Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 12-23-2012, 08:18 AM   #21
Thinks s/he gets paid by the post
Huston55's Avatar
 
Join Date: Jul 2011
Location: The Bay Area
Posts: 1,802
Quote:
Originally Posted by omni550 View Post
Regarding item 3. (above).... Here's the quote from the paper "Thus, a retiree who is satisfied with average sustainability can plan to spend only 3 percent plus an additional 0.693 divided by her or his median remaining lifetime. A median of 10 more retirement years can add 6.9 percentage points to spending; a median of 20 and 30 more retirement years adds, respectively, 3.5 percentage points and 2.3 percentage points."

That would indicate that a retiree with 40 more retirement years (who is satisfied with average sustainability) can add 0.693/40 = 1.73% to the 3.0 percent for a total of 4.73%.

What is "average sustainability"?

omni
My understanding of that quote is that it applies to an all-equity portfolio (7% RR). So, a balanced AA (say 50/50) would start with the longevity portion of the calculation based on a number <6.9% for 10 yrs longevity, and go down from there.

Comparing the formula's results doesn't get the resulting number to fit the SWRs in Table 5. But, they have "ruin" probabilities of only 5% and 10%. However, looking at the "ruin" %s in Table 4, it seems that "average sustainability" is a "ruin" % of ~33%, if I try to match the formula results to the table numbers.

That's just a guess at what "average sustainability" means. But, if it's correct, then no retiree would want that (33% chance of portfolio failure) as his/her goal and, thus, would use the tables in this paper versus the formula at the end.
__________________

__________________
You may be whatever you resolve to be.
Huston55 is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-24-2012, 05:45 AM   #22
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,412
all those numbers made my hair hurt.
__________________

__________________
mathjak107 is offline   Reply With Quote
Old 12-24-2012, 09:27 AM   #23
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,420
Quote:
Originally Posted by mathjak107 View Post
all those numbers made my hair hurt.
Then, one should just use the following simple equation.

Quote:
Originally Posted by foxfirev5 View Post
Spending < Income
But then, as one poster noted, simple as it is, that equation has great implications.
Quote:
Originally Posted by nun View Post
That is the Micawber equation

The difficulty with retirement income is that it often includes the spending of principal and SWRs are always a guessing game between investment return, life span and inflation. So your equation is great, but how do you define income?
Yes, it opens up another Pandora box. People who do not like to spend principal would then attempt to optimize the right side of the equation by seeking higher yields. They then are susceptible to buying high-risk assets that pay better yield now, but are likely to bring Dickensian pain and misery in the future.

I propose that there are investments that pay better than the current S&P index yield of 2.1%, and though far below the 6-7% of the high-risk aforementioned lures, still pay around 3-5% dividend for the more cautious investor.

That leaves the investor the task of minimizing the left side of the equation. Now, now, that's real work that he's faced with. I suppose that this is where the frugal posts of yesteryear, while some are obviously tongue-in-cheek, would be most helpful to our members to overcome the siren call of extraneous expenses for worldly pleasures and acquisitions that they can ill-afford.

I have not seen much of those frugal posts lately. I wonder if their frequency of appearance varies inversely with the level of the market indices.
__________________
NW-Bound is online now   Reply With Quote
Old 12-24-2012, 01:09 PM   #24
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by NW-Bound
Then, one should just use the following simple equation.
Yes, it opens up another Pandora box. People who do not like to spend principal would then attempt to optimize the right side of the equation by seeking higher yields. They then are susceptible to buying high-risk assets that pay better yield now, but are likely to bring Dickensian pain and misery in the future.

I propose that there are investments that pay better than the current S&P index yield of 2.1%, and though far below the 6-7% of the high-risk aforementioned lures, still pay around 3-5% dividend for the more cautious investor.

That leaves the investor the task of minimizing the left side of the equation. Now, now, that's real work that he's faced with. I suppose that this is where the frugal posts of yesteryear, while some are obviously tongue-in-cheek, would be most helpful to our members to overcome the siren call of extraneous expenses for worldly pleasures and acquisitions that they can ill-afford.

I have not seen much of those frugal posts lately. I wonder if their frequency of appearance varies inversely with the level of the market indices.
People who seriously attempt to preserve principal are usually the carful and conservation ones that avoid higher risk investments. I think they'd attack the spending side of the equation rather than go chasing return. Of course the ultimate conservative approach of an annuity actually involves spending principal to buy a guarantee
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 12-24-2012, 01:33 PM   #25
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by nun View Post
So in no year will I ever spend more than my fixed income plus the gain in my portfolio.
With that plan, the real value of your portfolio will be shrinking over time. You need to add to your portfolio from current income and earnings to make up for inflation. Otherwise, after 2 or 3 decades of typical inflation, you won't have much left in real terms.

