank you for your comments!
Doesn't sounds like it would be possible to do Roth conversions with that framework. I would worry your 401k will grow and eventually you will lose a lot to tax on RMDs. Consider doing a simulation with the bucket strategy and comparing to a standard VPW or SWR strategy perhaps with rising equity glide path. I am guessing if you add up the buckets you will find little difference.
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

wrongfunds wrote: Tue Oct 19, 2021 4:22 pm
DVMResident wrote: Tue Oct 19, 2021 4:06 pm OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
What is your bond allocation?

---
vanbogle59 wrote: Tue Oct 19, 2021 2:44 pm
southernlucky wrote: Tue Oct 19, 2021 1:05 pm Age 55. Single. No kids. No debt.
...
Bucket 1 (12.0x): first 12 yrs, ...
Bucket 2 (12.5x): next 14 yrs, ...
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.
All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.

Kitches recommends increasing the stock allocation as you grow older. His reasoning was that if you end up in bad SORR situation, you need high enough stock allocation ratio to bail you out as you come out of the other side of SORR. And if you don't end up in bad SORR situation, then you have it made anyways.
--That is how I understood it as well and the idea resonated with me. However, my implementation approach to accomplish the rising equity glide path/bond tent is probably more complicated than it needs to be.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Critique my FIRE withdrawal plan

Post by vanbogle59 »

wrongfunds wrote: Tue Oct 19, 2021 4:22 pm
DVMResident wrote: Tue Oct 19, 2021 4:06 pm OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
What is your bond allocation?

---
vanbogle59 wrote: Tue Oct 19, 2021 2:44 pm
southernlucky wrote: Tue Oct 19, 2021 1:05 pm Age 55. Single. No kids. No debt.
...
Bucket 1 (12.0x): first 12 yrs, ...
Bucket 2 (12.5x): next 14 yrs, ...
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.
All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
Kitches recommends increasing the stock allocation as you grow older. His reasoning was that if you end up in bad SORR situation, you need high enough stock allocation ratio to bail you out as you come out of the other side of SORR. And if you don't end up in bad SORR situation, then you have it made anyways.
Starting from 34X? Why bother? Seems horribly complicated. :confused

Compare to the boring alternative: "Permanent 40/60" with constant dollar WR of X. Done.
Much simpler.
No need to grow into a higher risk tolerance.
Same targeted WR.
Starts with 20 years of bonds! (aka, big-a$$ tent :happy )
No risk of a misbehaving bucket (which would be amplified as each nears empty).
Negligible (historical) risk of depleting the portfolio EVER.

Whatever floats your boat, I guess. It certainly appears conservative.
:sharebeer
DVMResident
Posts: 1814
Joined: Mon Aug 01, 2011 8:15 pm

Re: Critique my FIRE withdrawal plan

Post by DVMResident »

southernlucky wrote: Tue Oct 19, 2021 6:00 pm
DVMResident wrote: Tue Oct 19, 2021 4:06 pm OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
What is your bond allocation?

---
vanbogle59 wrote: Tue Oct 19, 2021 2:44 pm
southernlucky wrote: Tue Oct 19, 2021 1:05 pm Age 55. Single. No kids. No debt.
...
Bucket 1 (12.0x): first 12 yrs, ...
Bucket 2 (12.5x): next 14 yrs, ...
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.
All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
--Agree inflation is a risk. The proposed 1/n approach from each bucket earmarked for x yrs may indeed not keep up. I'm worried about taking on too much stock though and jeopardize my SWAN. It is a tough trade-off/balancing act.

What is your bond allocation?
--For the overall portfolio it would start about ~63% bonds. But, each bucket with x yrs of funded withdrawals would have different bond allocations. My idea was the first bucket would be 80% bonds, second bucket would be 60% bonds and last bucket would be 40% bonds.

This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.
--That is what I am trying to accomplish but may be over thinking/complicating it.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
--Thanks. I've read some articles by Kitces and Pfau already and probably need to look for others.
I meant what type of bonds? Duration and credit rating.
It there an iBonds/TIPs allocation?
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

DVMResident wrote: Tue Oct 19, 2021 6:16 pm
southernlucky wrote: Tue Oct 19, 2021 6:00 pm
DVMResident wrote: Tue Oct 19, 2021 4:06 pm OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
What is your bond allocation?

