This thread if for folks to share their general approach to retirement withdrawals. And how they use Pralana within that.
(Questions and clarifications welcome--but please no arguments about best approaches in this thread!)
Users here are very different in how they approach retirement. There are folks focusing on "safety first", or actuarial methods (VPW, TPAW), or 4% / Single withdrawal rates, SWR with guardrails, just to name a few well known methodologies. There are issues of cognitive decline.
But I'm not just asking about the "nut and bolts"... There are larger philosophical and psychological differences of approach as well. Some know their behavioral weaknesses and set things up around that. Some have more than enough so it's more of a game. Some focus on spending and consumptions, other are focused on charity or the next generations. Some have a timid personality, some are risk takers. Some are well versed in finance, others are not.
So how do you approach retirement withdrawals, and how is Pralana used within that? As @golich428 phrased the the question, "Not just nuts and bolts about Pralana but about how we approach it when we turn from building a castle to dismantling it brick by brick"?
@jkandell Great idea, I will start.
Pizza Man's Bank of 2 cents
We (wife + me) are not in danger of running out of money (live in Midwest, no kids, had access to company Roth 401ks), but I want to be efficient with what we have. So these are the keys things I work on:
- Convert from regular IRAs to Roth accounts as much as possible.
- Utilize government programs to help pay for health care (ACA) and energy efficiency (heat pump & insulation). Conflicts with #1.
- Reduce taxes as much as possible (asset allocation, staying within tax brackets, etc).
- Keep a budget.
- Decide how much to put into bonds (US Treasuries).
- Worry about the future relative to politics and US government debt.
- Read Pralana Forum 😀
- Pralana can track most of these, but not all. Must decide what numbers (inflation, rate of return, when to start Social Security, etc.) to enter into Pralana.
Each one of these could be a thread onto themselves. Which one interests you the most??
Interesting points. Here are some quick thoughts for each of your points:
- Convert from regular IRAs to Roth accounts as much as possible.
No big benefit for me.
- Utilize government programs to help pay for health care (ACA) and energy efficiency (heat pump & insulation). Conflicts with #1.
I’m already on Medicare. For me the current energy efficiency programs are not financially beneficial.
- Reduce taxes as much as possible (asset allocation, staying within tax brackets, etc).
Asset Allocation is for Risk/Return, not for taxes. I will maintain the Allocation via IRA and Roth, not Taxable. Asset Location is mostly for taxes; because of large unrealized LTCG I will not improve the Taxable account Locations unless the market drops or other unique situations. Staying within tax brackets - good idea but how?
- Keep a budget.
Good idea. I do not have a budget I just live my life reasonably. Trying to maximize spending (such as 4.7%) means that I need to track this limit. I do not believe that spending more will make me happier.
- Decide how much to put into bonds (US Treasuries).
I believe in Buy-and-Hold, constant Asset Allocation, no timing, No change of Bonds allocation.
- Worry about the future relative to politics and US government debt.
I stopped worrying. I am reducing the risk by selecting an appropriate Asset Allocation that fits my character.
- Read Pralana Forum 😀
😀 😀 😀
- Pralana can track most of these, but not all. Must decide what numbers (inflation, rate of return, when to start Social Security, etc.) to enter into Pralana.
Pralana is a guide. Does not need to be accurate, I just need it to ensure that I am in the right direction and to test certain assumptions.
I follow the Bogleheads® investment philosophy:
- save a lot,
- select an asset allocation containing both stock and bond asset classes,
- buy low cost, widely diversified funds,
- allocate funds tax-efficiently,
- and stick closely to a plan.
jkandell Great idea. I kinda hijacked pizza man’s post at the end with good intention's.
When I think of how you approach retirement other than the nuts and bolts what I am really referring to is what are your values.
When I say values i dont’ mean moral values but what do you value in retirement. You can make a list of what you value and then prioritize it. This can be a valuable tool to settle trade-offs. It really is about trade-offs. But one very big caveat, our retirement values can change with time while our moral values probably will not.
I have learned that I value secure income while we are young (relative I know). My personality conflicted with the math that I very well understood. I had difficulty withdrawing from my portfolio to meet my early spending goal. So my trade off has been: Do I maximize my ending wealth or do I maximize my early retirement secure income. Because I was clear about what I valued, the choice was clear.
