Secure Your Retirement with this Variable Withdrawal Strategy
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- Опубліковано 7 сер 2024
- Do you like the idea of a portfolio withdrawal strategy that can't run out of money? This walkthrough video is the third part in our Safe Withdrawal Rate (SWR) series, and teaches you how to model a variable withdrawal strategy based on the CAPE ratio. Using this powerful and FREE tool created by Karsten Jeske, you can design a personalized plan that works with your own financial situation. Be sure to see the show notes below to get your free copy, to see the two prior episodes, and for all the links we discuss in the video.
**Show notes: twosidesoffi.com/toolbox
Timestamps:
00:00 Safe Withdrawal Rate series
02:03 Getting started
04:54 How the model works
07:19 Entering the parameters
10:20 Reviewing the results
12:43 Wrapping up
**Show notes, tools, resources + information: twosidesoffi.com
**Our podcast: twosidesoffi.com/podcast/
**Eric’s "NOW" page at 30X40 Design Workshop: thirtybyforty.com/now
**Eric’s UA-cam Channel: thirtybyforty.com/youtube
**Jason's Blog: www.thenextphaseisnow.com
#twosidesoffi #financialindependence #firemovement
@30by40
**Note: This content does not constitute investment advice and is being presented for informational and educational purposes only.
Are you using or plan to use a fixed or variable withdrawal strategy in retirement? Let us know in the comments below.
Variable withdrawal strategy
Awesome video! Thanks for putting this together. One thought I had since you mentioned the VPW: That rule is indeed a special case of my CAPE-based rule if you set a=4% (or whatever number you want to use) and b=0. This will create a very volatile consumption pattern, essentially as volatile as your portfolio. That's why the CAPE-based rule is much preferred! But again, thanks for this, and keep up the great work!
Thanks, Karsten! That means a lot to us coming from you. Excellent point and we definitely didn't make it in the episode.
Thank you so much for putting this together! The visual walk-through is a great addition to ERNs awesome work. Enjoying the channel very much.
you're welcome! thanks for your support
Best of the best financial UA-camrs! Thanks!!!
Thank you!
@@TwoSidesOfFI My pleasure, gentlemen!
This tool box is so timely for me. I've been working my way through every model tool trying to get comfortable modeling ALL the scenarios if we retire now. Your videos have helped me understand a few of the parts I didn't quite understand, so I really appreciate it. I'm launching my own CAPE based cash flow retirement strategy next month thanks to the SWR Toolbox - Dr. Karsten and your videos.
Great! Best wishes to you
Quality intro , topic transitions, and outro music are overlooked by a lot on UA-cam. Not you guys. It’s adds a very solid quality increase to your videos for the effort (after you got it set the first few time). I really appreciate the touches you all do to your vids. Well done.
Thanks for the kind words, Rick! Eric gets full credit for the look and feel of the show, and he does nearly all of the editing. I've learned tons from him over the past few years but I won't be at his level of expertise anytime soon! I don't know if you've seen his personal channel but it's a masterclass in content creation in my humble opinion. www.youtube.com/@30by40
-Jason
Been using the SWR Toolbox for a while and still learned something new. I was an engineer by trade. While I trust the math, I can't get over withdrawing >4% (in my case 4.89% per the toolbox) during this early part of my RE. In fact, I am withdrawing
Thank you for this series. I love learning more about this tool and how you are using it in retirement.
While many will wrestle a lot with the idea of withdrawing less than the estimated SWR (which may help them sleep better), it ocurred to me that we also have another key input to tune conservatism in this toolbox. Given that one can set a final target value of the portfolio (e.g. 10% or 25% based on personal tolerance), has anyone though of using this setting to tune your level of comfort with the buffer in SWR estimate. I quite like the simplicity of using a single input to tune the conservatism buffer, which also comes with the ease of interpretation of what it means.
Great point, Anil. I often wonder the same thing.
Thanks for doing this!!!
You're welcome, Christina!
Really helpful video Jason! Hope to see more on how to get the most out of the SWR tool.
Glad it was helpful!
For me having fired at 49 years old it’s a 4% rule but no inflation increase in a year when the markets are down. Hopefully also overlay kitches ratcheting strategy to increase the withdrawal markets if portfolio grows big enough over time. Rob Berger just did a very good UA-cam video on this. Having said that currently actually spending about 3.5% because it is naturally my normal spend and don’t feel like forcing myself to spend more for sake of it!
