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Say Goodbye to the 4% Rule - tips from the WSJ
03-04-2013, 11:49 PM
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#1
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Thinks s/he gets paid by the post
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
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Say Goodbye to the 4% Rule - tips from the WSJ
Say Goodbye to the 4% Rule for Retirement - WSJ.com
"Conventional wisdom says you can take 4% from your savings the first year of retirement, and then that amount plus more to account for inflation each year, without running out of money for at least three decades.
This so-called 4% rule was devised in the 1990s by California financial planner William Bengen and later refined by other retirement-planning academics. Mr. Bengen analyzed historical returns of stocks and bonds and found that portfolios with 60% of their holdings in large-company stocks and 40% in intermediate-term U.S. bonds could sustain withdrawal rates starting at 4.15%, and adjusted each year for inflation, for every 30-year span going back to 1926-55.
Well, it was beautiful while it lasted.
(...)
So, if you can't safely withdraw at least 4% a year from a balanced portfolio of equity and bond funds, what do you do? Here are three alternative approaches that retirement specialists say may work better to ensure your money lasts as long as you do."
Some comments are interesting also.
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Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
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03-05-2013, 12:33 AM
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#2
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Full time employment: Posting here.
Join Date: Dec 2010
Posts: 576
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I do not know much about annuity. My understanding is that the annuity pays someone a fixed annual amount for life. In order to provide for that, the fixed amount can only be that large, given variation in people's life spans. The amount one receives may be ok initially, but with inflation, the annual amount without adjustment may not be all that large after 25 years.
Also, is the security of the annuity only as good as the company underwriting it? What would happen if you buy an annuity from an insurance company and it went bankrupt? Are annuity holdings separated in an escrow account that even in case of bankruptcy, the creditors cannot take the money as part of the bankruptcy settlement, leaving the retirees in a bind?
I need to read a little more because supposedly it is becoming popular. Am I wrong with my concerns?
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03-05-2013, 04:21 AM
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#3
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Recycles dryer sheets
Join Date: Jun 2011
Posts: 239
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You could also give the million to your alma mater in a Charitable Remainder Trust as those must pay 5%. No inheritance for the kids though.
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03-05-2013, 04:30 AM
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#4
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Thinks s/he gets paid by the post
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
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Clearly annuities have been discussed many times here. They have many pros and cons i.e. no money left for heirs, etc which I will not repeat. However, from a pure mathematical standpoint, some annuities do make sense in some cases. In my case, my Excel ER model is optimized with the purchase of some deferred annuities up to my mid 50s (say up to about 100k in all) and larger SPIAs much later in life (about 100k age 75 and another 100k around 85 if I am still alive). Choose your company carefully - mine is one of the top 3. The first deferred annuity I bought last year will generate 12% per year from 62 until I die. I'm aware that part of the % includes repayment of principal,also discussed in other threads.
I am aware many here dislike or even hate annuities and will beat up my comments above. That's fine. This is America, people can disagree.
Good luck.
Quote:
Originally Posted by bondi688
I do not know much about annuity. My understanding is that the annuity pays someone a fixed annual amount for life. In order to provide for that, the fixed amount can only be that large, given variation in people's life spans. The amount one receives may be ok initially, but with inflation, the annual amount without adjustment may not be all that large after 25 years.
Also, is the security of the annuity only as good as the company underwriting it? What would happen if you buy an annuity from an insurance company and it went bankrupt? Are annuity holdings separated in an escrow account that even in case of bankruptcy, the creditors cannot take the money as part of the bankruptcy settlement, leaving the retirees in a bind?
I need to read a little more because supposedly it is becoming popular. Am I wrong with my concerns?
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__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
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03-05-2013, 05:16 AM
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#5
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Administrator
Join Date: Jan 2008
Location: Chicagoland
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Didn't see anything new in the linked WSJ article. The analysis and proposal by W. Pfau has been discussed here before as well.
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03-05-2013, 05:22 AM
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#6
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Thinks s/he gets paid by the post
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
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I found some of the WSJ' readers comments very interesting. Did you read them also ?
Quote:
Originally Posted by MichaelB
Didn't see anything new in the linked WSJ article. The analysis and proposal by W. Pfau has been discussed here before as well.
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__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
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03-05-2013, 05:29 AM
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#7
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Administrator
Join Date: Jan 2008
Location: Chicagoland
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Quote:
Originally Posted by obgyn65
I found some of the WSJ' readers comments very interesting. Did you read them also ?
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Reader comments on news sites make me wonder if other animal species have learned to write. I've no doubt there is the occasional gem, but I doubt any comment there will be as meaningful as the typical serious comment here.
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03-05-2013, 06:18 AM
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#8
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Thinks s/he gets paid by the post
Join Date: Mar 2009
Posts: 2,983
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I've always had a hard time accepting any % rule. I can't imagine blindly taking the same % plus inflation regardless of what's happening. When I look back at the wild fluctuations in my income (not high income fluctuations just from low income to middle income) I see how we adapt to each new situation. Perhaps that lifelong experience will help me in future years.
__________________
Took SS at 62 and hope I live long enough to regret the decision.
