Return more than planned

[Bourne]

Originally Posted by Sam

Nothing is 100% in life.

Death and taxes.....

[Sam]

Originally Posted by audreyh1

Just a straight % annual withdrawal works for me. It's easier!

It would work for me too.

For me, the SWR is more useful in bad years. Backed up by historical data, I can confidently (to a certain level) withdraw a little more than the normal "straight %" in bad years.

[ladelfina]

don, I kinda get what you are saying here:

Firecalc will always give you the same or better survival rate in this scenario (better, because as the happy years go by you have a shorter life span to fund).

but on the other hand, as Firecalc totes up more "good" years in its database, then don't its assumptions get incrementally more rosy for all concerned? Add more years of double-digit returns and the 'canonical' return of 7% could creep up to 8%, tempting us with a higher SWR, which in turn might make a bad patch seem that much worse.

---
People's advice about the projects and "mad money" are sound. Unfortunately the projects have some overlapping electrical and plumbing issues that might be easier and more cost-effective if dealt with in one fell (and scary) swoop.

[For those interested, we bought a house with a big yard and an empty, non-functioning "swimming pool" that is about 36" deep, currently lined with painted blue concrete in a state of decay. The theory was that the runoff from the gutters would be caught in this holding pool, but no water currently arrives. Underneath is ROCK. Very hard travertine. The rest of the yard itself is trucked-in fill on top of this rock. I would love to turn the hole in the ground painted blue pool into a "natural swimming pool" which would need to have a minimum depth of 9 feet. A scenario for a high-end install of this type here is something like €50-75k. You can do something cheaper, but I have seen a cheaper version and it is not worth doing if not done right. This is average and not counting extra difficulty that might be posed by excavation in our particular case.

The kitchen needs re-doing. That could be a smaller chunk on its own, but re-doing the kitchen means (to me) ideally also re-doing the root-clogged drains and septic (if I wash more than three pots at a time, the water starts backing up; we're at the point where we call the high-pressure hose guy 2x a year) which means digging up the yard. If I'm digging up the yard, then while I'm at it, I should take a look into the separate gutter/water recovery system that isn't working and get the water to go either into the pool or into an underground tank (that we would have to install and wire a pump for) so that we can use it for watering the garden. And if I'm digging up all that, then I might as well get someone to get the pool, gutters and septic all coordinated at once. At least that's what I'd do if I were in the US, but here I worry about finding someone I trust to even undertake all this. Meanwhile the yard is filled with medium-size oak trees so I'm not sure if they will survive extensive yard digging. We also have some major yard electrical issues that would tie into this, and we'd like to bring some faucets to other points in the yard from where they currently are, run new electrical to the front gate/intercom/light, to the greenhouse, new circuits.. (circuits for pool, too, if we do that..) yada yada yada. Not to even START on where the overflow actually goes for the hole in the ground painted blue current pool and if it is legal or not.. not looking forward to opening up that can of worms. Plus the existing pool wall is exactly on the property line (corner, with 3 different non-residential properties abutting) so negotiating with the neighbors will be interesting. Who knows if something that excavates rock will even be able to operate with such close tolerances.. Well, it would make our lives interesting, add a s***-load to the prop. value if it came out right.. and, I know that in 10 years I'm not going to have the energy for it. IF it gets done, I'd like to start sooner rather than later so we have more time to enjoy it.]

Or we could just move.

[CCdaCE]

Originally Posted by Cut-Throat

The difference in this example for someone retiring at 70 versus 62 is $1188 per month or $14256/year.

Now using the 4 percent safe withdrawal rate I need $25 of nest-egg for each dollar of yearly income. But if I start SS at 70 I need $14k/year less income than if I start at 62. Therefore I can spend out of my nest-egg 25 times that $14k/year increase in my SS payment. My calculations show that I could spend my nest-egg down by around $356k (total) and still be in the same retirement position. Or put another way I could spend my nest-egg down by around $44.5k/year over the period from when I am 62 to when I am 70 and still be in the same position.

Add in the value of not paying the double taxation on that $356k and that's worth maybe another $30-$70k or more.

In regards to delaying SS, maybe you'll have to reference the original conversation... and I missed this part but...

What about the $125K you gave up based on NOT getting roughly $1300/month or $15.6K for the 8 years between 62 and 70. The $15.6K income times 25 would require a portfolio of $390K.

There must be a breakeven analysis in here somewhere...
-CC

[Sam]

Originally Posted by CCdaCE

There must be a breakeven analysis in here somewhere...

There is, and it's different for everyone based on expectation. I did mine a few months ago, using my specific numbers, 9% ROI, 3% inflation. My break even point happens at around age 80. I decided then to take SS at 62. I don't have that spreadsheet anymore, but the calculation was relatively straight forward.

[audreyh1]

Ladelfina

IMO it is fine to "raid" one's retirement fund to buy a house, for example. You can figure that doing the lump sum to buy a house, you remove the monthly expense of renting from your annual income needs so you can manage the resulting lower annual withdrawal.

Or you can outright say - well if I make this big lump sum payment, it means my yearly funds available are now $X lower. If that's OK, then go ahead and spend the money. It's a simple tradeoff.

