@pizzaman If you think tax rates will change in the future, you can specify the "when" and "how much (percentage-wise)" on the Home page of PRC.
Stuart
@smatthews51 It seems to be limited to a max increase of 25%. Not sure what that does. If for example I am in the 12% tax bracket and increase by the max 25%, what will my new tax rate be - 15%? That's not near enough. Can you explain. Thanks!
Saw this little tidbit, brought a smile to my face 😊 :
1795: American banker and businessman James Swan paid off $2,024,899 in national debt that the United States owed to France, which was amassed during the American Revolution.
Getting back to the topic of my original post, I rambled in my original post so let me be clearer here: the most common conception of withdrawal rate I see in the retirement literature is simply:
- Portfolio withdrawal = Portfolio withdrawal $ / Portfolio $ value at the end of the previous year.
After the dust settles I hope this widely used "common sense" conception doesn't get lost by Pralana. Indeed the current Pralana formula (Total Expenses / Portfolio value) is incorrect except in rare cases where users have no disposable income and are living just off their savings.
Is the straightforward formula above the same as the curated proposal users are voting on?
- Portfolio Withdrawal = Total Expenses minus Spendable Income / Portfolio Value
That is the part I'm thinking needs revision. On the one hand, because Total Expenses is everything one spends in total; and Spendable Income aka Disposable Income is the part of social security/pensions/rent that is not used for essentials or taxes and is therefore available to spend as an alternative to portfolio withdrawal-- In other words, income spent that doesn't come out of the portfolio, so isn't a "withdrawal".
However, one can make the case that the proposal should really be:
- Portfolio Withdrawal = Total Expenses minus Total Income / Portfolio Value
After all, spending on essentials and taxes (categories excluded in Disposable Income) are still part of one's total expenses that need to come from somewhere. So total expenses minus total income is the amount that almost by definition the amount that comes out of the savings portfolio.
I think this modified formula gets more to the heart of what we want to measure: how much gets actually withdrawn from the savings portfolio to pay everything one withdraws for--essentials and non-essentials. Disposable income is more relevant to how much is available to invest or save, not to how much one withdraws.
So in the end I am suggesting the proposal is valid, but needs to be revised. What Pralana uses currently is "wrong"-- but the proposed formula is not what we want.
Thoughts?
PS. I also find the other withdrawal % figures Pralana provides helpful (e.g. Non-essential $ / portfolio$) so I hope those are kept regardless of how they reconceive of Total Withdrawal.
I just noticed that what I'm calling the "common sense" withdrawal rate definition (portfolio withdrawal / total portfolio value 12/31 year prior) is already shown on the Review > Cashflow > Withdrawal. There is a column called "Overall withdrawal rate" which is defined as "Net cash flow / portfolio value", which I believe is the same as my suggestion of "Total Expenses minus Total Income / Portfolio Value". (Is this true?)
@jkandell I may not see your point here. When you say common sense withdrawal rate, is this the same as the old 4% rule for withdrawals? If so, I have not seen a valid comparison of the 4% rule in Pralana. The overall withdrawal rate includes other withdrawals beyond tax deferred accounts. To me, the 4% rule was designed to validate the longevity of tax deferred accounts and not other items in the "cash account". Maybe I am wrong. I am also searching a good 4% rule comparison within Pralana as I have stated in other post.
The simple calculation I use for my situation is "Withdrawal Rate from Tax Deferred compared to Total Tax Deferred Balance". Someone please educate me on all of this because I do not understand some mechanics of the Cash Account.
@jkandell I may not see your point here. When you say common sense withdrawal rate, is this the same as the old 4% rule for withdrawals? If so, I have not seen a valid comparison of the 4% rule in Pralana.
No, I wasn't referring to the 4% rule in this thread. This thread is about a column in the expense reports, not a method of withdrawal. I started this thread because I saw that a suggestion for new pralana features was getting quite a lot of user votes and didn't understand why. The suggestion was to change the formula withdrawal % shown in the right side of Review>Tabular>Expenses sheets. The suggestion getting votes was to show instead:
Withdrawal %= Total Expenses minus Spendable Income / Portfolio size.
What I called the "common sense" conception was Withdrawal % = "Withdrawal from portfolio / Portfolio size". I suggested that instead of Total Expenses minus Spendable Income might not be what people mean by the term or want to see, and rather the numerator should be
Total Expenses minus Total Income.
