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Old 07-05-2013, 03:50 AM   #41
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It seems like many on this board are planning for 100 year life spans and are worried about the SWR for that . . . probably no need to worry in reality . . .
"Probably" is the key word there. Planning for the "worst" case that can still reasonably happen makes sense to me. Living to 100 is not likely but yet not unreasonable for me. I do not want to be unprepared for that case.
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Old 07-05-2013, 08:10 AM   #42
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I grew up in the town where I live. I read the obits every day in the local paper, I have seen a lot of 50 and 60 something obits, very very few 100 or 100+. I Semi-ER'd because I thought the possibility of dying before experiencing some freedom was what was most important to not let happen. Look around folks, there are ton (if not the majority) of people around you who will never enjoy having the amount of money a person who is interested in participating in this site has. They will still get by, so will we. Those who paint the future as bleak are wrong but they play well to fear, a powerful human emotion.
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Old 07-05-2013, 08:21 AM   #43
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I grew up in the town where I live. I read the obits every day in the local paper, I have seen a lot of 50 and 60 something obits, very very few 100 or 100+. I Semi-ER'd because I thought the possibility of dying before experiencing some freedom was what was most important to not let happen. Look around folks, there are ton (if not the majority) of people around you who will never enjoy having the amount of money a person who is interested in participating in this site has. They will still get by, so will we. Those who paint the future as bleak are wrong but they play well to fear, a powerful human emotion.
Too bad your observation is misleading, but you're welcome to join the "proof by exception" club, it's a large group. Odds are, "a ton" more of us will live a long life despite the unfortunate exceptions. No matter how many times data is shared here from multiple sources (CDC this time)...
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Old 07-05-2013, 09:32 AM   #44
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Your CDC chart may be misleading, because it blends sexes and races. Men clearly live shorter lives on average and being a single male I only have to worry about me. The obits I read every day show a trend, very few 90+ old men. So did my daily visits to a large nursing home when my father was there. Very few men in the home by the way compared to women. I think one's ancestors give a greater indication of one's potential for longevity than any study of the masses. Males in my family have historically checked out between 52 and 83 and all but one went before 80 for 3 generations. Cures for the afflictions that took them still do not exist. Women in general have to be concerned with longevity cost more so than men and from a planning perspective a single male and a single woman is comparing apples to oranges.
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Old 07-05-2013, 09:56 AM   #45
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Too bad your observation is misleading, but you're welcome to join the "proof by exception" club, it's a large group. Odds are, "a ton" more of us will live a long life despite the unfortunate exceptions. No matter how many times data is shared here from multiple sources (CDC this time)...
It would have been interesting to see the chart broken down into 5 yr. segments after 85 to 100, instead of lumped together. My guess the line would plummet downward at 90.
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Old 07-05-2013, 10:58 AM   #46
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Why speculate when data is readily available online Actuarial Life Table? Fortunately people who die in their "50 and 60 somethings" are a small group compared to those in the 70s and beyond. The shorter lifespan exceptions that some members choose to highlight while undoubtedly true, are relative exceptions and therefore not a sound basis for retirement planning (unless perhaps the exceptions are within your family). The data suggests most of us should plan on 85-95...


Sex and race shift the distributions, but most of us will enjoy a longer life...
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Old 07-05-2013, 11:04 AM   #47
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The problem is if you don't plan for 100 and you do live that long, what is your plan B? It would be tough to go out and get a job at age 95.

I feel better having a plan that doesn't assume drawing down my money to zero at 90. I would rather live more frugal now and not have to worry about the future.
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Old 07-05-2013, 11:40 AM   #48
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The problem is if you don't plan for 100 and you do live that long, what is your plan B? It would be tough to go out and get a job at age 95.

I feel better having a plan that doesn't assume drawing down my money to zero at 90. I would rather live more frugal now and not have to worry about the future.
Everyone here is for LBYM but there's also something to be said for spending money when you can do some things which you presume you won't be able to do later in life.
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Old 07-05-2013, 12:20 PM   #49
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The problem is if you don't plan for 100 and you do live that long, what is your plan B? It would be tough to go out and get a job at age 95.

