Since we entered Blow that Dough phase in January 2000, net worth has become important because we are exceeding regular cash flow and liquidating assets. Our net worth has increased by 68% since Jan 1, 2000 so we need to get more aggressive!

Trips, charities and medical procedures (in Mexico) are the main elements. Always quality meals and drinks too with 20% tips too.

 

However, net worth is a reference point for determining how much cash flow COULD be consumed, cash flow being the sum of annuity income, recurring investment income AND some monetization of invested capital. There is ultimately no rationality to NOT tapping into invested capital on an ongoing basis as it will otherwise grow through capital appreciation.

Hence the 4% SWR, modified 4% SWR and VPW methodologies to establish those 'ceiling' guidelines. For someone like me aged 76 with a 90/10 portfolio, the VPW table for the closest proxy of 70/30 is 6.3% of my portfolio value on 1/1/2025.

That would be a maximum withdrawal of $63k this year on a $1M portfolio, $189k on a $3M portfolio, etc. Some of that 6.3% would come from recurring investment income, e.g. a portfolio yield of 3% while the rest will come from invested capital....to the extent someone wishes to spend at 'maximum rates'. Most with large portfolios will not spend at that rate but it provides flexibility to do so either directly or in combination with gifting, or padding an eventual legacy.

 

However, net worth is a reference point for determining how much cash flow COULD be consumed, cash flow being the sum of annuity income, recurring investment income AND some monetization of invested capital. There is ultimately no rationality to NOT tapping into invested capital on an ongoing basis as it will otherwise grow through capital appreciation.

True for some I guess, especially for those with larger capital appreciation assets. I guess since I only have my home that is a small percentage of my assets that I never plan to spend my viewpoint is different.

 

VPW at my age has me taking down/out about 5% give or take of my personal portfolio in my current 90/10 mix.

I probably won't do that in Year 1 of retirement which is tentative for early 2026 but something in the range of 3-4% (mix of dividends + capital) seems very reasonable out of the gate.

I could see my withdrawal rate for Year 1 and Year 2...in the range of 3-4% on a $2M investment portfolio.
I would ramp back up closer to 5% target in future years once I get used to my spending patterns.

 

It is normal to be more cautious in the first few years or retirement until one settles in and determines the key desires and drivers of retirement life.

To be clear, I do not advocate for anyone spending at the VPW limit but to recognize what that number means, and what and how one wishes to spend relative to that number.

 

Related to net worth, I care about my portfolio value and how much income could be generated by the portfolio. For example, I posted in my money diary that my investments can generate roughly 44K after tax.

While the total dollar value of the portfolio is a bit meaningless on its own, I find that focusing on this income (potential) is helpful. Can my portfolio pay my current living expenses? Can my portfolio pay my anticipated total cost of living? Those are the questions I ask myself.

 

How do you calculate how much income your portfolio can generate? Perhaps the 44k is dividends, distributions and interest?

 

Both net worth and cash flow are important for different reasons and their value changes depending on circumstance. A retiree who needs to pay bills every month depends on stable, predictable cashflow, ideally paid every month. Such a person might not care about growth as much, and might cut down on stocks (maybe aside from strong dividend stocks), and instead invest in bond, annuities, or REIT funds that give him monthly cashflow. Same for freelancers whose income is widely variable month to month. Yes, you could sell stocks and use capital gains, but psychologically, that is difficult, especially during times when the value is depressed. Humans aren't just robots and psychology matters. Somebody who has a steady paycheck and lives within his means can be more aggressive toward net worth and focus less on cash flow. Which is more important -- net worth or cash flow? Both are important, and their relative importance depends on the person.

 

By the way, one implementation of this withdrawal rate concept can be seen with BMO's ZMI (Monthly Income) fund.

This is not an endorsement, and I don't hold this, but it may be interesting to some. ZMI unfortunately is a very small ETF which doesn't have much assets. MER is good though, only 0.20%

ZMI holds a 60/40 portfolio that's pretty well diversified. It's similar to VBAL or XBAL... but yields 4.8% which comes from a mix of interest, dividends, capital gains and return of capital.

The idea there is that a diversified 60/40 should perform well over time, allowing one to extract a reasonably large % on an annual basis. Frankly I think ZMI's payout at 4.8% is a bit too high, but that's the general idea. I apply the same basic idea in my own portfolio, but aim for lower payouts -- because I think that's more sustainable.

 

The other decumulation option is VRIF with a 4% distribution yield, on a constant monthly basis, adjusted once per year based on portfolio value among other factors. It too is a combination of interest, dividends, capital gains and return of capital. Vanguard believes this is sustainable over time with ROC being a small component of the distribution. It needs a 10+ year performance record to see if it plays out as Vanguard suggests.

There are a number of variations of sustained, or modified, SWR with recent analysis by the founder of 4% SWR now saying 4.7% SWR is sustainable. However, that again is US based and with relatively low MER/AUM charges that the majority of retail investors will incur (as compared to more savvy DIY investors).

Point being, decumulation should always assume Total Return and not just recurring investment income. There are few viable portfolio constructs that would yield 4% recurring investment income long term without being highly concentrated in a few asset types, a potential route to possible ruin. Diversification (not diworstification) is a key component of a robust portfolio that will withstand a wide range of scenarios.

 

The other decumulation option is VRIF with a 4% distribution yield, on a constant monthly basis, adjusted once per year based on portfolio value among other factors.

Yes VRIF does this, but I find it strange that they have a 40% equity 60% bond allocation. That's a huge weight in bonds. A quick use of PortfolioCharts Withdrawal Rates tool, using the global 40/60 allocation suggests just a 3.6% Long Term Withdrawal Rate (LTWR), falling shy of 4%. It might be too conservative to sustain 4%.

In comparison a slightly more aggressive 60/40 has 3.8% LTWR which is higher

 

I believe it started life as a 50/50 mix. I don't know why it has been 40/60 for some time when it would seem that 60/40 would be better, but if you think you are smarter than the Vanguard sub-advisor team, I suggest you market your expertise to them.

 

It's very simple for me, I can't speak for others.

I/we realized we were financially independent when I saw that if we assume 5% annualized rates of return from our portfolio is > than our annual expenses = then we were "good".

That's without CPP, without OAS, and without any small workplace pension I will have.

So, cashflow/growth/spending at 5% from the portfolio > expenses for the next 45 years with 3% inflation. Those are my numbers. Everyone has different inputs that relates to their risk tolerance, assumptions about the future. Mine are purposely conservative.

As per @AltaRed - I appreciate simple math at times. Using 4% SWR, modified 4% SWR and VPW methodologies....leveraging the VPW table you should be able to figure out what it takes in general terms in a few minutes. The specifics can be more nuanced of course which is why financial planners charge $4,000.

LOL. (Don't pay that.)

 

I/we realized we were financially independent when I saw that if we assume 5% annualized rates of return from our portfolio is > than our annual expenses = then we were "good".

That's without CPP, without OAS, and without any small workplace pension I will have.

Similar calculation here though I used a projected expense amount (which is higher) instead current annual expenses and included CPP/OAS when that time comes.