New thoughts on the draw down phase

[Ed_The_Gypsy]

Baldwin United

[Nords]

Quote:

Originally Posted by cardude But how does one account for inflation, since these annuity payments are fixed? I don't understand how to bake inflation into the annuity, in other words. For instance, I see that I can buy an SPIA annuity from Berkshire today that would take care of all our cash flow needs for life, at a cost of about 1/2 of what our total portfolio is. But those cash flows are going to be worth a lot less 40 years in the future, so to me that's not really covering my future cash flows. I guess the other 1/2 of our portfolio would be keeping up with inflation? What am I missing here?

Annuity-quote websites were everywhere in 2007. Gee, I wonder what happened.

One of the posters on Raddr's board suggested Immediate Annuities - Instant Annuity Quote Calculator. and thinks that buying a COLA annuity would start at about 60% of the fixed amount. But no link was provided and I don't know how that would change with interest rates & recent inflation history. I can remember old Boglehead threads about COLA annuities where some of the posters were adamant that a COLA cap of 10%/year would absolutely not be tolerable. Why, starting over again at 1981's interest rates would bankrupt you before the 1990s!

Keep in mind that you're kvetching about the size/color of your reserve parachute. The annuity option is supposed to be that 5% disaster among the 95% success rates, the last stop on the "game over" line. By the time you get to that point you'll be deciding that a Social Security COLA will be enough, or that you'll bag groceries to pay for those days when you'd rather eat steak than hamburger.

I think the reality is that a portfolio approaching the annuity line would inspire several years of cost-cutting & variable-withdrawal schemes, perhaps part-time work if the ER is physically/mentally capable, and one or two years of spread-out purchases of smaller fixed annuities in order to delay the inevitable. But it's hard to chart that on a graph for a research paper.

I don't think anyone would fly toward the brick wall at Mach 2 and jerk the ejection lever just before impact. Not even REWahoo...

[nun]

Being a TIAA-CREF investor I've had annuities pushed at me for a long time. It's the TIAA default and for many people it's a very good solution. But there are other ways to go to get income for life. As I've said before my solution was to buy a rental property. My money is locked up and my investment can go up or down in value, but it wins over the annuity as I still own the principal and it can pass to my heirs. The return isn't bad either. Over the course of my 15 year mortgage the property will have cost $150k and I get $12k a year in rent after costs are taken out, so thats an 8% return. That $12k and SS will cover my retirement expenses. My draw down phase will be from my ER date until 66 and after SS starts I go into another accumulation phase where I reinvest all dividends and gains. Now I'm worrying about RMDs.

[ronin]

This is a fairly detailed study on the SWR question and includes some assumptions regarding the use of annuities in addition to portfolio withdrawals. It's pretty long but a lot of it is charts.

SSRN-Revisiting Retirement Withdrawal Plans and Their Historical Rates of Return by Christopher O'Flinn, Felix Schirripa

"Abstract:
This paper examines the historical record of the so-called 4% rule, the popular guideline for sustainable real annual withdrawals in a self funded retirement.

Our findings indicate that a withdrawal plan following this rule (“4R”) carries an historical risk of failure for a long retirement that is much higher than generally acknowledged. For example, we find that 15% of the historical 35-year retirements failed when funded with equal parts of stocks and bonds. The “real” withdrawal plans that generated no historical failures were all less than 4%, sometimes far less, when retirements exceeded 25 years. The historical failure rates that we find for a 5R plan are higher than a 4R plan by a factor of at least three for all retirement periods.

The historical failures are not random. Rather they occur in clusters of years in which the majority of new retirement withdrawal plans fail. A key driver of these failures was a rapid, significant and lasting increase in the rate of inflation - this event increased withdrawals and contributed to a declining real rate of return that was ultimately unable to support the withdrawal plan."

[nun]

Quote:

Originally Posted by ronin The historical failures are not random. Rather they occur in clusters of years in which the majority of new retirement withdrawal plans fail. A key driver of these failures was a rapid, significant and lasting increase in the rate of inflation - this event increased withdrawals and contributed to a declining real rate of return that was ultimately unable to support the withdrawal plan."

This just says to me that there needs to be feedback between inflation rate, expenses and withdrawal rate. So during spikes in inflation the retiree needs to economise rather than increase the withdrawal. Again this approach is the "Mcawber Rule" of never spending more that you have....or that your portfolio generates. So "don't eat your children", or spend principal........no rocket science here.

[GregLee]

Quote:

Originally Posted by nun So "don't eat your children", or spend principal........no rocket science here.

Being put in the situation of needing to eat your children to obtain required nutrition could be thought of as analogous to portfolio failure.

[rescueme]

Quote:

Originally Posted by nun Again this approach is the "Mcawber Rule" of never spending more that you have...

Heck, if the gummint can do it, why can't I? ...

[nun]

Quote:

Originally Posted by rescueme Heck, if the gummint can do it, why can't I? ...

.....what you "have" also includes your ability to produce income, now and in the future..hence mortgages and Gov bonds. If you have the big bucks rolling in even I think it's ok to have a mortgage.

[MasterBlaster]

Quote:

Originally Posted by nun Over the course of my 15 year mortgage the property will have cost $150k and I get $12k a year in rent after costs are taken out, so thats an 8% return.

I hope that you computed in a reasonable (ie not close to zip) vacancy factor and some expensive repairs along the way. Rentals have a nasty habit of throwing expenses at you out of the blue. Also factor in the occasional dud tennant and getting them out. Owning a rental is an education.

[packrat44]

Quote:

Originally Posted by rescueme Heck, if the gummint can do it, why can't I? ...

They own the printing press and you do not have access to it.

[nun]

Quote:

Originally Posted by MasterBlaster I hope that you computed in a reasonable (ie not close to zip) vacancy factor and some expensive repairs along the way. Rentals have a nasty habit of throwing expenses at you out of the blue. Also factor in the occasional dud tennant and getting them out. Owning a rental is an education.

Yes, vacancy has been zero in the 14 years I've owned the place. It's in a college town with lots of young professionals so the market is good. I insist on 2 months notice, and it's always rented within a week. I've had 3 tenants in that time and all have been good. The rental is the lower floor of a two family and I live on the top 2 floors so I can keep an eye on things.

I get $1250 a month rent, so $15k a year and I budget $3k expenses. Last year I had to replace a water heater and there's always little things to fix and maintain.

Obviously I have the extra cost of a bigger mortgage that I would otherwise have, but when the mortgage is paid off the rent will cover almost half of my monthly expenses.

If I want to get at my equity I can always condoize the place and sell the lower unit. It's probably worth $250k in today's market.