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03-05-2013, 06:23 AM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Location: NC Triangle
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Quote:
Originally Posted by obgyn65
I am aware many here dislike or even hate annuities and will beat up my comments above. That's fine. This is America, people can disagree.
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No one's "beating you up" or intends to.
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03-05-2013, 06:50 AM
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#10
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gone traveling
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Location: DFW
Posts: 7,586
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Quote:
Originally Posted by WestLake
You could also give the million to your alma mater in a Charitable Remainder Trust as those must pay 5%. No inheritance for the kids though.
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I've not heard of this before and am not sure if I am interpreting your statement correctly; that if you donate $1M to your alma mater, you are assured of receiving $50K/yr for life in return Sounds like a good alternative to a fixed annuity, no?
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03-05-2013, 07:10 AM
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#11
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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I like the standard 4% rule, or a smaller percentage using the same process, because that maintains an arguably constant standard of living throughout retirement. That is a nice goal to shoot for when planning. Most of the other methods might start a little lower and then let you increase spending if things went well. But do we really want to increase spending as we get older? I'd rather err a little on the side of overspending and optimism early in retirement, suitable for travelling for example, and then wind it down a bit if necessary. The 4% rule gives me an idea of the risks that might involve. Doesn't mean I won't make adjustments to my withdrawals later in retirement.
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03-05-2013, 07:14 AM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by DFW_M5
I've not heard of this before and am not sure if I am interpreting your statement correctly; that if you donate $1M to your alma mater, you are assured of receiving $50K/yr for life in return Sounds like a good alternative to a fixed annuity, no?
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I have heard of these. There is a very knowledgeable professor of finance here who until recently appeared on a PBS broadcast who mentioned them and their benefits, and I am interested because I want to make charitable donations. I can probably find the archives if you like.
Edit: it's a little silly to say "tell me if you want a link", rather than just posting it. Here's what I found - but keep in mind it dates from 2000.
PERSONAL FINANCE | Focus | Illinois Public Media
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03-05-2013, 07:19 AM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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You can find information on charitable gift annuities here: American Council on Gift Annuities - About ACGA
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Numbers is hard
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03-05-2013, 07:28 AM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I have nothing against SPIAs, per se, but you are still taking market risk with one, just indirectly...
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Have Funds, Will Retire
...not doing anything of true substance...
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03-05-2013, 08:05 AM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by HFWR
I have nothing against SPIAs, per se, but you are still taking market risk with one, just indirectly...
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So indirectly it is effectively inconsequential. The insurers would buy bonds with an aggregate duration approximately equal to the duration of the SPIA obligations. While insurers hold stocks that support their surplus and perhaps some longer term products (like whole life for instance) it would be almost unheard of for stocks to be included in the pool of assets supporting SPIA liabilities.
While I'm not a fan of SPIAs at all, I don't think it is a fair statement to suggest they have market risk.
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If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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03-05-2013, 08:08 AM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
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Quote:
Originally Posted by MichaelB
Didn't see anything new in the linked WSJ article. The analysis and proposal by W. Pfau has been discussed here before as well.
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+1 article was a perceptive glimpse of the obvious and I'm typically a fan of the WSJ. IIRC even way back when the issue of sequence of returns was referred to.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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03-05-2013, 08:23 AM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Agreed. Obygyn65 seems very quick to claim he is being (or will be ) beaten up for his comments.
People on this forum have presented viewpoints and opinions different from his, and challenged some of his statements, same as most everyone here. To claim that those people are "beating up" on him is dismissive and condescending, IMO. Just maybe there is some merit to those opposing views?
It seems to me that calling these people out as bullies is actually an act of bullying itself, far more than those who are presenting their alternate viewpoints.
Many here "hate" annuities? Where does that come from? All I've seen is analysis (expenses, low rates, safety of the insurer, etc), which leads many to avoid (or delay) them. They don't "hate" them. There may have been some "hate" expressed towards the sales people who sell (or over-sell) them in inappropriate cases.
-ERD50
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03-05-2013, 09:02 AM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by HFWR
I have nothing against SPIAs, per se, but you are still taking market risk with one, just indirectly...
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For the right people and the right circumstances, a low-cost SPIA can definitely make sense. But right now, it's hard for the circumstances to be "right" because interest rates are so pathetic that the cost of a guaranteed income stream is rather extreme at this point.
I suspect that when people usually speak pejoratively of "annuities" they are referring mostly to the high-cost, high-commission variable annuities, equity-indexed annuities and other products which carry high, recurring fees and punitive surrender charges -- the type that are *very* aggressively sold by commissioned salespeople.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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03-05-2013, 09:20 AM
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#19
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Recycles dryer sheets
Join Date: Jan 2013
Posts: 194
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I am glad this news is getting out to the unwashed masses. Better late than never.
We, as members of this elite group of financially sophisticated people, have known about his for quite a while.
For the record, I plan on a 3% withdrawal rate. Obviously, I reserve the right to change it as conditions warrant.
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03-05-2013, 09:32 AM
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#20
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Thinks s/he gets paid by the post
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,455
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The 4% rule is still valid for planning purpose. The key is to be flexible or adaptable to market conditions. That is, adjust the withdrawal rate and re-balance the portfolio to the desired AA. Our plan is 2% SWR, however.
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