It’s time for another Safe Withdrawal Rate case study today! Believe it or not, but this is already the ninth installment of the series! Check out the other case studies here. Today’s volunteer is Mrs. Wanderlust (not her real name), a frequent reader of the ERN blog. She and her husband plan to retire in 2018 (more or less voluntarily) and asked me to run their numbers. One challenge in pinning down a safe withdrawal rate: large additional cash flows because they plan to purchase of an RV and then sell it a few years later. They will also have different budgets during different phases in retirement. And not to forget, a four-legged family member that’s factored into their planning. So without further ado, let’s start calculating…
Mrs. Wanderlust’s Situation
Ages: 43 (me), 42 (husband).
I’m getting laid off early next year (my choosing – this is my ER event and part of our financial plan – it’s a windfall of a severance). My husband will follow next September. We think we’re going to follow the glidepath investment strategy, but starting at 70% equities. My question is mainly around our SWR. Our unique situation is that we’d like to buy an RV (while keeping our home) and travel 6 months/year for 4 – 5 years. I have a budget worked out for this, but am nervous to have the added expense during the highest risk of sequence returns period. Our budget would drop after we’re done RV’ing (and the remaining equity in the RV would be put back into the market at that time), but would increase slightly after our dog dies (yes, our dog dying is written into our plan – stop laughing!). After he passes, we plan to slow travel for 6 months/year.
OK, I’m impressed! You plan for everything, even the life expectancy of your dog! I thought I had seen everything but this is very impressive! Way to go! Let’s look at the portfolio:
401k: $1,095,691
Roth IRA: $31,890
Taxable investments: $515,851 (80% is cost basis, 20% is capital gains)
Checking/saving: $22k
Your budget in retirement?
2019 (or 2020?) – 2023 (RV years): $65k
2024 – 2028 (post RV, dog alive): $60k
2029 – 2034 (slower travel, post dog years): $65k
2035+: $75k (401k becomes fully accessible in 2035)
Note – …we can reduce our budget by only 10% during the first 10 years- it’s pretty scaled back to start with. One of our questions – how strictly do the numbers say we need to be to the budget? Can we scale up by a few thousand? We do not have children so our portfolio goal is not preservation but spend-down.
Other information: Additional Cash Flows?
When I leave work, it will be via a lay-off. My company has had regular lay-offs for over 15 years and I’m positioned well enough (and with enough experience) that I can coordinate my exit with a lay-off. Yay me! My severance package will be around $107k net. Timing is sometime in the first half of 2018. Let’s call it a best/worst case scenario of having a last day of working on 2/28/18.
We also have a cabin/lake home we will put on the market next spring. After realtor’s fees and taxes, I’m estimating we’ll net $100k (note, this is quite on the conservative side).
We are budgeting $100k for buying the RV and $70k for selling it; the exact purchase timing is something we’re interested in. Do the numbers say we can do this in late 2018, or should we wait a few years, say until 2020? Stupid sequence of returns risk. 😀
Social Security:
- Mrs Wanderlust: Age 62 – $1,600 Age 67 – $2,280 Age 70 – $2,827
- Mr WL: Age 62 – $1,362 Age 67 $1,934 Age 70 – $2,398
A pension: It’s a lump sum payout pension, currently worth $2,577 with an established annual COLA change of 4%. Stop laughing at the amount. 😉
Definitely, the severance package and the sale of the cabin will help with cash flow crunch! If possible it’s always best to structure your departure from work as a layoff because of the additional benefits, both from the workplace (severance package, benefits, etc.) and the government (i.e., unemployment benefits).
For now, let’s assume that you buy the RV in late 2018 and start with your RV trip in 2019. Your RV vs. non-RV budget is only $5k apart ($65k vs $60k), so why delay?
I reconfirmed with Mrs. W. that the pension is not $2577 per year, but one single payout. A 4% safe return is probably nothing to sneeze at (better than a CD!) but in the big scheme, it’s just a rounding error. You should probably keep that as a reserve for repairs on the RV. I will not factor that into the calculations here.
Social Security Timing
As I have said in these case studies before, it’s too early to commit to anything. But as a general rule of thumb, it’s best for the spouse with the higher benefits to wait until age 70. So, just because I have to make some assumption for the calculations, let’s assume that Mr. Wanderlust claims benefits at age 62 (when Mrs. Wanderlust is 63) and Mrs. Wanderlust who will likely have the longer life expectancy, claims benefits at age 70.
