Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Constant spending vs. Bernicke
Old 02-07-2013, 10:26 AM   #1
Recycles dryer sheets
teekaymn's Avatar
 
Join Date: Feb 2012
Location: Minneapolis
Posts: 61
Constant spending vs. Bernicke

I'm curious to know which FIRECALC choice is favored by those on the forum. I prefer to use "constant spending", but the Bernicke approach gives me a significantly higher annual spending ceiling, at a 99% success rate (93k vs 58k). Should Bernicke be considered with a grain of salt, or can I go ahead and keep my rose-colored glasses prescription?
__________________

__________________
teekaymn is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-07-2013, 10:37 AM   #2
Full time employment: Posting here.
 
Join Date: Dec 2010
Posts: 572
I prefer the Ben Bernanke's model of printing some more money out of my basement to deal with the limitation to spending.
__________________

__________________
bondi688 is offline   Reply With Quote
Old 02-07-2013, 10:48 AM   #3
Full time employment: Posting here.
 
Join Date: Dec 2010
Posts: 572
To get back to the question, Ty Bernicke did not figure in the possibility of accelerated inflation rate, high health care cost, especially long term care in his postulation that amount of needed withdrawal decreases with age.

Any model is just a model, what I would do is look at the cost of living, overall performance of the investment, my overall situation and adjust spending accordingly, though never go overboard just because I did well in any one year, and maintain the nest egg I hope in a positive trend, or at least neutral, i.e. I am in the camp of preservation of principal as discussed in another thread.

Here is an article that disputed the approach advocated by Bernicke.
http://online.wsj.com/public/article...0815.html?mktw
__________________
bondi688 is offline   Reply With Quote
Old 02-07-2013, 10:53 AM   #4
Recycles dryer sheets
teekaymn's Avatar
 
Join Date: Feb 2012
Location: Minneapolis
Posts: 61
Quote:
Originally Posted by bondi688 View Post
I prefer the Ben Bernanke's model of printing some more money out of my basement to deal with the limitation to spending.
Maybe not print money, but minting giant coins to cover it, now THAT's an idea!
__________________
teekaymn is offline   Reply With Quote
Old 02-07-2013, 11:07 AM   #5
Recycles dryer sheets
teekaymn's Avatar
 
Join Date: Feb 2012
Location: Minneapolis
Posts: 61
Quote:
Originally Posted by bondi688 View Post
To get back to the question, Ty Bernicke did not figure in the possibility of accelerated inflation rate, high health care cost, especially long term care in his postulation that amount of needed withdrawal decreases with age.

Any model is just a model, what I would do is look at the cost of living, overall performance of the investment, my overall situation and adjust spending accordingly, though never go overboard just because I did well in any one year, and maintain the nest egg I hope in a positive trend, or at least neutral, i.e. I am in the camp of preservation of principal as discussed in another thread.

Here is an article that disputed the approach advocated by Bernicke.
Saving Too Much for Retirement? - WSJ.com
Thanks Bondi. The fact that Bernicke didn't figure in high health care costs seems very short-sighted indeed. It's only THE big question mark for most folks trying to do the math. Unless I hear from others that Bernicke's formula in FIRECALC has been adjusted, I'll probably stick with "constant spending".
__________________
teekaymn is offline   Reply With Quote
Old 02-07-2013, 01:35 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 20,487
Quote:
Originally Posted by teekaymn View Post
Thanks Bondi. The fact that Bernicke didn't figure in high health care costs seems very short-sighted indeed. It's only THE big question mark for most folks trying to do the math. Unless I hear from others that Bernicke's formula in FIRECALC has been adjusted, I'll probably stick with "constant spending".
Who would ever have heard about Bernicke if he hadn't proposed the free lunch?

No one, and that is why he proposed the "Bernicke Model".

Ha
__________________
Wherever you go may people always recognize that you have a beautiful heart.
haha is offline   Reply With Quote
Old 02-07-2013, 01:53 PM   #7
gone traveling
 
Join Date: Jul 2007
Posts: 333
I tend to go with the constant spending model (inflation adjusted) but I do think the Bernicke model has some merit. One of my spreadsheets factors in the concept.
__________________
HighRoller is offline   Reply With Quote
Old 02-07-2013, 02:10 PM   #8
Recycles dryer sheets
teekaymn's Avatar
 
Join Date: Feb 2012
Location: Minneapolis
Posts: 61
Quote:
Originally Posted by haha View Post
Who would ever have heard about Bernicke if he hadn't proposed the free lunch?

No one, and that is why he proposed the "Bernicke Model".