---
vanbogle59 wrote: Tue Oct 19, 2021 2:44 pm
southernlucky wrote: Tue Oct 19, 2021 1:05 pm Age 55. Single. No kids. No debt.
...
Bucket 1 (12.0x): first 12 yrs, ...
Bucket 2 (12.5x): next 14 yrs, ...
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.
All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
--Agree inflation is a risk. The proposed 1/n approach from each bucket earmarked for x yrs may indeed not keep up. I'm worried about taking on too much stock though and jeopardize my SWAN. It is a tough trade-off/balancing act.

What is your bond allocation?
--For the overall portfolio it would start about ~63% bonds. But, each bucket with x yrs of funded withdrawals would have different bond allocations. My idea was the first bucket would be 80% bonds, second bucket would be 60% bonds and last bucket would be 40% bonds.

This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.
--That is what I am trying to accomplish but may be over thinking/complicating it.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
--Thanks. I've read some articles by Kitces and Pfau already and probably need to look for others.
I meant what type of bonds? Duration and credit rating.
It there an iBonds/TIPs allocation?
--Oops. My mistake. Would use Total Bond Market Index Fund. So, intermediate term investment grade bonds with duration around 6.5 and about 60% government bonds iirc. No TIPS included though.
Last edited by southernlucky on Tue Oct 19, 2021 6:32 pm, edited 1 time in total.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
wrongfunds
Posts: 3187
Joined: Tue Dec 21, 2010 2:55 pm

Re: Critique my FIRE withdrawal plan

Post by wrongfunds »

vanbogle59 wrote: Tue Oct 19, 2021 6:12 pm
wrongfunds wrote: Tue Oct 19, 2021 4:22 pm
DVMResident wrote: Tue Oct 19, 2021 4:06 pm OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
What is your bond allocation?

---
vanbogle59 wrote: Tue Oct 19, 2021 2:44 pm
southernlucky wrote: Tue Oct 19, 2021 1:05 pm Age 55. Single. No kids. No debt.
...
Bucket 1 (12.0x): first 12 yrs, ...
Bucket 2 (12.5x): next 14 yrs, ...
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.
All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
Kitches recommends increasing the stock allocation as you grow older. His reasoning was that if you end up in bad SORR situation, you need high enough stock allocation ratio to bail you out as you come out of the other side of SORR. And if you don't end up in bad SORR situation, then you have it made anyways.
Starting from 34X? Why bother? Seems horribly complicated. :confused

Compare to the boring alternative: "Permanent 40/60" with constant dollar WR of X. Done.
Much simpler.
No need to grow into a higher risk tolerance.
Same targeted WR.
Starts with 20 years of bonds! (aka, big-a$$ tent :happy )
No risk of a misbehaving bucket (which would be amplified as each nears empty).
Negligible (historical) risk of depleting the portfolio EVER.

Whatever floats your boat, I guess. It certainly appears conservative.
:sharebeer
Constant dollar WR would leave lot of money on the table. I did not do the actual calculation but I thought OP's method gave him more than the standard 3.y percent WR for his 44 year retirement. If that is giving him less than that, then you will be absolutely correct that there is no need for more complications.
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

vanbogle59 wrote: Tue Oct 19, 2021 6:12 pm
wrongfunds wrote: Tue Oct 19, 2021 4:22 pm
DVMResident wrote: Tue Oct 19, 2021 4:06 pm OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
What is your bond allocation?

---
vanbogle59 wrote: Tue Oct 19, 2021 2:44 pm
southernlucky wrote: Tue Oct 19, 2021 1:05 pm Age 55. Single. No kids. No debt.
...
Bucket 1 (12.0x): first 12 yrs, ...
Bucket 2 (12.5x): next 14 yrs, ...
Bucket 3 (9.5x): final 18 yrs, withdraw 1/n where n=18, 17, 16, etc. 60% stock/40% bond fund.
All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
Kitches recommends increasing the stock allocation as you grow older. His reasoning was that if you end up in bad SORR situation, you need high enough stock allocation ratio to bail you out as you come out of the other side of SORR. And if you don't end up in bad SORR situation, then you have it made anyways.
Starting from 34X? Why bother? Seems horribly complicated. :confused

Compare to the boring alternative: "Permanent 40/60" with constant dollar WR of X. Done.
Much simpler.
No need to grow into a higher risk tolerance.
Same targeted WR.
Starts with 20 years of bonds! (aka, big-a$$ tent :happy )
No risk of a misbehaving bucket (which would be amplified as each nears empty).
Negligible (historical) risk of depleting the portfolio EVER.