The Safe Withdrawal Rate Simulations
First, let’s calculate portfolio values as of 1/1/2019. You indicated that you still contribute a combined $14,950 into your 401k plans in 2018 and $10k in taxable savings. $107k from the severance package plus $100k flow into the Savings account. I also assume that in the latter half of the year, you use $100k from the savings account for the RV purchase. I also assume that you’ll need $30,000 in living expenses in the 2nd half of 2019 (half of your $60k non-RV retirement budget).
The $1,817,879 figure (projected NW in today’s dollars) is what we’ll use as our baseline.
—> Link to the Google Sheet <—
(Note on the Google Sheet: You can’t edit this sheet. You first have to download your own copy via File->Make a copy)
I also calculated all the supplemental cash flows (see chart below) that I like to take into account during the withdrawal phase. Most prominent is the one month where you sell your RV and you get back around $70k nominal (less in today’s dollars), over 3% of the portfolio value in today’s dollars. Also, let’s assume that the $65k is the baseline consumption level. We’ll factor in the lower-expense post-RV-years as a positive $5,000/year cash flow, the post-2035 years with $10,000 higher expenses show up as a slightly negative cash flow need (see the dip between months 193 and 240). Social Security for Mr. W. (after 240 months) and Mrs. W. (after 325 months) create two more small jumps later in retirement. The final long-term supplemental flow is actually quite substantial, around 1.8% of the initial Net Worth, adjusted for inflation. And that’s already after a 15% haircut to account for potential benefit reductions in the future!
Other assumptions in the Google Sheet:
- Asset allocation (static for now) is 70% stocks, 25% bonds, 5% cash/money market.
- 55-year horizon.
- Capital depletion, i.e., 0% final value.
Here are the results:
How much can you withdraw? Using a 3.9% SWR is pretty close to the fail-safe. Conditional on an elevated CAPE Ratio (20-30), a 3.9% WR will have a 95% success rate. 3.9% should sustain close to $71,000 annually. So, after taxes, that’s pretty close to your $65k target. It sounds like you budgeted just about right! Did you already perform the calculation at home and just had me check again? 🙂
(For full disclosure, there was one even lower SWR in 1901. So the overall fail-safe SWR is only 3.76%.)
How about a glidepath?
We like the idea of the glidepaths, though 60% equities seems too low for our start point. We think we are interested in starting at 70% and scaling up to 90%…but what do the #s say?
Great question! I wrote about that topic in Part 19 and Part 20 of the Safe Withdrawal Series. A glidepath would mean you increase your equity weight over time. This would expose you to less equity risk early on when you’re most subject to Sequence of Return Risk while scaling up the long-term equity share to make the portfolio last through the decades.
Currently, the Google Sheet is not set up to calculate the SWR for glidepaths for every single starting point in the backtest. But in the tab “Case Study” we can spot-check some of the unfortunate historic retirement cohorts, such as the November 1965 cohort that had the lowest SWR over the last 100 years (even lower than the Great Depression!!!). Here I compare the baseline static 70/25/5 allocation to one that starts with 65/35/0 and scales up the equity weight by 0.2 percentage points per month all the way to 100%. The initial SWR was 3.94% (picked to exhaust the portfolio under the glidepath assumption). The static allocation allowed for only a 3.81% SWR and would have run out of money after about 40 years when using the 3.94%, see below! I call this the SWR butterfly effect: A mere 0.13 %-point difference will shorten the life of the portfolio by 15 years!
The net-net: Don’t expect miracles from a glidepath. Even with a pretty aggressive path that glides all the way to a 100% equity share in the long-run you’ll increase the SWR by only 0.13 %-points (from 3.81% to 3.94%) for the 1966 cohort. For a $1.8m portfolio that’s $2,340 of additional sustainable withdrawals per year. Helpful but not that significant!
Cash Flow Simulations
I like to simulate how the account balances evolve over time and what’s the best withdrawal order and whether there are any issues with running out of the taxable account before age 59.5 or over-accumulation of 401k accounts and a nasty tax surprise with RMDs.