Great! Thanks for sharing, Craig
I've been a fan of VPW due to its simplicity (and I like the idea of a variable withdrawal rate as my natural inclination would be to adjust with market conditions anyway), but I wasn't aware that Karsten had a way to do variable withdraw.
FWIW I set them up with the same data (future income, 'ending' the retirement at 100, $0 future value) and they ended up with a suggested withdrawal within about 0.5% of each other (so pretty good agreement). Surprisingly Karsten was a bit more aggressive than the Boglehead VPW but as I said the differences were small.
Anyway Good stuff and thanks for the video!
Thanks for sharing, John!
I'd like to capture market upside using dynamic SWR. Tradeoff seems to be possibility of lower SWR than fixed SWR during poor return years. I could set lower bound on dynamic SWR to be same as fixed SWR. Also contemplating Kitces' ratcheting SWR, than only ever goes up.
I am planning a variable withdrawal strategy. But in my plan I will withdraw a higher amount of money when I start retire and cut back when the years progress. I observed that people tend to stay more at home and spend less when they got older and more sick. Should I ran out of money when I am 87+ and mentally impaired I don't care anymore 😃
Very true!
Same I plan on retiring as early as I can. I just turned 34 and hoping for 50 at the latest. I'm lucky I don't need to worry about medical bills/insurance in the UK so do not need anywhere near as much as US citizens and my mortgage will be gone by then also. Also as you say from about age 75 I think it will be pretty much just basic living costs. My state pension will kick in at 67 so I will have 17 years at slightly higher withdrawals then at 67 it will reduce massively. Still a long way off so not sure on the exact dynamics just yet haha.
Should I need too I'm sure I can get a one or two day a week job to help out, more likely earn a bit online in some way.
@@usefulrandom1855 Thanks for sharing! best wishes to you on achieving - and exceeding all your goals
I really loved this analysis with detailed examples.
I am curious if you both could share your feelings, as I think your feelings around the “math stuff” is a huge part of why this is such an admired FI channel, of how changes in the SWR in a volatile year affects your plans. Maybe it’s doesn’t at say 3 months or even 6 months. But how do you normalize 18-24 months of whipsaws? Especially given your last few years before or first few years after leaving traditional work.
Really great video. Thanks.
So glad to learn you found this useful! Thanks so much for calling ours an admired channel as well - that's very kind. For sure, the math of methods like these scares some - maybe many - people off. Our aim is to help clarify that approaches like these are readily understandable and in actuality, not that complex. There are people in the community much more focused on the math and who are better equipped to speak to it of course. But we're hopeful that our angle works well for our viewers.
The very longer term (10-year) lookback of CAPE is one of the key aspects of this method, as opposed to something that moves in lockstep like VPW. That smoothing effect can really help out. Yes, your safe withdrawal amount will drop when the market does but not as immediately nor to the same depths. For people who value consistency of withdrawals over all others, a fixed SWR as in Part 1 may be a much better fit.
Thank you for the video. Your explanation is very helpful. Maybe I missed it but how does the cash flow assist impact the withdraw rate? Since we are only looking on the income side and not expense, the other CF should have no impact on the withdraw rate. I entered my state pension & SS payments and I am getting a SWR of 7.5%. However, when I removed them, it drops to 5.05%....
Good time of day. It's strange, isn't the cape withdrawal rate supposed to change when % Stocks/Bonds is changed on the Parameters & Main Results tab. For example, by changing % Stocks/Bonds from 80/20 to 0/100, the rate remains unchanged. “thanks.
Do you ever change the a (intercept) and b (slope)? I've read some of the blogs but I cannot find an explanation what to do with these.
Great content. Thank you for putting this together. I'm playing around with the tool. Hopefully, this question makes sense. One thing that I notice in the CAPE base rule tab (cell B10) is 3.88% but the value of my Target Withdrawal (cell B16) is far greater than 3.88% and much larger number. Obviously I love the larger number :). So what the tool is saying is that if I stay within the target withdrawal rate in B16 I won't run out of money. I realize the tool is only for education. Is the value in B16 a pre-tax number?
I'm no expert with this tool, as I'm still coming up to speed with it myself. But I may be able to shed some light on your questions. I think cell B10 is for SWR, and B16 is SCR, based on your inputs. You can consume more do to your supplemental retirement income, but you do not withdraw more, as you are limited to preserving capital (for heirs?). I think these are all pre-tax numbers because only you know what accounts these will be drawn from. Any one out there, please correct me if I've mis-stated any of this, or am not clear!