Whatever floats your boat, I guess. It certainly appears conservative.
:sharebeer
--Thanks. I thought about that too as a KISS alternative but continued to be fixated on the rising glide path approach. I need to sleep on this some more and do additional modeling/simulation comparisons...
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Critique my FIRE withdrawal plan

Post by KlangFool »

OP,

1) How much taxes do you plan to pay with this approach?

2) It is very simple.

This does not work well because of taxes. You spend less money and pay more taxes. That alone make the plan useless.

3) Do you need ACA insurance and subsidy? That's another 10K worth of expenses.

4) Check out this thread.

viewtopic.php?t=87471
"How to pay ZERO taxes in retirement with 6-figure expenses"

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Critique my FIRE withdrawal plan

Post by celia »

This sounds like a plan to spend every dollar while living AND you know your death date!

But what if you live past 99?
What if your living assistance expenses in your last 3 years are triple your usual living expenses?
What if future tax law is nothing like it is today?

Meanwhile we have no idea how much of your portfolio is Roth, tax-deferred, or Taxable. We have no idea what your current or future tax brackets might be.


I would come up with a 55-year withdrawal plan (or mental buckets), to be safe and defer SS as long as possible to get a guaranteed 8% growth in your monthly benefit from FRA to age 70. (That means that if future SS is $22K per year (in today’s dollars, set aside 15 years of $22K, then divide the remainder by 55.)

The cost of living annual increase would be applied to the higher SS, which takes away some of the inflation concerns. This plan should try to keep your income level over all the years so that your taxes can be level. If you do some large Roth conversions before tax brackets change in 2026, you could think of the Roth as your ‘Emergency Fund’ where withdrawals won’t impact your tax, should you have a large expense occur.

Of course, your Roth account will hold only stock funds while the bonds will be in tax-deferred.
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: Critique my FIRE withdrawal plan

Post by Escapevelocity »

I agree with the suggestion to delay SS to age 70. I also think Roth conversions should be incorporated between now and age 70.

I think you would be better off just moving to a 50/50 constant allocation now and staying there. You have WAY more safety cushion than you need anyway with a $3M portfolio and withdrawing $100k first and then less (~$80K) after starting SS benefits. With a 3% SWR you don't need to overthink this.

Was that a typo in your OP when you said you're assuming a NEGATIVE 2% real return on stocks for 12 years??? Also good luck getting +0.5% real return with bonds. I think you have this backward. Bonds will be yielding negative to best case zero real return for the foreseeable future.
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

KlangFool wrote: Tue Oct 19, 2021 6:38 pm OP,

1) How much taxes do you plan to pay with this approach?

2) It is very simple.

This does not work well because of taxes. You spend less money and pay more taxes. That alone make the plan useless.

3) Do you need ACA insurance and subsidy? That's another 10K worth of expenses.

4) Check out this thread.

viewtopic.php?t=87471
"How to pay ZERO taxes in retirement with 6-figure expenses"

KlangFool
--Thanks. I was assuming a few thousand in taxes while tapping my taxable funds in Bucket 1 but then later realized based on some other comments that I need to relook at the minimum MAGI needed to obtain ACA subsidies as that is indeed important to securing health insurance prior to Medicare. I will take a look at the link you posted too. I appreciate everyone's feedback. It has been super helpful.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

Escapevelocity wrote: Tue Oct 19, 2021 6:52 pm I agree with the suggestion to delay SS to age 70. I also think Roth conversions should be incorporated between now and age 70.

I think you would be better off just moving to a 50/50 constant allocation now and staying there. You have WAY more safety cushion than you need anyway with a $3M portfolio and withdrawing $100k first and then less (~$80K) after starting SS benefits. With a 3% SWR you don't need to overthink this.