I also know that CFB would amortize certain maintenance issues over 10 to 20 years. You could figure it that way too. Like - it will cost $Y to do the project this year, but that will cover say 10 years of maintenance so the actual impact to the budget is $Y/10. I guess the trick is not to keep starting a new remodeling project every year, otherwise you are just kidding yourself!

Lots of ways to figure it!

Audrey

[Nords]

Originally Posted by ladelfina

[For those interested, we bought a house with a big yard and an empty, non-functioning "swimming pool" that is about 36" deep, currently lined with painted blue concrete in a state of decay. The theory was that the runoff from the gutters would be caught in this holding pool, but no water currently arrives. Underneath is ROCK. Very hard travertine. The rest of the yard itself is trucked-in fill on top of this rock. I would love to turn the hole in the ground painted blue pool into a "natural swimming pool" which would need to have a minimum depth of 9 feet. A scenario for a high-end install of this type here is something like €50-75k. You can do something cheaper, but I have seen a cheaper version and it is not worth doing if not done right. This is average and not counting extra difficulty that might be posed by excavation in our particular case.

This is why we end up doing so many of our own projects. If you find a good contractor, when you're done with them then ask them if they'd like a few all-expense-paid weeks in Hawaii...

[jeff2006]

Originally Posted by CCdaCE

What about the $125K you gave up based on NOT getting roughly $1300/month or $15.6K for the 8 years between 62 and 70. The $15.6K income times 25 would require a portfolio of $390K.

This analysis is not correct, as the replacement is only for eight years, not for the 30-35 years that the 25x multiplier accounts for. To replace the 15.6K you would need only the 124.8K invested at zero percent real return, drawn down over eight years.

[lazyday]

Instead of saying "starting fresh each year" I should have said something like "starting fresh each year that the portfolio increases".

Originally Posted by ladelfina

But that goes for everyone else, too. The "safe" withdrawal rate is either safe, or... it isn't.. depending on what you think the future holds, I guess.

I don't think there is a totally safe rate, and don't think 4% is extremely safe, unless you're certain you'll die in a couple decades.

Say that you plug in numbers and see 100% success for a 4% WR. But, the future is worse than the past, and the true 100% SWR for anyone retiring in the next 100 years is 3.8%, while 4% is only 94% successful. Then, when you increase your spending to 4%, you are hunting for the 6% failures.

If 4% shows 99% success using historical data, then it's even worse.

I'm just right around 100%

My personal choice right now is to not increase spending, but let the portfolio grow to reduce risk and allow a better lifestyle in the future. If my portfolio grows enough that spending drops below 2.5%, I'd consider increasing spending. But if at that time, I think stock markets are priced so high that their expected long run return will be under 3% real, then I probably wouldn't increase spending, and instead increase holdings of assets other than stocks.


On the other hand, at some point, one may go overboard trying to be safe, and spend too little. I wouldn't go so far as this quote, but he does have a point:

http://www.efficientfrontier.com/ef/901/hell3.htm

But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for political, economic, and military reasons relative to the failure of banal financial planning.

But the same author, in a discussion on Morningstar, indicated that for an early retiree, even a very low WR might not be low enough.

[kcowan]

Originally Posted by jeff2006

This analysis is not correct, as the replacement is only for eight years, not for the 30-35 years that the 25x multiplier accounts for. To replace the 15.6K you would need only the 124.8K invested at zero percent real return, drawn down over eight years.

To purchase an 8 year annuity earning 4.5% would cost $103,000 at age 62 so this is exactly what you are foregoing to get the higher payments starting at age 70

[unclemick]

Old Bill Bernstein has been known to mention Angus Maddison - The USA is not Argentina or Egypt - stock markets that had their day in the sun.

Even the Norwegian widow with her dividend checks may not have a fully adequate defense against political, economic or military boo boo's.

A valid passport and broad international diversification 'may' help in less extreme cases - a little Bear Bryant 'agile,mobile, and hostile.

Party on!

heh heh heh - I have no plans to haul sacks of gold and silver coins across borders or on airplanes.

[CCdaCE]

Originally Posted by jeff2006

This analysis is not correct, as the replacement is only for eight years, not for the 30-35 years that the 25x multiplier accounts for. To replace the 15.6K you would need only the 124.8K invested at zero percent real return, drawn down over eight years.

Thanks. I realize this, I just didn't go to the trouble that kcowan did. To figure out what 15.6K is worth at present value at an unknown rate.

Originally Posted by kcowan

To purchase an 8 year annuity earning 4.5% would cost $103,000 at age 62 so this is exactly what you are foregoing to get the higher payments starting at age 70

Anyway, three money streams here. Start at 62 SS, start at 70 SS, maybe a start at 66 SS. C-T was only talking about the difference between SS at 62 and SS at 70. What about the initial SS at 62... that's the only point I was trying to make.

Back to mediocrity.

-CC

[donheff]

Originally Posted by ladelfina

don, I kinda get what you are saying here: but on the other hand, as Firecalc totes up more "good" years in its database, then don't its assumptions get incrementally more rosy for all concerned? Add more years of double-digit returns and the 'canonical' return of 7% could creep up to 8%, tempting us with a higher SWR, which in turn might make a bad patch seem that much worse.