Ha
Quote:
Originally Posted by HighRoller View Post
I tend to go with the constant spending model (inflation adjusted) but I do think the Bernicke model has some merit. One of my spreadsheets factors in the concept.
If Bernicke's Model is that flawed (no allowance for HC factor), should it even be a choice as a model? Or is it only a good choice for those that don't anticipate rising HC costs? I have no trouble putting away the rose-colored specs in favor of the more conservative model, but I'd like to hear from more folks that DO justify clicking on that button, just to hear the reasoning.
__________________
teekaymn is offline   Reply With Quote
Old 02-07-2013, 02:37 PM   #9
Thinks s/he gets paid by the post
walkinwood's Avatar
 
Join Date: Jul 2006
Location: Denver
Posts: 2,028
Bernicke's model was based on studying the Consumer Expenditure Survey and then correlating that to median net worth by age & household income - way back in 2002.

It is not based on a bottoms up approach to spending.

It is also based on averages so you need to guess where you fall.
__________________
walkinwood is offline   Reply With Quote
Old 02-07-2013, 02:40 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 9,097
We'll probably use something close to William Bengen's model. It doesn't include the spending assumptions made by Bernicke. From Avi Oren's comment at this site:
Quote:
(as I see it in William Bengen's reports, and notice that it is for more than 30 years horizon. Bengen backested it, on rolling 30 years periods, from 1926 till 2005 on: Tax-advantaged acc with 40% Lrg caps, 20% Sm caps, 40% intermediate Gov bonds)

Age…....A….…B…...C….…..D…..….E
50……....34….44..4.1%..5.1%..65%
55……....30….40….4.2…..5.3…..65%
60……....25……35….4.3….…5.4…….60%
65……....21….31….4.4…….5.5…..50%
70……....17….27….4.5…..5.6….…45%
75……....13….23….5.0…..6.3…..35%
80……...…10….20……5.2…..6.5…..30%
85……...….8……18……5.3…..6.6…..30%
90………....6……16……6.0…..7.5…..30%
95………....4……14….6.5…..8.1…..30%
100……....3….13……7.5…..9.4..…30%

A = Approximate unisex life expectancy (LE).

Note: I have updated column A according to tables in the current IRS tables in Pub 590.

B = Adjust LE by adding 10 years.

C = SWR% for the adjusted LE.

SWR%= safe withdrawal rate (SAFEMAXฎ).

D = Add 25% to C and get the RED FLAG%

E = equity suggested with three asset classes: LCS, SCS, and intermediate term Gov bonds, at the ratio of : SCS allocation = ฝ LCS.

Note: I have added this column taken from Bill Bengen’s other reports.

Current Withdrawal Rate: end of year dollar withdrawal divided by beginning of year account value both in nominal terms. Don’t go over the RED FLAG.
I'm not convinced that Bernicke's data successfully made a distinction between what late term retirees actually spent and what they would have chosen to spend if they'd had the resources.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 02-07-2013, 02:49 PM   #11
Moderator
rodi's Avatar
 
Join Date: Apr 2012
Location: San Diego
Posts: 2,090
Observing my elders I think there is *some*merit to the Bernicke model... assuming SS and Medicare remain unchanged. (big assumptions)

My parents traveled extensively in their early years of retirement. My mom getting cancer slowed down that spending. After she passed, my dad still traveled, but didn't enjoy it as much because he was "slowing down" (his term.) He became happier being a homebody rather than an adventurer.

Physically - you can do more with less aches and pain in your 60's than in your 70's. so if you have expensive interests (travel, boating, etc) you might find yourself doing less in your later years.

My in laws are still around in their late 80's. They lived frugally, but still spent money to go to a shore house, etc... during their 60's and 70's... In the 80's it's just not happening as much (even though they can still afford it.) The body and mind is just not able to support the desire.

In other words - growing old isn't pretty and isn't always fun.

That said - I model with constant spending because it's a more conservative approach. I don't want to run out of money.
__________________
rodi is offline   Reply With Quote
Old 02-07-2013, 02:52 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,313
I'm happy to stay conservative with constant spending. Reducing from there can be plan A2. I didn't feel there was a big enough difference compared to the market uncertainties that I would increase my early spending in hopes of reducing it later.
__________________
Animorph is offline   Reply With Quote
Old 02-07-2013, 02:55 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Posts: 7,662
I use the constant spending model but I do think that spending slows as one ages until health deteriorates and then rises again when one is no longer able to live safely alone. That has seemed to be the pattern with retired relatives I have.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
pb4uski is offline   Reply With Quote
Old 02-07-2013, 07:39 PM   #14
Recycles dryer sheets
 
Join Date: Jan 2008
Posts: 394
Contemplative thread. I imagine if you are the "your money, or your life" type, then it certainly makes sense to consider the Bernicke selection which enables more money to be spent and enjoyed at a younger age. I do make the selected and it gets me out of Megacorp at present expenses*1.22. I'll probably continue present lifestyle so there is my cushion.

