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Old 04-08-2012, 10:55 AM   #21
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So I was doing Mom's taxes last week .... she's been living within the required mandatory IRA withdrawls (~4% for her age : 74). But she complains that she feels poor ... "can't even afford a sweater". Little bit of background, a pension and SS easily cover her living expenses .... just not enough for travel or "luxury" items.

So I looked at the balances on the IRA and told her pull 7% for the next 10 years. As she says "80 is the WALL" ... so let's enjoy what she has while she on her feet.
I think you gave her good advice.

Remember the 4% rule says you start with 4% and adjust for inflation each year. Assuming your mom retired at 65 and made that annual adjustment, her withdrawal % would have already increased gradually and be ~5% this year.
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Old 04-08-2012, 12:01 PM   #22
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I think you gave her good advice.

Remember the 4% rule says you start with 4% and adjust for inflation each year. Assuming your mom retired at 65 and made that annual adjustment, her withdrawal % would have already increased gradually and be ~5% this year.
+1. At age 74 she can easily afford the higher withdrawal, especially if the difference is meaningful to her.
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Old 04-08-2012, 12:22 PM   #23
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Merriman did a study (using only more recent historical data I think) that found taking 4% of a portfolio each year resulted in more income than taking 5% each year, after the first 6-10 years. That's straight % of portfolio, not first year fixed and inflation adjusted. So I would think anything above 4% and you're talking some form of portfolio shrinkage or flexible spending.

That residual portfolio value is my LTC insurance as well. Or for those life extending rejuvination treatments. You never know! However I also have two kids that I wouldn't mind leaving our unused portfolio to. So either way I'm happy to end up with about as much value in my portfolio as I have now.
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Old 04-08-2012, 01:06 PM   #24
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Those of us with all of our assets in tax-protected accounts will be required to take Minimum Required Distributions from our IRAs in excess of the 4% after 70-1/2. If you want to take only 3%, you will have to stash and invest more and more of the distributed payments as the years go by. The distribution each year is 1/your estimated remaining years to live as of that year. If you want, don't re-invest, just spend it.
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Old 04-08-2012, 01:08 PM   #25
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Thanks for the heads up. I'll go read. I've really been enjoying Pfau's blog. What a gift to us living off our investments.

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Old 04-08-2012, 01:31 PM   #26
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I would be happy to spend 4x more. What would not make me happy is being transformed into a poor person. This author seems completely to have failed to understand the principle of marginal utility. "Only 4 years of being broke". That would give plenty time to get hungry.

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I am with Ha here. Poverty sucks.
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Old 04-08-2012, 02:43 PM   #27
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Spending more will not make me any happier. Just this afternoon. I sat on my Adirondack chair in my backyard, one dog on my lap, the other lying in the grass, belly up her face toward the sun. This thought AGAIN comes to my mind, and it is a thought that I have at least 5 times a day "This is happiness!" And other than the cost of property tax and utilities and maintenance, that happiness did not cost me anything. To be happy in one's own home, wearing whatever is comfortable, and spending time w/ loved ones (in this case, all four-legged creatures) does not require 6% SWR. I would not be any happier if I spent more money.
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Old 04-08-2012, 02:48 PM   #28
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I am with Ha here. Poverty sucks.
The point is to annuitize enough of the portfolio to avoid "broke". You may no longer have big bucks in the bank accounts, but you'll have monthly checks from annuity sources like Social Security and AIG Berkshire Hathaway.
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Old 04-08-2012, 02:51 PM   #29
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Spending more will not make me any happier. Just this afternoon. I sat on my Adirondack chair in my backyard, one dog on my lap, the other lying in the grass, belly up her face toward the sun. This thought AGAIN comes to my mind, and it is a thought that I have at least 5 times a day "This is happiness!" And other than the cost of property tax and utilities and maintenance, that happiness did not cost me anything. To be happy in one's own home, wearing whatever is comfortable, and spending time w/ loved ones (in this case, all four-legged creatures) does not require 6% SWR. I would not be any happier if I spent more money.
Nothing wrong with that at all, as long as you have good uses for a large residual should that be the case. We don't...
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Old 04-08-2012, 02:57 PM   #30
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The assumption that one can accurately measure a clients preference for risk in the long term seems to me less sure than using the past performance of the S&P500 as the future predictor of stock moves.

