Sustainable Withdrawal rate opinion for a 50 year old

[daylatedollarshort]

Looking historically though, there does seem to be some basis for believing in reversion to the mean within 5 years or so IF you are highly diversified. A 100% return in a relatively short period following a 50% drop is not such an unrealistic expectation. As my dad used to tell me, the stock market is like a kid on an escalator with a yoyo.

Stocks are a good bet but it is still a bet, so it comes down to personal risk tolerance with a pretty bumpy ride along the way. For retirees with enough already in safe assets, they may no longer see a reason to keep playing the game. BB seems to have found that out with his clients post 2008.

 

[GTFan]

BB seems to have found that out with his rich clients post 2008.

FTFY.

 

[daylatedollarshort]

FTFY.

You can be rich, or you can have low spending, or other retirement income streams than your portfolio or some combination for this to work. But yeah with lower assets or retirement income you need to take on more risk.

That is why BB called it time to stop playing when you've already "won the game". No one is saying this approach will work for people who are 30 and want to retire on $1M. Many current retirees actually do live off mainly SS and pensions:

http://www.reuters.com/article/2014/06/10/us-column-miller-retirementincome-idUSKBN0EL1UH20140610

It works for people with low risk tolerance who are able to live off safe assets and are looking for less volatility than the 3 fund approach. I am just trying to point out the 3 fund approach is not the only game in town. People who want to avoid big losses more than look for portfolio growth might find this information useful. I know I did and I wish I'd heard about it sooner in our investing life. YMMV.

 

[Chuckanut]

Many current retirees actually do live off mainly SS and pensions:

Surprise: Even wealthy retirees live on Social Security and pensions | Reuters

Very true. Vegetable gardens, bartering, yard sales and sometimes even hunting game are ways these people make do on their SS check. It also helps to live in a lower cost of living area where that SS check goes a lot farther.

 

[ERD50]

...

That is why BB called it time to stop playing when you've already "won the game". ....

Seems to me this whole discussion is moot. If you define "won the game" as being able to live off something like TIPs for 40 years at 0-1% real, then basically you are talking about a WR of ~ 1/40, or ~ 2.5%.

If I plug 40 years and 2.5% of $1M ($25,000), and fairly 'conservative' 50/50 AA, the lowest ending balance in the worst period in history reports an ending balance of $892K.

If I plug in the same with 0/100 AA, and a fixed 0% inflation and 1% fixed return, the ending point is $198K.

And if I use higher equity AAs, the minimum ending point is even higher (greater than $1M, which FIRECalc does not report correctly - it shows the starting balance if ending is greater than starting, but you can eye-ball it on the graph). And you won't be 'selling equities when the market is down', divs and interest will provide much of that 2.5%, and you will be re-balancing into equities, or just drawing from the fixed to re-balance.

IOW, if you have "won the game" and can live off a relatively low WR%, you can do pretty much anything you want and you won't run out of money. With inflation tracking investment (assuming you can get them in the future, or enough of them), your money will mathematically outlast you. With equities, if your money doesn't outlast you, we probably will have larger problems that affect everyone.

-ERD50

 

[youbet]

IOW, if you have "won the game" and can live off a relatively low WR%, you can do pretty much anything you want and you won't run out of money.

There ya go......

 

[daylatedollarshort]

My issue is that the mutual fund company people we talked to for retirement planning were very adamant we needed 80% of our former gross income in retirement and "stocks for growth", when in our case neither was true at all. A lot of our income before went to taxes and saving for retirement, let alone accounting for expense reductions for kids leaving home, no longer needing to pay a premium for a house in a good public school district or a mortgage.

They also do not look at home equity, so it is my understanding that a retiree household that rents gets the same plan and recommendations as ones with a mortgage free home, which in some metro areas of CA can be a median price of $500K.

They recommended a much more volatile portfolio than we needed or were comfortable with for our particular situation. I'd encourage others with a low risk tolerance to research the LMP links and wiki at Bogleheads to see if that kind of strategy fits your risk level better than a 3 fund approach. Bernstein posts there and I found the LPM posts there by a poster named bobcat2 very helpful for us.

