How Much Is A Future Year Worth?

[MasterBlaster]

Scott Burns has a thought provoking article suggesting that we should spend the nestegg while we can. In his article he suggests tha saving the nestegg cause we may make it to 99, may not be as important as living large before then. The numbers certainly point that way.

How Much Is A Future Year Worth? - Registered Investment Advisor

 

[FUEGO]

I would say the article is more relevant for a typical 65 year old retiree than the folks here shooting for ER in their 50's or 40's, or even in their 30's. You don't need as much safety in your planning when there is a high likelihood you won't be here to enjoy your money for the full 30+ year retirement period. However if you will have 4-6 decades of anticipated retirement and a high probability of being alive during most of those decades, it is prudent to plan for it.

 

[haha]

IMO he is wrong right out of the gate:

There are two kinds of people in this world. Spenders. And Savers. There is no middle ground.

I took a middle way. I never had the extreme deprivation that some here endured. At the same time, I never spent money on things that would not give me or my wife of my children value, and I always lived with the knowledge that what I didn't spend would likely compound well over time. I think there are many people who live in a middle way. In fact, most people with secure government jobs can live very well, while also expecting to live very well in a long period of retirement.
He also makes the error of applying to something based on the law of large numbers, to a single person- oneself. Works fine for insurance, not so well for individual life plans.

Ha

 

[Brett_Cameron]

The article appears to be musings on probabilities rather than possibilities and trying to place a "worth" on the probabilities. Not much value here, IMHO.

 

[FUEGO]

I took a middle way. I never had the extreme deprivation that some here endured. At the same time, I never spent money on things that would not give me or my wife of my children value, and I always lived with the knowledge that what I didn't spend would likely compound well over time.

I guess it all depends on how each of us defines "extreme deprivation" and "value". I follow the same general take on spending - don't overly deprive myself or family, and make sure what we spend brings value.

To take an example out of the OP's article, I wouldn't spend a bunch of money today on a Corvette even if I know that the odds are that my grandchildren will end up spending the money on that Corvette in a few decades. I would rather know that I have a high probability of having plenty of money to live on indefinitely, with the knowledge that if I don't get a chance to spend everything, my kids or grandkids will certainly enjoy spending my money buying their own Corvettes some day.

 

[easysurfer]

I think so much of it is a value judgement.

One person may not wish to leave a single penny to heirs and have all of one's life savings spent while alive. While for another person, leaving something behind is very important.

For some, taking the chances and living day to day is the way to go, where as for someone else, having a rainy day fund is of utmost important.

Does one take the money early or wait? In a simliar fashion, that's the question about taking social security early or wait? Waiting, you'd get a bigger payout at a later age, but will you be around long enough to enjoy that?

 

[Chuckanut]

I have a problem with his basic assumptions. First, there are good wines that are not costly, and only a few dollars a bottle more than two or three buck chuck. I buy these. Second, instead of buying the Corvette, I would love to take my kids and grandkids on a nice vacation with me - one they could not afford on their own. The memories are priceless.

As far as making certain I will still have funds at 95, all I can say is that if I come to the conclusion I won't hit 95, I can always spend more. But, if I hit 95 and don't have the $$, I really don't want to go back to work. Peace of Mind has a value.

 

[rescueme]

While for another person, leaving something behind is very important.

Which for us (having an adult, disabled "child") is the case.

We certainly have much more (financially) than we will ever need, to live retirement as we wish. However, as responsible parents (which ours were not) we are driven in our financial decisions for not only our, but his future needs, which we calculate at a minimum 20+ years after we're gone since he suffers from a condition that will not reduce his expected lifespan.

There are many different situations. An article written for the "general public" dosen't necessarily apply.

 

[donheff]

Stupid article. He states there is no middle path but the whole point of the article is to focus on life expectancies to encourage us to take some undefined middle path. And, as Ha noted, many of us have been on a middle path for decades. The article would have a lot more value if he articulated a spending plan (or an approach to divining one) that incorporated his life cycle value numbers. But simply saying the years between 65 and 75 are twice as "valuable" as those from 75 on doesn't help us decide how much is safe to spend.

 

[Notmuchlonger]

Find something you enjoy doing and is rewarding. Then you wont have to retire and your money problem is solved. Hey I should put that in my newsletter.

brb

 

[steelyman]

I am on the side of those who think there is a middle path. I think members here are very intelligent and capable of managing spending without going hog-wild.

 

[NW-Bound]

The article made the point that the probability of living the 10 years of 65 to 75 is as high as for the 25 years from 75 to 100. Yet, in planning we usually spread out the expenses uniformly.

