This guy is dangerous

[Ed_The_Gypsy]

The-Risk-of-Ruin-for-Retirees: Personal Finance News from Yahoo! Finance

Andy Mayo, Investopedia.com Sunday, June 1, 2008. Sponsored by Fidelity (Shame!)

He starts out talking about a 4% withdrawal rate and how that it is dangerous. He proceeds to build a scenario with a 10% withdrawal rate and 4% inflation (I guess "4%" had to come from somewhere) from 1987 to 2003, backwards and forwards and uses it to show that early low returns are dangerous (duh!), but when I ran the same numbers at 4% withdrawal and 4% inflation, neither scenario went bust. Starting with $100,000, he would actually wind up with $346,130 in 2003 or $322,761, depending on whether one went forwards or backwards.

He talks about a 13.47% "average annual return". (True, that is the arithmetic average...which is entirely useless. I guess he can't calculate the geometric average, 12.04%.)

More financial pornography from the media. Shame on Fidelity for sponsoring such misleading drivel.

Blah!

 

[chinaco]

Of course Fidelity wants people to save more and invest the money in their mutual funds.

And you should be afraid to spend your money (and keep it in the funds). You would not want to run out of money.

There are a number of economic scenarios that could cause people to have financial problems. Increased inflation is bad news.

 

[RonBoyd]

There are a number of economic scenarios that could cause people to have financial problems.

Or as Ernest Hemingway said when asked how he became bankrupt:

"Slowly at first and then very rapidly."

 

[FinanceDude]

The-Risk-of-Ruin-for-Retirees: Personal Finance News from Yahoo! Finance

Andy Mayo, Investopedia.com Sunday, June 1, 2008. Sponsored by Fidelity (Shame!)

He starts out talking about a 4% withdrawal rate and how that it is dangerous. He proceeds to build a scenario with a 10% withdrawal rate and 4% inflation (I guess "4%" had to come from somewhere) from 1987 to 2003, backwards and forwards and uses it to show that early low returns are dangerous (duh!), but when I ran the same numbers at 4% withdrawal and 4% inflation, neither scenario went bust. Starting with $100,000, he would actually wind up with $346,130 in 2003 or $322,761, depending on whether one went forwards or backwards.

He talks about a 13.47% "average annual return". (True, that is the arithmetic average...which is entirely useless. I guess he can't calculate the geometric average, 12.04%.)

More financial pornography from the media. Shame on Fidelity for sponsoring such misleading drivel.

Blah!

I'm sure he will have a newsletter forthcoming for "only" $2000 a year, where you get "unlimited access" to "unknown tools"..........

 

[rs0460a]

What am I missing? I don't see this article sponsored by Fidelity (unless it's a marketing pop-up which I have blocked).

BTW, as a disclaimer, I'm 50/50 Fidelity/Vanguard.

- Ron

 

[Rustward]

When I click on The-Risk-of-Ruin-for-Retirees: Personal Finance News from Yahoo! Finance it says "sponsored By Fidelity" just below and to the right of the title.

Didn't read the article in detail. I did see where he says
"The greatest danger for someone in or planning on retirement is the rosy scenario - using one period of market performance as a guide. For anyone liquidating assets periodically, what's important isn't just the rate of return, it's the sequence of returns."
and I agree with that, and most people here probably would also. I don't see much new information here.

By reversing the years returns, he seems to have demonstrated how a string of loosing years early in a plan could cause the plan to fail. If those losing years are shifted to the end of the plan, the early years of the plan build up a "reserve" (not the best choice of words but all that comes to mind at the moment) and this reserve grows through the average years and is absorbed by the losing years at the end allowing the plan to succeed.

Problem is... unless you are 100% in fixed income, there is no control on the sequence of returns.

Maybe this is a "marketing by fear" tactic or maybe he is trying to educate people that straight line projections are not realistic.

 

[mexmeme]

I took this to be a worst case scenario. In investing I do believe I should be more concerned with this than a "rosy" scenario. While reading this article, I am nodding my head, because it sounded just like my fear of having entered a bad market cycle. I have also set up w/ds for 2% instead of 4% until I can feel confortable with all the "noise" in the market which really does turn the market on a dime and sometimes on a dollar bill.
When he used $10,000 withdrawals he was hurrying the timeline, and I always use 4% inflation in my projections.