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How long will $1 Million last in retirement?
Old 09-23-2012, 12:57 PM   #1
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How long will $1 Million last in retirement?

We've had threads on this topic all along, but I liked the graphic's simplicity, and the fact that it allows for lower rates of return.

Question...does getting 3% over the inflation rate (graphic No. 1) seem optimistic, or has that always been a reasonable goal? (even in days of higher returns, inflation was higher too).

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Old 09-23-2012, 01:22 PM   #2
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Since there seems to be a longevity gene in my family, my projections always assume an investment return equal to the inflation rate. I would have trouble sleeping if I assumed a higher rate, but that's just because I tend to be a worrywart.
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Old 09-23-2012, 02:07 PM   #3
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Nice graphics!
One more caveat is the assumption of consistent returns. As we all know, the average may remain the same even with wide variability over time, and if you are unlucky enough to retire into a major contraction, your portfolio will not be as sustainable as the average return would predict. This makes averages very misleading for most investors facing retirement.
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Old 09-23-2012, 02:30 PM   #4
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You will note that the graphic implies that 4% works for 35 years and I suspect for longer, so the 4% idea is retained. (Using no inflation adjustment)
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Old 09-23-2012, 02:50 PM   #5
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You will note that the graphic implies that 4% works for 35 years and I suspect for longer, so the 4% idea is retained. (Using no inflation adjustment)
I was noticing the same thing. A 2% return gets you to about the 4% SWR.
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Old 09-23-2012, 03:31 PM   #6
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$1/year for a million years ...
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Old 09-23-2012, 03:50 PM   #7
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Originally Posted by Amethyst View Post
Question...does getting 3% over the inflation rate (graphic No. 1) seem optimistic, or has that always been a reasonable goal? (even in days of higher returns, inflation was higher too).
You have an assertion embedded in a question. True that high inflation rates push down equity prices, and in a free market bond prices too, thus increasing nominal returns going forward, but it won't do much of anything positive for someone who is holding the stocks or longer duration bonds going into the period of high inflation. Also, we no longer have a free market in government bonds or interest rates.

The phenomenal bond and equity return that lasted almost 20 years for equities and even longer for bonds are a result of high inflation and even more importantly, Paul Volcker shutting off credit to kill the inflation of the 70s and early 80s. It wasn't inflation that caused high returns, it was the switch from extreme credit restraint and very high interest rates to a long period of falling rates, which may not even be over yet.

In your first sentence you use the word always. I can say with confidence that nothing is "always" in this arena, no matter what anyone tells you. We are in an unprecedented period with the Fed, the BOJ, and the ECB all engaging in full on "stimulus." All these represented nations have more debt to GDP than ever before in peacetime, and also more off balance sheet promises.

I am sure that someone will come along to remind me that the "great depression was worse, Firecalc survived it, blah blah blah. It is my opinion that unprecedented conditions mean that no longer are we drawing our white and black balls from that same jar as earlier. Unprecedented means there are no precedents. We are actually betting on the wisdom of a few people. Their forerunners have not performed so well as to give me a lot of confidence in what the current geniuses will do.

Pay your money and take your choices, ladies and gentlemen.

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Old 09-23-2012, 04:02 PM   #8
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These articles are almost useless since they don't consider the sequence of returns.

In ER, I think this focus on "always" is misguided. You just have to be ready to adjust your living standard, go back to work or both in order to retire early. I think this goes even if you have a COLA'd pension or rely just on SS. There is just too much uncertainty in the world but that's what makes life interesting.
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Old 09-23-2012, 04:50 PM   #9
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Question...does getting 3% over the inflation rate (graphic No. 1) seem optimistic, or has that always been a reasonable goal?
Since 1926 a diversified portfolio of large-cap US stocks has returned an average (mean) of 9.8% per year, before inflation and including dividends. "Large-cap US stocks" means the DJIA early on, and then the S&P 500 after it was created. This number is from memory. I believe it includes the crash of 2007-2009, but I am not positive.

Average (mean) inflation since 1913 in the U.S. has been 3.24%.

Beware of swings around the average, of course.

And for you spoil-sports who say that 20th-Century US stock-market performance was an anomaly because you can only become the world's largest economy once: the US became the world's largest economy in 1900 (based on GDP). Some say earlier.
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Old 09-23-2012, 07:33 PM   #10
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These articles are almost useless since they don't consider the sequence of returns.

In ER, I think this focus on "always" is misguided. You just have to be ready to adjust your living standard, go back to work or both in order to retire early. I think this goes even if you have a COLA'd pension or rely just on SS. There is just too much uncertainty in the world but that's what makes life interesting.
I was going to say the same thing. Sequence of returns and inflation trump returns by a huge margin.

Its amazing what the difference can be just by altering the sequence.

Over a 30 year period you can have 15 years of plus 30% followed by 15 years of minus 10% and have taken a 24% withdrawal rate for 30 years.

Have 15 years of minus 10% happen first followed by 15 years of plus 30% and your swr would be under 2%.

Your average return in both cases was over 8%
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Old 09-23-2012, 08:45 PM   #11
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$1/year for a million years ...
Nah. It lasts until it's gone.
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