OK, so nobody wants to die broke. But if one has means above bare-bone subsistence and can afford some luxuries and leisure activities, would it not make sense to front-load those extraneous expenses in the earlier years? Scott Burns argues that it would maximize our money's utility in the probability sense. Many of us who are conservative planners do not like that. But I will say that most of us end up spending less as time goes on anyway, as Bernicke found out from empirical data. So, why not plan on that decelerated spending curve rather than the constant consumption model?

 

[foxfirev5]

There absolutely is a middle path. It's all about setting your priorities. My DW and are aggressive savers and investors. On the other hand we enjoy at least 4-5 weeks on vacation trips and support a lake house in addition to our primary residence. On the frugal side both of our cars are over 8 years old and hopefully will go at least 7 more. Just a couple of examples, but my point is there are a lot of people in the middle ground as well.

 

[Danmar]

People have very different views on when and on what to spend money on. Depends on your tastes and you individual spending utility function. There is no "right" answer other than to live within your means, however you might define it. The article is pretty weak.

 

[Bestwifeever]

I think it's a good thing to remember, though, when an unexpected once-in-a-lifetime opportunity comes up that's not in the budget--go for it with no regrets and savor it. Gather ye rosebuds, etc., etc.

 

[RunningBum]

IMO he is wrong right out of the gate:

I took a middle way. I never had the extreme deprivation that some here endured. At the same time, I never spent money on things that would not give me or my wife of my children value, and I always lived with the knowledge that what I didn't spend would likely compound well over time. I think there are many people who live in a middle way. In fact, most people with secure government jobs can live very well, while also expecting to live very well in a long period of retirement.
He also makes the error of applying to something based on the law of large numbers, to a single person- oneself. Works fine for insurance, not so well for individual life plans.

Ha

Ha took my answer, on both points.

 

[MooreBonds]

The article made the point that the probability of living the 10 years of 65 to 75 is as high as for the 25 years from 75 to 100. Yet, in planning we usually spread out the expenses uniformly.

OK, so nobody wants to die broke. But if one has means above bare-bone subsistence and can afford some luxuries and leisure activities, would it not make sense to front-load those extraneous expenses in the earlier years? Scott Burns argues that it would maximize our money's utility in the probability sense. Many of us who are conservative planners do not like that. But I will say that most of us end up spending less as time goes on anyway, as Bernicke found out from empirical data. So, why not plan on that decelerated spending curve rather than the constant consumption model?

Two cautionary opposing points of view:

One train of thought against throttling up the budget too much in the early years is that investment markets tend to be cyclical. While it's certainly not guaranteed, there is a chance that as you start to hit 81 and need to spend decently on assisted living care, the market starts to drop in a downturn. Combining increasing withdrawals for your care with poor market returns can be a sharp double whammy. Multiply that by 5 years in a care facility if you self-insure for Long Term Care (which some on this forum are doing), and your portfolio could really take a huge hit in no time flat.

The other train of thought is that if you are able to spend wisely, and enjoy your 60s/early 70s on a modest budget, you still have money to spend on things you want if you are still healthy in your 80s. Perhaps you won't do as many crazy things as in your 60s....but my widowed grandmother took 2 cruises when she was 80 and 81 with me and my sister. If I hadn't been the only one helping to take care of her, and I wanted to spend even more time with her, she could have been talked into taking other trips. She went out to eat often, and didn't deprive herself of food at the grocery store....as well as lived in a pretty expensive home with not-too-cheap real estate taxes, just as she wanted. And also left quite a legacy behind - again, just as she wanted. She was the saving type, so even if she knew she would make it to 88 with a good portfolio (thanks to my shrewed buying of callable CDs with juicy yields), she probably wouldn't have spent too much more...but her wealth gave her choices.

And having the wealth is kind of like having some freedoms outlined in the Constitution - even though many people don't vote, or choose not to own firearms, it might give them a certain sense of ease or comfort knowing that there are freedoms available to them if they so choose, whether or not they need/want to actually do that. It's not quite the same as having the money "just in case" you need it - it's slightly different.

 

[Animorph]

Wade Pfau has been working in the same direction. One approach, though not his primary one I think, is to use the RMD's to determine the portfolio withdrawals. RMD's are based on life expectancies that are adjusted as you get older. They have the effect of allowing higher earlier spending, but with some concern for the future. Reasonable enough, but I can't help thinking about having to pay for help around the house and yard (and broker?) as I age, nursing home costs, and rejuvination treatments. I'm not sure I see declining costs as I age.

