Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Tips for managing spending in retirement
Old 04-11-2014, 09:01 PM   #1
Thinks s/he gets paid by the post
martyp's Avatar
 
Join Date: Sep 2010
Location: Thailand countryside, Sisaket province
Posts: 1,331
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
__________________
Happy, Wild, and Free
martyp is offline   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 04-12-2014, 04:37 AM   #2
Administrator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,583
Nice article, thanks.
Quote:
“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.
MichaelB is online now   Reply With Quote
Old 04-12-2014, 05:32 AM   #3
Thinks s/he gets paid by the post
 
Join Date: Oct 2012
Location: Colorado Mountains
Posts: 3,165
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.
Hermit is offline   Reply With Quote
Old 04-12-2014, 07:17 AM   #4
Thinks s/he gets paid by the post
martyp's Avatar
 
Join Date: Sep 2010
Location: Thailand countryside, Sisaket province
Posts: 1,331
Quote:
Originally Posted by MichaelB View Post
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.
__________________
Happy, Wild, and Free
martyp is offline   Reply With Quote
Old 04-12-2014, 07:20 AM   #5
Thinks s/he gets paid by the post
martyp's Avatar
 
Join Date: Sep 2010
Location: Thailand countryside, Sisaket province
Posts: 1,331
Quote:
Originally Posted by Hermit View Post
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.
__________________
Happy, Wild, and Free
martyp is offline   Reply With Quote
Old 04-12-2014, 07:32 AM   #6
Thinks s/he gets paid by the post
Huston55's Avatar
 
Join Date: Jul 2011
Location: The Bay Area
Posts: 2,736
Quote:
Originally Posted by Hermit View Post
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."

----------------
__________________
You may be whatever you resolve to be.
100% x 10% > 10% x 100%
Small pensions & SS cover essentials
Huston55 is offline   Reply With Quote
Old 04-12-2014, 08:05 AM   #7
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
Good article. I plan to spend only the interest generated from my investments, so I guess that is a very conservative approach.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 04-12-2014, 08:17 AM   #8
Thinks s/he gets paid by the post
David1961's Avatar
 
Join Date: Jul 2007
Posts: 1,085
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).
David1961 is offline   Reply With Quote
Old 04-12-2014, 08:34 AM   #9
Thinks s/he gets paid by the post
photoguy's Avatar
 
Join Date: Jun 2010
Posts: 2,301
Quote:
Originally Posted by Huston55 View Post
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.

Quote:
Originally Posted by obgyn65 View Post
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%?
photoguy is offline   Reply With Quote
Old 04-12-2014, 09:02 AM   #10
Thinks s/he gets paid by the post
Ready's Avatar
 
Join Date: Mar 2013
Location: Southern California
Posts: 3,995
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?
Ready is offline   Reply With Quote
Old 04-12-2014, 09:18 AM   #11
Administrator
Alan's Avatar
 
Join Date: Jul 2005
Location: N. Yorkshire
Posts: 34,050
Quote:
Originally Posted by David1961 View Post
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
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Enough private pension and SS income to cover all needs
Alan is offline   Reply With Quote
Old 04-12-2014, 09:20 AM   #12
Thinks s/he gets paid by the post
 
Join Date: Oct 2012
Location: Colorado Mountains
Posts: 3,165
Quote:
Originally Posted by Alan View Post
My great grandfather knew exactly when he was going to die - the judge told him
Not sure he wanted to know that.
Hermit is offline   Reply With Quote
Old 04-12-2014, 09:35 AM   #13
Moderator Emeritus
Bestwifeever's Avatar
 
Join Date: Sep 2007
Posts: 17,773
Quote:
Originally Posted by Alan View Post
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)
Bestwifeever is offline   Reply With Quote
Tips for managing spending in retirement
Old 04-12-2014, 09:54 AM   #14
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
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.

Quote:
Originally Posted by photoguy View Post


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%?
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 04-12-2014, 11:56 AM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,263
Quote:
Originally Posted by obgyn65 View Post
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.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is offline   Reply With Quote
Old 04-12-2014, 12:00 PM   #16
Thinks s/he gets paid by the post
photoguy's Avatar
 
Join Date: Jun 2010
Posts: 2,301
Obgyn65 -- Thanks for the clarification. I think you are in a very fortunate spot to be able to ER on a 1% WR.
photoguy is offline   Reply With Quote
Old 04-12-2014, 12:44 PM   #17
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,872
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.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 04-12-2014, 02:57 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 13,202
Quote:
Originally Posted by Bestwifeever View Post
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.
RunningBum is offline   Reply With Quote
Old 04-13-2014, 02:17 AM   #19
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 1,183
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.
kramer is offline   Reply With Quote
Old 04-13-2014, 03:49 AM   #20
Thinks s/he gets paid by the post
 
Join Date: Oct 2012
Location: Colorado Mountains
Posts: 3,165
Quote:
Originally Posted by kramer View Post
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.
Hermit is offline   Reply With Quote
Reply


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


Similar Threads
Thread Thread Starter Forum Replies Last Post
Managing a Retirement Portfolio: Do Annuities Provide More Safety? chinaco FIRE and Money 23 10-10-2011 04:57 PM
Managing retirement assets in today's environment mickeyd FIRE and Money 2 09-22-2011 05:46 PM
Article on Managing Retirement Income nun FIRE and Money 7 04-04-2011 09:27 AM
2008 Actual Spending and 2009 Budgeted Spending dex FIRE and Money 122 03-17-2009 02:49 PM
Few Tips for Managing Budgets! wog777 Health and Early Retirement 1 01-26-2007 03:29 AM

» Quick Links

 
All times are GMT -6. The time now is 07:25 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.