Lord Abbett retirement insight

[al4trade]

This is a link to a Lord Abbett article on retirement savings.

http://www.lordabbett.com/us/home.jsp

They make compelling arguments for extending the life expectancy and increasing the cost of living increases to 5% - 7%.

I'm interested in the Board's feedback.

Thanks

 

[d]

i would agree that most should plan using an expected life of >90. i would also agree that inflation for retirees will likely exceed that of the general population (because of increased medical utilization, and the likelihood that health related items will inflate at a more rapid rate). but, i also think it likely that decreased spending in other categories as we age will offsett to some degree the increased health/medical spending. so, i'm using 95/100, but sticking with the general inflation rate.

if we're too cautious in our assumptions, most of us would never amass (or would have never amassed)* enough of a nest egg to retire at a "reasonable" age.

*just in case JG is checking my grammer

 

[wabmester]

I just ran a couple of quick FIREcalc runs.

At 7% COLA and 30 year period, your SWR is about 2%.

At 7% COLA and 50 year period, your SWR is about 1%.

So, if you want to be conservative, keep working until you have between 50 and 100X your expenses.

 

[OAG]

Interesting article, but, they do not provide much reasoning for this 5-7% inflation rate. However, it is interesting to me since I have kept a detailed spreadsheet since "retiring" 28 years ago this April 1st. While the official CPI-W has risen 103.8% my personal income solely from a COLA'd "pension" and (for the past 6 years) SS supplemented with savings has risen 209.3%. I anticipate that if I live another 10 years my income must rise about 100% to maintain the current coverage of expenses which, as it has in the past, to give me a personal rate of increase in income of about 7.5% per year (my personal CPI?) to maintain the current "nest egg" of about 70 times current expenses.

So, although the article does not provide much in the way of justification of the 5-7% number -- my personal data over the past 28 years does..... at least in my case that number has applied pretty close and on the high side.

 

[kaudrey]

I agree with the idea.

My spreadsheet goes out until I am 95.

I have healthcare as a separate line item on the expense side - and it gets inflated at 10% per year. I use 3% for everything else.

I have a lot of fudge factor in mine, as I'm not retiring for 15 years. So a lot of it is subject to much changing...

Karen

 

[haha]

The uncomfortable fact is that no one can know what to expect, individually or collectively. Yet all our planning, spread-sheeting, etc is based on setting limits to whatever we are trying to plan for.

Imagine a doctor in Berlin in the 20s. Would he in a million years have considered that he should plan on all his cash, bonds and any fixed marks denominated accounts becoming worthless? Of course not! And had he expected this, would he have considered early retirement? Of course not! The same thing has happened, all over the world, throughout history.

But it is fun to take it easy, to walk around during the day instead of having someone tell us what to do minute to minute. So are many of us going to go back to work? Likely not. Many of us couldn't, and those that could are spoiled.

"How you gonna keep 'em down on the farm, after they've seen Paree?"

First thing we should do is form prayer groups to pray for a benign future.

Ha

 

[wabmester]

First thing we should do is form prayer groups to pray for a benign future.

Amen. And have a good plan-B. Hard fungible assets, enough land and animals to feed your family, bomb shelter, plenty of ammo, off-grid power supply, etc.

 

[SteveR]

Nothing new in the article.

The financial sector needs your money to continue to grow their business. Scare people in to saving more and you have a nice income stream for your business. Stick it to them with fees and exchanges and blame losses on "the market".


Retirement planning really comes down to:

Plan to live longer than you think...die before that or have the funds and the investment plan to pay your future expenses plus inflation. Have a fall back plan to scale back your expenses as inflation increases to keep your nest egg from going to zero before you cash out.

25X annual expenses still works for most people.

As you age your entertainment expenses will go down while your health care expenses go up.

You can live on far less than you think.

Less income means lower taxes which requires less income to live on in retirement.

Don't use the 80% of pre-retirement income rule to determine your income needs in retirement; use actual expenses plus inflation.

Don't plan on 8-10% increases in your investments per year. It won't happen most of the time.

Don't over analyze your expenses. Record actual expenses...determine which ones will go away once you retire...add in expenses that are unique to your retirement...do the math and see where you stand. Adjust your nest egg or investment strategy as needed....repeat once a year to stay focused on your goals and to rebalance your investments.

Have fun after your working life is behind you. Enjoy life and live your plan.

