I see in the new feature voting this topic is getting lots of support. Can someone explain to me what this means, and why is it preferable to what exists now in Pralana?
Total expenses minus spendable income is also known as "disposable income". Why is disposable income more to the point, and how would this affect the spending strategies?
| Revise Spending Strategies to use 'withdrawal rate' instead of 'spending rate'. | Pralana Online and PRC Excel have implemented most spending strategies to use Spending Rate = 'total expenses/prior year-end savings'. While much of the published literature uses the term 'spending rate' and 'withdrawal rate' interchangeably, the intent is 'withdrawal rate' which is: (total expenses - spendable income) / prior year-end savings. When the change is made, we will also address the loss of any 'non-essential' charitable deductions which is a side-effect of the current implementation. [FB 2288] |
I know that what I have asked for is a change in reporting, so that my expenses are shown as a more traditional withdrawal rate. In other words, regardless of my chosen spending strategy (Guyton Klinger, specified expenses, etc,), what then is my withdrawal rate, as a percentage of my investments. Currently Pralana doesn’t have a way to show that. In other words, I’m curious if my chosen spending strategy has me spending 3%, 5%, or 10%.
@debrazebra Right. The proposal (that is second in terms of voting!) is to switch from “total expenses” to “Total expenses minus spendable income” — that is the “gap” between what you spend and non-portfolio income like ss, pensions, rent etc. In other words what has to come out of your portfolio alone.
I don’t understand why they think that is the mainstay of retirement literature, when stuff like the 4% rule uses the simpler
—withdrawal = (expenses / porfolio)
Maybe one of the many who voted for it can tell us why it is preferred and important?
How will it affect the various spending strategies?
regardless of my chosen spending strategy (Guyton Klinger, specified expenses, etc,), what then is my withdrawal rate, as a percentage of my investments. Currently Pralana doesn’t have a way to show that. In other words, I’m curious if my chosen spending strategy has me spending 3%, 5%, or 10%
Is the column labeled “overall spending rate” in the [i]Review>Tabular>expenses>Expense Statement[/i] the withdrawal figure you are looking for? If so, then (after choosing a spending strategy and running a Monte Carlo), you could peak at this tabular review to see the withdrawal percentage over each year of the plan.
@jkandell What it would like to see is (total expenses - normal income) / portfolio value. In other words, what do I need annually withdrawn from my portfolio, and what percentage is that of my portfolio? If I’m not mistaken, that is where the 4% rule comes from , ie RLE (residual living expenses after monthly income).
Total expenses aren’t relevant. You and I may have the same monthly expenses, and the same starting portfolio, but if you have a giant pension, and I do not, our portfolio withdrawals will not be the same, and will have different success rates.
Am I missing something?
@debrazebra ok so you’re the one who proposed it. 🙂 What you are saying makes sense.
@jkandell What it would like to see is (total expenses - normal income) / portfolio value. In other words, what do I need annually withdrawn from my portfolio, and what percentage is that of my portfolio? If I’m not mistaken, that is where the 4% rule comes from , ie RLE (residual living expenses after monthly income).
Total expenses aren’t relevant. You and I may have the same monthly expenses, and the same starting portfolio, but if you have a giant pension, and I do not, our portfolio withdrawals will not be the same, and will have different success rates.
Am I missing something?
I think we are saying the same thing but differently. Perhaps others will chime in. The 4% is indeed about the portfolio. We don’t take expense money out of our portfolio unless the expense is not covered by other income, such as SS and pensions. I don’t have time right now to search for references, but I do believe that all of the SWR (safe withdrawal rate) models use Residual Living Expense, ie expenses less income.
Glad to hear my proposal is getting votes. I think when I proposed it Stuart said it would be coming relatively soon.
I did a DuckDuckGo search (I use DuckDuckGo's web browser instead of Google for safety reasons) on the term "Residual Living Expense" and got zero hits, so I clicked on the AI button and got this:
Residual living expense refers to the amount of money an individual has left after covering all necessary living expenses, such as housing, food, and bills. It is often used to assess financial health and budgeting capabilities.