From a nuts and bolts perspective, I elected to take my pension as an annuity at 62 rather than a lump sum.
We elected to take my wife’s pension as a 15 year period certain annuity with an IRR of 5% rather than a lump sum or a life annuity where the early payment would have been much less.
My wife is taking her social security at age 62 and I am taking mine at 70 (similar full retirement benefits but I am 6 years older).
As you can see, we selected the alternatives that would give us mail box money in the early years of retirement which was our number one value recognizing my personality flaw restricting portfolio withdrawals. I fully recognize that some would view this as irrational and would want to show me the math proving to me there is a better solution. But that assumes I value the better solution.
We do have other values that rank very high as well so the process still requires us to consider our other trade-offs and weight them accordingly so to be clear it is not an all or nothing approach but the process can make the choices a little clearer on the margin.
For example, we do value a legacy but we will not try and maximize that if it prevents us from meeting our early retirement spending goals. We indeed consider both but make trade-offs in favor of the early retirement spending goals.
I often see questions asked and answered purely on the merits of the math and for some that may be totally fine. However, I would encourage folks to take some time to brainstorm what is important to them and then rank them. Then ask questions in the context of what you value (i.e. in terms of relative importance).
I see questions in posts that I may have an opinion about but without the context of values I find it difficult to provide my opinion because it would likely only reflect my values not the person asking the question.
As far as how Pralana fits into my retirement planning: it helps me quantify the difference between the various trade-offs. I can clearly see what it costs me to select an alternative that is mathematically sub optimal and then me and my wife can have a conversation. So far it has mostly made our decisions easier because monitory trade-offs have not been significant enough to change our priorities.
To all Pralana users - don’t let the math dictate your decisions - your personality should be given at least equal weight - for me recognizing this has given me freedom to choose the mathematical sub optimum retirement.
One tool that helped me years ago is Wade Pfau and the retirement style questionnaire. It can help some to better understand what their personality is telling them about how to approach retirement.
Just to be transparent I am safety first so take that into consideration when reading this.
@golich428 Thanks for sharing, it really gets to the heart of the matter. Finding it hard to spend in retirement is a common issue. Here are a few links:
https://crr.bc.edu/half-of-retirees-afraid-to-use-savings/
https://www.aarp.org/money/retirement/signs-you-should-spend-more/
Maybe use Pralana to help convince someone that it's OK to spend more in retirement. The average 65-year-old retired couple in 2022 is projected to spend $315,000 on health care expenses during retirement, according to Fidelity Investments. So maybe set age to, I don't know, 95, and make sure you have at least $315,000 at age 95. Add in any additional money you want left over to that. So this is kind of going backwards to see how much you can spend and still meet your requirements.
Our approach is guided--for better or worse--by the fact we're two working class social workers, with relatively low income and no generational wealth. So this has led to a "safety first" basic approach. In accumulation this meant gathering savings in a savings account until we had seven years, then starting to invest. That was not rational by "expected returns"--but it was rational in terms of comparing the consequences of losing (where we had no safety net) compared to the benefits of winning.
The biggest decision while accumulating was... to invest. I remember the fear and "leap of faith" I made when I moved $100,000 we had saved up over many years sitting in our bank account to Vanguard index funds. It is not something anyone I grew up with did. (Nowadays, a rollover of that amount doesn't blink an eye.) I based it on looking at the long term stock returns and starting to read the Bogleheads forum. The aha moment for me was that stocks had 0% capital gains tax; something that working class folks don't know or think about. And realizing a lot of the tips that were discussed with people with 5 and 10 million portfolios applied even more to people like us without money.
That happy ending is that that leap of faith (being "in the market" even at 50/50) enabled me to retire early at 61 and my wife in a few years at 59. We're not "FIRE" but would fit the "Lean Fire" model if we had to label us. We don't have enough to travel the world or do cruises or luxuries, but we do have enough to continue our lifestyle and take out an actuarial paycheck each year for fun. It turns out that if you live minimally, with low cost tastes and lifestyle, it is the same as earning a super high salary with expensive tastes.