Here are the assumptions:
- We don’t want to reveal where exactly Mrs. W. lives, so I assume a 6% flat tax rate on the state level without revealing the exact state tax brackets. The calculations will be very close to reality! I also assume that the Trump/GOP tax plan will pass in its current form with a $24k standard deduction, $19,050 in the 10% tax bracket and 12% up to $77,400 in 2018, adjusted by 2% assumed inflation every year.
- Let’s use 100% equities in the taxable account and Roth. 60/40 in the 401k. Notice that the initial allocation is pretty close to 70/25/5 and will slowly shift more into equities due to the Roth Conversions! There’s your glidepath!
- I would keep a pretty low cash balance considering you are running low on taxable account balances. I assume you withdraw $20k per year for several years. After you sell the RV (proceeds go into MM account) and you get down to $30k (in today’s dollars) you let the cash balance grow with inflation (2%) and just withdraw the interest income.
- For the first 11 years, do the Roth Conversion ladder. You fill up the standard deduction and 10% bracket with conversions. In the table below, this will show up as a withdrawal from the 401k and a “negative” withdrawal, i.e., a contribution to the Roth.
- Initially, you draw down the taxable account to balance the budget. In 2030, after 11 years, that account should be pretty much depleted. You then leave that account alone and withdraw only the dividends.
- For the years 2030-2034, you’ll keep doing the Roth conversions as before but you also withdraw previously contributed principal into the Roth. That will be quite a big number. For example, in 2030 you convert $53,552 and withdraw a total of $33,348+$53,552=$86,900 from the Roth (see the two cells marked with the red edge, second panel). The net withdrawal is only $33,348, but you actually fund almost your entire budget from the Roth. This goes on for 5 years until you reach age 59.5!
- Starting in 2035, you can finally withdraw from the 401k penalty-free. (I know, the SEPP/72t option exists, but let’s use that only as a last resort!!!) Let’s assume you withdraw the 2% dividend income from the Roth and the rest from the 401k to balance the budget.
The plan seems to work. Even with relatively modest nominal return assumptions, you draw down the portfolio only by a bit. You still have $1.5m (in today’s dollars!) at age 70 when Social Security kicks in and you’re home-free at that time. Also, notice that you’ve engineered a pretty nice transition of assets out of the 401k and into the Roth, so there is no issue with RMD (Required Minimum Distributions) and a big tax bill later in retirement. Of course, everything could be different if we have a repeat of the 1965 cohort, but let’s cross our fingers that this will not happen.
Conclusion
This is probably one of the closest calls in the history of Big ERN case studies. The SWR study reveals that the $65k annual budget comes pretty close to the maximum amount recommended for your situation. The withdrawal strategy would utilize the taxable account first while doing the Roth Conversions, then withdrawals of Roth IRA principal, then the 401k and Roth once you reach age 5905. It’s a bit tight and could be thrown off balance by a major bear market early during your retirement. But you still have several levers to deal with the unexpected. A spending reduction (and it might be feasible to reduce spending by more than 10%, check out Mr. Money Mustache for tips) and the SEPP/72(t) penalty-free withdrawals from your 401k.
So, it looks like you’re good to go! Best of luck and enjoy well-deserved early retirement!
Thank you for these excellent case studies. I wanted to say that they are so close to the Obamacare subsidy line at 65K per year. You have not discussed health care and of course it will be changing. But right now, for 2018 if their income is below $64,960 they qualify for a subsidy. I have found that it varies a lot based on zip code and age, but they should try the AMA website to look at the estimate.
I’m betting they are getting an Airstream. They seem expensive, but they have great resale. They have a very exciting life ahead!
Hi Susan! I’ve definitely been using the calculators and we aim to stay beneath the ACA “cliff”. We’ve included a good size health care budget in our plan, but we know that this line item could change dramatically. It’s definitely something we’ll be keeping a close eye on!
Also…we’re going to get a motorhome and not a trailer. We think it’s better for boondocking (free camping on BLM land) and for changing locations once/week. Those Airstreams look really nice though!!
Thanks for the comment!
Even better: the 65k consumption disguises the fact that Adjusted Gross Income is much lower. Some of the money comes from the cost basis. So Mrs. W and her husband should qualify for subsidies!
Holy cats!! This is some super dense material, or at least it feels that way since this time it’s my scenario! I’ve already read this 3 times and will read it at least 3 more. It’s interesting that the severance and cabin sale go into cash – we were planning to invest it (or at least half of it), but I need to put some more thought into this. There are certainly some pro’s to keeping it in cash, where the most we’d “lose” would be inflation…especially during the first few years of returns risk.
