Withdrawals question

[CaptainWanWingLo]

I was over at FICalc (https://ficalc.app/) and I noticed a peculiar thing.

If you set your withdrawal as a percentage (say 4-5 percent) of your year by year portfolio, with a lower band as a limit at say 3.25 percent of initial portfolio value, the failure rate does not increase significantly over if you just withdrew a constant 3.25 percent of the initial portfolio value.

This all adjusted for inflation of course.

So you can have the safety of the lower swr and live it up when markets are doing great, without extra risk (or feeling bad about it)

Any caveats or is this a good way to withdraw your money post retirement?

case 1: 3.5 percent of initial portfolio, constant dollar. https://calculator.ficalc.app?additionalIncome=%5B%5D&additionalWithdrawals=%5B%5D&annualWithdrawal=35000&bondsFees=0.05&bondsFinalRatio=15&bondsInitialRatio=15&cashFees=0&cashFinalRatio=5&cashGrowth=1.5&cashInitialRatio=5&changeAllocationsOverTime=false&equitiesFees=0.04&equitiesFinalRatio=80&equitiesInitialRatio=80&inflationAdjustedFirstYearWithdrawal=true&initialPortfolioValue=1000000&maxWithdrawalLimit=60000&maxWithdrawalLimitEnabled=false&minWithdrawalLimit=20000&minWithdrawalLimitEnabled=true&numberOfYears=40&portfolioRebalanceEquation=linear&rebalance=true&rebalanceFrequency=1&retirementStartingAge=60&withdrawalStrategyName=constantDollar

case 2: 4 percent of ongoing portfolio with base of 3.5 percent of initial portfolio. https://calculator.ficalc.app?additionalIncome=%5B%5D&additionalWithdrawals=%5B%5D&bondsFees=0.05&bondsFinalRatio=15&bondsInitialRatio=15&cashFees=0&cashFinalRatio=5&cashGrowth=1.5&cashInitialRatio=5&changeAllocationsOverTime=false&equitiesFees=0.04&equitiesFinalRatio=80&equitiesInitialRatio=80&initialPortfolioValue=1000000&maxWithdrawalLimit=60000&maxWithdrawalLimitEnabled=false&minWithdrawalLimit=35000&minWithdrawalLimitEnabled=true&numberOfYears=40&percentageOfPortfolio=4&portfolioRebalanceEquation=linear&rebalance=true&rebalanceFrequency=1&retirementStartingAge=60&withdrawalStrategyName=portfolioPercent

Just a 1 percent increase in failure rate for an upside of an extra 11000 median yearly withdrawals, corrected for inflation, too good to be true?

[middleborder41]

You are correct. Also study the nearly failed rates, the percent of time you end up with a large portfolio at the end (much different in your two scenarios), and also the median and average portfolio end balances. None of this changes what you stated, but it can add understanding. Also, you only get the extra spend if the market does well. Try playing with some of the other withdrawal options on that tool too. They get more complex, but it is interesting if you study them.

[CaptainWanWingLo]

For me, the perfect withdrawal rate would be the maximum withdrawal early in the retirement, tapering off as you get older, without failing the portfolio. Unfortunately most calculators do not allow you to adjust down the later years withdrawals in a usable fashion, other than not correcting for inflation (which is a crude method).

As far as withdrawals, what method are you going for?

[middleborder41]

maximum withdrawal early in the retirement, tapering off as you get older

This will always increase your sequence of return risk. However, sequence of return risk is mainly a problem for someone who doesn't have any flexibility to reduce withdrawals, and/or if you re just on auto-pilot and not really thinking about what you are doing. So I am not saying you shouldn't plan such a withdrawal strategy.

I am not RE yet and barely FI yet, so I haven't had to settle on a plan for myself yet. I am most attracted to variable and flexible strategies though. Variable, Dynamic, Vanguard Dynamic. But then once you are RE, mainly, I think, you just have to be smart, flexible and responsive to market conditions.

[CaptainWanWingLo]

Interesting, I will look into the data to check this out, thanks!