Factoring social security into withdrawal rate

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Financologist
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Factoring social security into withdrawal rate

Post by Financologist »

If one is planning to retire at 50 and aims for a $4m nest egg. And assuming s/he expects $7k monthly between SS and pension starting at age 71..

Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.

Are there any baseline rules of thumb that address this?
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dogagility
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Re: Factoring social security into withdrawal rate

Post by dogagility »

Financologist wrote: Fri Jul 23, 2021 11:51 pm Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.
I'd suggest diving into the methods underlying withdrawal strategies like VPW and ABW. These incorporate future income streams like pensions and SS.
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bradpevans
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Re: Factoring social security into withdrawal rate

Post by bradpevans »

Financologist wrote: Fri Jul 23, 2021 11:51 pm If one is planning to retire at 50 and aims for a $4m nest egg. And assuming s/he expects $7k monthly between SS and pension starting at age 71..

Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.

Are there any baseline rules of thumb that address this?
There have been threads that suggest this route provides more spendable dollars — WITH the assumption that you are NOT trying a leave a legacy

It also leaves more room for Roth conversions (assuming other funds for taxes and expenses

It specifically notes higher rate early and lesser rate later
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JoeRetire
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Re: Factoring social security into withdrawal rate

Post by JoeRetire »

Financologist wrote: Fri Jul 23, 2021 11:51 pm If one is planning to retire at 50 and aims for a $4m nest egg. And assuming s/he expects $7k monthly between SS and pension starting at age 71..
That's an odd starting age...
Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.
Sounds like a plan.
Are there any baseline rules of thumb that address this?
If it works for you financially, go for it. You don't need rules.

On a spreadsheet, model what withdrawing $200k for the first 20 years of retirement does to your portfolio. Then model the remaining years of retirement while withdrawing $120k. It either works for you or it doesn't.
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klaus14
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Re: Factoring social security into withdrawal rate

Post by klaus14 »

Financologist wrote: Fri Jul 23, 2021 11:51 pm If one is planning to retire at 50 and aims for a $4m nest egg. And assuming s/he expects $7k monthly between SS and pension starting at age 71..

Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.

Are there any baseline rules of thumb that address this?
Look at ABW

You can configure it to spend some percentage of your $4M plus returns for 20 years.
For example, you configure it to leave 50% of your savings after 20 years like:
=PMT(1.5%,20,-1,50%,1)=3.61%
This assumes 1.5% real portfolio return. You can increase or decrease it as you like based on your portfolio.
Then you can spend $4M*3.61%=$144,327 in the first year

After 20 years, you can put half of remaining $2M into a SPIA with 2% COLA, which will pay (with today's numbers) $1M * 5.37% = $53,700 and you get 7*12= $84000 annually from SS and pension. Add this to SPIA and you have $137700 guaranteed annual income.
You can invest remaining $1M to global stock market, which should pay like 2% dividends, so $20k from there as well. For any unexpected large expense, you can sell some stocks.

You can play with numbers and come up with your plan.
You calculate the numbers again every year before that years withdrawal and update your plan.
You update portfolio return expectation based on current earnings yield and bond yields.
You update the SPIA payout rate based on current quotes.
My investment algorithm: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=351899&p=6112869#p6112869
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Re: Factoring social security into withdrawal rate

Post by galawdawg »

Financologist wrote: Fri Jul 23, 2021 11:51 pm If one is planning to retire at 50 and aims for a $4m nest egg. And assuming s/he expects $7k monthly between SS and pension starting at age 71..

Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.

Are there any baseline rules of thumb that address this?
Sure. Just calculate your annual spending needs for the two or three different "periods" of retirement. First period is age 50 to start of pension. Second period is from start of pension to addition of SS. Final period is from pension/SS until death. I think using your spending needs is easier in this case than a percentage withdrawal.

So if we assume you need $100k per year and your pension of $42k/yr starts at 65 and your SS of $42k/yr starts at 70 and you want your portfolio to last until age 100, just figure:

$100k/yr for fifteen (15) years ($1.5 m)
$58k/yr for five (5) years ($290k)
$16k/yr for thirty (30) years ($480k)

That gives you a total needed portfolio of $2.27 million (without accounting for returns from age 50-100, nor for inflation adjustments to your spending).

