Interesting, though maybe depressing, article...

[LARS]

on withdrawal rates. What was especially "enlightening" (i.e depressing to read it in print despite already thinking it) was the assumptions about inflation and higher tax rates against a likely volatile investing environment.

Bottom line of article if you want a near 100% chance of leaving an inflation adjusted estate you shouldn't withdraw more than 1%!

Ultra Wealthy Urged To Restrain Spending

 

[W2R]

Don't the usual SWR values assume that the remaining portion of the portfolio at death will be zero? I wonder if the requirement for a portfolio of the same value (adjusted for inflation) in this article could to some extent account for the low SWRs suggested.

 

[LOL!]

I can't believe that financial advisors are recommending that wealthy families cut expenses and spend less. I would imagine the first expense to cut would be the fees and charges paid to financial advisors themselves.

 

[LARS]

Don't the usual SWR values assume that the remaining portion of the portfolio at death will be zero? I wonder if the requirement for a portfolio of the same value (adjusted for inflation) in this article could to some extent account for the low SWRs suggested.

Clearly it is the goal of maintaining an estate (inflation adjusted) that is driving the conclusion of a very low SWR (1%). Still, the following paragraph was an eye opener:

"Let's take a portfolio worth $30 million. We'll assume a yearly spending rate of $900,000 or 3%. Now, let's make the annual investment return a nice round 10%, peg inflation at 5% and put taxes at 20% for long-term gains and 45% for ordinary income. But for planning purposes it is a pretty good assumption...

In this scenario, a family can spend $900,000 a year for about 23 years—and then the money runs out.

Boost inflation to 7% and taxes to 25% for long-term gains and 60% for ordinary income (all within this country's post-World War II experience) and the family has just 16 years to enjoy its money."

The real take away for me from the article was higher tax rates and higher inflation rates make a 3% SWR highly questionable. What are the chances we'll see significantly higher taxes and inflation rates... your guess is as good as mine.

But for planning purposes I think you have to assume it will be the case...

 

[NW-Bound]

1% SWR? I guess I can do that by "extreme scrimping", yet still be able to afford medical insurance.

How, you ask?

I will have to sell my houses to cut expenses and raise capital, and live in my 26' class C RV full time.

As I am not ready for that extreme frugal 1% SWR, I think I will keep my part-time work a bit longer.

 

[W2R]

Clearly it is the goal of maintaining an estate (inflation adjusted) that is driving the conclusion of a very low SWR (1%). Still, the following paragraph was an eye opener:

"Let's take a portfolio worth $30 million. We'll assume a yearly spending rate of $900,000 or 3%. [...] In this scenario, a family can spend $900,000 a year for about 23 years—and then the money runs out.

That is indeed an eye-opener, especially for very early retirees who might expect to live for 50+ years on a 3% SWR.

I think you bring up a very good point - - past (market, and tax) conditions are no guarantee of what we may experience in the future. We may have a very rough ride ahead of us.

 

[Bestwifeever]

I can't get past the 10 percent pretax annual earnings the portfolio is anticipated to receive....

 

[bbbamI]

I can't get past the fact I'm reading an article about the ultra wealthy.

 

[traineeinvestor]

If personal taxes go up then you would expect corporate taxes to also go up which will affect the already high effect of a 10% pretax return. You would also expect companies to cut dividend because the double tax effect will be higher.

Of course the real message I take from this is that if you have US$30 million you shouldn't be spending US$900,000 a year.

 

[Nords]

I can't get past the fact I'm reading an article about the ultra wealthy.

Let's take a portfolio worth $30 million. We'll assume a yearly spending rate of $900,000 or 3%. Now, let's make the annual investment return a nice round 10%, peg inflation at 5% and put taxes at 20% for long-term gains and 45% for ordinary income.
In this scenario, a family can spend $900,000 a year for about 23 years—and then the money runs out.
Boost inflation to 7% and taxes to 25% for long-term gains and 60% for ordinary income (all within this country's post-World War II experience) and the family has just 16 years to enjoy its money.

Well, dammit, that's simply unacceptable. Only $900K/year? How can I endure these ridiculous spending cuts on life's essentials?!?

