"4% is too low." How much will you leave on the table?

[Ed_The_Gypsy]

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.

Ha

I am with Ha here. Poverty sucks.

 

[Retire2013]

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.

 

[Nords]

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.

 

[Midpack]

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...

 

[Running_Man]

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.

 

[Midpack]

Well at least I know I'm not a Risk Aversion = 1! Ouch!

 

[Animorph]

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.

 

[traineeinvestor]

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.

 

[H2ODude]

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.

 

[Midpack]

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?

 

[marko]

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.

 

[Koolau]

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

 

[Running_Man]

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.

 

[Bikerdude]

The Bikerdude SWR = Good years spend more, bad years spend less.

 

[Ronnieboy]

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!

 

[pb4uski]

The Bikerdude SWR = Good years spend more, bad years spend less.

+1 That's my withdrawal plan in a nutshell.

 

[Aiming_4_55]

One size does not fit all.

Not ER or SER yet, but hopeful. As I think and think about our family's personal situation, it'll change almost every few years, so my plan has to be very customized. It would be easier if our barebones budget was covered by a pension, SS, etc, but it is not. I have to plan from mid-40's to early 60's before anything kicks in.

I see some years in the 3% SWR and others in the 4 - 6%. Life happens.

 

[beowulf]

We know far too many people who ended up having no clue as to what was being spent, where they lived, how much money they had or even who they were in their final years. If you live to be 95 and have retained your mobility and brain, you will know the difference if you have to cut expenses by 75% to survive. But I believe those folks are a very small minority. Unfortunately, none of these analyses take into account the real possibility that those of us who make it to extreme old age will not have the faculties to enjoy them.

If I am the last survivor (extremely unlikely - my wfe's mother died at 87 and her aunts in their 90s), I would like to pass with all my credit cards maxed out and deeply in debt, having enjoyed myself to the fullest while alive .

For us, the biggest question, like others have said, is inflation - $20 a gallon gas, and everything else priced similarly. Having a DB inflation adjusted pension will help a lot, until the government goes bust.

 

[2B]

I have created two retirement funds. The first includes a small DB pension (not COLA'd), cash to bridge us until Medicare and SS kick-in, the eventual SS payments and enough cash to supplement this up to our "basic" spending level effectively forever. Realistically, we could still significantly reduce this spending level if necessary but that's "Plan B." The second plan is designed to be more along the lines of a Bernicke 20 year plan with a 70% survival rate. It's amazing how much spending that allows. It's significantly higher than a level "safe" spending rate which would be less than I would like to spend in my early retirement years and more than I would likely want to spend as I start falling apart.

Of course, I realized I was FI around 2005 just after I started to "lurk" here. I continued with employment because my in-laws had all sorts of issues that kept DW from traveling. If I didn't have a j*b, I knew I would be spending many hours accompanying DW visiting her parents in whatever stage of care they were in. This has resulted in my nest egg being safely above what a classic early retirement goal would need to be. Right now I could be one of people bragging about the under 3% SWR. Instead, I start at almost 10% as I drop assets to pay for delaying SS to age 70. This would be reduced over time. If the stock market truly falls apart and doesn't come back, I'll be down quicker than hoped for but I should still be in a safe position. I plan on reviewing assets versus spending annually to validate the plan or to make needed changes.

The one thing that we can never truly account for are the uncontrollable risks. Major cuts to SS would hurt. Hyper inflation would destroy my asset base and effectively eliminate the value of my pensions. Even those with COLA'd government pensions can't consider them totally risk free. Municipalities have reduced pensions in this country and many more including various state governments are in a death sprial trying to continue with the payments.

 

[growing_older]

I do not consider any surplus "more than I need". The extra 2 years I worked (past when I reached FI) buys me peace of mind, and is worth far more to me than an extra $10-20K a year to spend.

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...

I am still accumulating, although I have reached FI by 4% measures. I could retire and even spend more, but I am more interested in buying safety and certainty of having "enough" than I am in spending more, or even sooner. Planning scenarios to a very fine level of detail seems like overthinking to me. The future events that are included in the plan are unlikely to occur within the limits described in the plan. Some thing(s) never imagined are likely to occur that will change the plan. By squeezing the highest "predictable" spending from an asset base, a retiree makes themselves vulnerable to unexpected downside risk, for the sake of marginal (at best) increased spending.

It's very much like the decision to LBYM and accumulate assets in the first place. I am very willing to trade excess current spending that brings me limited enjoyment for future ability to spend. Leaving some (or even a lot) on the table is not lost. It bought me security and a level of certainty in an otherwise very uncertain world. The trick is deciding how to value what I might do with spending now compared to how I value the safety I am buying. I am comfortable with my valuations. Others likely have different values.

 

[rescueme]

I see some years in the 3% SWR and others in the 4 - 6%. Life happens.

