Retiring in 1965 - The Worst Time Ever?

[Andre1969]

Wonder what would have happened if someone retired in 1965 with a WR of 3%, or 2%. Over the long haul, a small change in WR can make a big difference.

I tried putting $1M into FireCalc with a 50 year time span and a 3% WR, and come up with a 100% success rate. The end values ranged from $811,332 to $21,041,527, with an average at the end of $6,285,846. Going back 50 years would be 1965, so I'd presume that the 1965 scenario would be one of the cycles in the calculation.

Here's an interesting calculation to try, though: try the above numbers, but for only a 15 year span. At a 3% WR, the end values ranged from $398,915 to $4,110,839, with an average at the end of $1,696,146. I'd be interested to see how that $398,915 scenario plays out, long term. Once you're down to $399K, pulling out another $30K is 7.5% of what's left, so that would seem a bit scary.

However, when we try it at a 4% WR for 15 years, the ending values are $273,507 to $3,761,393, with an average at the end of $1,440,834. So that shows what a difference 3%, versus 4%, can make, even in just 15 years. And, to be down to $273K, I'd be really leery about keeping up a $40K/yr (plus inflation) withdrawal rate. That would be almost 15%!

At a 2% WR, the ending values are $519,644 to $4,460,284, with an average at the end of $1,951,457. Even if you take nothing out at all and let it sit and grow (0% WR, the ending values are $761,103 to $5,313,475, with an average at the end of $2,462,080. So, it looks like one of those scenarios could be destined to be a loser, eventually, regardless of how little you withdraw. Incidentally, at 0%, it looks like about 6-7 scenarios do end up below the $1,062,695 line (close enough to $1M for government work).

So, there's a few potential losers in there, no matter how careful you try to be. But, 6-7 out of 130 that FireCalc tested is only about 5%.

Is there any way in FireCalc, I wonder, to pick a specific year? For instance, I'd be curious to see how my planned retirement, taking SS etc into account, would stack up using 1965 retirement data.

 

[David1961]

Even if you take nothing out at all and let it sit and grow (0% WR, the ending values are $761,103 to $5,313,475, with an average at the end of $2,462,080. So, it looks like one of those scenarios could be destined to be a loser, eventually, regardless of how little you withdraw. Incidentally, at 0%, it looks like about 6-7 scenarios do end up below the $1,062,695 line (close enough to $1M for government work).

Thanks, Andre, for running this. Were the 0% WR scenarios where you end up losing money for a 15 year period? I'd have a hard time believing that would happen for a 30 year period.

Is there any way in FireCalc, I wonder, to pick a specific year? For instance, I'd be curious to see how my planned retirement, taking SS etc into account, would stack up using 1965 retirement data.

Others can chime in here, but I think there are spreadsheets you can export from FireCalc that would contain this data.

 

[thefinancebuff]

Wonder what would have happened if someone retired in 1965 with a WR of 3%, or 2%. Over the long haul, a small change in WR can make a big difference.

Of course it's going to make a big difference. The change appears small from 4% to 3% but it's actually reducing your withdrawal by 25% or increasing the required stash for the same living standard by 1/3. That's a big change.

The problem with telling people they need 33x instead of 25x is it will make the goal harder to achieve.

 

[Andre1969]

Yeah, the 0% WR scenarios were 15 year periods, as well. That was actually an eye opener for me, seeing how quickly some of those scenarios could deplete, simply from market conditions, without even withdrawing anything from them.

 

[Running_Man]

What I did do is take the year, my personal bias towards what I would possibly have recommended to an early retiree friend with $135,000 in assets and wondering what he could retire on. I would have recommended:

Assets $135,000
-----------------
10 Year Treasury ladder 60K
Vanguard Windsor Fund 60K (reinvest all divs/cap gains)
Checking account 5K
Savings account 10K

Spending
-----------
$5,060 in 1965 $38,039 in 2014
3.75% of total assets
Adjust annually for inflation

Rebalancing Rules
--------------------
End of year transfer from stocks any shortfall from savings interest and bond interest from the sale of Windsor fund. Then value bonds at face value and Windsor at end of year share price. If Windsor >50% of total of that total purchase amount of 10 Year Treasury Bonds in rounded thousands to get to 50/50 if stocks under 50% no action necessary. All Treasury Bonds coming due are reinvested in new 10 year Treasury Bonds.

Logic
--------------
The 50/50 value in stocks and bonds is as Benjamin Graham recommended back then absent any superior intellect so I defer to his wisdom. The application of this results in a rather conservative portfolio, the protection is if spending gets to the point where there no longer are any stock shares to sell there is a 10 years of Treasury Bonds coming due each year with nearly a year's worth of income, at least at the start and if the portfolio is failing this gives sufficient time to formulate a rescue plan.

Results:
-------------
Due to Windsor's funds ability to over perform the portfolio never withdrew more than the 5.6% of total assets in 1982. By 2014 it was down to a 2.38% withdrawal and total assets were now $1,619,466.

