Is C/W wrong?

[mickeyd]

Here are a few quotes from an article that I ran across today. It addresses a number of interesting topics that have been addressed here. I do not see any brand new ideas about retirement (are there any?) in this piece but some good points to ponder.

“When it comes to retirement, most of the ‘conventional wisdom’ is wrong,” according to Dr. Van Harlow, managing director of The Fidelity Research Institute.

For instance, take previous studies of the “safe” withdrawal rate, i.e. the amount you can withdraw from your nest egg each year and have a high probability that you will not run out of money. The conclusion: 3-4 percent in Year No. 1, increased each year after that by 3 percent, so your spending power keeps up with inflation.

But the impact of a reduced benefit is compounded over time, so our “early” retiree rapidly begins to lose ground.* For instance, you know those annual cost-of-living (COLA) increases Social Security doles out? While the percentage is the same for everyone, the amount of dollars is not — it’s based on the size of your benefit.

In our example, a 3 percent COLA means our early retiree’s Social Security income would increase by $476.64 ($15,888 x 3 percent) in Year No. 2. If she waited until age 66 to start her benefit, a 3 percent COLA translates into $653.04 ($21,768 x 3 percent) more income the next year. The same percentage applied to benefits started up at age 70 results in an increase of $883.08 ($29,436 x 3 percent) the following year.

On the other hand, if the markets go into a swoon and your portfolio is taking a big hit, then it makes sense to start Social Security as soon as you can because every dollar in benefits you receive is a dollar less you have to withdraw from your nest egg. The nightmare scenario for a retiree involves having to take money out of their portfolio when it’s declined in value. As anyone who retired in 2000-2002 can tell you, you run the risk of withdrawing so much principal that your portfolio may never recover, even when the markets do.

http://www.foxnews.com/story/0,2933,235562,00.html

[dmpi]

Originally Posted by mickeyd

"The nightmare scenario for a retiree involves having to take money out of their portfolio when it’s declined in value. As anyone who retired in 2000-2002 can tell you, you run the risk of withdrawing so much principal that your portfolio may never recover, even when the markets do."

I never really understood this. Does it really matter if your portfoilo has increased or declined in value? For example, If your protfoilo is worth 200K what difference does it make if you bought it for 100K or 400K?
And just because your stocks are down, it don't mean that it not going to go even lower. It's just as hard to time the market buying into it as pulling out of it.

[haha]

Originally Posted by dmpi

I never really understood this. Does it really matter if your portfoilo has increased or declined in value? For example, If your protfoilo is worth 200K what difference does it make if you bought it for 100K or 400K?
And just because your stocks are down, it don't mean that it not going to go even lower. It's just as hard to time the market buying into it as pulling out of it.

Isn't one of the major arguments for rebalancing is that it automatically helps you sell expensive goods and buy cheap goods?

Haa

[mickeyd]

If your protfoilo is worth 200K what difference does it make if you bought it for 100K or 400K?

Good Q. If you were withdrawing 4%, for instance, from your stash each year you would take $4000 from the 100k and $16000 from 400k. You'd probably feel the difference because you'd be eating cat food by summertime if you only had $4k.

[dmpi]

Originally Posted by mickeyd

Good Q. If you were withdrawing 4%, for instance, from your stash each year you would take $4000 from the 100k and $16000 from 400k. You'd probably feel the difference because you'd be eating cat food by summertime if you only had $4k.

I do understand that someone with a 100K nest egg will live at a lower standard of living than someone with a 400K nest egg. But if the 400K guy has a 200K loss, and the 100K guy has a 100K gain. They will both be living at the 200K level. So I don't think it matter if you've gain or lost. But rather its where your at, that will dictate how you will live.

[Tadpole]

Originally Posted by dmpi

I do understand that someone with a 100K nest egg will live at a lower standard of living than someone with a 400K nest egg. But if the 400K guy has a 200K loss, and the 100K guy has a 100K gain. They will both be living at the 200K level. So I don't think it matter if you've gain or lost. But rather its where your at, that will dictate how you will live.

Not necessarily. If you start out and your plan includes the lower income your choices of things like where you live and what car you buy are based on the lower cash flow. If you start out with expectations of a higher income, your disgressionary income can be far less than the guy who started out with the lower income plan and your actual "life style" could be very bleak. It begs the question: Should all retirees establish a most pessimistic outlook when setting up for retirement?

[rmark]

The full paper is a pdf at http://www.fidelityresearchinstitute.com.

Yes the value of the portfolio matters-
If it goes to $0 you eat cat food, if it goes to $1,000,000 your cat eats steak.

The average retiree has the problem of being a net seller as assets must be sold to support their lifestyle. Having to sell in a falling market early in retirement, combined with typically more conservative portfolios later in life, means the retiree never has a chance to truly recover from early losses.

[rmark]

Kotlikoff has a recent paper comparing investment and lifestyle risk.
http://www.bos.frb.org/economic/conf.../kotlikoff.pdf

Now its off to fight the cat over the can opener.