You can use both FIRECalc and VPW to model how your pension and SS will be received (amount and year), your portfolio, your desired spending and it will run calculations for you. FireCALC will give you your success/failure rate with different assumptions about inflation and returns, VPW will give you an annually adjusted recommended maximum withdrawal amount.

https://firecalc.com/

https://www.bogleheads.org/wiki/Variabl ... _Worksheet

Hope that is helpful! :beer
JediMisty
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Re: Factoring social security into withdrawal rate

Post by JediMisty »

Financologist wrote: Fri Jul 23, 2021 11:51 pm If one is planning to retire at 50 and aims for a $4m nest egg. And assuming s/he expects $7k monthly between SS and pension starting at age 71..

Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.

Are there any baseline rules of thumb that address this?
Are you aware that the SS estimate assumes you will work at the same salary until you are eligible to collect? If you haven't already, you need to get a custom estimate from SSA gov or crunch the numbers yourself to determine the benefit you'd receive if you stopped working at such a young age. Also, if it's a government pension, your benefits are subject to the WEP rules. Read your estimate statement carefully. It clearly states the assumptions made in preparing the estimate.
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Financologist
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Re: Factoring social security into withdrawal rate

Post by Financologist »

JediMisty wrote: Sat Jul 24, 2021 6:21 am
Financologist wrote: Fri Jul 23, 2021 11:51 pm If one is planning to retire at 50 and aims for a $4m nest egg. And assuming s/he expects $7k monthly between SS and pension starting at age 71..

Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.

Are there any baseline rules of thumb that address this?
Are you aware that the SS estimate assumes you will work at the same salary until you are eligible to collect? If you haven't already, you need to get a custom estimate from SSA gov or crunch the numbers yourself to determine the benefit you'd receive if you stopped working at such a young age. Also, if it's a government pension, your benefits are subject to the WEP rules. Read your estimate statement carefully. It clearly states the assumptions made in preparing the estimate.
Hi JediMisty,

Thanks and yes.. I am not too far from this plan and did look into SS - this is an estimate for household SS and a small corp. pension.
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Financologist
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Re: Factoring social security into withdrawal rate

Post by Financologist »

klaus14 wrote: Sat Jul 24, 2021 5:56 am
Financologist wrote: Fri Jul 23, 2021 11:51 pm If one is planning to retire at 50 and aims for a $4m nest egg. And assuming s/he expects $7k monthly between SS and pension starting at age 71..

Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.

Are there any baseline rules of thumb that address this?
Look at ABW

You can configure it to spend some percentage of your $4M plus returns for 20 years.
For example, you configure it to leave 50% of your savings after 20 years like:
=PMT(1.5%,20,-1,50%,1)=3.61%
This assumes 1.5% real portfolio return. You can increase or decrease it as you like based on your portfolio.
Then you can spend $4M*3.61%=$144,327 in the first year

After 20 years, you can put half of remaining $2M into a SPIA with 2% COLA, which will pay (with today's numbers) $1M * 5.37% = $53,700 and you get 7*12= $84000 annually from SS and pension. Add this to SPIA and you have $137700 guaranteed annual income.
You can invest remaining $1M to global stock market, which should pay like 2% dividends, so $20k from there as well. For any unexpected large expense, you can sell some stocks.

You can play with numbers and come up with your plan.
You calculate the numbers again every year before that years withdrawal and update your plan.
You update portfolio return expectation based on current earnings yield and bond yields.
You update the SPIA payout rate based on current quotes.
Thanks klaus14. I will try this and see what sorts of scenarios play out.

One reason for my post is that it seems strange to me that the most popular SWR rule of thumb doesn't take SS into account.
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ram
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Re: Factoring social security into withdrawal rate

Post by ram »

Financologist wrote: Fri Jul 23, 2021 11:51 pm If one is planning to retire at 50 and aims for a $4m nest egg. And assuming s/he expects $7k monthly between SS and pension starting at age 71..

Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.

Are there any baseline rules of thumb that address this?
Assumptions:
Retiring age = 50
Dying age = 90
SS & pension of 84K/yr during the second half of this span.

Average spending ability each year:
160 K (4% withdrawal) + 42 K ( half of 84K) = 202 K.

During age 50 to 70 : Take all 202k from the investments. This comes at about 5% of the 4M.

Good enough for planning purposes.
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Re: Factoring social security into withdrawal rate

Post by sycamore »

Financologist wrote: Sat Jul 24, 2021 8:02 am ...
One reason for my post is that it seems strange to me that the most popular SWR rule of thumb doesn't take SS into account.
I think the purpose of SWR guidelines is not to give you a holistic plan for withdrawing. At best they would tell you if your residual living expenses would be covered. Your RLE equals your expected spending minus any Social Security and any pension and annuity. So in that sense, the SWR guidelines do incorporate SS. That's how I think of it.
delamer
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Re: Factoring social security into withdrawal rate

Post by delamer »

galawdawg wrote: Sat Jul 24, 2021 6:10 am
Financologist wrote: Fri Jul 23, 2021 11:51 pm If one is planning to retire at 50 and aims for a $4m nest egg. And assuming s/he expects $7k monthly between SS and pension starting at age 71..

Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.

Are there any baseline rules of thumb that address this?
Sure. Just calculate your annual spending needs for the two or three different "periods" of retirement. First period is age 50 to start of pension. Second period is from start of pension to addition of SS. Final period is from pension/SS until death. I think using your spending needs is easier in this case than a percentage withdrawal.

So if we assume you need $100k per year and your pension of $42k/yr starts at 65 and your SS of $42k/yr starts at 70 and you want your portfolio to last until age 100, just figure:

$100k/yr for fifteen (15) years ($1.5 m)
$58k/yr for five (5) years ($290k)
$16k/yr for thirty (30) years ($480k)

That gives you a total needed portfolio of $2.27 million (without accounting for returns from age 50-100, nor for inflation adjustments to your spending).

You can use both FIRECalc and VPW to model how your pension and SS will be received (amount and year), your portfolio, your desired spending and it will run calculations for you. FireCALC will give you your success/failure rate with different assumptions about inflation and returns, VPW will give you an annually adjusted recommended maximum withdrawal amount.

https://firecalc.com/

https://www.bogleheads.org/wiki/Variabl ... _Worksheet

Hope that is helpful! :beer
This is the way I’d approach the issue.

If you assume conservatively that your portfolio will only grow at the rate of inflation, then $2.27 million is a good estimate. With higher rates of return, your starting nest egg could be smaller.
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Eagle33
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Re: Factoring social security into withdrawal rate

Post by Eagle33 »

delamer wrote: Sat Jul 24, 2021 9:13 am
galawdawg wrote: Sat Jul 24, 2021 6:10 am
Financologist wrote: Fri Jul 23, 2021 11:51 pm If one is planning to retire at 50 and aims for a $4m nest egg. And assuming s/he expects $7k monthly between SS and pension starting at age 71..

Rather than a 3.5% withdrawal rate starting at age 50, why not start at say 5% and then plan to reduce it once SS and pension kick in.. to 3% for example.

Are there any baseline rules of thumb that address this?
Sure. Just calculate your annual spending needs for the two or three different "periods" of retirement. First period is age 50 to start of pension. Second period is from start of pension to addition of SS. Final period is from pension/SS until death. I think using your spending needs is easier in this case than a percentage withdrawal.

So if we assume you need $100k per year and your pension of $42k/yr starts at 65 and your SS of $42k/yr starts at 70 and you want your portfolio to last until age 100, just figure:

$100k/yr for fifteen (15) years ($1.5 m)
$58k/yr for five (5) years ($290k)
$16k/yr for thirty (30) years ($480k)

That gives you a total needed portfolio of $2.27 million (without accounting for returns from age 50-100, nor for inflation adjustments to your spending).

You can use both FIRECalc and VPW to model how your pension and SS will be received (amount and year), your portfolio, your desired spending and it will run calculations for you. FireCALC will give you your success/failure rate with different assumptions about inflation and returns, VPW will give you an annually adjusted recommended maximum withdrawal amount.

https://firecalc.com/

https://www.bogleheads.org/wiki/Variabl ... _Worksheet

Hope that is helpful! :beer
This is the way I’d approach the issue.

If you assume conservatively that your portfolio will only grow at the rate of inflation, then $2.27 million is a good estimate. With higher rates of return, your starting nest egg could be smaller.
+1
I also approached this way. Instead of using the income gap (residual living expenses, aka RLE) between SS/pension income and total monthly expense, I prefer my total annual expenses equals 1. Then calculate what percentage annual SS/pension is of the total annual expense. During years with SS/pension I need 1 minus that percentage, then multiple the RLE % by number of years needing RLE. Add this RLE number of years to the number of years without RLE income to get a total number of years of annual expenses that factors in RLE.

Example: Need $120k/year expenses starting today at 50.
$7k/month SS/pension starting at 70 (today's dollars) = $84k/year
$84k/$120k = 0.70 years
1 - 0.70 = 0.30 years of RLE
Expect to live to 100, so 30 years x 0.30 = 9.0 years of total annual expenses
70 - 50 = 20 years of full annual expenses
20.0 + 9.0 = 29.0 years of total expenses
29 x $120k = $3480k needed in portfolio at start of retirement
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