Was that a typo in your OP when you said you're assuming a NEGATIVE 2% real return on stocks for 12 years??? Also good luck getting +0.5% real return with bonds. I think you have this backward. Bonds will be yielding negative to best case zero real return for the foreseeable future.
--Thanks. I'm rethinking a streamlined KISS approach with a bond bridge to 59.5 or 67 and then just a static allocation with some reasonable withdrawal rate afterwards. I agree much easier. Yes, I was assuming a bad sequence of stock returns to start early retirement as a what-if scenario and then using tvm/pmt calculations to see if the proposed approach would last. I agree if real bond returns are negative for a long time then my proposed plan would be in jeopardy. But, that would likely be the same case using a static 50/50 allocation too. Lots of things to consider still...
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

celia wrote: Tue Oct 19, 2021 6:45 pm This sounds like a plan to spend every dollar while living AND you know your death date!

But what if you live past 99?
What if your living assistance expenses in your last 3 years are triple your usual living expenses?
What if future tax law is nothing like it is today?

Meanwhile we have no idea how much of your portfolio is Roth, tax-deferred, or Taxable. We have no idea what your current or future tax brackets might be.


I would come up with a 55-year withdrawal plan (or mental buckets), to be safe and defer SS as long as possible to get a guaranteed 8% growth in your monthly benefit from FRA to age 70. (That means that if future SS is $22K per year (in today’s dollars, set aside 15 years of $22K, then divide the remainder by 55.)

The cost of living annual increase would be applied to the higher SS, which takes away some of the inflation concerns. This plan should try to keep your income level over all the years so that your taxes can be level. If you do some large Roth conversions before tax brackets change in 2026, you could think of the Roth as your ‘Emergency Fund’ where withdrawals won’t impact your tax, should you have a large expense occur.

Of course, your Roth account will hold only stock funds while the bonds will be in tax-deferred.
--Correct, trying to spend every dollar. :) I agree the >99 is a risk and something I need to think about more. The VPW wiki had a good suggestion about considering an annuity for a portion of one's portfolio around 80+ to help protect against such risk. The SSI at 70 is an option too but I had originally rejected it as did not want to wait another 3 years while taking full withdrawals from my portfolio. I will relook at that too with some more modeling. Future taxes are a wild card. There is no ROTH today, only Traditional IRA and 401K, plus the taxable account. Based on a previous comment I need to research the ROTH conversion wiki to learn more about that in order be more tax efficient and help generate sufficient MAGI for ACA subsidies. Thanks for the feedback!
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Critique my FIRE withdrawal plan

Post by KlangFool »

southernlucky wrote: Tue Oct 19, 2021 1:05 pm
Age 55. Single. No kids. No debt.
Savings 34x annual withdrawal (12x taxable, 22x tax deferred).
southernlucky,

It is very simple.

1) Keep 2 to 3 years of expense in CASH.

2) Put all your bonds into your tax-deferred account

3) Use the rest of the space for 100% stock.

4) Keep at least 10 years of expense in Bond

5) Pick an AA between 70/30 to 30/70.

6) With (1), you can manage your taxable income every year for maximum tax efficiency.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Critique my FIRE withdrawal plan

Post by aristotelian »

southernlucky wrote: Tue Oct 19, 2021 7:17 pm
--Thanks. I'm rethinking a streamlined KISS approach with a bond bridge to 59.5 or 67 and then just a static allocation with some reasonable withdrawal rate afterwards. I agree much easier. Yes, I was assuming a bad sequence of stock returns to start early retirement as a what-if scenario and then using tvm/pmt calculations to see if the proposed approach would last. I agree if real bond returns are negative for a long time then my proposed plan would be in jeopardy. But, that would likely be the same case using a static 50/50 allocation too. Lots of things to consider still...
That makes sense to me. Achieves your rising equity glidepath without overly complicating things. In the meantime, make sure to manage your asset allocation and withdrawals/conversions for optimal tax efficiency rather than psychological preferences.
59Gibson
Posts: 1386
Joined: Mon Dec 07, 2020 7:41 am

Re: Critique my FIRE withdrawal plan

Post by 59Gibson »

celia wrote: Tue Oct 19, 2021 6:45 pm This sounds like a plan to spend every dollar while living AND you know your death date!

But what if you live past 99?
What if your living assistance expenses in your last 3 years are triple your usual living expenses?
What if future tax law is nothing like it is today?

