Withdrawal rate is backward
I put in a set amount for expenses every year in the calculator -- required field. Using that amount as the standard for all situations, the calculator says you can retire sooner and sooner the higher the withdrawal rate. That isn't correct. People should be planning for lower withdrawal rates to account for a bad economy, not higher withdrawal rates. Telling them they can retire sooner the more they spend is seriously bad advice. At higher withdrawal rates, you run out of money sooner. The calculator even says I could have retired years ago when I had the return rate being 5 percent and the withdrawal rate being 8 percent. At that rate, you will run out of money. The calculator page at the bottom even says that your withdrawal rate should be less than your rate of return, but the calculator itself is saying the opposite -- it says you can retire even sooner if you just spend more. And I read the answers to the similar posts. Yes, if $30,000 is 4 percent of the total, you only have $750,000 in the bank. If $30,000 is 3 percent of the total, you have to have $1 million in the bank. But withdrawing $30,000 from $750,000 is going to run out a lot sooner than withdrawing $30,000 from $1 million. And, you are in danger in the first scenario of outliving your savings because you spent down the principle.
After thinking more about this, the solution is probably removing the ability to input "withdrawal rate" at all. If what you said is true, kablamo--that "the calculator assumes your current expenses are the same as your expenses after retirement"--then this withdrawal rate should be a calculated value, not something the user specifies.
If "current annual expenses" is $30,000 and "annual return on investment" is 7%, for example, withdrawal rate cannot be 50%. That would mean your total savings for retirement would NEED to be $60,000ish (because you are locked into withdrawing 30k, and you are ALSO locked into withdrawing 50%) and after slightly over 2 years, you'd be out of money.
Of the following 3 values:
-Current annual expenses
-Annual return on investment
... You need to specify 2 and calculate the third. By allowing all 3 to be specified, you can create scenarios where retirement is impossible.
This is a bug, and the explanation in the comments makes no sense.
At the bottom of the page, it clearly states "When your annual return on investments cover 100% of your expenses you are financially independent." The number of years until retirement should be the number of years until this point. This is not true when you change the withdrawal rate from anything other than 4% (or something very close). This is very clear with just a casual glance at the bottom chart.
With a 4% withdrawal rate, our "Percent Of Expenses Covered By ROI" approaches 100%, goes a little bit over, and stops. This is correct, and explained below: "The above table will likely show you need to work slightly longer because your withdrawal rate should be less than your return on investments."
If you double your withdrawal rate to 8%, the "Percent Of Expenses Covered By ROI" never actually reaches 100% before the number of years you can supposedly retire in. It stops at an arbitrary year before reaching 100%. (Also, many of the values in the table are mysteriously missing.)
Now, reduce withdrawal rate to 1% and check the chart again. 100% is reached relatively quickly, but the chart continues, again, to an arbitrary year, this time long after 100% of expenses are covered by ROI instead of too soon. In the final year, the dark line representing "Percent Of Expenses Covered By ROI" shoots way off the page.
kablamo, all the calculations you stated are correct, but they are unrelated to this problem. The problem is the calculation of the number of years until retirement. If I'm withdrawing 100%, it says I can retire instantly. If I withdraw 0.01%, it will take me over 100 years. You can see how this is obviously incorrect, right?
Sune Bjørn Andersen commented
It is a very important piece of information but the calculation is correct. You can retire earlier withdrawing 5% instead of 4%. This however increases risk that isn't part of the calculation. It shouldn't be part of the calculation but it is very important background knowledge of the calculation.
Yup - the comment explanation is key. Should have it as a popup note on the calcuator page. Because my first gut reaction is that with my big portfolio, if I have a smaller withdrawal rate I'm going to use up my retirement money more slowly and need less of it. Its not automatically assumed withdrawal rate ties to your expences and determines size of nest egg needed.
Adminkablamo (Admin, Networthify) commented
Thanks for the comment.
Its not backward. The calculator assumes your current expenses are the same as your expenses after retirement. Another words the amount being withdrawn in retirement is the same as your expenses before retirement -- regardless of what you set the withdrawal rate to be.
Lets try an example. Lets say you're expenses are $40,000 a year before retirement. The calculator assumes your expenses are $40,000 a year after retirement -- regardless of what you set the withdrawal rate to be.
The withdrawal rate = amount withdrawn / total nest egg. Since the amount withdrawn is $40,000, the only thing which is going to change in this equation is the size of your total nest egg -- it has to go up. So it will take you longer to retire.
If you save $1,000,000 and withdraw 4% each year you will get $40,000 to spend each year.
If you save $1,333,333 and withdraw 3% each year you will get $40,000 to spend each year.
But it will take you longer to save up a larger nest egg with the 3% withdrawal rate than the 4% withdrawal rate.