First thing tomorrow morning I'm going to have the chauffeur polish up the ol' Bentley, alert the butler & valet to lay out my best shorts & t-shirt, and proceed smartly to the family banking staff with stern instructions for them to spiff up our portfolio. Life is just simply not worth living with only one yacht, and those Waikiki berths won't pay for themselves-- to say nothing of the diesel fuel, sunscreen, masseuses, and helicopter flight hours for our annual Great Barrier Reef cruise. Why, we might have to cut back to only four weeks instead of eight!

Then I'm going to seek out a first-edition copy of a "Passionate Saver" (or something-or-other title like that) volume for my estate library. That feller may be able to teach a thing or two about this safely withdrawing rate, if such a concept really exists. Doesn't sound very manly to me.

Need to pick up a couple more cases of single malt on the way back to the estate, too. We'll just have to make up for it tonight after the polo match with a thinner cut of Kobe beef on the hors d'oeuvres tray. Confound this recession, haven't all of those unemployed people gone back to work yet?

 

[Gone4Good]

30 Yr TIPS at 1.77% . . . anyone suggesting that you can't withdraw more than 1% real from a portfolio should actually look at some market information. Anyone professing to be a "Financial Professional" of any kind making such claims should be fired immediately.

 

[Gone4Good]

"Let's take a portfolio worth $30 million. We'll assume a yearly spending rate of $900,000 or 3%. Now, let's make the annual investment return a nice round 10%, peg inflation at 5% and put taxes at 20% for long-term gains and 45% for ordinary income. But for planning purposes it is a pretty good assumption...

In this scenario, a family can spend $900,000 a year for about 23 years—and then the money runs out.

Yeah, but it looks like they're talking about drawing 3% before taxes. That's not how we'd define our withdrawal rate here. And if they're assuming that you're paying taxes on the full 10% portfolio income that could easily double the withdrawal rate. In that case, you'd be withdrawing 6% real from a portfolio earning 5% real, which obviously will run out of money at some point.

 

[David1961]

The 4% SWR is a rule of thumb, so it's a good idea to have a safety cushion and withdraw less than 4%. It's hard to say where that "sweet spot" of withdrawal is and it will be different for everyone. But IMHO 1% is way too low.

 

[ziggy29]

The 4% SWR is a rule of thumb, so it's a good idea to have a safety cushion and withdraw less than 4%. It's hard to say where that "sweet spot" of withdrawal is and it will be different for everyone. But IMHO 1% is way too low.

The funny thing is that the 4% was supposed to already include a bit of a "safety cushion," but I suppose the last couple of years in the market have convinced an increasing number of people that there's not enough cushion there.

As for 1%? Not only can you already considerably beat that with TIPS (I loaded up on them in November 2008 with about a 2.9% real YTM and even today it's a little under 2%), but that's not something many but the very wealthy who are cheapskates can even find usable. That's $10K a year from $1M. That's it.

 

[HFWR]

Well, dammit, that's simply unacceptable. Only $900K/year? How can I endure these ridiculous spending cuts on life's essentials?!?

First thing tomorrow morning I'm going to have the chauffeur polish up the ol' Bentley, alert the butler & valet to lay out my best shorts & t-shirt, and proceed smartly to the family banking staff with stern instructions for them to spiff up our portfolio. Life is just simply not worth living with only one yacht, and those Waikiki berths won't pay for themselves-- to say nothing of the diesel fuel, sunscreen, masseuses, and helicopter flight hours for our annual Great Barrier Reef cruise. Why, we might have to cut back to only four weeks instead of eight!

Then I'm going to seek out a first-edition copy of a "Passionate Saver" (or something-or-other title like that) volume for my estate library. That feller may be able to teach a thing or two about this safely withdrawing rate, if such a concept really exists. Doesn't sound very manly to me.

Need to pick up a couple more cases of single malt on the way back to the estate, too. We'll just have to make up for it tonight after the polo match with a thinner cut of Kobe beef on the hors d'oeuvres tray. Confound this recession, haven't all of those unemployed people gone back to work yet?

The humanity...

 

[LARS]

The real world implications/impact of this article are limited for most. The reality of dramatically increasing taxes are not likely for mere mortals (i.e. those with incomes below $250,000).

Still, what is a worry for mere mortals is the potential enviroment of high inflation and low real returns.