Residual living expense refers to the amount of money an individual has left after covering all necessary living costs. This includes expenses such as housing, food, transportation, and other essential bills.
Key Components
-
Income: The total earnings from all sources, including salary, investments, and any other income streams.
-
Necessary Expenses: All mandatory costs that must be paid to maintain a basic standard of living, such as:
- Rent or mortgage payments
- Utilities (electricity, water, gas)
- Groceries
- Transportation costs (fuel, public transport)
- Insurance (health, auto, etc.)
Calculation
The formula to calculate residual living expense is:
Residual Living Expense = Total Income - Necessary Expenses
This calculation helps individuals understand their financial situation better and plan for savings or discretionary spending. It is an important metric for budgeting and financial planning.
Plus:
Comparison of 4% Rule and Residual Living Expenses
| Aspect | 4% Rule | Residual Living Expenses |
|---|---|---|
| Purpose | Withdrawal strategy for retirement | Identifying shortfall after income |
| Calculation | 4% of total savings | Total expenses - guaranteed income |
| Focus | Sustainable withdrawals | Covering living costs |
| Flexibility | Generally fixed, but can adjust | Varies based on income sources |
This link is to Bill Bengen's 2012 update of his 4% rule:
In this essay, I am going to undertake three tasks:
1. Compare the status of the original "worst case" scenario (the investor who retired in 1969) with a prospective "worst case" candidate, the 2000 retiree. Who was better off after 12 years of retirement?
2. Explore possible future conditions that might lead to a "blowup" of the 4.5% rule.
3. Consider some alternative strategies for a retired client if the 4.5% rule appears it may fail.
1969 Versus 2000
When I conducted my first research in 1993, there were only 38 complete 30-year retirement periods available for study in Ibbotson's yearbook (1926 through 1963). Today, there are 57 periods (from 1926 to 1982). This is hardly an exhaustive sample, and the case can clearly be made that no sample, no matter how large, would provide conclusive results since markets change over time. However, I maintain that the 87 years beginning with 1926 saw a wide range of market and economic conditions, including wars, depressions, oil shocks, "great moderations," etc. Surely they contain something of value as precedent.
The individual who retired on January 1, 1969, was the "big loser" in my analysis. Employing the 4.5% initial withdrawal rate, his portfolio was the only one of the 57 to exhaust itself at the end of 30 years. Chart 1 depicts the annual nominal account balances for a 1969 retiree who began with $100,000 in his (not-yet-invented) IRA account...........
https://www.fa-mag.com/news/how-much-is-enough-10496.html
If I understand Bengen's 4% rule correctly, it has nothing to do with someone's expenses, of any kind. That is not an input into the 4% rule. The 4% rule just states that given a starting value of your, say, regular IRA, this is how much you can withdraw each year over 30 years and not run out of money, although you my get very close to $0. You then look at what your annual expenses actually are to see if it match's or under cuts the 4% withdraw number. Then you make your adjustments. Just wanted to make that clear 😉.
@jkandell What it would like to see is (total expenses - normal income) / portfolio value. In other words, what do I need annually withdrawn from my portfolio, and what percentage is that of my portfolio? If I’m not mistaken, that is where the 4% rule comes from , ie RLE (residual living expenses after monthly income).
Total expenses aren’t relevant. You and I may have the same monthly expenses, and the same starting portfolio, but if you have a giant pension, and I do not, our portfolio withdrawals will not be the same, and will have different success rates. Am I missing something?
1) The proposal is written almost exactly was you state above! The good news (for you) is your proposal is in third place, with 56 users voting for it. And now I understand what it means and why it is being voted for. (Thank you for explaining.)
2) There are two issues that might be getting confused:
- What is the best generic % measure of "withdrawal rate" from the portfolio Pralana should list on the tabular Expense page?
- What is the best measure for documenting and calculating withdrawal amounts for each of Pralana's withdrawal methods?
I am not sure on the answer to either question.