 

[cute fuzzy bunny]

Seems reasonable. Depending on our age, we're all quite likely to live a lot longer than our grandparents and parents.

And I've been pushing on that cost of living thing for a while. Not a popular position to take.

The good news is that high true cost of living changes can be heavily mitigated by a retiree willing to change vendors, lifestyle and do more for themselves rather than pay for services.

A lot of that is one-time stuff though. Eventually it catches up on ya.

But for someone that wants to live their pre-ER lifestyle, complete with heavy travel, eating out and enjoying all the finer things...best plan for a bit more than 3% cola...

 

[Cut-Throat]

Ho*cus was right 2% SWR or Less!

 

[unclemick]

Ya know - time BR(before retirement) many of us lived on what we were paid after saving something for our 'old age'.

At 14 yrs into ER - my day(job) is to manage the nest egg to provide income. Inspite of my jokes about 84.6 croak date - I tend to view it(da nest egg) as a perpetual income producer ala a never ending pension fund.

That colors everything - my stock/bond/cash and /or RE mix and adjusting spending to fit the income produced.

A forever 'pension fund viewpoint' makes me more growth oriented than many and more flexible on lifestyle

heh heh heh - my history produced some wide swings in spending.

 

[Gone4Good]

A quick calc says 5-7% inflation is way too high (at least for me).

Me & my wife graduated college in 1993. If I compare what we spent in 1993 (essentially all of our income) with our expected base level of spending now (including $11K out of pocket health insurance costs that we didn't pay then, automobile insurance that we didn't have in 1993, parking rent for said automobile, property taxes that we didn't pay then, home insurance, income taxes, dining out, Netflix, cell phones, broadband, a wine budget, etc. etc,) my compound average annual expense growth over 14 years is only 3.03%.

So notwithstanding a significant increase in our standard of living from 1993, and notwithstanding living in a very high-cost area of the country, our expenses have grown an average of 3% per year compared with 2.4% CPI over the same time period.

 

[cute fuzzy bunny]

Ho*cus was right 2% SWR or Less!

Perhaps he was.

But that wasnt the point. He's still a butthead.

 

[unclemick]

5% variable/ the Norwegian widow's current yield/ spend RMD age 70-84.6.

The origin of the comedy number 42 was ?

heh heh heh - spend up while young in ER and throttle back as the grey and creaky joints settle in.

 

[cute fuzzy bunny]

The origin of the comedy number 42 was ?

It was the answer to the ultimate question about life, the universe and everything.

 

[clifp]

It was the answer to the ultimate question about life, the universe and everything.

Doug Adam's Hitchhikers guide to the Galaxy. I must say I answer many questions with 42.

http://en.wikipedia.org/wiki/42_(number) for more than you possibly wanted to know.

 

[W2R]

The uncomfortable fact is that no one can know what to expect, individually or collectively. Yet all our planning, spread-sheeting, etc is based on setting limits to whatever we are trying to plan for.

Imagine a doctor in Berlin in the 20s. Would he in a million years have considered that he should plan on all his cash, bonds and any fixed marks denominated accounts becoming worthless? Of course not! And had he expected this, would he have considered early retirement? Of course not! The same thing has happened, all over the world, throughout history.

This is the kind of thought that keeps me awake some nights, long after I should have gone to sleep.

Usually about 3 AM my conclusions are that I can't control the future, and all I can do is to build sufficient safety nets into my planning and then stop worrying since it's not productive to fret. The $64,000 question is... what is sufficient? We each have our own answer to that, probably based more on emotions than logic.

If I can manage to survive (barely) with a bear market and rampant inflation during my initial retirement, and with social security falling apart, then I think I have enough safety net. But that is just my concept of what I might need. As HaHa said, there is so much that is possible and yet unforeseen. Hurricane Katrina altered my own retirement plans to some extent, though it looks like I am finally back on course. We all just have to deal with such situations if and when they happen. There's no other choice.

Life is a lot like surfing - - I'll try to catch a wave if I can, do my best not to wipe out, and enjoy my exciting, bumpy, ever dynamic ride.

 

[rmark]

According to the IRS life expectancy tables, the current joint life expectancy for a married couple at age 62 is about 91, by age 80 life expectancy has moved out to 94.

 

[W2R]

According to the IRS life expectancy tables, the current joint life expectancy for a married couple at age 62 is about 91, by age 80 life expectancy has moved out to 94.

