From the article:
A typical 65-year-old couple with $1 million in tax-free
municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.
Well, no. It has never been concerned common or rule of thumb to drawn down 4% with a 100% bond portfolio. The article does mention that all bond portfolios give probabilities that are "remarkably grim." However, given that, why use an example someone who made that kind of bone-headed move? (withdrawing 4% with all bonds). They do point out this is why they recommend people have some equities.
They then point out that if only have $10,000 assets then you have very little flexibility. That is true but seems beside the point in talking about households with a net worth of $1 million.
The article goes on to point that being a millionaire household no longer seems truly rich (I agree). And says people may have difficulty maintaining standard of living in retirement. However, the article sort of begs the question in not describing what they think the standard of living is for the average person with a net worth of $1 million. The article already said that isn't truly rich, but then they seemed to assume that the lifestyle is extravagant.
The article goes on to then discuss the problems with low bond yields and what about when rates go up.
The article then says:
Consider again the 65-year-old couple who are starting to draw down $1 million in savings this year: if they withdrew 3 percent, or $30,000, a year, rather than that standard rate of 4 percent, inflation-adjusted, there is still a one-in-three chance that they will outlive their money, under current market conditions.
But again, the point here is that they are still using a couple 100% in bonds. The whole thing in the article seems to be pointing out that if you are 100% in bonds then you have large chance of portfolio failure if you withdraw 3 or 4%.
The article points out stocks will reduce risk of outliving the portfolio but increases the risk of big losses. It then gives as an example a portfolio of 80% stocks and 20% bond. Why on earth is the article solely using as examples ridiculous retirement allocations - all bonds or 80% equities?
So then the article goes on to ask
ASIDE from recalibrating a portfolio, what can be done to improve a would-be retiree’s financial situation? One answer is to work longer and retire later. Yet many people can’t do that, often because they are physically unable to do so or can no longer find a suitable job.
Aside from recalibrating the portfolio? Yeah, I can see going from 100% bond to 80% equities might not be ideal. But, why skip entirely over more reasonably asset allocations like 40% to 60% equities?
And then the article gets back to lifestyle:
Still, even $61,000 or $71,000 a year — the combined Social Security and cash flow from the $1 million portfolio — isn’t likely to be enough for most people who have grown accustomed to living on $150,000 or more a year. And $150,000 is the median income of a typical household in the top 10 percent, roughly the ranking of a family with $1 million in net assets, Professor Wolff says.
So they have basically assumed that anyone with net assets of $ 1 million had an income before retirement of at least $150,000. And that may indeed be true for many. However, it isn't true for all. And, more to the point, we all know that expenses may decrease sharply after retirement due to kids leaving, no longer saving for retirement, lower taxes, no work expenses, etc. Right now we still have one child in college, one in high school and we are still living on 38% of what we were making before DH retired and I semi-retired. Once the kids are gone we will be living on about 25% of pre-retirement income.
Ah, but according to this article:
Without another source of income, perhaps from traditional pensions from either or both spouses, he adds, a household like this won’t come close to replacing 80 percent of its pre-retirement income — often considered an acceptable target level.
So basically a million dollars isn't enough because you really need $120,000 to replace the $150,000 you were making before (sigh) and with SS and portfolio only you can't do that ....
And in the end...just work until 70....
You can also try to pay off your mortgage, so you have the option of tapping home equity if you need to supplement your income later. And, she suggested, if you’re lucky you’ll find work that you like and can stick with for a long time — until 70, at least.
What a ridiculous article....