I feel better having a plan that doesn't assume drawing down my money to zero at 90. I would rather live more frugal now and not have to worry about the future.
This is true, but everyone still has to draw a line somewhere. And, it has to be considered as part of the overall planning.

That is, it is easy to say that one will plan to have enough money to last to say age 80 or 85. But, not many people will feel that they have to plan to age 110.

The other thing is certainty. That is I might want to feel 100% certain (although I think there is no such thing as 100% certainty) that the plan will work to age 80 but I might feel fine with a little bit less certainty that the plan will work to age 95 or age 100 and I may not put any effort at all into making sure the plan will work to 110.

The other thing is that when people want a plan that will work for 30 years or 40 years, etc. I always feel that this is really just a proxy for saying that you want a plan that will work for the rest of your life.

So, let's say you are happy with a plan that is 95% for 35 years taking you to age 95. That doesn't mean you have a 5% chance that you will run out of money before you die. Your actual chance of running out of money before you die is well below 5% because most people don't live to be 95.

This is why you see people with withdrawal rates that are higher than what most people here would think prudent and yet they do fine. That is, they die 20 years into their plan and so it doesn't end up mattering that their plan wouldn't have survived for 30 years.
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Old 07-05-2013, 01:02 PM   #50
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like the fact that I'll only live to 80 or so
I bet you change your tune when you are age 79.
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Old 07-05-2013, 02:21 PM   #51
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I would recommend to treat your life expectancy as a probability distribution. This is what I did in my modeling before I retired. I used a mean and a normal distribution based on actual data, although I upped the average for my unique situation and also for how much I believed that life expectancy would increase over that time frame.

This is very different than saying I am planning to live to 100 (even though that small possibility is accounted for using this technique). It is highly likely that only a small percentage of people posting on this board will ever live to see that age.

I have read detailed research overview articles that state that genetics probably accounts for a third of longevity, at most. There are many factors.
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Old 07-05-2013, 02:23 PM   #52
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So, let's say you are happy with a plan that is 95% for 35 years taking you to age 95. That doesn't mean you have a 5% chance that you will run out of money before you die. Your actual chance of running out of money before you die is well below 5% because most people don't live to be 95.
Exactly.
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Old 07-05-2013, 03:09 PM   #53
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Well, the 'Race to the bottom' has really bottomed out, when some folks retirement plan has them hoping to die in their 80s.......

This is why you should delay S.S. to age 70 for the increased benefit, in case you do live beyond age 85.....And this means you can have a higher withdrawal rate in your 60s as result of this 'Old Age Insurance'. It's a no-brainer if you have the Funds to afford this. Most don't have the money and have no choice, but to take S.S. at age 62.
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Old 07-05-2013, 03:54 PM   #54
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So, let's say you are happy with a plan that is 95% for 35 years taking you to age 95. That doesn't mean you have a 5% chance that you will run out of money before you die. Your actual chance of running out of money before you die is well below 5% because most people don't live to be 95.
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Exactly.
I don't think that is a useful way to look at it. Averages be damned, you either live to 95+ or you don't. I want to be prepared in case I do.

Lets make a parallel 'bet'. Let's say you live in an area that is rated as flooding once in 100 years. So that's a 1% chance in any one year, on average. Let's also say that the cost to protect your house against this kind of flooding is something you can afford - maybe making sure gutters are routed properly, some berms to deflect water around the house, a battery backed up sump pump, etc.

Would it make sense to do just 1% of those things? So if/when that flood comes, you have 9.9" of water in your basement instead of 10.0"? Of course not. We take steps to protect against things that may happen. We have to weigh the risk/reward, and maybe we decide we can't afford the flood protection, and take our chances. But we shouldn't fool ourselves about the risk we are taking, and the consequences of our decision.