 

[growing_older]

I don't object to dying broke. I do object to becoming broke before I'm dead. Most of these spend now or save for later arguments seem to ignore the uncertainty in any such spending calculations. Since I cannot know what unexpected events may happen in my future, I will likely save more than I need, but I consider that I am buying security with those funds. I don't have to actually spend the money on Corvettes to get value from having it. I value the security it gives me in knowing I can reasonably deal with what the unexpected future brings.

 

[obgyn65]

+10. This is what financial independence is all about, isn't it ?

I don't have to actually spend the money on Corvettes to get value from having it. I value the security it gives me in knowing I can reasonably deal with what the unexpected future brings.

 

[donheff]

Wade Pfau has been working in the same direction. One approach, though not his primary one I think, is to use the RMD's to determine the portfolio withdrawals. RMD's are based on life expectancies that are adjusted as you get older. They have the effect of allowing higher earlier spending, but with some concern for the future.

This sounds backwards to me. RMDs are just a fixed percentage approach adjusted for life expectancy each year. They start out at 70 at about 3.6% of portfolio and INCREASE as a percentage as you get older. The goal is to liquidate the untaxed pot by death, not insure that a smooth spending curve is implemented. In most markets this method would result in a steadily growing spend. In volatile markets it would result in large swings. How does Pfau use the tables?

 

[skyvue]

My own planned spending model in retirement takes what he is talking about into account. I am currently shooting for an early retirement of 52 and am planning my expenses to initially be higher then than what they are now. That is when I plan to do extensive travel and have a lot of fun.

However, as I approach 65, the plan is for me to gradually throttle back on exepenses (while accounting for inflation) because I will not feel like traveling or physically be capable of doing the things I plan on doing in my early 50's.

I plan to defer Social Security to age 70 and treat it more or less like a hedge against outliving my money. If I live past 70 there is decent chance I AM going to run out of money, BUT will have $3,100 per year coming in from Social Security which I feel can provide a comfortable existence for somebody that age. The main risk is assuming social security benefits will not be cut in the future. I feel comfortable that they will not. To politically unacceptable (IMO)to actually cut actual benefit payout amounts. I believe they will raise taxes, increase retirement age and do everything else they can to make the program solvent before cutting the actual amount paid out.

I do agree with others that there is a middle ground. However, who wants to believe and admit they are on one side of these extremes? We all would like to think we are in the middle even though I would bet based on the nature of this board, most on here are people others would call "cheapskate party poopers".

 

[jerome len]

Which for us (having an adult, disabled "child") is the case.

We certainly have much more (financially) than we will ever need, to live retirement as we wish. However, as responsible parents (which ours were not) we are driven in our financial decisions for not only our, but his future needs, which we calculate at a minimum 20+ years after we're gone since he suffers from a condition that will not reduce his expected lifespan.

There are many different situations. An article written for the "general public" dosen't necessarily apply.

I have a disabled granddaughter as well. I've started a special needs trust so that when I nor her parents are around, she will be taken care of. And, if her parents are still around at their retirement, they'll have additional funds for their daughter and be able to retire. I commend you, really commend you for thinking ahead. We who have our health are so lucky....and I'm just thankful that I can set aside funds now and it doesn't affect my conservative but full future retirement. Overall, I've really been blessed, but my heart goes out to every parent with a disabled child.

And, I assume I'll live to 95..... I'd rather leave a little then have to be miserable if I live to a really old age.

 

[rescueme]

I've started a special needs trust so that when I nor her parents are around, she will be taken care of.

Bless you; you well understand the challange...

Just remember that the SNT (as we have, also) hopefully will provide the cash resource. The challange is to match the ongoing living requirement/services to ensure that they are taken care of, after all (who give a damn) have passed, regardless of financial resources. In our case, our "family" want nothing to do with him, or his future (that's why I say "family's suck", but in your case, it seems to be different).

It's not an easy path to follow, regardless of your "connection" to the disabled...

 

[Animorph]

This sounds backwards to me. RMDs are just a fixed percentage approach adjusted for life expectancy each year. They start out at 70 at about 3.6% of portfolio and INCREASE as a percentage as you get older. The goal is to liquidate the untaxed pot by death, not insure that a smooth spending curve is implemented. In most markets this method would result in a steadily growing spend. In volatile markets it would result in large swings. How does Pfau use the tables?

I think of it like a 4% of portfolio value per year kind of rule, but as you age you can increase the percentage because you have fewer possible years to worry about. It is intended to maximize your spending, but in an arguably "safe" way. No way a 100 year old needs to take just 4% of their portfolio value per year if the intention is not to leave anything.

Here's the last post Dr. Pfau posted about this:

Retirement Researcher Blog: Retirement Planning Horizons and IRS Required Minimum Distributions (RMDs)