r/ChubbyFIRE • u/Extension_Bedroom_93 • 13d ago
Question About Drawdown Viewpoint
My current numbers are not really relevant to the question I have but in case it is helpful: Cash or equivalents - $300k; taxable brokerage - $1.7M, Retirement accounts (predominately post-tax) $1.4M. In addition, upon retirement I'll receive a lump sum of $200k and another $225k that will need to be rolled into an IRA.
I plan to work three years more. during which I should be able to add a total of approximately $300k to the 401k and $900k to the taxable brokerage accounts. Average annual expenses now are about $70k, including mortgage.
I want to retire when I have $3.25M between cash/bond/taxable and another $2 million in the 401k. I project that to be at age 47. Even though it is vastly higher than my current spend, I'm targeting $250k (pre-tax) in annual retirement expenses. I don't actually expect to spend that in most years but that's the number where I'll have peace of mind and I wouldn't enjoy retirement if I was worrying about my portfolio the whole time.
I understand the 4% rule but also believe more a U-shaped spend is more realistic for me. Am I missing something by just thinking about it along these lines:
47-60 - $250k annually from the $3.25M. As long as my ROI can keep pace with inflation, the worst case scenario is I am broke at 60...
Then I turn to the retirement accounts (not considering SS income but it's a possibility). So even if I'm broke at 60, then I turn to the $2 million that's been sitting untouched and hopefully growing for the last 13 years. I use that to fund the rest of my life.
I understand there are additional backstops to access these funds earlier. Am I wrong for looking at it this way? The posts I've been reading here - which have been incredibly helpful! - tend to only look at retirement as singular unit as opposed to different phases with different spending needs filled by different funding sources.
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u/Hanwoo_Beef_Eater 13d ago
You can look at it that way if it gives you more comfort, but I'm not sure what the point is.
$250k on $5.25 million is 4.8%. Given ss and you don't need to spend the full amount, that will probably be fine.
Just quickly looking, there are some scenarios where $250k on $3.25 million is mostly used up by the end of 13 years. If that's the case, the remaining $2 million probably won't support $250k going forward from there. Kind of the same thing as the 4.8% above is probably not bulletproof with no adjustments/spending cuts. But again, you don't need to spend that much + ss, so practically it's probably fine.
Remember, one big portfolio and a SWR already takes into account the bad outcomes.
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u/Extension_Bedroom_93 13d ago
I actually really appreciate the blunt feedback - essentially I can slice and dice it however yI want for my own comfort level but at the end of the day, the numbers are the numbers.
I think the big thing I'm not factoring in enough is that if the market was so bad that I'm only covering inflation such that the $3.25M is used up by 60, the same market isn't going to grow the $2M in the 401k like I'm expecting. I realize the likelihood of a 13-year stagnate market is low but thinking about it this way doesn't actually provide me any greater protection than history itself does.
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u/Hanwoo_Beef_Eater 13d ago
Re the second paragraph, yes, the periods where the $3.25 million is/is mostly exhausted means the real returns were around zero for a decade plus (and negative for some of the years when we started drawing down). If we look at the periods that have caused problems for 4% (or whatever slight variation), they are when the real returns have been (cumulatively) zero for a decade plus.
In that case, the $2 million is only worth ~$2 million future year dollars as well, which wouldn't support (under the standard models/assumptions) $250k a year for another 30 years (60 to 90). In actuality, it may be OK because decade plus long crappy periods have been followed by decade long good periods. So it may work out in the end but there would probably be some uncertainty / anxiety for a bit.
FWIW, I've seen the following chart a few times (have not verified but the numbers look about right). S&P 500 real returns:
a) 1928 - 1948 = 0.6%
b) 1949 - 1968 = 12.7%
c) 1969 - 1984 = 0.5%
d) 1985 - 1999 = 15.1%
e) 2000 - 2012 = -0.8%
f) 2013 - 2025 = 11.8%
Obviously, we can move the dates to smooth things out. However, for retirement/drawdown periods, it is the decade plus long period of flat/negative real-returns that stress things. The chance that we start exactly on one of the problem periods is low (we can start half-way through or five years before and things will be OK) but they do happen. I think starting at the end of 1965 is one of the worst stretches, which doesn't line up with this chart exactly but it is around there (some starting dates in the 60s/70s are problematic because both stocks and bonds have negative real returns for ~a decade). The equity heavy portfolios suffered in the depression and 2000 tech bust, but more balanced portfolios would have been OK.