Meanwhile we have no idea how much of your portfolio is Roth, tax-deferred, or Taxable. We have no idea what your current or future tax brackets might be.


I would come up with a 55-year withdrawal plan (or mental buckets), to be safe and defer SS as long as possible to get a guaranteed 8% growth in your monthly benefit from FRA to age 70. (That means that if future SS is $22K per year (in today’s dollars, set aside 15 years of $22K, then divide the remainder by 55.)

The cost of living annual increase would be applied to the higher SS, which takes away some of the inflation concerns. This plan should try to keep your income level over all the years so that your taxes can be level. If you do some large Roth conversions before tax brackets change in 2026, you could think of the Roth as your ‘Emergency Fund’ where withdrawals won’t impact your tax, should you have a large expense occur.

Of course, your Roth account will hold only stock funds while the bonds will be in tax-deferred.
Classic.. 55 years old single, no kids with 34X is advised to bump their planning for a 55 yr retirement...plan to 110 folks!
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Critique my FIRE withdrawal plan

Post by vanbogle59 »

wrongfunds wrote: Tue Oct 19, 2021 6:22 pm
vanbogle59 wrote: Tue Oct 19, 2021 6:12 pm
wrongfunds wrote: Tue Oct 19, 2021 4:22 pm
DVMResident wrote: Tue Oct 19, 2021 4:06 pm OP, the aggregate portfolio is quite conservative: 39%/61% slowly rising to 60/40 after 26 years.
With 45+ years, I think you're carrying a lot of risk inflation.

How does your plan tackle inflation?
What is your bond allocation?

---
vanbogle59 wrote: Tue Oct 19, 2021 2:44 pm

All goes according to plan and your are 60/40 from age 80 on?
Seems like you are planning to grow into a higher risk tolerance. :confused
This is in effect a bond tent to attenuate sequence of returns risk (SRR). Negative returns in early years of retirement have a larger impact on SWR than later years.

You can read more at ERN or Kitces. The Boglehead forum response has been mixed, but some have suggested the very conservative/low-risk approach is bond-tent to make it through the early "red-zone" of SRR risk followed by SIPA at 80+ (see Pfau's work) to minimize the longevity risk.
Kitches recommends increasing the stock allocation as you grow older. His reasoning was that if you end up in bad SORR situation, you need high enough stock allocation ratio to bail you out as you come out of the other side of SORR. And if you don't end up in bad SORR situation, then you have it made anyways.
Starting from 34X? Why bother? Seems horribly complicated. :confused

Compare to the boring alternative: "Permanent 40/60" with constant dollar WR of X. Done.
Much simpler.
No need to grow into a higher risk tolerance.
Same targeted WR.
Starts with 20 years of bonds! (aka, big-a$$ tent :happy )
No risk of a misbehaving bucket (which would be amplified as each nears empty).
Negligible (historical) risk of depleting the portfolio EVER.

Whatever floats your boat, I guess. It certainly appears conservative.
:sharebeer
Constant dollar WR would leave lot of money on the table. I did not do the actual calculation but I thought OP's method gave him more than the standard 3.y percent WR for his 44 year retirement. If that is giving him less than that, then you will be absolutely correct that there is no need for more complications.
So, in my world :wink: ...

I have seen lots of methodologies that lead to large accumulations when run against historical data or monte carlo sims.
But I have yet to see one that would force me to "leave money on the table".
Talk about an easy problem to solve. Oh my.
If the SWR is "good enough" I'll be happy to deal with that type of portfolio "imbalance"!
:sharebeer
BabaWawa
Posts: 540
Joined: Sun Sep 06, 2020 2:47 pm

Re: Critique my FIRE withdrawal plan

Post by BabaWawa »

Sounds like you're comfortable with the plan, so go with it. Me, not a fan of buckets. I like the total return approach to retirement income. Buckets seem cumbersome making it difficult to adapt to changes including market volatility and tax law changes. Wondering how you rebalance across the buckets, or do you do it within each bucket.

I love having access to taxable, tax-free and tax deferred accounts and punch the numbers every year to withdraw in the most tax efficient way possible based on current conditions, including decisions on changing tax rates, Roth conversions, ACA subsidies, IRMAA, etc. Two to three years in cash gives added flexibility. We've all heard the saying that the only constant is change, but it's true.