[jazz4cash]

Executive Summary of Fidelity Research Institute Report

Trade More Often

[donheff]

Originally Posted by dmpi

I never really understood this. Does it really matter if your portfoilo has increased or declined in value? For example, If your protfoilo is worth 200K what difference does it make if you bought it for 100K or 400K?
And just because your stocks are down, it don't mean that it not going to go even lower. It's just as hard to time the market buying into it as pulling out of it.

This only applies if you are taking a constant 4%/year out - variable with your portfolio (e.g. both would pull $8K from the $200K portfolio regardless what amount they started with). Most ERers are setting the amount at ER adjusting by inflation. So the $100K ERer is pulling $4k per year. If the nest egg increases to $200K they are now pulling at a very comfortable 2% and can rest easy. The $400K ERer starts out at $16K/yr. If they stick with the plan after the nest egg collapses to $200K they are pulling at a stomach wrenching 8%. For the later, Firecalc says that at the outset of their retirement the odds are the market will recover in time to rescue them but it is still a scary matter.

The underlying historical principles intuitively imply that it does really matter what point in a cycle you retire. If you are in shape to pull the plug after a major decline, the odds must favor a better likelihood of success. If you are ERing far into an extended bull market the odds have to favor a downturn earlier on and thus a somewhat more risky future.

[dmpi]

Originally Posted by donheff

This only applies if you are taking a constant 4%/year out - variable with your portfolio (e.g. both would pull $8K from the $200K portfolio regardless what amount they started with). Most ERers are setting the amount at ER adjusting by inflation. So the $100K ERer is pulling $4k per year. If the nest egg increases to $200K they are now pulling at a very comfortable 2% and can rest easy. The $400K ERer starts out at $16K/yr. If they stick with the plan after the nest egg collapses to $200K they are pulling at a stomach wrenching 8%. For the later, Firecalc says that at the outset of their retirement the odds are the market will recover in time to rescue them but it is still a scary matter.

OK. I guess I understand this now. I would hope people would be at least slightly flexiable and be able to increase or reduce their spending when needed. But I do realize some costs are fixed and there are not much you can do about it.

[deserat]

Hmm - I thought an easy way of thinking about it was that one wasn't necessarily touching their prinicipal so much as living off the earnings and that withdrawing 4% allowed for that principal to stay fairly intact....i.e. that you stood a good percentage chance (99% or so) of having your money outlive you - therefore, one strived to have 25x what they wished their yearly amount of spendable assets be the 'principal.' This also took into account average inflations rates/etc.

So, if someone wishes to eat catfood (they may like it!), then fine, the $4k would work for them and they'd only need $100K as principal- if they want more than that then start multiplying by 25 what their principal will need to be. One can become more complicated if they wish and follow the Gummy mechanisms or tweak as per ESRBob in his book (Eat Less...errr Work Less, Live More :-) must be dinner time here!) but 4% is a really good goal to shoot for - especially if you know your 25X tables....

Deserat

[UncleHoney]

What’s more, $29,436 is nearly twice the amount of annual income our retiree would receive if she opted for “early” Social Security benefits at age 62.

Why do all these financial wizards always leave the the 62 year olds at the starting gate when comparing social security benefits. With 3% increase each year shouldn't the 62 year old be getting nearly $20000 in yearly benefits by the time they reach 70?

A lot different from "nearly twice the amount".

[New Thinking]

Uncle - Its because the starting base amount is what counts over a long retirement horizon. It is that base amount (which you choose to be reduced, full, or increased) which gets the COLA each year. Of course the "early" SS at 62 gets bigger in eight years..But it is the base amount that counts and is often ignored..This base amount will often be paid to a widow/widower too.

[New Thinking]

I do not see any brand new ideas about retirement (are there any?) in this piece but some good points to ponder.

If I may be so bold, the subject of the tax benefits provided by taking IRA withdrawals first and delaying SS was brand new when I wrote about them. More will come on this in 2007.

[REWahoo]

Originally Posted by New Thinking

Uncle - Its because the starting base amount is what counts over a long retirement horizon. It is that base amount (which you choose to be reduced, full, or increased) which gets the COLA each year.

New Thinking, to clarify your above statement:

Reduced = begin SS at age 62
Full = begin SS at age 66 (or whatever your qualifying age might be for "full" benefits)
Increased = wait to take SS until age 70

Correct?

Originally Posted by New Thinking

If I may be so bold, the subject of the tax benefits provided by taking IRA withdrawals first and delaying SS was brand new when I wrote about them. More will come on this in 2007.

From...?

[UncleHoney]

Thanks guys, a little misinterpretation of the game rules on my part.

UH

[New Thinking]

New Thinking, to clarify your above statement:

Reduced = begin SS at age 62
Full = begin SS at age 66 (or whatever your qualifying age might be for "full" benefits)
Increased = wait to take SS until age 70

Correct?

Yes and this means that even during the possible 8 years of delaying SS, COLAs are credited.

From

This will come out via The Pension Research Council and presented at their annual symposium in April 2007. "New Approaches to Retirement Income Phasing" http://www.pensionresearchcouncil.or.../conf-2007.php