And then, there's also the possibility that an individual may live considerably longer than a statistical distribution would lead one to think. I'm thinking of my mother, who is happy, lucid, and enjoying life day by day at 97 in a posh continual care facility. I am sure she never thought she would live to be 97, and actually I would not be surprised if she hung on for a few more years. Luckily, her retirement planning is such that her nest egg is actually growing nicely, these days. An SWR based on a 95 year lifespan and an SWR based on an infinite lifespan are not too far apart, if I recall correctly.

 

[cute fuzzy bunny]

Imagine a doctor in Berlin in the 20s. Would he in a million years have considered that he should plan on all his cash, bonds and any fixed marks denominated accounts becoming worthless? Of course not! And had he expected this, would he have considered early retirement? Of course not! The same thing has happened, all over the world, throughout history.

So what you're saying Ha...is that if Bush invades Poland, we should sell everything and buy beaver cheese?

 

[calmloki]

You know, i felt like a real doomsday pessimist when i answered this poll:

http://early-retirement.org/forums/index.php?topic=11701.0

Looks like there are a few other doom and gloomers who use something other than 3% for CPI/inflation (really don't know the practical difference between (those).

 

[W2R]

You know, i felt like a real doomsday pessimist when i answered this poll:

http://early-retirement.org/forums/index.php?topic=11701.0

Looks like there are a few other doom and gloomers who use something other than 3% for CPI/inflation (really don't know the practical difference between (those).

Even if the most probable inflation rate might be 3% or less over the long term, five or ten years of 10-12% inflation early in retirement could make a mess of someone's plans. It's something to think about in the middle of the night when you can't sleep.

 

[cute fuzzy bunny]

I'm pretty sure it was Nords who brought this up, but i'm too lazy to go look. I think his point was that while CPI has run at around 3% long term, in the last 25 years its been closer to averaging 5%.

The flashing red light on my dashboard is that it looks to me like a lot of businesses and services are cutting costs and product quality/service quality along with it...to keep costs in line.

That rubber band has a breaking point. Once you've cut your costs and 'increased productivity' to the maximum reasonable level using current technology, theres nowhere to go but raise prices.

I have this sneaky suspicion that 'invisible' inflation wont remain invisible for long.

 

[calmloki]

This will get your digestive juices churning!

http://www.shadowstats.com/cgi-bin/sgs/

His "consumer price update" on the right side is....interesting.

Substitution of hamburger for steak, catfood for hamburger - at what point does one say "this is not equivalent". And yes, we spent $3000 on our first computer setup, complete with 80meg harddrive. The gal's phone has a postage stamp sized chip in it with 1 gig of memory - 12.5 times as large. Think we paid maybe $150 for that gig of memory. OTOH, steak and gas are way higher now. Guess it depends what you spend your $$ on.

 

[Nords]

I'm pretty sure it was Nords who brought this up, but i'm too lazy to go look. I think his point was that while CPI has run at around 3% long term, in the last 25 years its been closer to averaging 5%.

Dimson & Marsh, "Triumph of the Optimists".

If that book was more reader-friendly then we wouldn't be having these Chicken-Little conversations. You people laying awake at night and you perma-bears should at least consider using a library copy of this tome to help you get to sleep. Worry constructively, for gosh's sakes. But don't doze off with it on your chest or you'll asphyxiate.

Everybody can get upset about the 1920s Weimar Republic... but no one ever wants to talk about the other 15 countries that muddled through an entire century without blowing up like Germany. Or the 200 other countries who couldn't put together a century of data. Survivor bias indeed...

I think it's worth pointing out that economic data-crunching has never really had a handle on inflation data and is just barely beginning to get to the point of distinguishing between 1% and 2%. (All bets are off below 1%.) U.S. economic policy never really tried to control inflation until the 1970s, either, and earlier attempts at economic manipulation were constrained by the dollar's link to gold, foreign exchange currency controls, the high cost of credit, a lack of liquidity, and a host of other mechanisms that aren't used today. I think the only constant between the economics of the late 19th century and the economics of today is politics.

I think globalization will flatten a lot of things-- inflation, prices, wages, and investment returns. I don't have a problem with that because someone will always be selling their dollar bills for 75 cents. We just have to wait for the blue lights to start flashing and for the crowds of buyers to run away screaming... I'm happy to spend a few years barely keeping ahead of after-tax inflation (or a couple years of lagging it by 5-10%) in exchange for one or two years a decade when I can beat inflation with double-digit returns.