Due to rising yields and good fortune on stocks being converted to 10 year treasuries, Bond income exceeded spending from 1985 until 2008. Falling yields have hurt bond income in recent years but not as much as you might think as there would have been bond purchases of 140,000 in recent years. $27,442 in bond income in 2014 vs a peak of $32,036 in 2007.

By comparison if the withdrawal rate had been 4.0% stocks came close to zero in 1975 @ 47,546 and in 1983 would have been at 8.6% portfolio spend but good times that followed made it all the way to a final asset level including bonds of 1.2 million. 4.5% stocks would have run dry in 2010 with $193,000 in bonds left to spend, 1975 stock balance was $42,806. @ 4.75% Stocks ran dry in 2001 with 110K in bonds and at 5% Stocks ran dry in 1992 with 77K in bonds.

Now this example is with a managed mutual fund that far outperformed the market in the down years of 1973 and 1974 but the sensitivity to withdrawal percentages shows the importance of keeping the spending level as low as possible in early years. But this is an investment one could actually make.

 

[big-papa]

Wonder what would have happened if someone retired in 1965 with a WR of 3%, or 2%. Over the long haul, a small change in WR can make a big difference.

The issue is that the difference between, say, 4% and 3% WR is a whopping 25%. If your SWR was $100K at 4%, it's now $75K at 3%

 

[ERhoosier]

Great post, Running-Man!

BloggerS

 

[haha]

The problem with telling people they need 33x instead of 25x is it will make the goal harder to achieve.

And they will quit reading your blog and head over to MrMM. It's the blog version of Gresham's Law.

Ha

 

[FUEGO]

What's funny is that this particular blogger referenced by the OP has been a forum member here since 2006.

 

[audreyh1]

OK - glad I figured out what MMM meant. Thank's Ha!

 

[dallas27]

So don't retire in 1965, got it.


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[petershk]

Kinda funny. Woulda coulda shoulda.
I love Charlie Munger saying I just want to know where I'll die so I never go there.

Life is ALWAYS going to be unpredictable. 2014 could be the best year ever to retire, the worst year, or statistically somewhere in between. Waiting a year or two could be smart or a terrible mistake.

Were left with backward looking stats and forward looking hope and then mapping that to our risk tolerance.

So it goes

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[LRDave]

That is correct. And yes I confess to "drama queening" it a bit. A tripling increase of premiums sounds more dramatic than $225 does. I am also sure there are many who may think $300 is a good deal compared to what they may be paying.


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Was the increase in any way related to your AGI going up and the loss of a subsidy?

 

[Mulligan]

So don't retire in 1965, got it.


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I am glad I didn't as that would more than likely mean I would be dead now.


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[Options]

...

This obvious rip-off of the Mr Money Mustache the world is all sunshine blog and 100% stocks always works out if you keep a good attitude and are willing to ride a bike is dangerous to financial planning. Of course the income from the blog from people wishing to be able to stop working at age 35 means the writer never has to worry about living on stocks, he's got blogging income!

Here's a reality check of how things really turn out:

“A Look at the End-of-Life Financial Situation in America,” and “Measured Matters: The Use of 'Big Data' in Employee Benefits” | EBRI

From the downloadable report:

This report takes a comprehensive look at the financial situation of older Americans at the end of their lives. In particular, it documents the percentage of households with a member who recently died with few or no assets. It also documents the income, debt, home-ownership rates, net home equity, and dependency on Social Security for households that experienced a recent death. Significant findings include that among all those who died at ages 85 or above, 20.6 percent had no non-housing assets and 12.2 percent had no assets left. Among singles who died at or above age 85, 24.6 percent had no non-housing assets left and 16.7 percent had no assets left.

Emphasis added

 

[Fermion]

Is it really surprising that 20% of people 85+ die with no or little assets? It is quite likely most of those people spent a few of the last years in LTC which from stories on here can reach $100k or higher per year.

I am actually surprised only 20% died with little assets.

 

[dallas27]

Agreed, shocked it was only 20-30 percent. They didn't even have the interwebcloud to help them.


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[Rothman]

I think the percentage with no assets is probably highly correlated to those with medical conditions or in long term care. The system today depletes assets fast and government supports comes only after assets are depleted.


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[Hermit]

All you need to do is live in a tent for two years and South America for a couple other years.
I'd rather get another job than live in a tent.

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I lived in a tent on 3-week visits out here in the Colorado mountains before I retired. It wasn't so bad. Glad it wasn't this year, though. With all the spring snow we've had, the tent probably would have collapsed!

 

[GravitySucks]

I lived in a tent on 3-week visits out here in the Colorado mountains before I retired. It wasn't so bad. Glad it wasn't this year, though. With all the spring snow we've had, the tent probably would have collapsed!

Since retiring I've spent a month plus living in a 30 year old Toyota Mini Motorhome and two weeks sleeping mostly on a train in the coach seats. Plus some generous couch surfing time.

Tenting for two years would be beyond the pale though. I stand by the going to a part time job instead statement.

 

[aim-high]

These carefree yes you can retire with 80 - 100 percent stock portfolios presented as see you can survive the worst times are absurd, the article has the following problem:

1) How was this mythical person invested? In non-existent low cost ETF's? Per John Bogle in 1965 only 5.7% of equities were owned by funds and most of those funds were blends of stocks and bonds. Pure equity plays were almost impossible to find.