Actually, your assumption is closer to reality (as is actually happening in my/DW's case, today) - especially in an "ER situation".

By that term, I mean a person/couple who decides to retire earlier than what is considered "normal" - that is before all their respective "income streams" become effective.

I know I tell the same old story but it's like a comedian. They don't necessarily change their jokes, but tell the same time worn jokes to a different audience.

DW/me made plans to both retire (we're the same age) a bit earlier than normal, at age 59. While a lot of folks may think that age is not ER, to us (who decided to w*rk till our SS FRA age of 66), it is.

I retired in early 2007, at age 59 - as planned for. DW (who is sort of an "Energizer Bunny") planned for the same year, but decided to stay employed (until last Monday - her first day of retirement).

Anyway, using the facilities of FIDO's RIP program (better known as "Retirement Income Plan), which shows a year by year breakdown of estimated withdrawal rates, we are quite in excess of that "magic 4%".

Is there really a problem? For us? No.

That's because we are retired and are funding our respective retirement income only through our respective retirement portfolios.

But wait. In 13 months (when DW turns age 65), she will start to receive two small (defined benefit) pensions. A year after that, she will start receiving her FRA (age 66) SS benefit, with me applying for 50% of that amount for the next four years.

At that time (when I'm 70 - assuming I'm still alive, an accruing an 8% increase per year - plus any COLA, since DW applied for benefits), I'll max out my SS (primarily for the benefit of DW - assuming I'll pass first) we will have our "maximum planned retirement income" - along with a withdrawal rate of much under 4%, even with our "planned excessive ER spending", which will not exceed that 4% rate for many years into the future - in our late 80's, in our case.

The simple question is why would I/DW in ER stick to a current day 4% rate, when future income streams will ensure an eventual withdrawl rate much below that?

Should we delay "life" at an ER age just to meet some published rule?

I think not. Just my/our POV on the subject being discussed...

BTW - just a note on leaving a big estate (per the thread title). For us (and our only (disabled) adult child) - we are fortunate that we will be leaving a quite "healthy" estate, primarily for his care after we're both gone. Sometimes, there are reasons not to "die broke". If you feel you must, consider yourself lucky...

 

[martyp]

When I was working my philosophy was to save some and spend some. I spent money without a budget but there was always money left over. In reality, I ended up saving more than I thought I was mainly because of basic LBYM life choices that just came naturally. The article seems to be saying that a 4% SWR is unnecessarily conservative given the probability of your lifespan. That you are forcing yourself to "suffer" in your early retirement years and that, in the end, "you can't take it with you".

I would never advocate that people deprive themselves in their working years to provide for an early and/or lavish retirement. Nor would I advocate the same for the early retirement years vs old old age. The key to me is to figure out how to enjoy the life you can afford at any point in your life. If I end up with a chunk of money at the end that I can't take with me . . . well, then I'll make sure it goes to some worthy use after I'm gone. I can certainly read the lifespan tables but, personally, I'm concerned about quality of life at the end. So my personal preference is to make sure I have what I think is adequate funds at the end to cover health care costs. If I kick off early or am too mentally out of it to use the money then, c'est la vie.

 

[Danmar]

@Martyp. good post and I agree with your philosophy. Putting it in practice is the tough part though.

 

[Midpack]

When I was working my philosophy was to save some and spend some. I spent money without a budget but there was always money left over. In reality, I ended up saving more than I thought I was mainly because of basic LBYM life choices that just came naturally. The article seems to be saying that a 4% SWR is unnecessarily conservative given the probability of your lifespan. That you are forcing yourself to "suffer" in your early retirement years and that, in the end, "you can't take it with you".

I would never advocate that people deprive themselves in their working years to provide for an early and/or lavish retirement. Nor would I advocate the same for the early retirement years vs old old age. The key to me is to figure out how to enjoy the life you can afford at any point in your life. If I end up with a chunk of money at the end that I can't take with me . . . well, then I'll make sure it goes to some worthy use after I'm gone. I can certainly read the lifespan tables but, personally, I'm concerned about quality of life at the end. So my personal preference is to make sure I have what I think is adequate funds at the end to cover health care costs. If I kick off early or am too mentally out of it to use the money then, c'est la vie.

+2. The search for that balance never ends. I know I can't really die broke, but if real returns are better than I expect, I'll certainly adjust spending accordingly along the way and more aggressive the older we get.

 

[Major Tom]

+2. The search for that balance never ends. I know I can't really die broke, but if real returns are better than I expect, I'll certainly adjust spending accordingly along the way and more aggressive the older we get.

I'm trying to banish from my head the vision of a number of e-r.org members at an extremely advanced age and in decrepit condition, trying desperately to act out some rather excessive and inelegant "spring-break" type behaviors while struggling with canes, walkers and electric scooters in an effort to "spend down the stash"