And it’s always a good idea to have someone well respected check your numbers! *wink* This is a plan with many moving parts (yes, we even include our pup in our plans), and it’s wonderful to see it validated here. We’ll consider reducing spending during our post-dog, non-RV travel years in order to keep the cash flow positive. Travel hacking or geo-hacking, here we come. 😉
Thank you for all these case studies! Hopefully this is useful to others who feel called to a life of adventure.
Thanks, Mrs. W! Glad you liked the case study!
If you feel comfortable investing the $207k in the market, go ahead. I thought that considering the outflow for the RV after only 1 year it would have been more prudent to keep that money in cash. Best of luck!
OMG – I also havet our pet’s demise in our spending timeline. So glad I am not alone on this crazy tab on my spreadsheet.
OMG – *I* am glad I’m not alone to have this in my plan!! LOL 🙂 Thanks for the reassurance!
Oh, wow, that’s good to know! Very impressive planning!
But I wish you and your pet a long, long life! 🙂
All I have to say, is that my dog will be living forever. 😉
Great analysis! This couple seems extremely well prepared for what is sure to be a lifetime of fun.
That’s what I said about our first dog!! …but…then he didn’t. It crushed me. So hard to lose them!
And yay, we certainly hope it will be a lifetime of fun! 🙂
Thanks, Kristine! Yes, for a couple in their early 40s, having a seven-figure net worth is very impressive! Cheers!
That is a very detailed and inspiring analysis as always. The case studies are inspiring me to take a very, very hard look at exiting the work world. Mrs. Wanderlust, I hope you have a festive time and enjoy a long, long ride! One word of advice, motorhomes depreciate like chicken salad on a hot picnic table. Google can lead you to valuation guides and as always with such things, be leery of the values as the guides are similar to used car price books like the NADA as they favor dealers greatly. Also, sadly, a large number of motorhomes come available each year due to health and death of their owners. Hope you a “happy camper” for a long time. 🙂
Probably it’s not a good idea to buy one brand new, then? That means they should buy one lightly used RV! Great suggestion!
The SWR targets at different failures rates is great. Thank you for that.
Glad you liked it! Quick to program in Excel/GoogleSheets! 🙂
Thanks!
I agree with Big ERN’s advise to put severance and proceeds from the sale of cabin into cash because Mrs. WL plans to buy an RV very early. I wouldn’t put money that I need within 5 years into the stock market. I’d prefer a 5-year CD instead and break even with the inflation/taxes.
Big ERN, are you predicting another great year next year? I sure hope so. However, if say their 1/1/19 baseline balance becomes not $1.8M, but $1.3M instead, is it still pretty safe? Would their NW be above $1M by age of 100? I assume they’ll live until 100, but definitely not until 5905 like you mention :-).
Thanks, Mrs. Greece!
I predict that PE ratios stay the same or deflate a little bit, so the S&P grows roughly in line with the earnings growth. Which could still be pretty solid. I don’t see a 30% correction next year.
But if the portfolio were to dwindle to $1.3m it might be time to rethink that $65k budget…
Thanks, Mrs Greece! Keeping some cash for the RV in a cash equivalent account is now something we’re considering, thanks to ERN’s analysis. I guess the question now is…beyond that, how much cash do we need to keep for annual expenses in a similar account? More research ahead! 🙂
I think I am speaking to the choir for Mrs. Wanderlust as the buy at 100k sell at 70k after 5 years implies depreciation of a used RV. .
http://www.camperreport.com/rv-depreciation-everything-possibly-want-know/
http://www.axleaddict.com/rvs/RV-Financials-Part2-Understanding-RV-Depreciation
Also, it is years/age, and not so much mileage that is the driving force in depreciation so a 5 year old low mileage RV looks to be near the sweet spot on the curve when considering age/value/and depreciation. That said, I think the line that they depreciate like chicken salad on a hot picnic table was worth using in any event though I should have said “RVs depreciate like chicken salad in the sun on a hot picnic table.” Happy motoring in any event and the number of sweet rides on CL in Florida around Tampa is pretty amazing. I looked at Florida because of the number of advanced age folks and think that geographic arbitrage may well be worth looking into for such a large purchase. Happy motoring in any event and such a dense and informative case study! 🙂
Hi Blind Squirrel! Found any good nuts lately? LOL yes, we’ll definitely buy used. We’re hoping to find something about 5 years old that’s diesel, as they seem to keep their value a bit better (I’ve read that first link but the second one is new to me – thanks!!). And we’ll be *totally* open to looking in Florida as well as NM and AZ! We’ll take our time to find the “perfect” RV for us. Lastly, the chicken salad really made Mr Wanderlust laugh. 😀
These deep dives are just amazing. You should do these privately as a side hustle. I am sure that you could make a pretty penny performing these for people. I know I would be your 1st customer!