But using the first example of Figure 3 in the Finke/Pfau/Williams proposed "optimal retirement solution" for a couple with guaranteed income of $20,000 and a portfolio of 1 million dollars. The couple is stated to be able to optimize their retirement for risk and reward and ability to withstand lower spending later in life with a 7 % inflation adjusted withdrawal and 70% stock (S&P 500 as stated in the study) investment.

Using Raddr's Y2K study that strategy would lead to a million dollar portfolio value in 2000 falling to $48,000 remaining at the start of this year for a 76 year old couple with an expected life span of 13 years and probably a planning lifespan of 20-25 years. This couple would now have to cut spending from $111,000 to $20,000. Spreadsheet is attached. Somehow I feel if this were to really occur when the children went to sue the financial planner, the study used to justify this "optimal retirement" and the signed document of the couples claim they were a "risk aversion certainty equivalence of 1" would be adequate to defend the CFP against any lawsuits.

Does anyone know the current yield (payout % relative to investment) for a inflation indexed annuity for a 65 year old couple? I am assuming it is around 3.3% today but I am not sure. The idea that one could annuitize a portion of a portfolio if it begins to fail becomes darn hard if you start with withdrawls so far above the annuity rate.
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Old 04-08-2012, 03:21 PM   #31
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Well at least I know I'm not a Risk Aversion = 1! Ouch!
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Old 04-08-2012, 03:38 PM   #32
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Spending more will not make me any happier. Just this afternoon. I sat on my Adirondack chair in my backyard, one dog on my lap, the other lying in the grass, belly up her face toward the sun. This thought AGAIN comes to my mind, and it is a thought that I have at least 5 times a day "This is happiness!" And other than the cost of property tax and utilities and maintenance, that happiness did not cost me anything. To be happy in one's own home, wearing whatever is comfortable, and spending time w/ loved ones (in this case, all four-legged creatures) does not require 6% SWR. I would not be any happier if I spent more money.
If your SWR is low, then maybe you should be bugged with the thought of why you didn't retire earlier!

The high SWR research may lead to ways to retire earlier, or allow us to be more efficient in flexibly adjusting our withdrawals in retirement for extra safety, more income, or more to give our kids or charity. Probably something for everyone there.
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Old 04-08-2012, 04:29 PM   #33
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While that made for interesting reading (thanks for posting), I very much prefer the risk of leaving excess value to my heirs than the risk of being forced to cut back on my desired lifestyle later in life. There is also the fact that some of us tend to worry more than others - I would not enjoy spending my declining years worrying about my finances.

The point about the value of annuities as a risk reduction tool is well made - unfortunately they are not really available in my local currency and the offshore products are currently very unattractive due to a combination of low interest rates, awful pricing by the issuers, expecting to retire at a relatively young age and unfavourable tax treatment. If things change I may revisit the point later.
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Old 04-08-2012, 05:12 PM   #34
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The assumption that one can accurately measure a clients preference for risk in the long term seems to me less sure than using the past performance of the S&P500 as the future predictor of stock moves.

But using the first example of Figure 3 in the Finke/Pfau/Williams proposed "optimal retirement solution" for a couple with guaranteed income of $20,000 and a portfolio of 1 million dollars. The couple is stated to be able to optimize their retirement for risk and reward and ability to withstand lower spending later in life with a 7 % inflation adjusted withdrawal and 70% stock (S&P 500 as stated in the study) investment.

Using Raddr's Y2K study that strategy would lead to a million dollar portfolio value in 2000 falling to $48,000 remaining at the start of this year for a 76 year old couple with an expected life span of 13 years and probably a planning lifespan of 20-25 years. This couple would now have to cut spending from $111,000 to $20,000. Spreadsheet is attached. Somehow I feel if this were to really occur when the children went to sue the financial planner, the study used to justify this "optimal retirement" and the signed document of the couples claim they were a "risk aversion certainty equivalence of 1" would be adequate to defend the CFP against any lawsuits.