Im not sure if I am using the toolkit correctly. I was adjusting the starting portfolio and it seems that as I increase the portfolio size the SWR on the first tab decreases and at some point goes negative. What am I doing wrong?
During the drawdown phase, do you adjust the worksheet (e.g. annually) so that year 1 is always the current year in order to use variable withdraw strategy properly? It may be a broader question of your experience of annual review during the post FI phase. Thanks.
Yup
Thanks, this 3-video series has been outstanding and I hope you continue it if able. One question: I'm not quite understanding the methodology regarding the fill-color of the cells. Specifically, a few are colored orange, while others are white. Is the intent to only change what's in orange? I'm guessing not because you also change some numbers in white cells further into the video (such as portfolio value if it drops below $3M vs. if it rises over $3M). Can you help explain the color rationale? Thanks Jason
Thanks, Casey! Glad you liked it. The orange cells may be changed - especially the CAPE, which definitely needs to be updated over time. The others may be left as the defaults if you like - more details on those in the blog posts linked in the show notes. The cells in white link back to fields you enter in the first two sheets in the tool. I didn't show that explicitly here as it was covered well in Part 1 of the series: ua-cam.com/video/CClhsaBbTm0/v-deo.html
Around 11:28 Jason changes the white cell directly, likely just for a quick example. One could change the value in the Cash Flow Assist tab, cell E5, instead.
Awesome video. Thank you! I am having hard time understanding how you can safely withdraw $10,991 (4.40%) as "Cape-based Rule" tab shows. When I check the failure probability of 4.40% WR in "Parameters & Main Results" tab from your first video, it has a failure probability of above 50% when Cape > 20. How should I think about the safe withdrawal result in Cape-based Rule tab vs. safe WR in the very first tab? Thanks again!
The Parameters screens uses a fixed rate based on worst case scenario (same amount withdrawn every year after being adjusted for inflation). The CAPE screen uses a variable rate (less money withdrawn in bad market conditions).
I’m confused about what asset allocation the CAPE based rule sheet assumes? It doesn’t look like any of the formulas are connected to the asset allocation that is chosen on the parameters sheet? If I change my asset allocation it doesnt change the target withdrawal rate on the CAPE rule sheet. Similarly, I dont understand what choosing CAPE1 vs 2 on the parameters tab affects since on the CAPE based rule tab, it shows you the current CAPE1 and CAPE2 and then it seems that you just manually enter the desired CAPE in cell b9 of that sheet. Thanks for any clarification you can provide! I did read ERN's posts as well but am still confused
Hi Richard, If you change your asset allocation on the Parameters and Main Results tab, you'll see the historical performance table on the CAPE tab change (see the formulas in col E to see why) - as I mentioned. You are correct that your current SWR on the CAPE tab has nothing to do with your asset allocation. It does however change all the fixed rate SWR calculations on the Parameters and Main Results tab.
Yes, I didn't cover this but you're right that the model selection on the Parameters and Main Results tab doesn't impact the main data section on the CAPE tab - you just manually enter your CAPE value. However, the CAPE model selected does impact the SCR Time Series tab - check that out. This ensures that the Parameters and Main Results tab works properly. So it is still a very good idea to select it as shown in case you want to compare these approaches.
Jason - can you please share your thoughts on the followings.
1. Cape ratio is based on historical data so how future or forecast is factored in SWR?
2 let us assume SWR for May came $10.000 per month. But due to some emergency one need to spend $15.000. What should be done next? You spend less in coming months than what SWR suggest?
3. Cap ratio is based on S&P 500 so does it ignore mid cap and small cap which has a huge impact on economy. Also what about international?
4 Since cap ratio is based on S&P 500 it will be very volatile month to month so my question is, does it make sense to calculate SWR quarterly instead monthly?
Thanks and I do like detail approach. Looking forward to your thoughts.
Paresh
Hi Paresh, let me try to answer your questions without making (many) errors!
1) As you referenced in Q4, you continually evaluate your SWR over time. there's no need to project future CAPE values. you do project asset return rates going forward but as we know it's those earliest years that have the biggest impact on SWR.
