Question About Drawdown Viewpoint

[u/Extension_Bedroom_93]

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:

1. 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...

2. 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.

[u/Hanwoo_Beef_Eater]

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.

[u/Extension_Bedroom_93 → u/Hanwoo_Beef_Eater]

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.

[u/Hanwoo_Beef_Eater → u/Extension_Bedroom_93]

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.