More difficult then you would think... spending down

[LARS]

Let me try this another way.

Let’s assume that today, 2 people living in an Assisted Living facility costs approximately all-in $110,000 per year (this $ amount comes from recent direct experience with parents).

Now assume, worst-case scenario that you and DW both need AL care when you turn 80 (about where my parents each did), which for DW and me is approximately 20 years out. So, figure the cost of AL care in 2035 will be (for two) $240,000 (that assumes a 4% inflation factor). Further figure SS will be $50,000 per year in 2035.

So net expense (reduced by SS, but not any other income/insurance) for AL for two of approximately $200,000 per year. Figure again worst-case you and DW live 10 years in AL. That means you need approximately $2,000,000 in 2035 to cover your expenses (worst-case) for 10 years.

Conclusion: Why not spend income AND CAPITAL with an eye to arriving at 2035 with a net worth of $2,000,000?

 

[marko]

Let me try this another way.

Let’s assume that today, 2 people living in an Assisted Living facility costs approximately all-in $110,000 per year (this $ amount comes from recent direct experience with parents).

Now assume, worst-case scenario that you and DW both need AL care when you turn 80 (about where my parents each did), which for DW and me is approximately 20 years out. So, figure the cost of AL care in 2035 will be (for two) $240,000 (that assumes a 4% inflation factor). Further figure SS will be $50,000 per year in 2035.

So net expense (reduced by SS, but not any other income/insurance) for AL for two of approximately $200,000 per year. Figure again worst-case you and DW live 10 years in AL. That means you need approximately $2,000,000 in 2035 to cover your expenses (worst-case) for 10 years.

Conclusion: Why not spend income AND CAPITAL with an eye to arriving at 2035 with a net worth of $2,000,000?

I'd guess that most people would play the game of arriving at AL with a net worth of zero. Around here it's advertised on TV as "Elder Law/Financial Management"

 

[marko]

Hmmmm....maybe I should borrow to pay for my mega yacht. My estate can pay it off.

I suspect this happens more than one might think.

I know of one very successful guy in town who did this (via an early heart attack); the bank was left holding the bag because despite a big house/boat/car/vacation home had a very, very small estate.

Well, it's one way to beat the system and your ne'er-do-well heirs!!

But seriously: maybe LBYM is a bell shaped curve? Amass a goodly chunk of change, spend it down and then in later life borrow away with no plan to pay it all back?

 

[aja8888]

I take my RMD's from an inherited IRA as 'in kind' distribution, in the form of securities. Sure, I pay taxes on the distribution, but these holdings go right back into my brokerage account.

Nice to hear, but not all of us have the good fortune of inherited IRA's. Many here have to make their own from scratch.

 

[Accidental Retiree]

I'd guess that most people would play the game of arriving at AL with a net worth of zero. Around here it's advertised on TV as "Elder Law/Financial Management"

I haven't heard of any AL facility in the U.S. that will take someone in with no money, that is to say, entirely depending by Medicaid or MediCal or whatever.

Do such AL facilities exist? That would be good to know about.

Or are subsidized senior housing or the nursing home the two choices for the indigent elderly?

 

[growing_older]

Am I that odd? I don't particularly care if I "spend it all" and given how little control I have over some key variables such as my own future health and longevity, it seems almost impossible that I could. My focus is on having "enough" to live as I choose (modest LBYM lifestyle). I know I will use any excess for safety and I certainly hope that safety will mean there is some leftover. Let that fall where it may - some nice inheritance to children late enough in life to avoid spoiling them and some nice support for some favorite charities. Perhaps if the portfolio grows unexpectedly large I would consider some indulgences, but those are more likely to be family experiences than things.

 

[LARS]

Am I that odd? I don't particularly care if I "spend it all" and given how little control I have over some key variables such as my own future health and longevity, it seems almost impossible that I could.

No you are not that odd. But, and it is a big but for me, I do not want to leave too much on the table so to speak as leaving a large inheritance is not important for us.

So while I agree that "spending it all" is not realistic; neither is an ever increasing net worth. The question becomes when, and by how much, to start dipping into principal for us?

Mind you if there were a foolproof way to show up at my funeral with only $1 in my pocket I'd be all for it, but there ain't so I won't...

 

[ERD50]

Love this line from that article:

Your gravestone will have two dates separated by a hyphen. You have no control over the dates, but you do have control over the hyphen … that’s your life. Make the most of that hyphen.

A quote by Kevin Welch made famous by the Garth Books song, "Pushing Up Daisies."

That sure sounded familiar, here's another song on that theme, from a great great artist, Steve Goodman:

Lyrics to Between the Lines:


The day you're born they sign a piece of paper
To certify the date of your birth
And the day you die they sign another
Just to prove you've gone back to the earth

And between those two pieces of paper
There's the truth that is so hard to find
And the story of your life is written ' , but
You must read in between the lines

Now when you're young you think it doesn't matter
If you leap before you look
But those old folks are wiser and sadder
From the chances that they took

Now when your chance comes along, you must take it
Just be careful and take your time
And the chances are good you will make it
If you could read in between the lines...

more at: Steve Goodman - Between the Lines Lyrics

To the OP - if by, say 75 ~ 80 YO, I find I'm still in good financial shape, and any heirs are likely to get 'enough' (I would start annual gifts, I think), I might go pretty heavy into annuities, as a form of insurance. There are drawbacks and considerations, but it does address the "die with $0" conundrum (well, not literally, I don't think you can go 100% annuities).

