Calculating SWR With Large Expected Social Security Benefit

I realize this is probably “in the weeds” for all those except the few out there in a similar situation as we are: Those retired or retiring in their 50s with a sizable Social Security balance…and trying to figure out how much to add to the 3.5% (or 3.25%) safe withdrawal rate (SWR) we apply to our net investable assets exclusive of the SS. The purpose of this post is to share our approach and see if others have any other methods they might find useful. It probably also goes without saying that poking holes in our thinking is fair game and appreciated :-).

Some stats:

>>M/57 and F/52 retired early 2019

>>$1.9M net worth

>>$1.6M Investable Assets (which we use to calculate our SWR…the remainder of NW being our home which we own outright).

>>$75k/yr (today’s dollars) Expected Social Security at m/70 f/65 with net present value (NPV) of $1.2M.

>>30 year horizon. (Our plan is to make certain that the surviving spouse will have paid for home, $43k/yr SS + residual portfolio which will not allow to dip below at least a few hundred thousand dollars.

>>We plan to recalculate our SWR annually with a strong commitment to reducing spending if our investable assets drop substantially. We are in a fortunate position in that we would be ok with 75% of our current budget if conditions required it. This does allow us to take on a bit more risk in choosing a SWR.

If you retire very early, the SS doesn’t add much to your SWR. If you retire later, you can just add your SS benefit you’re already receiving to your SWR. But we’re in the middle, where we have to span 13 more years to SS but want to work out a SWR that will be fairly flat for our entire retirement (though it will be funded mostly from our investments for the next 13 years and mostly from SS after that).

We’ve used three methods to perform these calculations. Interestingly, they all tell a similar story (which I guess is good). (Of course we’re bracing for any possible cuts to Social Security…and will adjust accordingly. But every year that goes by seems to make it more likely the changes won’t affect our demographic…or if so, not much. I’m not of the opinion it will be politically feasible to just apply a 25% or whatever cut to those on SS or those close to receiving it.)

Here’s what we used for SWR to reach our $105k budget for next year:

1) Backing into SWR via trial/error on Firecalc.com. This method yields a SWR of around $95k (5.9%) flat or $105 to start backing down to $85K in the out years. (The “success rate” we were shooting for here was 95%+. This seems comfortable in that we’re ready to reduce our budget as soon as next year if the market dips.)

2) Using the NPV of our Social Security account ($1.2M) as additive to our Investable Assets ($1.6M) and applying 3.5% = $98k SWR. (I realize the SS account underperforms bonds in terms of asset allocation on average, though by pacing inflation it’s actually currently significantly outperforming any “safe” bonds or other fixed income investments. Still this probably suggests that this estimate is a little high and a somewhat lower SWR should be used.

3) ERN’s tool. (https://earlyretirementnow.com/2017/07/19/the-ultimate-guide-to-safe-withdrawal-rates-part-17-social-security/) It also yielded the most generous SWR of 6.3% when we calculated it last year. ERN show three levels of risk. The lowest level resulted in 5.4% SWR, the middle 6.3% and the riskiest 6.8%. We used the middle and that works out to around $104k SWR. (Note: ERN’s shortest retirement period was 40 years, which we used.)

We’re at the higher end of these estimates with a $105k budget for 2021….but feel that’s offset by the fact we’re not locking in a spending number for more than a year. We plan to 100% start over determining our SWR for 2022 with effectively no minimums. This also will effectively stretch our retirement horizon to a new 30 years each year, adding safety.

Any other tools out there you’re using? Are we looking at this wrong in any way? It’s not too late to lower that budget for 2021! 🙂