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Tips for managing spending in retirement
Old 04-11-2014, 10:01 PM   #1
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Tips for managing spending in retirement

I thought this was a pretty decent article on retirement spending. Liked the list of 18 risks too. Still not the full picture but some good things to consider when planning for the future.

http://www.nytimes.com/2014/04/12/yo...l?ref=business
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Old 04-12-2014, 05:37 AM   #2
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Nice article, thanks.
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“The biggest problem I see is people have a hard time connecting a pool of money that they can’t understand to a time period they can’t quantify, ”
That's the nice thing about FIRECalc. It is a tool to project two complex variables with other inputs in a way that is simple but very useful.
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Old 04-12-2014, 06:32 AM   #3
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The article discusses calculating a "funding ratio". It appears the definition is the net assets divided by liabilities. In terms of one's retirement I assume what they are doing is adding up the unfunded expenses (spending minus SS and pensions, etc.) during retirement and dividing that amount into the retirement portfolio. The article said one should have a ratio of 135%. Does anyone have a reference to this approach for retirement planning? Calculating the health of pension plans was all I could come up with.
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Old 04-12-2014, 08:17 AM   #4
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Nice article, thanks.


That's the nice thing about FIRECalc. It is a tool to project two complex variables with other inputs in a way that is simple but very useful.
They did mention tools like FIRECalc but said that they are too complicated for people to understand. I can see their point. Most people haven't a clue about statistics.
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Old 04-12-2014, 08:20 AM   #5
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The article discusses calculating a "funding ratio". It appears the definition is the net assets divided by liabilities. In terms of one's retirement I assume what they are doing is adding up the unfunded expenses (spending minus SS and pensions, etc.) during retirement and dividing that amount into the retirement portfolio. The article said one should have a ratio of 135%. Does anyone have a reference to this approach for retirement planning? Calculating the health of pension plans was all I could come up with.
I think the 135% is just one of those throw away numbers like the 4% withdrawal rate. It is a contingency number.
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Old 04-12-2014, 08:32 AM   #6
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The article discusses calculating a "funding ratio". It appears the definition is the net assets divided by liabilities. In terms of one's retirement I assume what they are doing is adding up the unfunded expenses (spending minus SS and pensions, etc.) during retirement and dividing that amount into the retirement portfolio. The article said one should have a ratio of 135%. Does anyone have a reference to this approach for retirement planning? Calculating the health of pension plans was all I could come up with.
I read the article, excerpt below, had some of the same questions as you, then did a little research on pension fund accounting (since the article referred to it) and spent some time on Investopdia.

My conclusion is that the "funded ratio" method is no better and, perhaps worse, than using FIRECalc, RIP or the like.

1. It purports to remove the "how much" factor, focus on the "how long" factor and, voila...it's simple enough for the retiree to understand.

Wrong. Both factors are important because either one can tank your retirement, and visibility of both is required IMO, to have a sound analysis of where one stands.

2. Then they assert that the retiree (or FA) do a NPV calculation to address the "how much" (returns) side of the equation.

Mostly wrong. This is essentially a deterministic approach that could give on a false sense of security because, there are key assumptions that must be made to calculate NPV. When pension funds do this, it's where they make the most 'judgments', including discount rate and rate of return, and also evidently where they play the most games and experience the most scrutiny/criticism.

3. Lastly, the proponent of the "funded ratio" method says, 'just to be safe, have 35% extra in case something happens.' And, oh yeah, "it is still an art, not a science..."

Well, yeah. That's why we use historical and Monte Carlo modeling tools to quantify, as best we can, the impact of those other factors.

"Funded Ratio" method anyone?

Not me. It strikes me as a "head in the sand" (at least half way in) approach, versus a "head in the spreadsheet" approach. I'll take the spreadsheet, thank you.

Excerpt
----------------------
A newer and more dynamic approach is to borrow the concept of funded ratios from the pension fund world. This number is a measurement of the assets in a pension fund versus the payments it will eventually have to make. The closer to 100 percent it is for a pension, the better.

Timothy Noonan, managing director of capital markets insights at Russell Investments, said using funded ratios with individuals would help take the focus off returns and account balances and put it on how long a person expects to live with the money he has. The funded ratio is calculated by doing a present-value calculation of the amount of money someone has saved or will receive — say, from Social Security or a pension — and comparing it with basic and desired expenses and life expectancy.

Since it gets represented as a percentage, it gives advisers and clients a way to check how they’re doing. “When you consider, what percentage of my portfolio is it safe to distribute, most people believe mistakenly that it must be related to the amount of my wealth,” Mr. Noonan said. “But in fact it’s related to the length of my life.”

In his book, “Someday Rich: Planning for Sustainable Tomorrows Today” (Wiley Finance, 2012), Mr. Noonan gives the example of a couple trying to calculate their annual spending, having saved $775,000 by their early 60s and counting on $38,000 a year from Social Security. They’re debating between needing $60,000 a year and $72,000 a year (including Social Security) for their expected life expectancies. With the former, they’re 152 percent funded; with the latter, that number drops to 98 percent.

In his own situation, Mr. Noonan, 50, said he was 95 percent funded if he retired today. In two years, with his earnings and savings continuing, that number rises to 114 percent. Two more years and it hits 125 percent. Ideally, he said, people should aim to get to 135 percent funded, which would insulate them from most shocks.