Does anyone know the current yield (payout % relative to investment) for a inflation indexed annuity for a 65 year old couple? I am assuming it is around 3.3% today but I am not sure. The idea that one could annuitize a portion of a portfolio if it begins to fail becomes darn hard if you start with withdrawls so far above the annuity rate.
But in this scenario, dropping from $111k to $20k a year is hardly likely. Long before the portfolio was exhausted as the market gobbled up the value, they would have made proactive reductions in their withdrawals, at least I'd hope so. That's what makes some of these analyses a little unrealistic, it's not all or nothing. One should expect to make adjustments, up or down, as markets make major moves. The alternative is stubbornly sticking to some predetermined SWR until one suddenly exhausts the portfolio or dies with a ton of cash on hand.
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Old 04-08-2012, 05:22 PM   #35
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But in this scenario, dropping from $111k to $20k a year is hardly likely. Long before the portfolio was exhausted as the market gobbled up the value, they would have made proactive reductions in their withdrawals, at least I'd hope so. That's what makes some of these analyses a little unrealistic, it's not all or nothing. One should expect to make adjustments, up or down, as markets make major moves. The alternative is stubbornly sticking to some predetermined SWR until one suddenly exhausts the portfolio or dies with a ton of cash on hand.
That makes way too much sense, what are you thinking?
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Old 04-08-2012, 06:02 PM   #36
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All very interesting and I hope it's right.

HOWEVER...thanks to a government that is spending money (that it doesn't have) like a house afire, I worry that inflation will likely wipe out any 6% SWR ideas.

$10 for a loaf of bread anyone?

We may be the last generation to be able to FIRE.
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Old 04-08-2012, 06:07 PM   #37
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The point is to annuitize enough of the portfolio to avoid "broke". You may no longer have big bucks in the bank accounts, but you'll have monthly checks from annuity sources like Social Security and AIG Berkshire Hathaway.
Sounds good as presented but, unless I missed it, I haven't seen any discussion of "high" inflation's potential effects on the annuities required for the strategy. (I acknowledge that SS has a good track record of keeping up with higher than normal inflation.) Yes, there are inflation adjusted annuities available, but I recall inflation raging at much higher levels than adjusted-annuities allow. True, there is no guarantee that keeping your stash (i.e., not annuitizing) will allow you to keep up with inflation, but annuitizing makes you vulnerable to inflation without offering any course corrections. Controlling your own stash gives you more flexibility.

Still, I like the concept and will dig deeper. Who wouldn't like to be able to spend more (other than Retire2014, heh, heh)? YMMV
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Old 04-08-2012, 06:11 PM   #38
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But in this scenario, dropping from $111k to $20k a year is hardly likely. Long before the portfolio was exhausted as the market gobbled up the value, they would have made proactive reductions in their withdrawals, at least I'd hope so. That's what makes some of these analyses a little unrealistic, it's not all or nothing. One should expect to make adjustments, up or down, as markets make major moves. The alternative is stubbornly sticking to some predetermined SWR until one suddenly exhausts the portfolio or dies with a ton of cash on hand.
What you are saying about this is in direct competition with what the author of the article advocates, which is that going bust is not such a bad idea---- Live life you will probably be dead before you run out of money. I watched my own parents follow this exact thought process. By 2002 using this strategy, you would already be down to 542K, what I would consider reasonable @ 22K + 20K might not seem reasonable to one who bought in to this and was looking forward to enjoying their sixtes and spending 75K at that point. Any reasonable adjustment from that high of spending is going to be severely dramatic, cutting spending by 60%+. And if you have to do that in the 3rd year of a retirement strategy, what kind of strategy did you take? This "optimal " retirement strategy was designed by 3 PHD's not me.
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Old 04-08-2012, 06:25 PM   #39
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The Bikerdude SWR = Good years spend more, bad years spend less.
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Old 04-08-2012, 07:17 PM   #40
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Having witnessed what can happen first-hand this is nonsensical thinking in my experience. My parents took their retirement savings and spent freeely - my father since age 82 is now living alone after the death of my mother and has no money other than Social Security (he is now 86). Yes if studied he will be one of the people that "prove" you spend less later in retirement. But the increased spending in the early part was totally foolish in retrospect. ( my parents spent at about a 7 percent rate)
Yes, but was he and his wife happy for the remaining years they had together?

I would happily spend more when I am 'younger' and able to enjoy it, especially with the woman I loved, but maybe with a little more to fall back on than SS.

This is why I need to know exactly when my wife and I are gong to croak!
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