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Old 07-05-2013, 04:18 PM   #55
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For data wonks only:

I was curious (and anxious) enough about this paper to write a program that implements their model. I get completely different results than they do, and the results that I do get are more in line with some of the other calculators (Firecalc, Fidelity Retirement Income Planner) that I've tried. For example, for a 4% withdrawal rate over 30 years, and starting with the same parameters used in the paper (CAPE = 22, current 5 year bond = 2%,10000 simulations), I get a 84% success rate. Firecalc gives about a 96% success rate. If I use a more reasonable management fee (.18% instead of .5%) I get a 88% success rate. The paper gives a success rate of somewhere around 50% for the first case. I also noticed that their model shows increased volatility for a bond only allocation vs a 100% stock allocation, which doesn't make much sense.

Perhaps I screwed up something in my program, but, at least at first glance, there appear to be problems with both the model and the model calculations written up in the paper.
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Old 07-05-2013, 04:19 PM   #56
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I don't think that is a useful way to look at it. Averages be damned, you either live to 95+ or you don't. I want to be prepared in case I do.

Lets make a parallel 'bet'. Let's say you live in an area that is rated as flooding once in 100 years. So that's a 1% chance in any one year, on average. Let's also say that the cost to protect your house against this kind of flooding is something you can afford - maybe making sure gutters are routed properly, some berms to deflect water around the house, a battery backed up sump pump, etc.

Would it make sense to do just 1% of those things? So if/when that flood comes, you have 9.9" of water in your basement instead of 10.0"? Of course not. We take steps to protect against things that may happen. We have to weigh the risk/reward, and maybe we decide we can't afford the flood protection, and take our chances. But we shouldn't fool ourselves about the risk we are taking, and the consequences of our decision.

-ERD50
Yes, I completely understand that (although I think your flood analogy is flawed, that is beside the point). The consequences of the negative outcome of running out of money are greater than the rewards of the positive outcome. It is why I won't be taking social security until age 70, and I just bought a big batch of 30 year TIPs that won't mature until I am 77 years old (I am currently 47 years old and retired) -- I have others maturing in my mid-70s. And I may buy annuities with that money at that time. I have established a basic income floor on my old age, no matter how long I live. But I am still not planning as if it is a LIKELY possibility that I will live to 100, as many on this board seem to do. There is a big difference.
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Old 07-05-2013, 04:26 PM   #57
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Also, don't forget William Bernstein's advice in the "Retirement Calculator from Hell, Part III" about the futility of low failure rates on long term withdrawals from a portfolio. Although I think he is too pessimistic in the article, it is general advice well worth noting:

The Retirement Calculator from Hell, Part III

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For this to be a useful estimate of your true chance of not running out of money, the "success rate" of your ambient political, economic, and military environment must be at least 97% over this 40-year period. Do you think that this is likely? Only if you are an historical illiterate (which, I’m afraid, subsumes many finance academics).

Let’s examine a small sampling of possible political, economic, and military failure modes:

The mildest scenario is that of catastrophic inflation, as experienced in Germany and Hungary in the 1920s or, more recently, in much of the developing world.

Political failures are slightly worse, since these threaten the basic human motivation to work and produce. The state, for whatever reason, can decide to confiscate your assets or, worse, society’s means of production. Anyone who judges this unlikely should turn on CNN during any G-8 or WTO conference.

Local military action. Probably the lowest-probability item on this list, but something to think about on other continents.

The Big One: Some deranged prime minister or colonel in central Russia, Pyongyang, or South Asia could let loose the four horsemen upon the planet.

So, think about what a 97% 40-year success rate means: the absence of all of the above for approximately the next 1,200 years. (A 97% success rate means a 3% failure rate; those 40 years divided by 0.03 is 1,200 years.) Ignore for a minute the uncertainties of the less-developed world and think only about the winners: Germany—in this century alone, three episodes of military and/or economic disaster, the first two associated with mass starvation. Japan—wartime devastation even worse than Germany’s. England—near brushes with disaster in 1812-1814 and in both world wars. And even the United States—repeated banking failures, civil war, and the near-bankruptcy of the Treasury in the 19th century. The near collapse of the capitalist economy in the 1930s. And oh yes, I almost forgot—the entire globe barely missed mass incineration in October 1962.