For help in planning expenses we looked at the Consumer Expenditure Survey.

 

[ERD50]

My issue is that the mutual fund company people we talked to for retirement planning were very adamant we needed 80% of our former gross income in retirement and "stocks for growth", when in our case neither was true at all. A lot of our income before went to taxes and saving for retirement, let alone accounting for expense reductions for kids leaving home, no longer needing to pay a premium for a house in a good public school district or a mortgage.

They recommended a much more volatile portfolio than we needed or were comfortable with for our particular situation. I'd encourage others with a low risk tolerance to research the LMP links and wiki at Bogleheads to see if that kind of strategy fits your risk level better than a 3 fund approach. Bernstein posts there and I found the LPM posts there by a poster named bobcat2 very helpful for us.

For help in planning expenses we looked at the Consumer Expenditure Survey.

That sounds like an issue with depending on financial planners (which is why so many of us are DIY), not an issue of choosing a 60/40 AA vs 0/100 AA for someone planning a low WR%.

Of course you can do as you please, and I think your plan will work for you. But seriously, there are a lot of straw-men and twisted logic puzzles in this discussion.

-ERD50

 

[Katsmeow]

Seems to me this whole discussion is moot. If you define "won the game" as being able to live off something like TIPs for 40 years at 0-1% real, then basically you are talking about a WR of ~ 1/40, or ~ 2.5%.

I think there is some disconnect here. When I was first reading daylatedollarshort I was reading the "won the game" (still hate that terminology that some use) discussions as recommending a 0% equities portfolio which I do think requires a very tiny withdrawal rate and if you can afford that then you can afford to have a more standard AA.

But, when I went and read the stuff at Bogleheads it was much less concerning. First, this is only talking about essential expenses which for many of us is less than what we plan to spend.

Second, this is only talking about putting into "safe" assets, the amount necessary to cover those essential expenses.

Third, you deduct from those essential expenses the amount covered by Social Security, pensions, other income (rental income, part-time work, etc).

Finally, you put into the safe assets only the amount necessary to cover the essential expenses.

In our case, SS will cover at a minimum all but about $10,000 of essential expenses (after kids are out of school). So, even under this theory, the amount that would need to be TIPs or "safe" assets is the amount necessary to cover that spending which is a relatively small amount.

 

[GTFan]

Seems to me this whole discussion is moot. If you define "won the game" as being able to live off something like TIPs for 40 years at 0-1% real, then basically you are talking about a WR of ~ 1/40, or ~ 2.5%.

If I plug 40 years and 2.5% of $1M ($25,000), and fairly 'conservative' 50/50 AA, the lowest ending balance in the worst period in history reports an ending balance of $892K.

If I plug in the same with 0/100 AA, and a fixed 0% inflation and 1% fixed return, the ending point is $198K.

And if I use higher equity AAs, the minimum ending point is even higher (greater than $1M, which FIRECalc does not report correctly - it shows the starting balance if ending is greater than starting, but you can eye-ball it on the graph). And you won't be 'selling equities when the market is down', divs and interest will provide much of that 2.5%, and you will be re-balancing into equities, or just drawing from the fixed to re-balance.

IOW, if you have "won the game" and can live off a relatively low WR%, you can do pretty much anything you want and you won't run out of money. With inflation tracking investment (assuming you can get them in the future, or enough of them), your money will mathematically outlast you. With equities, if your money doesn't outlast you, we probably will have larger problems that affect everyone.

Well said, and I think this sums up everyone's responses to why this approach, while seeming to be a risk-free way to retire, can actually be more riskier if you outlive your money.

But you do have to take into account SS, and with either approach if the WR is that low it doesn't matter anyway.

 

[GTFan]

First, this is only talking about essential expenses which for many of us is less than what we plan to spend.
Second, this is only talking about putting into "safe" assets, the amount necessary to cover those essential expenses.
Third, you deduct from those essential expenses the amount covered by Social Security, pensions, other income (rental income, part-time work, etc).
Finally, you put into the safe assets only the amount necessary to cover the essential expenses.