2) in 1975 when they cut their spending to 2.5% of the original portfolio amount, at that point the 40K withdrawal should have been $69,418 with inflation, they are going to live on 25K? The chart implies about 18K on an inflation adjusted basis but that does not match with the article statement. That 2,5% of original portfolio is equivalent to $15,716 in 1965 or in other words changed to a 1.5% withdrawal rate! Hey you can retire with 4% withdrawals, all you need is flexibility to live on 1/3 of that amount.

3) In the middle of this in 1970's they consider a part time minimum wage job to make $500 a month after tax. Minimum wage in 1977 is $2.30 so they are going to need to work 217 hours without considering taxes to make $500 per month. This is 54 hours per week. But hey no, let's just move to Brazil for a couple of years it'll be great there and we'll save a fortune so we go!.

4) The article implies you live off an average of 3.75% over the lifetime of 50 years with a little flexibility - really what is written calls for psychic powers. Despite a belief in 4% withdrawals you know enough to start at 3% and average a 2.5% withdrawal during the early bad years and are able to drop that to 1.5% 10 years in and at the all time low in stocks you go 100% stocks invest at the absolute bottom. Then when portfolio is just starting to recover you go to 4% of original portfolio, 8% withdrawal of the actual portfolio why not!, right when the market makes a huge multi-year greatest bull run ever, which helps because otherwise that withdrawal rate would have failed for sure.

This psychic ability is necessary since if you started at 4 per cent withdrawals and dropped to 3% as the portfolio fell and invested in the mutual funds available at the time you would be a 50 year old bankrupted individual in 1980 otherwise, right when unemployment is set to be at an all time high. Of course at age 50 with no retirement savings, you would be no worse off than over 50% of all 50 year olds.

This obvious rip-off of the Mr Money Mustache the world is all sunshine blog and 100% stocks always works out if you keep a good attitude and are willing to ride a bike is dangerous to financial planning. Of course the income from the blog from people wishing to be able to stop working at age 35 means the writer never has to worry about living on stocks, he's got blogging income!

 

[1979dreamer]

Bloggers. I also read the comments to the link, most made by other bloggers. I wonder how many of their commenters/readers are bloggers. I bow to whoever created the blogosphere.

He links to another article of his about how the 4 percent annual withdrawal for 50 years is supported, but that article of course is all about the 30 year period, not 50. I think we need a blog entry about how you can take 4 percent from birth.

From this thread (and others) it seems that the common wisdom around here is contrary to MMM and other bloggers whose common wisdom is that 4% is just fine, even for 50 years. So what is the mindset here? 3% 2%?

 

[W2R]

From this thread (and others) it seems that the common wisdom around here is contrary to MMM and other bloggers whose common wisdom is that 4% is just fine, even for 50 years. So what is the mindset here? 3% 2%?

For other people, I would think probably 3% for a 50 year retirement.

For myself - - well, I think everyone here would agree that I am cautious about money, perhaps overly cautious. So far in retirement I have been spending around 2%, but I am taking steps to increase my spending from now on because you can't take it with you. I am 66 so I think 3.5% is a better spending level for me.

 

[pb4uski]

From this thread (and others) it seems that the common wisdom around here is contrary to MMM and other bloggers whose common wisdom is that 4% is just fine, even for 50 years. So what is the mindset here? 3% 2%?

4% can be close to ok if you have SS or a pension that replaces a good portion of your spending needs.

For example, take firecalc and a 50 year old single with $1 million in assets and $40k living expenses, 60/40 portfolio and the remaining assumptions defaults. Success ratio is 73.7%.

Now assume that SS replaces 25% of living expenses ($10k in current $) beginning at age 66 and the success ratio increases to 91.6%.

Now assume that instead the person waits until age 70 and receives $13.2k (132%, 8% increase for 4 years) and the success ratio is still 91.6%.

So SS can have a significant impact on a sustainable withdrawal ratio. For me, I would want 98% success which implies a 3.75% WR with SS covering 25% of living expenses ($10k in the scenario above), so it isn't a lot lower than 4%.

 

[2017ish]

From this thread (and others) it seems that the common wisdom around here is contrary to MMM and other bloggers whose common wisdom is that 4% is just fine, even for 50 years. So what is the mindset here? 3% 2%?

I don't know that there is a particular mindset--other than that many (most) feel that the "traditional" lockstep 4% every year is likely a risky way to go when you are planning a 40-50 year retirement in the current environment for Stocks/Bonds. 3% is probably common.

OTOH, we plan to work until 3% would let us travel more/better than we have to date, and 1% would let us live reasonably well without travel. But leaning toward a withdrawal "strategy" of 4.5-5% of the previous year end portfolio value; indeed, in the early years, it may even be 1.1-1.25% of the previous quarter's ending value. This will be a roller coaster, but given that the vast majority of our spending will be discretionary....

VPW (Variable Percentage Withdrawal) is also a noteworthy approach, and there are many others.