But then a few days I saw that on a different tabular review (Review > Cash Flow > Withdrawals), there is yet another column and formula for withdrawal %. This one shows what's called "Overall withdrawal Rate" and the formula is Net Cash Flow / Portfolio. And my last post was postulating that this "overall withdrawal" rate was another way of saying the "common sense" conception I started the thread with, namely "Withdrawal from portfolio / Portfolio". In other words, I think that Net Cash Flow is the same as Total Expenses minus Total Income is the same as Net Withdrawal.
Does that help? I think having so many different versions of the withdrawal percentage is a bit confusing, and maybe only one of them should be chosen? My suggestion didn't get any feedback from others, so perhaps that figure on the charts isn't that valuable to others.
Currently the "Overall withdrawal rate" is the difference between total cash inflows and total expenses, but total cash inflows includes RMDs rather than just including income (salary+pension+social security).
For example, if my expenses equaled my RMDs (and I didn't have any pension/SS/etc), the overall withdrawal rate would show as 0%, but the amount that came out of my portfolio would be the RMD/portfolio value. So this rate seems to underestimate the actual withdrawal rate and is not the number to compare to a 4% rule strategy.
The 4% Rule is not related to tax deferred accounts. It came from Bengen's 1994 study that showed that even though common portfolios returned 6-7% on average, that in the worst historical periods, that if your spending each year was simply increased for inflation, that the most you could withdraw and not have your portfolio completely fail in 30 years was 4%, which you will see called the Safe Withdrawal Rate or SWR. Most of the time, markets did much better, often making you very rich, but that would be cold comfort if you retired at an unlucky moment and ran out of money. The asset allocation did not matter much as far as portfolio survivability between 25%-75% stocks. The extremes were worse, where heavy bond portfolios didn't keep up with inflation and heavy stock portfolios suffered from occasional terrible crashes (on average, the higher stock portfolios do better, but we don't get to experience the average, just our own timeline). This shook people up as the advisor industry was telling clients they could take out the average returns each year. But the fact that you have to withdraw even in down markets means the average isn't all that important, if the recovery comes after your portfolio is depleted, it's too late and this effect is labeled Sequence of Return Risk (SORR).
The year after the Bengen study came out, there were 30 years of data available starting in 1965 and it was found that they would have been worse off yet. Plus of course historical US returns are zero guarantee of future returns.
EarlyRetirementNow.com has a many-part series of writings on the subject of SWR, the author of that blog is Karsten Jaske, a retired Fed economist. He dives into the numbers, but explains things very well, so his blog is a nice way to learn about lots of subjects. Jaske has a free downloadable spreadsheet with monthly data going back to 1871. The monthly data shows that there were some unlucky months where as little as a 3.6% initial withdrawal (and subsequent inflation adjustments) would have failed.
Note that the 4% withdrawal rates from the study included dividends and interest and has to cover all expenses, including taxes.
Currently the "Overall withdrawal rate" is the difference between total cash inflows and total expenses, but total cash inflows includes RMDs rather than just including income (salary+pension+social
In that’s case, i revert to my original suggestion that the current definition of withdrawal rate should be replaced with “Total expenses minus total income” (ie total withdrawn/total portfolio), not the alternative definition in the wishlist voting list. RMDs are still withdrawals, not income.
EarlyRetirementNow.com has a many-part series of writings on the subject of SWR, the author of that blog is Karsten Jaske, a retired Fed economist. He dives into the numbers, but explains things very well, so his blog is a nice way to learn about lots of subjects. Jaske has a free downloadable spreadsheet with monthly data going back to 1871. The monthly data shows that there were some unlucky months where as little as a 3.6% initial withdrawal (and subsequent inflation adjustments) would have failed.
Note that the 4% withdrawal rates from the study included dividends and interest and has to cover all expenses, including taxes.
@Ricke did you see the discussion on page 4 in the thread “All Things William P Bengen and his New 4.7% Rule”? Jaske’s consideration of how far the market is from a high was contrasted with bengen’s model. I find Jaske’s analysis superior to Bergens old and new analysis, for a variety if reasons, not the least of which is monthly data. You can also personalize it to your own situation—much more useful IMO.
Just a note (that was briefly mentioned in another post topic here) that Big ERN has also set up a website with a colleague which performs the calculations done on the spreadsheet: https://saferetirementspending.com/
You can save your input parameters for later recall and assorted scenarios.
Just a note (that was briefly mentioned in another post topic here) that Big ERN has also set up a website with a colleague which performs the calculations done on the spreadsheet: https://saferetirementspending.com/
You can save your input parameters for later recall and assorted scenarios.