2) You spend 15K and when you adjust your model for the next period (month, in how I use it) your total portfolio will be a little lower than it would normally (i.e. by $5k) and therefore you'll have a slightly lower SW than you would have otherwise for a given CAPE. but i expect that would be a very small difference for a single event like this. now, if it keeps happening i.e. your budget is fundamental off by 30%, that will surely have impact.
3) Big ERN's analysis is definitely US-based, as is CAPE. I'm personally unfamiliar with any international equivalents - though Wikipedia suggests there are at least 15 others out there, but they aren't integrated into the tool and to my knowledge Karsten hasn't tested them. But to your first question - I'm no economist nor finance wizard. But for sure there's bias irrespective of what market reference chosen. There are ample arguments out there on the relative merit or downside of using CAPE for a variety of purposes. I'm certainly not skilled enough to defend them.
4) Don't forget the cushioning aspect from CAPE being a 10 yr lookback. That smoothing is an essential part of its merit vs something like VPW. As Karsten commented on the video, "That rule is indeed a special case of my CAPE-based rule if you set a=4% (or whatever number you want to use) and b=0. This will create a very volatile consumption pattern, essentially as volatile as your portfolio. That's why the CAPE-based rule is much preferred". But I haven't evaluated the historical impact of less frequent WR updates myself, and don't recall if Karsten did in his posts. I'd have a look at the relevant articles if you haven't already.
-Jason
Thanks Jason. Much appreciated. Very thoughtfully laid out video. By far useful than many out there for withdrawal rates so congratulations.
Newbie question, should we adjust our withdrawal amount for inflation? Or is this somehow baked in to the calculation? Thanks for the video!
That's correct. Much like the 4% Rule, annual withdrawals should be inflation adjusted. Karsten comments on this in the very first post in the SWR series earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/
@@TwoSidesOfFI Great thanks, I've read his response but unfortunately I can't quite get my head round how inflation is applied...somebody asks the question with an example, but to me it assumes a fixed withdrawal rate. How should I go about adding inflation to a variable monthly withdrawal rate? At the risk of sounding silly, would I do something like: (((current month CPI - previous month CPI)/previous month CPI))*100...then apply this percentage to the months withdrawal amount?
Or perhaps we want to use a 'cumulative inflation factor' like the Vanguard Dynamic Spending Rule uses?
P.S I also found this comment from ERN: "The CAPE-based SWR is not explicitly adjusted for inflation, but if you do this right then the portfolio will keep up with inflation and so will your withdrawal ammounts. But there have been instances where the withdrawal amounts fell for extended periods. Which is what all “flexibility rules” do (see parts 23-25). It’s then a matter of figureing out how much erosion of your (real) withdrawals can you stomach."
First this solves my need to a cape based approach which i have been searching for. It is quite a detailed workbook. However, the spreadsheet is a bit misleading in that additions to income such as ssec, pension, etc. seem to be deducted from the 4% safe withdrawal rate amount. Most people are not using ssec and pension in that way. The 4 percent ( insert your safe rate) is the safe rate to draw from savings, then most i think add the fixed sources of income. Those with a million dollars are rarely reducing the draw form the deferred accounts when ssec starts. They may lesson the amount drawn if the rmd is not in play, but seldom is the 40,000 enough to live on. Am i missing something? Ran it both with and without the fixed income sources. WIthout seems to be more in line with my other tests.
Glad this fits a need you've been seeking! We wouldn't agree that it's misleading, given the energy he takes in the blog and the disclaimer in Row 5 of the first sheet to talk about the difference between SWR and safe *consumption* rate, which was called out in Part 1 of our video. You're right that it's important to consider what that means.
@@TwoSidesOfFI Noted, and yes I did see that disclaimer. It just doesn't seem to be useful to have the values deduct in such a way that they appear to make you withdraw or "consume" in a reduced manner or the way it changes the safe rate of draw. Perhaps, I am not comprehending the purpose of the change in terms/values. Thanks for the reply.
How you factor tax into SWR? Is withdrawal rate included any tax to be paid?
Yes. As Karsten has mentioned throughout the series, taxes are on you and are part of withdrawals. Taxation is such an individual question that it's on each of us to understand what that looks like and it's not handled explicitly in these tools.
Makes sense. Thank you.
23,51
Gotta say this series is awful for us podcast listeners, it's impossible to follow audio only.
Totally understood. But there’s no good way to walk through this kind of tool via audio only, hence the comments right at the top acknowledging that. And we’ve gotten so many requests for this series that we wanted to do them. Thanks for checking out the video for this one!