Definitely see myself spending much less after 75 if I get there. At least that's the world I see around me.
__________________
NanoSour is offline   Reply With Quote
Old 02-07-2013, 08:06 PM   #15
Thinks s/he gets paid by the post
Katsmeow's Avatar
 
Join Date: Jul 2009
Posts: 2,663
I don't use either constant or Bernicke. I use the manual spending option. Basically I have it reducing spending gradually over the next 10 years and then I leave it level. This is based upon specific spending expected over the next 10 years.

In any event, Bernicke DID note that health expenditures rise. You can look at his article and see it....

It is clear to me from seeing family members that expenditures overall usually decrease with age. I am sure there are exceptions.


__________________
Katsmeow is offline   Reply With Quote
Old 02-07-2013, 08:26 PM   #16
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,025
Like pb4uski, I think there's something to the U-shaped curve, corresponding to three phases of retirement - Active, Passive, Dependent.

But, since I don't know when they'll start or how they'll vary, I retired with a level spending plan.

I think there's some truth to the Sam's comment above.
__________________
Independent is offline   Reply With Quote
Old 02-07-2013, 08:31 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Jun 2007
Posts: 2,023
I'm going with constant (or even slightly increasing) spending. I've read the surveys that show the older old do decrease their spending, but all my personal examples of folks I've known at those ages didn't do so. They either held level because of increased medical costs or increased with added household help and increased lifestyle expenses as they pursued less active pastimes, more luxuriously. If I'm wrong I'll be forced to leave my kids a bigger bequest.
__________________
growing_older is offline   Reply With Quote
Old 02-07-2013, 09:39 PM   #18
Thinks s/he gets paid by the post
Katsmeow's Avatar
 
Join Date: Jul 2009
Posts: 2,663
Quote:
Originally Posted by growing_older View Post
I'm going with constant (or even slightly increasing) spending. I've read the surveys that show the older old do decrease their spending, but all my personal examples of folks I've known at those ages didn't do so. They either held level because of increased medical costs or increased with added household help and increased lifestyle expenses as they pursued less active pastimes, more luxuriously. If I'm wrong I'll be forced to leave my kids a bigger bequest.
That is interesting to see different experiences. With both my family and DH's family it was lower expenses in later retirement even considering health expenses (with the exception of one family member who was in a nursing home for several years). So, some of this may just depend upon what is typical in one's social/family circle.

I actually think the best course of events is to look at what you like to do and what your expenses are now and then do some projections.

For example - some people might have increased expenses in later life if they currently clean their own house and do their own yard and might later hire someone to clean the house and mow the yard. In our case, we already pay someone to clean the house so that expense won't be a new expense later. On the other hand, DH currently does our mowing so I do project at some point paying someone to do that.

Some one who is an avid traveler might significantly reduce expenses in future by not traveling or might increase expenses in the future if intending to still travel but making travel more expensive due to adjustments being made for older age.

For me we won't have much reduction during old age for travel since travel isn't a big part of the budget anyway. So just depends on the individual how that shakes out.
__________________
Katsmeow is offline   Reply With Quote
Old 02-08-2013, 07:47 AM   #19
Recycles dryer sheets
teekaymn's Avatar
 
Join Date: Feb 2012
Location: Minneapolis
Posts: 61
It would seem the prudent thing to do would be to "plan for the worst and hope for the best". I'll stick with the Constant Spending model for my budgeting for now, and if Bernicke turns out to be a more applicable model to my future situation, I should come out ahead. I intend to play with the W. Bengen model as well. Thanks for the link, samclem.
__________________
teekaymn is offline   Reply With Quote
Old 02-08-2013, 11:13 AM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 13,443
Quote:
Originally Posted by haha View Post
Who would ever have heard about Bernicke if he hadn't proposed the free lunch?

No one, and that is why he proposed the "Bernicke Model".

Ha
Love this comment, how true!

Maybe we need a "Saint Francis of Assisi" spending model option? Anytime you want to spend money, you throw yourself onto thorn bushes to distract yourself. A 0% WD methodology. I'm sure it would be wildly popular!

-ERD50
__________________

__________________
ERD50 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 08:21 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2014, vBulletin Solutions, Inc.

Early Retirement News right to your Email!

Stay up-to-date with all the latest news to your inbox!

unsusbcribe at anytime with one click

Close [X]