Once I’m retired I might consider that. 🙂
Hi there! Awesome analysis as usual. Can you point us to the cash flow planning tool you used to generate the cash flow plans?
I’m also in Mickey’s (the commenter above) boat, effectively waiting for your early retirement to ping you for fee-based planning assistance. In the interim, if you have someone you’d recommend…. :^).
I haven’t made the cash flow tool public yet. It’s still a work in progress with lots of hard-coded stuff and overrides in Excel. Not ready for the public yet. 🙂
Haha, I will go public in March. Time flies, can’t believe the big day is just around the corner!
In all serious, if you move forward with fee only analysis, let us know!
Haha, let’s see how things go later in the spring! Thanks for the words of confidence! 🙂
I’m new to your blog. Love it. Just glancing over the google docs spreadsheet. For social security purposes it looks like you assume that Mr. and Mrs. Wanderlust die in the exact same month and that they will have both social security income streams for their entire lives. Isn’t that way too optimistic? How do you plan for survivor income stream when the first spouse dies?
I assume that they both live to an age well above their life expectancy (late 90s). If one of them were to die before it would actually be a financial plus. Half the number of people can live easily live on the same annual withdrawals plus a slightly reduced SocSec income.
Here I just assumed that ERN thinks our love is so grand that we can’t live without each other… 😉
🙂
I want an update! How are things for Mr & Mrs Wanderlust?
Hey, thanks for checking in, Erin!
I was successfully laid off at the end of Q1 this year (yay me!) so I’ve been retired since then. Yahoo! I received an AMAZING sendoff from my colleagues (who were *shocked*), but the best part is that I talked someone else into getting laid off in the next round! She had received a very large inheritance with her husband, had grown to hate her job, and was missing out on her two daughters’ childhoods (woohoo, spread the FIRE!). After I said to her in no uncertain terms, “you are wasting your life working,” she made the leap and had an amazing summer with her girls. For me, it’s taken longer than I thought it would to come down from 20 years of accumulated stress and a toxic environment, but I think I’m getting there.
Our cabin took longer to sell than we expected, but we finally have a purchase agreement on it and it closes in less than a month. We’ll be netting approximately $130k from it (more than the # I gave Big ERN) after all is said and done.
Mr Wanderlust is still gainfully employed (we knew he wouldn’t leave before the cabin sold). We have a big trip coming up to celebrate retirement (joke’s on us since he’s not retired yet – ha!) and he ended up taking vacation for it (instead of quitting)…so he’s going to come back and keep working. For how long? We’re not sure. Could be until March, but maybe he’ll hold on until next September when he becomes fully vested in the match portion of his 401k (worth only about $4k right now – it’s just part of the match). We’re playing it by ear – the nice thing is that if he gets too fed up, he’ll say sayonara and we’ll be on to other things! The max he has left is 11 months, either way.
On the investment front, we have created a CD ladder of one year of cash (we’re still creating rules for “when” we’d access this cash – it’s intended for a worst case market scenario and if not used in the first 5 years of retirement, we’ll start using it for expenses). We’ve already moved to our planned 70% equities and 26% bonds. What we haven’t figure out yet is when to begin our glidepath (should we already be doing it since I retired, or wait until Mr W has joined me? We’re leaning toward the latter).
In summary – more or less going as planned, I guess. It has been an exercise in patience, that’s for sure! Thank you for wanting an update!!
PS – our dog is still kicking, so at least HE is following the plan. 😉
Nice! Congrats on getting that generous package and thanks for the update!
Regarding the glidepath, you’d want to wait until you make significant withdrawals from the portfolio. As long Mr. W still has an income and that more or less pays the bills, I’d hold off with GP for now. 🙂
Hope this helps!