I don't think a few good years now will make much difference in Firecalc's projections. The reason the projection will remain rosy when you start fresh with the original+3% portfolio is that the historical chance of failing is no worse now than before. If as of last year you could survive the worst historical period with a $1M portfolio and $40K SWR (adjusted for inflation) you can survive this year with a $1.03M portfolio and a $40.03K SWR. Edit: $40.012K or something like that.

---
People's advice about the projects and "mad money" are sound. Unfortunately the projects have some overlapping electrical and plumbing issues that might be easier and more cost-effective if dealt with in one fell (and scary) swoop.

...details...

Wow - quite a dilemma. Better you than me

[ladelfina]

lazyday, "right around 100%" means w/o spending this year's "excess" we are at 100. If I spend it we are at 98.8% or something like that.

(what's tempting me to spend it is the fact that we will get some inheritance, but I have not figured this into Firecalc, nor have I put in any SS.. not wanting to count chickens before they hatch, etc.)

Some conflicting opinions here, though..

- lazyday doesn't think 4% is safe.. (I know it is always "prudent" to err on the side of caution)
- Bernstein says over a long period even an 80% of success is probably good enough..
- and don, your reasoning is perfectly sound, but you seem trusting that the future will not hold anything worse than what we have already seen.

I know it all boils down to having a crystal ball.. but when I see everyone crunching their numbers and the reasonable level of faith they have in Firecalc (a v. good app!).. it's hard not to get sucked into a level of detail (100% vs 99%... vs. 101%?) that may be unneccesarily distracting.

--
Greg wrote me about using copper sulfate to mitigate the root/drain issue, so maybe the kitchen will be project #1. Everything is more complicated because the house is entirely stone/brick/concrete/tile so even that will be a challenge. Just putting in a new outlet takes 1/2 a day (chip chip chip with a little hammer and chisel). Re-routing drain pipes means chopping up the slab floor.. what fun!

The funny thing is that this house could go on for another 50 or 100 years without changing anything; it's just that it's not really built for modern life. Everything is minimalist, from the wiring (think naked wire running underground to the garden lights -- who needs conduit?-- and "one outlet is all you need in the kitchen, right?") to the insulation (zero). I won't even go into the other electrical wierdnesses.. it would turn into a book.

However, at the time it was built (1969-70) it was the height of luxury for a "country" house!
Some people even today live in apt. buildings in Rome with no central heating, so I should just be thankful we have radiators.

[lazyday]

I think Firecalc or Trinity are only part of the story, especially for someone who could potentially be around for another 50 years.

Perhaps wage inflation will vastly outstrip monetary inflation in the future, putting retirees way behind. Or, accelerating technological innovations drive down the cost of living so far, that even the poor live quite well. A major country goes bankrupt. We run out of oil, cook the planet, or unleash nanobot or biological destruction on one another. We "cure" aging so people can live for hundreds of years. The cure may be very cheap, or so expensive few can afford it.

I don't worry too much about these things, but would like to be able to afford optional health care services and products, should worthwhile ones be invented.

Originally Posted by ladelfina

The funny thing is that this house could go on for another 50 or 100 years without changing anything; it's just that it's not really built for modern life.

Would it make sense to sell the house to someone who is ok with how it is, and buy a more modern one? (Sorry if you discussed already and I didn't catch it.)

[rmark]

The past 4% withdrawal is based on a the u.s history of a fairly specific asset mix. Stepping outside that mix, or increasing the past return sample size to include other market history gives different results. In short, something like this-

u.s. history only, no investing cost, retiree 60/40 stock bond = 4%, 40/60 stock bond = 3%
u.s. history only w/ investing costs, retiree 60/40 stock bond = 2%, 40/60 stock bond = 2%
u.s. int’l history w/ investing costs, retiree 60/40 stock bond = 0%, 40/60 stock bond = 0%

Resulting in something like -
late life 0% after tax net real returns from badly timed ever more conservative portfolios

Low cost index funds don't exist before about 1975, and aren't popular before about 1985. Most investors historically had either high fund costs from actively traded funds or small portfolios from individual securities resulting in non-average returns.

Cooley, Hubbard, Walz “Sustainable withdrawals from your retirement portfolio” paper
Dichev “What were stock investors actual historical returns?” paper
Dimson, Marsh, Staunton “Irrational optimism” paper
Jorion “Long term risks of global stock markets” paper
Jorion, Goetzmann “Global stock markets of the 20th century” paper

My opinion, which may well be worth what you're paying for it.

[rmark]

With late life 0% returns, you may well just be dividing your money over your life time -

Divide after tax fixed pensions and mixed portfolios annually over IRS life expectancies, withdrawing part and reinvesting the rest, thus adjusting fixed pensions for past inflation and matching conservative withdrawals to 401k plans required minimum distributions.

Spend the lesser of the new annual division or the previous year’s division plus inflation.

Withdrawal varies with portfolio value, but stable cash from bonds, pension & dividends.

[rmark]

oh yeah -

My opinion, which may well be worth what you're paying for it.