Preserving principal in real terms will be a bit more challenging than in nominal terms. But since maintaining the value in nominal terms isn't preserving the principal at all, keeping up in real terms might be a worthwhile goal, at least early on.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 12-24-2012, 01:38 PM   #26
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by nun View Post
Of course the ultimate conservative approach of an annuity actually involves spending principal to buy a guarantee
Today must be my day to fret about the impact of modest long term inflation....... When I read this it reminds me that non-cola'd annuities offer no guarantee whatsoever, at least in terms of providing purchasing power over time. In a decade or two, depending on inflation levels, the non-cola'd annuity payout will likely no longer buy even half of the goods and services it bought at the beginning. If we repeat the inflation of the 70's, even just a single decade will do the annuity in.

An annuity, such as an SPIA, can certainly be very useful in solving certain retirement funding dilemmas. But "guaranteeing" today's purchasing power of some amount of money into the future isn't a guarantee a non-cola'd annunity offers.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 12-24-2012, 01:49 PM   #27
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by youbet View Post
With that plan, the real value of your portfolio will be shrinking over time. You need to add to your portfolio from current income and earnings to make up for inflation. Otherwise, after 2 or 3 decades of typical inflation, you won't have much left in real terms.

Preserving principal in real terms will be a bit more challenging than in nominal terms. But since maintaining the value in nominal terms isn't preserving the principal at all, keeping up in real terms might be a worthwhile goal, at least early on.
Agreed, inflation will be eating away at the value of the principal. I did mention that while spending less than your income is a good principle it does not tell you anything about how much less you should actually spend. With a 2% withdrawal rate you might keep up with inflation if you had a 5% return. My goal is to do that between ER and 65 and the to get all my income after 65 from rent, US and UK SS and a small pension. I'll do some ROTH rollovers while I'm spending that 2% from my taxable accounts, but RMDs will be an issue.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 12-24-2012, 01:52 PM   #28
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by youbet View Post
Today must be my day to fret about the impact of modest long term inflation....... When I read this it reminds me that non-cola'd annuities offer no guarantee whatsoever, at least in terms of providing purchasing power over time. In a decade or two, depending on inflation levels, the non-cola'd annuity payout will likely no longer buy even half of the goods and services it bought at the beginning. If we repeat the inflation of the 70's, even just a single decade will do the annuity in.

An annuity, such as an SPIA, can certainly be very useful in solving certain retirement funding dilemmas. But "guaranteeing" today's purchasing power of some amount of money into the future isn't a guarantee a non-cola'd annunity offers.
Yes if you buy an annuity that does not raise with inflation you spending power will be eroded. I was referring to guaranteed income, not spending power.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 12-24-2012, 01:58 PM   #29
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by nun View Post
Agreed, inflation will be eating away at the value of the principal. I did mention that while spending less than your income is a good principle it does not tell you anything about how much less you should actually spend. With a 2% withdrawal rate you might keep up with inflation if you had a 5% return. My goal to do that between ER and 65 and the to get all my income after 65 from rent, US and UK SS and a small pension.
Yes.

And please note that my comments were not at all meant to critique your particular plan being executed under your particular personal circumstances. Rather, I've been somewhat concerned over posts from many of our members talking about preservation of principal, non-cola'd annuities, non-cola'd pensions, etc., that do not account for even tame inflation levels.

For folks retiring early and expecting to fund a 40 year retirement, strong consideration has to be given as to what part of your strategy will take care of inflation.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 12-24-2012, 02:08 PM   #30
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by nun View Post
Yes if you buy an annuity that does not raise with inflation you spending power will be eroded. I was referring to guaranteed income, not spending power.
That's the kind of terminology that concerns me. Obviously nun, you "get it." But sometimes I'm concerned about folks who might understand "guaranteed income" as meaning "guaranteed buying power."

In fact, a "conservative" strategy of taking 50% of one's portfolio and buying a non-cola'd SPIA and putting the other 50% in long term government bonds might sound conservative but seems very risky to me. Just an example.

Again, I understand you "get it." My comments were meant only to point out the "guaranteed income" vs. "guaranteed buying power" and "preserving principal" vs "preserving real principal" issues.