I also achieve a rising equity glide path (Bonds in IRA and equities in taxable and Roth). Bonds in tax deferred are converted to equities in Roth or spent first during RMD years, leaving increasing equities in taxable and Roth. Admittedly I have a little more complexity when considering legacy planning.
chance
Posts: 155
Joined: Mon Jun 11, 2007 9:55 pm

Re: Critique my FIRE withdrawal plan

Post by chance »

If your portfolio is 34x your required annual income then that means your withdrawal rate is slightly under 3%. If you look at the back tested de-cumulation strategies or simulations based on mean (sd) returns you will see that the probability of failure is extremely low (almost non-existent) at <3% withdrawal rate. So not sure you need to sweat this a whole lot, but the biggest issue for you would be that your conservative allocation increases the risk of failure. Check out some of the SWR posts on the Early Retirement Now blog.
randomguy
Posts: 11295
Joined: Wed Sep 17, 2014 9:00 am

Re: Critique my FIRE withdrawal plan

Post by randomguy »

celia wrote: Tue Oct 19, 2021 6:45 pm This sounds like a plan to spend every dollar while living AND you know your death date!

But what if you live past 99?
What if your living assistance expenses in your last 3 years are triple your usual living expenses?
What if future tax law is nothing like it is today?

Mathematically the odds of living past 99 are pretty low. And realistically I doubt he can spent all the money. Odds are this system will have spending levels of 200k+/year (in real dollars) after age 85. I sort of doubt anyone will inflate their spending like that. Odds are they die with a huge fortune.... And it should be pointed out that we are hitting prime annuity cases when you are like 85 and don't care about leaving money to heirs. You are probably looking at a 15% or so payout. Buy an annuity and gamble that you will live long enough. If you lose, you don't care.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Critique my FIRE withdrawal plan

Post by celia »

59Gibson wrote: Tue Oct 19, 2021 8:05 pm Classic.. 55 years old single, no kids with 34X is advised to bump their planning for a 55 yr retirement...plan to 110 folks!
As I was saying, the last few years could be VERY expensive and OP does not have kids to look after him/her as he ages.

The last 10 years of money could easily be added to the already allocated money saved for ages 97-99 to provide for a nursing home or live-in help. 24-7 care is expensive, especially if you don’t split the expenses with someone else (by living in a group setting).


Another option is to start buying annuities at age 80. Since they don’t adjust their payouts over time, only use half the money to buy an annuity to cover age 80 to the end. At age 85 and age 90 buy another one to cover the increase from the then current age till the end. But on these later years, don’t spend all the income unless you need expensive care. This is one way to ensure your income increases at the end. And if you don’t live to 80, then a beneficiary will enjoy it.
heyyou
Posts: 4461
Joined: Tue Feb 20, 2007 3:58 pm

Re: Critique my FIRE withdrawal plan

Post by heyyou »

If you retire expecting to adapt a little bit each year to changing conditions as they occur, that avoids many of the problems that rigid, unchanging methods can develop since they are each designed to avoid a specific situation. Yes, the rigid methods look better to prospective retirees. Have you seen changes to your life and in retirement info in the last thirty plus years? Wouldn't you expect those to continue to occur in the future?
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: Critique my FIRE withdrawal plan

Post by Escapevelocity »

heyyou wrote: Tue Oct 19, 2021 11:22 pm If you retire expecting to adapt a little bit each year to changing conditions as they occur, that avoids many of the problems that rigid, unchanging methods can develop since they are each designed to avoid a specific situation. Yes, the rigid methods look better to prospective retirees. Have you seen changes to your life and in retirement info in the last thirty plus years? Wouldn't you expect those to continue to occur in the future?
Good point. Also, I would add that a reasonable goal would be to smooth the spending level to a more generous amount up front in order to enjoy the “go go” years. OP could enjoy the first 10 years of retirement in more style than currently envisaged IMO.
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

KlangFool wrote: Tue Oct 19, 2021 7:35 pm
southernlucky wrote: Tue Oct 19, 2021 1:05 pm
Age 55. Single. No kids. No debt.
Savings 34x annual withdrawal (12x taxable, 22x tax deferred).
southernlucky,

It is very simple.

1) Keep 2 to 3 years of expense in CASH.

2) Put all your bonds into your tax-deferred account

3) Use the rest of the space for 100% stock.

