Using Goal Seek but limiting withdrawal percent

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FRPJunkie
Posts: 33
Joined: Wed Feb 24, 2016 8:17 am

Using Goal Seek but limiting withdrawal percent

Post by FRPJunkie »

Jim,

When one uses the Goal Seek feature that shows portfolio value needed to sustain withdrawals, the resultant withdrawal percentages are higher than what one would accept in real life.

For example, in my situation a $1m retirement portfolio would "work" but the planner shows some years with 12% withdrawal rates, which of course is not real life. Then once SS kicks in the WR goes to zero, but few people will spend down their nest egg to almost nothing which is what FRP is suggesting.

Is there a method to get this same sustaining portfolio value but ALSO limit the withdrawal rate to, say, below 5%, or something that one might actually do?

jimr
Posts: 600
Joined: Thu Feb 28, 2008 6:48 pm

Re: Using Goal Seek but limiting withdrawal percent

Post by jimr »

I'm a little confused about why you're seeing such a high withdrawal rate in some years. Assuming you're targeting a 90ish percent probability of success, the planner wouldn't be likely to draw down the portfolio to zero. This is because it'd be tough to target such a complete spend-down while still keeping the probability of success high.

As a test, I created a new plan with default settings, then I selected "goal seek on portfolio value" in settings, then I clicked run. This results in a retirement portfolio around $1m and a withdrawal rate between 4.5% and 5.9% ($50k annual withdrawal).

What do you think I'd need to change in my sample setup to see what you're seeing?

Thanks,

Jim

FRPJunkie
Posts: 33
Joined: Wed Feb 24, 2016 8:17 am

Re: Using Goal Seek but limiting withdrawal percent

Post by FRPJunkie »

jimr wrote:
Sat Sep 05, 2020 10:55 am
I'm a little confused about why you're seeing such a high withdrawal rate in some years. Assuming you're targeting a 90ish percent probability of success, the planner wouldn't be likely to draw down the portfolio to zero. This is because it'd be tough to target such a complete spend-down while still keeping the probability of success high.

As a test, I created a new plan with default settings, then I selected "goal seek on portfolio value" in settings, then I clicked run. This results in a retirement portfolio around $1m and a withdrawal rate between 4.5% and 5.9% ($50k annual withdrawal).

What do you think I'd need to change in my sample setup to see what you're seeing?

Thanks,

Jim
Hi. The initial portfolio value at retirement to sustain a 100k/yr flexible withdrawal (much of which will be funded by 2 SS payments and a pension in later years) reported by the planner is:

$523,000

In year R+1 (age 59) the planner reports a median withdrawal of $62,803, which is 12% (pension payment is active, so that's 40k of the 100k needed)

In year R+2 the planner reports a median withdrawal of $62,221, which is 12.6%

It goes on like this until age 67, where the WR is 9.3% ($25,647).

After that, since one SS has kicked in, it spikes to 10%, then eventually falls to below zero once two SS payments are present, so the entire $100k is covered and no addl portfolio withdrawals are needed. That said, at age 67 the $523k has been spent down to $260k. No one would plan a retirement like this (or at least I would not).

What I want it to do is adjust the "amount needed at retirement" so that the withdrawal rate stays at or near 4-5% for the initial years, rather that spike up and then plummet.

My success target is 98%

jimr
Posts: 600
Joined: Thu Feb 28, 2008 6:48 pm

Re: Using Goal Seek but limiting withdrawal percent

Post by jimr »

Thanks. So the way your retirement income is staged is going to force your portfolio withdrawals to be very lumpy. This makes more sense now.

I don't quite understand why a few years with a high withdrawal percent is a problem. If it was me, I'd probably be inclined to seriously lower portfolio risk during the high draw-down period, but otherwise, I don't quite see what the big problem is with a few years of high withdrawal rates, followed by a basically fully-paid for retirement in the later years. I must be missing something.

That said, the short answer is really that this just isn't something that goal-seek is set up to optimize around. The easiest path is probably to turn off goal-seek and just use trial and error (starting at maybe $600k) to see what portfolio value results in a withdrawal rate range you're comfortable with.

FRPJunkie
Posts: 33
Joined: Wed Feb 24, 2016 8:17 am

Re: Using Goal Seek but limiting withdrawal percent

Post by FRPJunkie »

jimr wrote:
Sat Sep 05, 2020 6:31 pm
Thanks. So the way your retirement income is staged is going to force your portfolio withdrawals to be very lumpy. This makes more sense now.

I don't quite understand why a few years with a high withdrawal percent is a problem. If it was me, I'd probably be inclined to seriously lower portfolio risk during the high draw-down period, but otherwise, I don't quite see what the big problem is with a few years of high withdrawal rates, followed by a basically fully-paid for retirement in the later years. I must be missing something.

That said, the short answer is really that this just isn't something that goal-seek is set up to optimize around. The easiest path is probably to turn off goal-seek and just use trial and error (starting at maybe $600k) to see what portfolio value results in a withdrawal rate range you're comfortable with.
I think part of the point is that I want to leave more of a legacy rather than spend, say, 50% of my portfolio. I agree, however, that a higher WR is fine in early years. But by higher I mean 7-8%, not 12%. Certainly I will be de-risking since no real risk is needed to meet goals.

Part of what I am seeing is that (assuming the above withdrawal plan that I described) I am already beyond my savings goal (at least as per Goal Seek) and thus the planner tells me I don't need to save any more to meet that "523k" goal. Since markets are fickle I don't believe that saving nothing (or much less than I am saving now) is wise. Plus, there's always uncertainty with future SS and pension income.

jimr
Posts: 600
Joined: Thu Feb 28, 2008 6:48 pm

Re: Using Goal Seek but limiting withdrawal percent

Post by jimr »

FRPJunkie wrote:
Sat Sep 05, 2020 6:45 pm
I think part of the point is that I want to leave more of a legacy rather than spend, say, 50% of my portfolio.
One way to explore this is to create a single year "other expense" in the last year of the plan. Set the amount of the expense to the amount you'd like to leave behind.

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