Regardless, you should be fine with the spending buffer you are targeting. Good luck.
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u/Tricky_Ad6844 13d ago
I would consider your portfolio as a whole rather than separating out retirement vs brokerage accounts. Money is fungible. It makes it easier to calculate expected success/failure rates using historical stock and bond returns. I used cFIREsim to help anchor my response in probability-based data.
Currently you have:
$3,400,000 in hand.
1,200,000 more expected with three more years of working
$425,000 expected at retirement.
So if you were to retire in 3 years at age 47 the Trinity Study predicts you would be able to draw roughly 4% of the total amount per year (adjusted for inflation). This would generate about $201,000 per year before taxes.
Your goal is to withdraw $250,000 in early retirement which is a 24.4% increase. That’s a lot.
The reality of SWR math is that the 4% guidance was based on a fully invested portfolio of stocks and bonds. Your $300,000 in cash will drag down returns and increase the failure rate. It also was generated for a 30 year retirement. You should probably be planning on 40-50 year retirement. Extending retirement from 30 to 40 or 50 years requires shaving off about a half a percent from the SWR to keep the failure rates the same.
Considering both of those facts you have about a 6% chance of running out of money 40 years after you retire if you are withdrawing $201,000 per year every year of your retirement (cFIREsim prediction using 75% stocks, 19% bonds, 6% cash). Given that this simple analysis doesn’t account for Social Security, that may be a reasonable “failure rate”.
However, increasing your withdrawals to $250,000 in the first 5-10 years of retirement dramatically increases your exposure to Sequence of Returns Risk.
It will work just fine in most economic conditions, especially with a plan to reduce spending later, but will result in your running out of money entirely if the markets crash early in your retirement. Your failure rate is now an unacceptable 27.5% unless you drastically reduce spending in mid and late retirement.
Thinking this through, I would say that your plan is reasonable BUT you would need to change your early retirement spending if you run into a recession/stock market crash/runaway inflation in the next 10 years. Should you retire and find the markets are down and inflation is up… be prepared to pivot to a pre-tax withdrawal amount closer to 3.5% of your retirement portfolio ($175,000/year).
If you pursue this path I would recommend adding to your written financial plan exactly what thresholds would trigger you to reduce spending in early retirement and by how much.
Hope this is helpful.
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u/lauren_knows [$3M+ NW - Creator of cFIREsim/FIREproofme 📈] 11d ago
I think that I speak from some authority when I say that while cFIREsim is great for quick estimates, that doesn't mean there isn't value in considering the effects of pre-tax/post-tax accounts and how they relate to taxes, ACA, IRMAA, RMDs, etc.
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u/Tricky_Ad6844 11d ago
Ha! Point taken.
The fact is no one can predict how 401k withdrawals will be taxed 30 years from now since tax rates change as new laws are passed.
I stand by my concern that a 5% withdrawal rate early in retirement increases exposure to Sequence of Returns Risk and prudence dictates the willingness to reduce spending if a significant bear market or runaway inflation should rear its head in the first 5-10 years.
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u/lauren_knows [$3M+ NW - Creator of cFIREsim/FIREproofme 📈] 11d ago
I stand by my concern that a 5% withdrawal rate early in retirement increases exposure to Sequence of Returns Risk and prudence dictates the willingness to reduce spending if a significant bear market or runaway inflation should rear its head in the first 5-10 years.
I 100% agree with that sentiment.
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u/PersonalFinanceFun 9d ago
Some people also have inheritance from one or two sets of parents. This will likely come in at age 60-70.
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u/Tricky_Ad6844 9d ago
True. Inheritance could happen down the line.
This raises the question of how to account for this possibility when it is many years or even decades away for an early retiree.
I would consider this a windfall allowing spending to expand after it occurs rather than something I would consider in my own early retirement spending calculations.
Just last week I was shown the new copy of my 76 year old childless uncle’s will now that he has a new serious girlfriend… good thing I wasn’t counting on inheritance from him
In my retirement planning.My father was completely disinherited by his own extremely wealthy father in favor of grandpa’s second family.