 

[traineeinvestor]

Unfortunately, investing in TIPS or equivalent will not do the job - the Forbes cost of living well index has tended to rise faster than the general CPI by a meaningful margin. The 2007 data is here: The Price of Living Well - Forbes.com

 

[HFWR]

Fighting inflation may be "fighting the last war"...

 

[LARS]

Fighting inflation may be "fighting the last war"...

That appears to be the broad landscape for the near term, but the on-going battle to eek out real returns against one's personal inflation rate is alive and all too well.

 

[Bestwifeever]

Not to mention why worry about leaving an estate, especially since in many cases more people will enjoy it than the decedent--for example, if you have two children or other heirs, your estate is halved between them (whether it's a trust that has its income divided by two or an outright handing over of 1/2 of your estate to each). So your heirs will then take only 1 percent of their own share so they can leave the bulk to their (multiple) heirs. That $900,000 a year today, for future generations will be chump change anyway, so just go buy that yacht and island today and enjoy them.

 

[Tigger]

Not to mention why worry about leaving an estate, especially since in many cases more people will enjoy it than the decedent--for example, if you have two children or other heirs, your estate is halved between them (whether it's a trust that has its income divided by two or an outright handing over of 1/2 of your estate to each). So your heirs will then take only 1 percent of their own share so they can leave the bulk to their (multiple) heirs.

Close, my dear, but no cigar. The heirs are supposed to marry descendants from equally wealthy families. Thus, two halved estates, make a whole together.

If there are too many heirs, there's always the possibility of sending some off to monasteries where they'll take a vow of poverty. Or get them to enlist in the military, so they can be gloriously blown to tiny bits in a foreign country. Another way to avoid excessive heirs is to mostly have illegimate offspring. After all, a sufficient supply of peasants is needed to work the fields.

so just go buy that yacht and island today and enjoy them.

Oh, that would be SO nouveau riche.

 

[M Paquette]

That is indeed an eye-opener, especially for very early retirees who might expect to live for 50+ years on a 3% SWR.

Well, yes, for someone taking out 900,000 annually off a 30 million dollar pot. I suspect that the taxable returns on that pot may be in a higher marginal rate than what someone taking out 50,000 a year from a 1.5 million dollar pot might reach.

There's also the matter of appropriate investments. With those very high tax and inflation rates, a bit of tax planning might be wise.

Personally, I managed to harvest so much in short and long term losses last year that I don't think I'll see a taxable capital gain during my lifetime.

 

[haha]

Personally, I managed to harvest so much in short and long term losses last year that I don't think I'll see a taxable capital gain during my lifetime.

Congratulations!!!

 

[ERD50]

Don't the usual SWR values assume that the remaining portion of the portfolio at death will be zero?

No - where did this idea come from? How could that even be possible - it would imply certainty of the future?

If you look at the output from the default FIRECALC run (95% success, $750K starting portfolio 4% WR)), you will see a wide range of outputs at the end of the selected time-frame. There will be one for each time-frame with sufficient data (currently 109 cycles tested).

From the output:

Here is how your portfolio would have fared in each of the 109 cycles. The lowest and highest portfolio balance throughout your retirement was $-300,739 to $4,259,606, with an average of $1,304,195. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

A whole bunch (I'd eyeball it at > half) where the ending portfolio exceeds the start point. And of course, 5% that go < zero.

-ERD50

 

[Hamlet]

I'm at a loss as to how they are calculating this.

They must be using some pretty high level of portfolio turnover and unrealized capital gains.

Starting in the first year, their numbers say that the portfolio generates $3 million in gross returns. If half of that is capital gains and half is regular income, I figure that the portfolio nets a little over $2 million, minus the 900k living, leaving over $1.1 million to add to the portfolio.

In year two they will earn $3.1 million gross, net $2.1 million, minus the 945k living due to inflation, leaving a little bit more to the portfolio than the year before.

What am I missing?

Yeah, but it looks like they're talking about drawing 3% before taxes. That's not how we'd define our withdrawal rate here. And if they're assuming that you're paying taxes on the full 10% portfolio income that could easily double the withdrawal rate. In that case, you'd be withdrawing 6% real from a portfolio earning 5% real, which obviously will run out of money at some point.