-ERD50

 

[unno2002]

We never really own anything, we are just temporary custodians entrusted with the care of assets to be passed on to someone else as the next temporary custodian.


There's a "proverb", something like "shirtsleeves to shirtsleeves in three generations", meaning that wealth gained in one generation will be lost by the third…. " I know I'll never see the results, but I hope our family can avoid that. I grew up in what was essentially a camp trailer. The wife in a remove village in a third world country. We both worked our way out of a downtrodden situation, and overall we're doing ok. Our one child seems to have a clear mind, and decent prospective career.


I expect the expenses for the wife & I will rise as we finish out time on this Earth, but rather than spending down, I concur with the approach of ensuring the wife & I have enough to live on, and then working on getting the rest to the custody of a well trained/educated next generation.


Personal opinion, the article:


Planning To Die Rich Misses The Point - Business Insider


… is just pushing more "consumerism", and failure of personal responsibility to care for the assets of YOUR next generation…

 

[daylatedollarshort]

… is just pushing more "consumerism"

+1. I don't feel like I will be a failure if I leave enough money to either pay for many years of LTC for both of us without being a burden to our kids or society, and what we don't need for end of life care can go to help our kids enjoy the freedom of FI, feed low income families, and provide sanctuary to formerly abused animals.

Personally, I would rather see the money go to elephants than a Maserati dealer's profits.

 

[aja8888]

Personally, I would rather see the money go to elephants than a Maserati dealer's profits.

Not me, I'd go for the car while I can still have fun with it! (And, they go up in value over time, these exotic machines).

 

[RunningBum]

Let me try this another way.

Let’s assume that today, 2 people living in an Assisted Living facility costs approximately all-in $110,000 per year (this $ amount comes from recent direct experience with parents).

Now assume, worst-case scenario that you and DW both need AL care when you turn 80 (about where my parents each did), which for DW and me is approximately 20 years out. So, figure the cost of AL care in 2035 will be (for two) $240,000 (that assumes a 4% inflation factor). Further figure SS will be $50,000 per year in 2035.

So net expense (reduced by SS, but not any other income/insurance) for AL for two of approximately $200,000 per year. Figure again worst-case you and DW live 10 years in AL. That means you need approximately $2,000,000 in 2035 to cover your expenses (worst-case) for 10 years.

Conclusion: Why not spend income AND CAPITAL with an eye to arriving at 2035 with a net worth of $2,000,000?

If you really think that is worst case, sounds good. Matching family history sounds like it may not be the worst case though, but maybe it is in this case.

 

[calmloki]

Hmm. 4.2 liter v8 in an elephant... not thinking the 0-60 speed will be that great..

 

[aja8888]

Hmm. 4.2 liter v8 in an elephant... not thinking the 0-60 speed will be that great..

Tough to park, too.......

 

[LARS]

If you really think that is worst case, sounds good. Matching family history sounds like it may not be the worst case though, but maybe it is in this case.

Needless-to-say, this sort of "planning" is fraught with much inaccuracy. And reality is if I thought for example $2 million was the number I'd add a nice cushion just to be safe. After all, that is what we all do on this site!

To other posters on spending equating to giving into "consumerism": I don't get that point of view personally. I look at all of my current/future spending as slowly chipping away at the "delayed resources" I banked early on for the express purpose of consumption/living down the road so to speak.

Again, this discussion takes on a different trajectory if leaving an inheritance is important.

 

[Options]

Needless-to-say, this sort of "planning" is fraught with much inaccuracy. And reality is if I thought for example $2 million was the number I'd add a nice cushion just to be safe. After all, that is what we all do on this site!

...

Agreed. Even the best planning can be disrupted by the unforeseen (asteroids), but a "nice cushion just to be safe" is a great if not imperfect insurance policy.

Speaking of unforeseen events (depending on degree of crystal ball cloudiness), presented without comment:

Obama Proposes New Tax Hikes on Wealthy to Aid Middle Class - Bloomberg

From the article:

He would increase the top tax rate on capital gains and dividends to 28 percent from 23.8 percent. The rate was 15 percent when Obama took office in 2009, meaning that he’s proposing to almost double it over his two terms in office.

 

[growing_older]

He's also proposing eliminating the step-up basis on inheritances. Limiting the step up to 500k on a primary residence and 200k in investments. This might be a big factor for those who do seek to leave an inheritance.

 

[ERD50]

He's also proposing eliminating the step-up basis on inheritances. Limiting the step up to 500k on a primary residence and 200k in investments. This might be a big factor for those who do seek to leave an inheritance.