Sounds like you have your act together!
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 12-24-2012, 02:11 PM   #31
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by youbet View Post
Yes.

And please note that my comments were not at all meant to critique your particular plan being executed under your particular personal circumstances. Rather, I've been somewhat concerned over posts from many of our members talking about preservation of principal, non-cola'd annuities, non-cola'd pensions, etc., that do not account for even tame inflation levels.

For folks retiring early and expecting to fund a 40 year retirement, strong consideration has to be given as to what part of your strategy will take care of inflation.
Yes, the 4% SWR for portfolios has inflation baked into it, and most people will get some inflation protection through SS, but if they put most of their money into non-cola'd income products that provide good income early in retirement the value will be severely eroded by 30 years of 3% inflation. Of course there is the saving grace that income requirements shrink after 70, but I wouldn't build that into my plan........I have my spending growing with inflation until I hear the trumpets.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 12-24-2012, 02:21 PM   #32
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by youbet View Post

Again, I understand you "get it." My comments were meant only to point out the "guaranteed income" vs. "guaranteed buying power" and "preserving principal" vs "preserving real principal" issues.
Sometimes it's easy to forget that everyone isn't an ER geek and I agree that it's important to be precise with language so that people understand the implications of various income choices. I will probably bias my AA more towards equities as I approach 65 and my cola'd income streams begin which is the reverse of conventional logic.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 12-25-2012, 02:40 PM   #33
Recycles dryer sheets
Focus's Avatar
 
Join Date: Oct 2009
Posts: 473
Quote:
Originally Posted by youbet View Post
I've been somewhat concerned over posts from many of our members talking about preservation of principal, non-cola'd annuities, non-cola'd pensions, etc., that do not account for even tame inflation levels.
I worry about this too -- yet, I keep seeing calculations that show putting a portion into annuities substantially increases the chances of success. As Walter Updegrave says in this CNNMoney article:

Quote:
Splitting savings fifty-fifty between an immediate annuity and a diversified portfolio can provide the same 4% inflation-adjusted income as in Strategy 1 [50% stocks / 50% bonds, 77% chance of success] -- but with a 99% chance of lasting 30 years.
However, not sure how much today's less favorable annuity rates would alter this result (the article is from 2009).

On the optimistic side, perhaps we overstate the impact of inflation, as discussed in this previous thread:

Inflation, shminflation

But I don't support a switch to "chained CPI" by the federal government. That removes the needed wiggle room for a less-than-best-case scenario.
__________________
Focus is offline   Reply With Quote
Old 12-26-2012, 01:21 PM   #34
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,974
Turned out to be an interesting read, but it's really not a retirement how-to book. I most enjoyed the Kolmogorov chapter (7) and the annuity table in chapter 3.

Take It as a Lump SumSelect a Life Annuity
1)OverallYou can invest the moneyPlan sponsor manages
flexibilityany way you want, andthe money, but sends
spend more or less moneyyou a fixed monthly
over time.check, like a salary.
2)GuaranteesUnless you buy someIncome for the rest of you
and promisesprotection, you are at theand your spouse’s life
mercy of the market.that can’t be outlived.
 A form of insurance.
3)Legacy valueFunds can be bequeathedPossibly reduced income
or transferred, and arefor spouse upon death,
part of the retiree’s estate.nothing left for the next
 generation.
4)DecisionYou must manage theOnce the initial decision
complexitymoney for the rest ofis made, no further deci-
your life, or delegate thesions are required. Low
responsibility.complexity.
5)InflationDepends on how youSome employers provide
protectioninvest the money, and theincome adjusted annu-
type of investments youally for inflation, but most
select.do not.
6)Credit safetyAssuming the money isYou are at the mercy of
invested in conventionalthe pension plan spon-
funds, there is no greatsor, and their ultimate
risk.guarantor.
7)HealthIf the couple is in (very)Pension income partially
implicationspoor health, taking thedies with you, and com-
lump sum is a (much) bet-pletely dies with your
ter option.spouse. A gamble.

If you’re in poor health you might want to elect to take the lump sum. If you think you are healthier than everyone else, then go for the pension annuity. If you want to leave money to the kids and grandkids, go for the lump sum. But if you’re concerned about not having enough money to live on for the rest of your life, go for the annuity. If you are concerned about managing, investing and allocating your money well into your old age, take the pension annuity. But if you feel comfortable and competent enough to do your own investing, or you have a trusted advisor, go for the lump sum.
__________________

__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 12:40 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.