For me the most intuitive for #2.1 is simply: "Total taken out of portfolio this year/ total portfolio at the end of last year". I think "total taken out of portfolio this year" is the same as you're saying ("total expenses - normal income"); and if so I agree with your proposal. But I'm not sure at all: For any money I get from pensions or ss goes right into my portfolio, literally, and any expenses get taken out of all of it: so why is pension or social security $ qualitatively different from portfolio returns $? (So why should it be excluded?)
With regard to question 2.2, it may be the case that each withdrawal method has its own "best measure" of withdrawal that fits its methodology. i really don't know. Some methods seem more concerned with spending and some seem more concerned survival. You're describing a method that works with Bengen's 4% rule or a SWR analysis. But will that same number be useful for the actuarial method or % withdrawn? It may be that the "total withdrawals from all sources=total expenses" or something else even in some methods. I am not sure.
I personally come from a "lifecycle investing" foundation for my retirement withdrawal methodology. So I take what you said about a pension a step further, and generalize it. In deciding how much to withdraw this year: All income gets taken into account (total of: future pensions/social security + income now + income in the future + portfolio now) and all expenses get taken into account (total of: essential now and in future, discretionary). Each year I have a "personal balance sheet" of my total lifetime income and my total lifetime expenses, so I know (a) how much I need to keep safe for future essentials, (b) what do I need this year for essentials and (c) how much I can utilize to take an even portion (self-imposed RMD) of discretionary spending?
But like I said 56 people agree with you, so I think I might be the odd one out in having any doubts.
If I understand Bengen's 4% rule correctly, it has nothing to do with someone's expenses, of any kind. That is not an input into the 4% rule. The 4% rule just states that given a starting value of your, say, regular IRA, this is how much you can withdraw each year over 30 years and not run out of money, although you my get very close to $0. You then look at what your annual expenses actually are to see if it match's or under cuts the 4% withdraw number. Then you make your adjustments. Just wanted to make that clear 😉.
Right, that matches my knowledge of Bengen too. I think actuarial methods are the same, where, say, VPW takes a percentage taken from an actuarial table from your portfolio and then expenses are expected to be taken out of that. If you have Income like pension I am not sure how that affects Bengen.
So if you're correct, which of the two ways of calculating the % withdrawals as shown at the far right of the Expense page is more useful? It seems the existing way?
@jkandell I don't use the online version of PRC so I don't have an option. This issue is not a big deal to me. If I may get on my soap box for a moment, I think of much more importance to the success of your lifetime retirement finances (portfolio) is future tax rates and the viability of Social Security (SS). I didn't think that it would be possible for SS payouts to decrease because politicians would not be that stupid not to fix SS. Well, the passage of the One Big Beautiful Bill Act (OBBB) shows blind stupidity is alive and well. The time when tax rates will need to be increased is also now sooner then it was a week ago. How do you plan for that in PRC?? I am shaking in my boots! 😬
@pizzaman You make a valid point. I too am shaking in my boots about BBB. A huge deficit that doesn’t fix ss is unconscionable. Each year the govt actuarial office does an analysis of ss viability. Last year we were something like 23% cut by 2036; i wonder what they’ll say now.
Im going to adjust for it in pralana by increasing my ss cut to 25% and by seeing if i taxes can be set to increases about then. The other thing they might do is get around the problem by inflation, so do more sensitivity analyses with that. And you know my favorite: buy more tips.
BBB was passed via budget reconciliation (only 50 votes + the VP tiebreaker needed in the Senate) so only certain things could be addressed and SS is automatically off limits for that procedure. Several larger cuts that were passed in the House bill were omitted for the same reason, they were ruled out of bounds by the Senate Parliamentarian. Then you get the quirkiness of some senators - they needed one of Rand Paul or Lisa Murkowski. Murkowski demanded a lot more spending be added back in. Rand Paul wouldn't vote for the bill no matter what because it didn't cut enough, so instead, they gave Murkowski billions and billions more in extra spending to get her vote. Sausage making at its finest.
I'm sure you, along with tens of millions of others, would crucify your representatives if your SS benefits were to receive such a cut, making it extremely unlikely for that to happen. Someday, there may be changes to reduce future worker benefits or increase worker's taxes, or delay retirement age or whatnot, but in the meantime, they will just keep writing hot checks to everyone.