History’s best-case scenario was the Roman Empire, which survived more or less intact for about seven centuries (if you ignore the odd sackings of the capital after 200 A.D.).

A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless.
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Old 07-05-2013, 04:43 PM   #58
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For data wonks only:

I was curious (and anxious) enough about this paper to write a program that implements their model. I get completely different results than they do, and the results that I do get are more in line with some of the other calculators (Firecalc, Fidelity Retirement Income Planner) that I've tried. For example, for a 4% withdrawal rate over 30 years, and starting with the same parameters used in the paper (CAPE = 22, current 5 year bond = 2%,10000 simulations), I get a 84% success rate. Firecalc gives about a 96% success rate. If I use a more reasonable management fee (.18% instead of .5%) I get a 88% success rate. The paper gives a success rate of somewhere around 50% for the first case. I also noticed that their model shows increased volatility for a bond only allocation vs a 100% stock allocation, which doesn't make much sense.

Perhaps I screwed up something in my program, but, at least at first glance, there appear to be problems with both the model and the model calculations written up in the paper.
Fred I am curious how did you model the equity returns? In particular did you decrease the average returns by 2% like they did, but keep the variance the same.

One of the things that I find most suspicious about the paper is this. The found the optimum AA was 40% equities and 60% bonds. At time when bonds are at historic lows (when the paper was written) such an AA makes no sense even if you believe stocks are overpriced.

Does anybody know if the Journal of Financial Planning articles are per reviewed? Perhaps that is what he is getting now.
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Old 07-05-2013, 05:17 PM   #59
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Fred I am curious how did you model the equity returns? In particular did you decrease the average returns by 2% like they did, but keep the variance the same.

One of the things that I find most suspicious about the paper is this. The found the optimum AA was 40% equities and 60% bonds. At time when bonds are at historic lows (when the paper was written) such an AA makes no sense even if you believe stocks are overpriced.

Does anybody know if the Journal of Financial Planning articles are per reviewed? Perhaps that is what he is getting now.
Getting into the weeds now!

They model the returns using what is know as an autoregressive model. These kind of models assume that the values from the current year can be used to predict the next year, and that the next year value is a linear function of the current value. They derive the parameters for the model (I assume) by fitting it to historical data.

They start with a "seed" CAPE (cyclically adjusted PE ratio), and then assume that the CAPE changes each year using the following recurrence relation:

CAPE(t) = 2.11 + .87*CAPE(t-1) + e(CAPE)

where e(CAPE) is normalized white noise with a mean of 0 and standard deviation of 4.0 They then estimate the total stock return using this equation:

r(s) = .24 - .0083*CAPE(t) + e(S)

where e(S) is more normalized noise with a mean of 0 and std dev of 0.2.
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Old 07-05-2013, 05:49 PM   #60
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I don't think that is a useful way to look at it. Averages be damned, you either live to 95+ or you don't. I want to be prepared in case I do.
Me, too. I'm not advocating that people shouldn't prepare. I'm saying a few things though that I think get overlooked.

1. First, is that everyone does draw the line of preparation somewhere. That is, while you may want to be prepared in case you live to 95, do you also demand the same degree of certainty to prepare to live to be, say, 105? Or 110? Some people do live that long. So we all have to draw a line somewhere. Maybe you draw it at 95 and someone else might draw it at 90 and someone else at 100.

2. My point is that drawing the line is not just something where you are either have a 100% chance of success or no chance of success. That is, if you say want a 100% chance of success for 95, that doesn't mean that you have 0% chance of success for 96 or even 100. That is, many might say that while they want 100% for 90, they would be fine with 95% for 95, and 90% for 100. This is because the chances of living to 100 is less than the chance of living to 90. So I want a different level of preparation for 90 than for 100 (of course, where one draws that line will differ from person to person but most everyone will draw that line somewhere).
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