When I don't know what to do or there isn't a consensus of experts, I'm a "split down the middle" guy. So unable to decide between stocks and bonds (both foreign concepts to me at that point), I simply maintained a 50/50 AA. Out of laziness (because I think one needs some kind of system) I have maintained that until retirement last year. Now in Withdrawal phase, that is changing! My presumed AA should drop to 40% stocks now (but I'm having trouble doing so without triggering large MAGI that will ruin my aca!), and then gradually go down to 25% in our 80s/90s, based on npv of remaining essential expenses (including ltc). I don't see the need to take risk I don't need to take.
Now at 61 I have my own "nest egg", so in theory should be more daring. But I just can't break the "safety first" fear. So my core principle is to always maintain the net-present-value of all my essentials (sustaining a minimum dignity lifestyle to which I'm accustomed) after subtracting out the npv of my small state pension and our estimated social security, going forward to 25th percentile longevity (wife 96) in safe assets like individual TIPs or CDs or treasury funds. With my personality (and lack of safety net), this security of essentials gives me the courage to then invest the rest above and beyond that in a more aggressive manner, because I know I am covered. Otherwise I'd always be worrying about the occurrence of a black swan leaving me destitute. (And I don't trust Pralana's monte carlo or that historical summaries capture the true range of what can go wrong.)
With regard to how to "take apart the house I've built block by block", for someone with my wife and my personalities, the actuarial method works very well: Once I know my essentials are covered with TIPs or CDs etc, then I simply withdraw an equal chunk of what's left with an assumed ROR and conservative longevity. The PMT formula works quite well for this purpose. This works for my personality because when markets drop 50%, my withdrawal of discretionary will drop 50%, and vice versa. Actuarial withdrawals react immediately to changing conditions now, spreading benefits and risks across remaining years. I do use a cape-influenced ROR, so there is a tempering effect: when stocks drop 50%, my withdrawal doesn't drop a full 50% because there is a presumed higher rate-of-return, and vice versa. This all allows me the courage to withdraw rather than be paralyzed by fear.
My intention is to move to a simple one fund-of-funds portfolio and a simple system (like VPW) when we enter our 80s or earlier if we start to decline.
We have a 16 year old son, and are not planning on leaving him an explicit large legacy. I guess that is what Greg would call a "value". But that doesn't mean we won't help him with college state tuition if he changes his mind about going, or that we won't help him while we are still alive. And realistically, even when you plan for 0, there are funds left over for him to inherit.
As to how I use Pralana... mostly to model year by year essential expenses going forward including taxes, account withdrawal order, and rough eyeballing of roth conversions. It turns out that with our low wealth, donating a considerable amount to charity (QCD) after age 70 makes Roth conversions unnecessary. Pralana has helped me see that Roths are not really that essential for us: if we go into a higher bracket in some years because of RMDs, we'll pay more taxes. Not the end of the world. That's a value too, I suppose. I don't really trust Pralana's Monte Carlo, and I don't really use any of its built-in withdrawal methods. Because I know my estimated actuarial amount, I just plug that in as a "phased expense".
Maybe there is a middle ground between nuts & bolts (mathematics) and Safety First. By that I mean there are steps that you can take, and check with PRC, that enhances your prospect of a successful retirement, that are agnostic to your "values". Example is proper asset location - bonds in tax advantaged accounts and stocks in taxable account to take advantage of capital gains tax rates. Playing around with your MAGI to get better ACA (Obamacare) and energy efficiency subsidies. Increasing the amount you have in Roth accounts (which will help with just about any "value" system). Active risk management, meaning being ready when a once in a 3-5 year event happens, such as taking advantage when stocks go on sale (Bear Market of 2008-2009) and buying them. Or when US Treasuries suddenly go way up (October 2023) and buying them. Or selling stocks when they are hitting new record highs practically on a daily bases (like now!). So my no "value" system I guess is my "value" system. In the past 15 years just following these actions (including going to 80-90% in US stocks starting after the great recession) have benefited me more then anything else. Right now I am selling stocks (total US index funds) and extending my zero coupon US Treasury ladder. Market timing? Absolutely not! Last time I sold stocks was October 2023 to buy US Treasuries. I am taking advantage of what life throws me, and having a ball 😋.
Embrace reality!!
Active risk management in retirement planning involves identifying and addressing potential risks that could impact your financial security during retirement. This includes strategies to manage longevity risk, inflation, market volatility, and unexpected expenses to ensure your savings last throughout your retirement years. wellsfargo.com financialplanningassociation.org