4) Keep at least 10 years of expense in Bond

5) Pick an AA between 70/30 to 30/70.

6) With (1), you can manage your taxable income every year for maximum tax efficiency.

KlangFool
--Thank you. I need to think some more about my proposed strategy. I originally liked the idea of using different balanced funds with varying allocations to spend at different times (ie., spend safer bucket early on and when depleted spend the more risky bucket, etc). The balanced funds would allow me to get completely out of the way with no rebalancing ever needed on my part (which I might be tempted to tinker with or even worse not even do it when I need to (like Mar/Apr 2020 when I could not pull the trigger to buy stocks for rebalancing). But, the tax inefficiencies you mentioned are a good point I need to look at further.
Last edited by southernlucky on Wed Oct 20, 2021 7:59 am, edited 1 time in total.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

aristotelian wrote: Tue Oct 19, 2021 7:47 pm
southernlucky wrote: Tue Oct 19, 2021 7:17 pm
--Thanks. I'm rethinking a streamlined KISS approach with a bond bridge to 59.5 or 67 and then just a static allocation with some reasonable withdrawal rate afterwards. I agree much easier. Yes, I was assuming a bad sequence of stock returns to start early retirement as a what-if scenario and then using tvm/pmt calculations to see if the proposed approach would last. I agree if real bond returns are negative for a long time then my proposed plan would be in jeopardy. But, that would likely be the same case using a static 50/50 allocation too. Lots of things to consider still...
That makes sense to me. Achieves your rising equity glidepath without overly complicating things. In the meantime, make sure to manage your asset allocation and withdrawals/conversions for optimal tax efficiency rather than psychological preferences.
--Yes. I need to think about tax efficiency further. Thank you.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

59Gibson wrote: Tue Oct 19, 2021 8:05 pm
celia wrote: Tue Oct 19, 2021 6:45 pm This sounds like a plan to spend every dollar while living AND you know your death date!

But what if you live past 99?
What if your living assistance expenses in your last 3 years are triple your usual living expenses?
What if future tax law is nothing like it is today?

Meanwhile we have no idea how much of your portfolio is Roth, tax-deferred, or Taxable. We have no idea what your current or future tax brackets might be.


I would come up with a 55-year withdrawal plan (or mental buckets), to be safe and defer SS as long as possible to get a guaranteed 8% growth in your monthly benefit from FRA to age 70. (That means that if future SS is $22K per year (in today’s dollars, set aside 15 years of $22K, then divide the remainder by 55.)

The cost of living annual increase would be applied to the higher SS, which takes away some of the inflation concerns. This plan should try to keep your income level over all the years so that your taxes can be level. If you do some large Roth conversions before tax brackets change in 2026, you could think of the Roth as your ‘Emergency Fund’ where withdrawals won’t impact your tax, should you have a large expense occur.

Of course, your Roth account will hold only stock funds while the bonds will be in tax-deferred.
Classic.. 55 years old single, no kids with 34X is advised to bump their planning for a 55 yr retirement...plan to 110 folks!
:)
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

BabaWawa wrote: Tue Oct 19, 2021 8:29 pm Sounds like you're comfortable with the plan, so go with it. Me, not a fan of buckets. I like the total return approach to retirement income. Buckets seem cumbersome making it difficult to adapt to changes including market volatility and tax law changes. Wondering how you rebalance across the buckets, or do you do it within each bucket.

I love having access to taxable, tax-free and tax deferred accounts and punch the numbers every year to withdraw in the most tax efficient way possible based on current conditions, including decisions on changing tax rates, Roth conversions, ACA subsidies, IRMAA, etc. Two to three years in cash gives added flexibility. We've all heard the saying that the only constant is change, but it's true.