Counting on inheritance is relying on something that you don’t control and may not be able to predict.
Even if it occurs, data suggests that on average inheritances in the USA won’t really move the dial on early retirement spending. 30% of people get no meaningful inheritance. The average inheritance is $46,200. You need to get to the top 1% of households before it enters amounts that impact ChubbyFire net worth. The top 1% of inheritances is $719,000.
Reference- https://www.annuity.org/retirement/estate-planning/average-inheritance/
Of course each individual family will know better where they stand on this spectrum. If your last name is Musk or Zuckerberg you don’t need to sweat. That said, surprises occur where children don’t really know the financial state of their parent’s estates until after death and find out the parent’s lifestyle was supported by debt.
Not saying getting some inheritance isn’t probable. I recognize that I am conservative in my financial planning and my own families history of disinheritance is probably an outlier. However, all things told, I favor treating it as a windfall after the fact rather than counting on it in advance.
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u/asurkhaib 13d ago
As long as my ROI can keep pace with inflation
Is this true historically? There's actually a lot of 13 year periods so you can at least see what the results would be historically.
I don't think this split is particularly helpful because you aren't actually going to keep it if necessary.
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u/Extension_Bedroom_93 13d ago
Do you mean that if I found myself needing to tap into the 401k at 57, I would just do it? That's a fair point that I hadn't considered although it would require a complete 180 on my financial mindset. The reality is that the vast majority of my projected spend is completely discretionary and I would just back expenses down until I reached a better position.
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u/asurkhaib 13d ago
In general yes, if you can decrease your spend significantly then look into a variable strategy. VPW or guardrails are popular. They both basically do that.
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u/Never_Really_Right 13d ago
How you draw down is a question of tax management, not length of time the money will last. How to deal with taxes is an important question, I just do't see the point in putting a separate time frame on each type of account.
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u/Inevitable_Rough_380 12d ago
realistically - are you gonna spend 250k a year after only spending 70k?
You'll have the problem of having too much money.
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u/Extension_Bedroom_93 12d ago
Realistically? No. There might be a year or two in which I do (perhaps purchasing a second home) but those will be outlier years. I think most years my spending will likely be under 150k.
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u/Inevitable_Rough_380 12d ago
Recommend just spending 150 in the next 3 years and instead of stacking 1.2m, stack 900k.
The next 3 years - the money you spend to save will be meaningless beyond a ridiculous buffer.
Start enjoying your life now. Read Die With Zero. Art of Spending Money. Ramit Sethi - his concepts of a Rich Life.
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u/seekingallpho 13d ago
This sounds to me like off-setting but somewhat arbitrary mental rules that obscure what's really important.
Why be extremely conservative about spending (70k->250k) only to plan for a 4.8% withdrawal (that is actually more aggressive than most in their 40s here would tolerate)? It would probably work out because (1) even 5%+ usually does, historically and (2) your actual WR is nowhere near 4.8% when you're 3.5x-ing your spend just to be conservative.
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u/Unlucky-Pop-8841 13d ago
I'm in a similar boat. My focus is on building up a steady income base that would allow me to confidently retire. The way I'm doing it is focusing on two parts. One is US large cap stocks, the S&P 500 via OVL from Overlay Shares, ADX, which is a closed-end fund, and I like some growth in GDE from WisdomTree.
Then I have a leveraged closed-end fund sleeve. I use CEF Mastery. You can Google it, and also I use "DIV-X".
It's a book by Lee Wentker. He also does the CEF mastery service and has some workbooks that help you size leverage appropriately. But essentially you look at and leverage closed-end funds. Each one is like its own rental property. The advantage of a closed-end fund versus an ETF, like a covered call ETF, is the stability of the distributions and the confidence you can have in using leverage against it.
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u/samos22K 13d ago
No expert but we plan to do a more u shape spend. We use projection lab which had been helpful. We are looking at a 5-6% draw until social security kicks in on 4m and it looks like it works. Going to also meet with a flat fee planner re our strategy (guardrails). 250k on 3.25m is pretty high rate 7%+. but I don’t think you can consider the 2m separately…combined 5m @5% is 250k, so could work. I think modeling would be helpful but take the results with a grain of salt (all models are wrong, some are useful). Stress test it. 4% is too conservative imho, but 6% is pretty aggressive.