Work-Free Wealth

Income Investing for Financial Independence and Early Retirement

Early Retirement: How much to adjust your withdrawal rate for future Social Security or Pension payments

Do you wonder how much you could adjust your withdrawal rate at an early retirement age for pensions or social security income?  You may be overly conservative if you take the standard advice on withdrawal rates without adjustments.  The amount you withdraw now will need to cover your entire expenses but you can withdraw less later once a pension or social security kicks in.  Can you take the around the world trip now without short-changing your future?  Chances are Social Security will be around for you even if reduced.    How do you figure your safe overall withdrawal rate if you expect to receive Social Security or maybe even a pension?

Anybody who is already receiving social security or pension payments can simply subtract the payment from their anticipated expenses.  Applying a withdrawal rate (e.g., 4% per Bengen) to the portfolio only needs to cover the remainder of the annual expenses.  I wanted to get an idea of how much the withdrawal rate can be adjusted upwards to account for a social security or pension income that will be received several years later.

There are several ways to do this. I decided to assume Social Security payments taking either at 62 (Scenario 1) or 67 (Scenario 2) and lasting until age 85 with an annual COLA adjustment of 2%.  I then calculated the net present value of these payments for various early retirement ages (40, 45, 50, 55, and 60).  The increase in the withdrawal rate will be lower if your income needs are higher since any social security payment will represent a smaller share of your overall income.

Withdrawal Rate Adjustments

Here is what I came up with for various early retirement ages assuming annual income needs or either $50,000 or $70,000. The safe withdrawal rate without any expected social security or pension is set to 3.5% for the calculations.

Scenario 1:  Start receiving Social Security of $1000 per month at age 62:

Early Retirement Age Desired Income Adjusted WR Increase Over 3.5%
40 50000 4.05% 0.55%
70000 3.88% 0.38%
45 50000 4.08% 0.58%
70000 3.90% 0.40%
50 50000 4.12% 0.62%
70000 3.92% 0.42%
55 50000 4.16% 0.66%
70000 3.94% 0.44%
60 50000 4.19% 0.69%
70000 3.97% 0.47%


Scenario 2:  Start receiving Social Security of $1500 per month at age 67:

Early Retirement Age Desired Income Adjusted WR Increase Over 3.5%
40 50000 4.15% 0.65%
70000 3.94% 0.44%
45 50000 4.19% 0.69%
70000 3.96% 0.46%
50 50000 4.23% 0.73%
70000 3.99% 0.49%
55 50000 4.27% 0.77%
70000 4.02% 0.52%
60 50000 4.32% 0.82%
70000 4.05% 0.55%


Overall check

This makes sense overall:  the older your are, the more you can revise your withdrawal rate upwards.  It is quite interesting to note that even really early retirees (age 40) can adjust their withdrawal rates upwards.  A withdrawal rate of 4.05% vs. 3.5% means that you need $194,606 less in savings when you start your retirement at age 40.

Another way to look at this, it to run a simulation with cfiresim.  I ran a scenario for a 45 year retirement investigating for the maximum initial income using a $1,000,0000 portfolio. The resulting income was $35,668 for a 95% overall success rate.   With a $12,000 annual income from social security starting 22 years after the early retirement date, the resulting max initial income was $38,500.  This means the initial withdrawal rate without social security would be 3.57% vs. 3.8%  with social security.

Even at a retirement age of 40, a pension income or social security that kicks in after age 60 can provide a little extra kick.  You can ignore it to make your withdrawal rate just a little bit safer.  Alternatively count it in, if you rather spend more earlier.



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