I also achieve a rising equity glide path (Bonds in IRA and equities in taxable and Roth). Bonds in tax deferred are converted to equities in Roth or spent first during RMD years, leaving increasing equities in taxable and Roth. Admittedly I have a little more complexity when considering legacy planning.
--Thanks for the feedback. I guess buckets in my mind is more about a having 3 "accounts" with a specific asset allocation each and I would spend down a specific "account" for a period of time and then switch to another account. Each account with varying stock/bond allocation using balanced funds would allow a natural, rising equity glide path too which I like the concept of and with no rebalancing ever needed on my part. But, based on the many good comments I am reading I need to think about my proposed strategy further. There is likely easier ways to accomplish the same thing and perhaps be more tax efficient too.
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

chance wrote: Tue Oct 19, 2021 8:57 pm If your portfolio is 34x your required annual income then that means your withdrawal rate is slightly under 3%. If you look at the back tested de-cumulation strategies or simulations based on mean (sd) returns you will see that the probability of failure is extremely low (almost non-existent) at <3% withdrawal rate. So not sure you need to sweat this a whole lot, but the biggest issue for you would be that your conservative allocation increases the risk of failure. Check out some of the SWR posts on the Early Retirement Now blog.
--I agree that past SWR and perpetual withdraw rates indicate an initial 3% withdrawal rate with subsequent inflation adjustments is good essentially forever assuming a reasonable amount of equities >=50%. But, I was thinking to start with a slightly lower stock % and increase that % over time in order to protect against a significant decline in the early years of retirement prior to SSI. My bucket idea using balanced funds with various asset allocations was a proposed approach but albeit probably much more complicated than it needs to be. I need to relook at my plan some more. Lots of good feedback from the community to digest further. Thanks!
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
Topic Author
southernlucky
Posts: 329
Joined: Sat Jun 21, 2008 10:51 am

Re: Critique my FIRE withdrawal plan

Post by southernlucky »

heyyou wrote: Tue Oct 19, 2021 11:22 pm If you retire expecting to adapt a little bit each year to changing conditions as they occur, that avoids many of the problems that rigid, unchanging methods can develop since they are each designed to avoid a specific situation. Yes, the rigid methods look better to prospective retirees. Have you seen changes to your life and in retirement info in the last thirty plus years? Wouldn't you expect those to continue to occur in the future?
--I think I can be flexible as long as the stock/bond markets and my buckets/accounts don't totally implode within a few years of retirement. :) If that happens then I guess lots of people are in the same boat. If I can make it to 67 or later for SSI that helps a great deal to remain flexible. There has been some good suggestions to simply consider a bond bridge to SSI and spend a reasonable % of the remaining portfolio. That might be better/easier to implement and provides for a rising equity glide path too. I need to do some more homework. Thanks for your feedback!
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Critique my FIRE withdrawal plan

Post by vanbogle59 »

southernlucky wrote: Wed Oct 20, 2021 8:15 am But, I was thinking to start with a slightly lower stock % and increase that % over time in order to protect against a significant decline in the early years of retirement prior to SSI.
But what if there is wild inflation at the start of your retirement. All those bonds with negative real returns... :(

Sometimes when I look in the mirror, I see an algebra student trying to solve an equation. What happens if I change this variable? Oh, that back tests much better!
Then I go have a beer. When I come back to my computer, I delete the spreadsheet.
It can't really be done. (The sane me has stopped trying.)

There will be risks. There will be unexpected events (in the stock market, in the world, in your life...).
All you can do is have a reasonable plan, and be flexible.

Your plan is great. It has an excellent chance of success. (most likely, you will have more money than ever in 20 years)
If you are comfortable with it, you are done.
Congrats.
:beer
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Critique my FIRE withdrawal plan

Post by aristotelian »

southernlucky wrote: Wed Oct 20, 2021 7:58 am --Yes. I need to think about tax efficiency further. Thank you.
IMO the big thing to think about is how to deal with the 401k/Traditional IRA. Once you are past accumulation, the biggest advantage of Traditional (tax deferral) becomes the biggest liability, and instead of maxing the account as much as possible, the game shifts to getting money out of the account as fast as possible, ideally in the form of Roth conversions where you are shifting the money from traditional to Roth rather than simply withdrawing. The big constraint is the more you take out, the more tax you pay, so the game is to figure out how to convert/withdraw as much as possible while staying within a low tax bracket. Early retirement makes this easier because you have a window before SS and/or pension kick in where you are in the 0% tax bracket. If you don't touch the traditional account during this period, you are wasting a huge opportunity to get funds out of the traditional account and into Roth, so IMO the Roth conversion is the primary decision you have to make, and you build the rest of your withdrawal strategy around that. If you post more details on your portfolio you may get more specific advice. Hope this helps.
Post Reply