But how do you define 'essential expenses' over time? Lots of stuff can change, regardless of the effects of inflation. Wouldn't you rather have the greater upside of a reasonable AA instead of hoping that what you put aside in fixed income will be enough?

 

[Katsmeow]

But how do you define 'essential expenses' over time? Lots of stuff can change, regardless of the effects of inflation. Wouldn't you rather have the greater upside of a reasonable AA instead of hoping that what you put aside in fixed income will be enough?

You are missing my point. First, I personally have a standard AA (currently about 50/50).

However, I could easily do the LMP concept and would at the end still have the same AA I currently have. That is, the amount I would put in "safe" assets under the LMP concept isamount that I already have in safe assets through my normal asset allocation.

Basically, I might call it a standard AA (which it is) but I could do the exact same AA and say I am doing a LMP.

 

[GTFan]

Sure that's great for you, but you didn't answer my question.

The LMP approach is clearly targeted towards those that either have enough money not to care about SWR or are much closer to SS than the average ER here. So yeah it's easy to target 'essential expenses' when you either have way more than you need (even at 1-2% WR) or don't have nearly as long to risk a lack of port growth.

Those of us that have ports without huge cushions and 15-20 year horizons to FRA SS are not looking at shifting that much money out of equities, even if there weren't any tax implications (which can be huge with a lot of taxable assets).

 

[daylatedollarshort]

Sure that's great for you, but you didn't answer my question.

The LMP approach is clearly targeted towards those that either have enough money not to care about SWR or are much closer to SS than the average ER here. So yeah it's easy to target 'essential expenses' when you either have way more than you need (even at 1-2% WR) or don't have nearly as long to risk a lack of port growth.

Those of us that have ports without huge cushions and 15-20 year horizons to FRA SS are not looking at shifting that much money out of equities, even if there weren't any tax implications (which can be huge with a lot of taxable assets).

You are right. It is probably not a good portfolio fit for your age, goals and risk tolerance. But many here do retire in their early or mid fifties and can collect early pensions, have rental income, have low expenses in relation to their portfolios or other income streams so they can retire relatively early as well as use a LMP plan.

On page 16 of the Capgemeni World Wealth report, it shows that many high net worth individuals actually do have fairly conservative portfolios, and not a 60/40 mix -

http://www.capgemini.com/resource-file-access/resource/pdf/wwr_2013_0.pdf -

Given recent market rallies, there is little doubt that the
high allocation to more stable assets has likely caused some
HNWIs to miss opportunities for wealth growth.
However, this is often a conscious decision as some
HNWIs willingly forego returns in exchange for the safety
of capital.

 

[GTFan]

If you have pensions, rental income, and/or are serious LBYM to the point of being able to live on a 1-2% WR, you don't have to have an LMP plan. You already have liabilities matched to income to a very large extent so it really doesn't matter what you do with the rest of the money.

0/100, 50/50, 100/0, it's all good.

And there are no guaranteed returns for a serious black swan, which is really all that matters once you get to this point...

 

[Katsmeow]

Sure that's great for you, but you didn't answer my question.

The LMP approach is clearly targeted towards those that either have enough money not to care about SWR or are much closer to SS than the average ER here. So yeah it's easy to target 'essential expenses' when you either have way more than you need (even at 1-2% WR) or don't have nearly as long to risk a lack of port growth.

Those of us that have ports without huge cushions and 15-20 year horizons to FRA SS are not looking at shifting that much money out of equities, even if there weren't any tax implications (which can be huge with a lot of taxable assets).

I did answer your question. I said I personally have a standard portfolio with a 50-50 AA. So, yes, I do prefer a standard portfolio to the LMP methodology.

My main point is that really this is often just a matter of semantics. In our case, DH (retired 4 years at this point) is already getting SS. I'm not yet eligible. If we were both taking SS, though (I'm 2 years from eligibility), we would only need to cover $10k from a LMP portfolio and that amount is already in "safe" assets from our regular portfolio (and we don't have all that large a portfolio FWIW).

As for projecting essential expenses, I've tracked spending for many years so have a handle on most expenses. I'm sure it won't be exact but I don't think it will be way off either.

Oh -- and to be clear given our ages, I feel OK with about a 4% WR.