But it is still an art, not a science, since people don’t know how long they’re going to live. To compensate for living longer than expected, Mr. Noonan said people needed to continually assess their funded ratio. If it goes too low, and it looks as if they’re going to run out of money, the funded ratio would dip below 100 percent. At that point, people have a choice: reduce spending to get the ratio back up or buy an income annuity to cover basic expenses."

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Old 04-12-2014, 09:05 AM   #7
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Good article. I plan to spend only the interest generated from my investments, so I guess that is a very conservative approach.
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Old 04-12-2014, 09:17 AM   #8
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Very good article. Thanks for sharing. The "funding ratio" calculation seems to be based on your life expectancy. So if your life is either shorter or longer, the formula is not accurate for your case. Wouldn't it be easier if we knew exactly how long we would live? (Although not sure I'd want to know that).
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Old 04-12-2014, 09:34 AM   #9
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2. Then they assert that the retiree (or FA) do a NPV calculation to address the "how much" (returns) side of the equation.

Mostly wrong. This is essentially a deterministic approach that could give on a false sense of security because, there are key assumptions that must be made to calculate NPV. When pension funds do this, it's where they make the most 'judgments', including discount rate and rate of return, and also evidently where they play the most games and experience the most scrutiny/criticism.
Totally agree on these points. The funding method is going to be critically sensitive to the discount rate and is another parameter that could be manipulated (even unintentionally) by magical thinking.

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I plan to spend only the interest generated from my investments, so I guess that is a very conservative approach.
If your investments yield say 3% (just as an example) and inflation is 2%, are you spending 1% of your income? or are you spending the full 3% effectively drawing down your portfolio by 2%?
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Old 04-12-2014, 10:02 AM   #10
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I'm not following how they get their percentage funded calculation. With social security of $38,000 and a desired income of $60,000, the article states they are 152 percent funded. What is the calculation they are doing to get this figure?
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Old 04-12-2014, 10:18 AM   #11
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Wouldn't it be easier if we knew exactly how long we would live? (Although not sure I'd want to know that).
My great grandfather knew exactly when he was going to die - the judge told him
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Old 04-12-2014, 10:20 AM   #12
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My great grandfather knew exactly when he was going to die - the judge told him
Not sure he wanted to know that.
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Old 04-12-2014, 10:35 AM   #13
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My great grandfather knew exactly when he was going to die - the judge told him
When I die, I want to die like my grandfather who died peacefully in his sleep. Not screaming like all the passengers in his car.

(Attributed to Will Rogers, but also Bob Monkhouse: Bob Monkhouse - Wikipedia, the free encyclopedia)
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Tips for managing spending in retirement
Old 04-12-2014, 10:54 AM   #14
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Tips for managing spending in retirement

I can live on 1% of what my investments generate. Social security, annuities, pensions etc will come into play from my early 60s onward. Therefore, my withdrawal rate should be lower then, or maybe the same considering inflation. I have lived frugally all my life, and don't think this habit will change when I finally FIRE. The sad thing is I don't think I can live with the idea of drawing down on my portfolio. Being ultra conservative in life and very cautious with money is part of my DNA I guess.

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If your investments yield say 3% (just as an example) and inflation is 2%, are you spending 1% of your income? or are you spending the full 3% effectively drawing down your portfolio by 2%?
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Old 04-12-2014, 12:56 PM   #15
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Good article. I plan to spend only the interest generated from my investments, so I guess that is a very conservative approach.
While that is fine, the reality is that your approach will likely result in your working much longer than you really need to and you will also have a large residual balance when you pass on.

If it works for you, then great, but I wouldn't recommend it to others.
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Old 04-12-2014, 01:00 PM   #16
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Obgyn65 -- Thanks for the clarification. I think you are in a very fortunate spot to be able to ER on a 1% WR.
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Old 04-12-2014, 01:44 PM   #17
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Retirement articles never quite capture the complexity of ER income generation. If you retire long before pensions or SS start ER folks will have vastly different drawdown requirements depending on when SS and pension payments begin

Right now (at 52) I don't have any SS or pensions payments and my WR is 3%.
At 66 my SS and pensions will all be paying out and I expect to be saving money again.
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Old 04-12-2014, 03:57 PM   #18
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When I die, I want to die like my grandfather who died peacefully in his sleep. Not screaming like all the passengers in his carbus.

(Attributed to Will Rogers, but also Bob Monkhouse: Bob Monkhouse - Wikipedia, the free encyclopedia)
Love that joke. It works even better with bus instead of car, IMO.
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Old 04-13-2014, 03:17 AM   #19
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Long before I retired, I read a wide range of investing literature, participated actively in various early retirement forums, researched ER lifestyles like living abroad in depth, read widely on health care and health insurance issues, and I built my own Monte Carlo simulation tool from scratch using the MATLAB simulation software libraries.

And all this time I thought I my preparation was just average.
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Old 04-13-2014, 04:49 AM   #20
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Long before I retired, I read a wide range of investing literature, participated actively in various early retirement forums, researched ER lifestyles like living abroad in depth, read widely on health care and health insurance issues, and I built my own Monte Carlo simulation tool from scratch using the MATLAB simulation software libraries.

And all this time I thought I my preparation was just average.
With all the engineers on this forum, if that's your population, it might just be.
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