This is just posturing.

No way will the House and Senate pass this. These sorts of changes didn't even get enough support when the administration had the House and Senate.

Stop worrying... for now.

-ERD50

 

[jkern]

I would rather have money left over when I kick the bucket than risk becoming destitute. I am not going to make any attempt to "spend it down" until at least 5 years after ER, that is, until the retirement risk period is over I am sticking to ~3% WR. If things look good 5 years in, I will loosen the purse strings a little.

I feel exactly the same way. I'm 5 1/2 years into ER and in another 5 I'll start SS. At that time I'll look into significantly increasing spending.

 

[razztazz]

I feel exactly the same way. I'm 5 1/2 years into ER and in another 5 I'll start SS. At that time I'll look into significantly increasing spending.

Whew! I thought I was the only one. All the projections indicate I am free and clear to up my spending, considerably. But I always end up saying... Better wait till I actually start getting socials sec.

 

[gcgang]

As gcgang points out you can buy annunities and have nothing left at death (better buy a funeral in advance though or your survivors will be stuck paying for it). But that then is essentially making a bet with the insurance company (exactly the opposite bet of life insurance) that you will live longer than the company things, just like life insurance is essentially a bet you will die sooner.

The other thing the income annuity does is remove uncertainty.

We all talk about safe withdrawal rate, consensus being 4% is OK. Then we worry about market declines, maximum drawdown, or, as the OP here, leaving a bigger than desired remainder.

Using Vanguard immediate annuity quotes, assume a 65 year old with $2mm.

Almost 5% can be generated with $1.4mm ($8k/mo or 4.8%), leaving $600k. Then, income increases of $1k/mo in 5 and 10 years can be secured with another $167k, leaving $433k in reserves.

Yes, ALL uncertainty has not been removed, inflation being the major risk not addressed. But KNOWING there is $8-10k a month for the rest of your life, might be appealing to some.


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[Options]

This is just posturing.

No way will the House and Senate pass this. These sorts of changes didn't even get enough support when the administration had the House and Senate.

Stop worrying... for now.

-ERD50

I view them as smoke signals from the upcoming 2016 elections. Discussions regarding taxes are inevitable, sooner rather later:

Inside Obama's middle class tax plan | PBS NewsHour

From the article:

And the two things that the parties have agreed on — and you have seen this in a number of potential Republican presidential candidates, you have heard it from former Secretary of State Hillary Clinton, and the White House is really pressing on this issue — is that the middle class is need — in need of help, and that wages are stagnant, and while GDP is growing and unemployment rate is at new lows, the middle class is still really struggling and requires some targeted measures to try and build them up.

And so what you’re going to hear the White House and Democrats do when they get with these measures, this package that the president is going to roll out on Tuesday in his State of the Union address, is put the ball in Republicans’ court to say, OK, well, what are your proposals? What do you — what do you want to do? And if you don’t support this, then what do you support?

And so it’s the — it’s designed to, even if it doesn’t pass, move the debate along to where the two sides are having to stake out their territory ahead of the 2016 election.[Emphasis added]

 

[EastWest Gal]

He might be trying to return it to the level where it was historically. The rate was 25% under Eisenhower, Kennedy and most of Johnson's administration. Under Nixon it really jumped, came down a bit under Carter, then way down under Reagan, but under Reagan went back up to 28%. It dropped significantly at the end of the Clinton Administration, but under Bush, along with the other tax cuts, it went to 15% where it has remained, while the national debt soared.

Historical Capital Gains and Taxes

Excessive cutting of taxes didn't do the national debt any good. Unless we're willing to cut the 1/2 trillion in defense spending or the $141 billion in education spending, or cut Medicare, at some point the government needs to pay its way. I'd rather move toward a balanced budget and pay some taxes on the free money my money is making for me then have the government borrow money to pay it's bills.

 

[gcgang]

He might be trying to return it to the level where it was historically. The rate was 25% under Eisenhower, Kennedy and most of Johnson's administration. Under Nixon it really jumped, came down a bit under Carter, then way down under Reagan, but under Reagan went back up to 28%. It dropped significantly at the end of the Clinton Administration, but under Bush, along with the other tax cuts, it went to 15% where it has remained, while the national debt soared.

Historical Capital Gains and Taxes

Excessive cutting of taxes didn't do the national debt any good. Unless we're willing to cut the 1/2 trillion in defense spending or the $141 billion in education spending, or cut Medicare, at some point the government needs to pay its way. I'd rather move toward a balanced budget and pay some taxes on the free money my money is making for me then have the government borrow money to pay it's bills.

Capital gains have not remained at 15%, current max rate is 23.8%, I think.

The national debt hasn't soared due to lack of capital gains taxes. It's the economy, _____. Table below shows debt soaring in 2009 due to significant drop in revenues (lousy economy) and increased outlays. In like manner, only time budget balanced was 1998-9 with a booming economy.

http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200



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[MichaelB]

Thanks for an interesting discussion.
.
.