What is your "terminal value" target

[Roger_R]

I am new to some of the ER concepts and have chomped away at the FIRE calculator many times. One thing that keeps bugging me is the assumption of a zero terminal value, at say the 95% conficence, when your statistical lifespan has run it's course. In the perfect world I guess we (or someone) would be paying our estate accountant with the last dollar of our savings. But we don't live in that perfect world.

I am thinking that there should be a nest egg that might always be a nest egg. Aside from any inheritance that you might wish to pass along, do you have an estimate of what you might want in your nest egg incase you live an extra ten years beyond stats. Or if supplemental insurance beyond medicare goes bonkers or SS goes belly up. Or if you are looking at some sort of unexpected long term in home health care?

I have some younger friends that have agreed to meet me when I am 85 with a batch of lethal drugs and evaluate my mental status at that time. Unfortunately they aren't that much younger and may forget our appointment. So I'm asking about plan B.

 

[Nords]

$100K.

I figure that's a couple years' worth of full-time care. I've heard that's the median stay, although medical technology may do "great" things for prolonging future durations.

My grandfather spent 14 years in a full-care facility in senile dementia (after spending five years on his own getting into that condition). It could have been a very sad situation but, from his perspective and judging from his demeanor, it was the happiest time of his life. We had more fun together then than ever before.

While I've joked about my spouse's purchase of my 9mm LTC insurance policy, I can't imagine how bad my life would have to get for me to take it into my own hands. (And I hope I never find out.) I've read Doug Bader's "Reach for the Sky" biography about fighting the Battle of Britain with prosthetic legs, attempting to escape from Nazi POW camps, and rebuilding his life afterward. And I'm humbled by Stephen Hawking's accomplishments in the face of ALS.

So maybe that nest egg should be 10 years' expenses-- because how do you know you don't want to live if you can't recognize or remember that you're not you anymore?

 

[cute fuzzy bunny]

I *may* have a spare room available by then. Hope not, but its possible.

Seriously though. I dont consider plans that eat my capital down to zero at some magical time in the future when I may be dead to be good ones. I'm seeking self sustaining, preferably growing capital base.

If your best plan has you chomping your last saltine cracker at 80, and due to longer lifespans and better medical care, you're still alive...re-plan. If your re-plan has you taking on unsavory risk, see if wal-mart is hiring.

 

[charlie]

You might consider buying long term health insurance
when you get into your 60s. Both Lyn and I have
policies.

Also, you might consider converting part of your IRA
to an immediate annuity at some point. We have not
done that yet but it is an option. That's one way to
guarantee covering bare bones living expenses for
as long as you and your spouse live. Another option
is to think about doing a reverse mortgage on your
home to cover a few years when all else fails.

Cheers,

Charlie

 

[Bob_Smith]

Hi Charlie,

My wife and I bought Long Term Care insurance - unlimited years with an inflation rider. We bought it 2 or 3 years ago at age 49/48 and paid it off. I hope we never need it.

 

[mickeyd]

$1.00

 

[Nords]

GDER:  No problem!

We do these all the time at the local surfing spots. They're well-attended because they're usually followed by a heckuva party in memory of "dear departed what'shishame with the funky old board".

I'm sure the cost is covered by your veteran's benefits. Just have your executor mail your ashes in any urn (or, even more frugally, a water-soluble sealed envelope). I'll duct-tape you to my longboard and paddle out past the break a few hundred yards (until I'm sure you won't wash up on the beach). For a small additional fee, I have some old fishing weights that I could "securely attach" to ensure that you're not drifting around out there...

If you want a low-budget ceremonial thrill for your descendants, my friend runs a shark-visit tour boat. She goes off the North Shore a couple miles, drops a steel cage over the side, and then drops the visitors in the water (presumably in the cage) with snorkel gear & camcorders to watch the local wildlife. The sharks have been trained (chum-fed) for months so they never miss a date. For that small additional fee I bet they'd be willing to push you out the cage mesh and let you sleep with the fishes...

Contemplating events like this has inspired me to donate my remains to medical science or to agriculture. If I'm hospitalized when the EKG goes flat, my spouse/kid have instructions to leave a false name/address/phone# and to vacate the room before the floor nurse arrives.

But I'm hoping to achieve my terminal value at home, where my remains will fertilize the mango trees that I spend so much time pruning. (Come to think of it, where did they inter the previous owners of this place?!?)

But seriously, TH, you're absolutely right and I'm retracting my $100K recommendation. A properly capitalized retirement portfolio shouldn't have to consume the principle to support its retirees. Instead its "critical mass" should throw off a perpetual annuity, hopefully enough to pay for the maintenance & utility bills on whatever medical-miracle life-support hardware surrounds our decrepit braincases. In my case I can take it out of the "fantasy vacation" budget and have enough left over for painkillers & a high-bandwidth cortical modem...

 

[ESRBob]

I think this question is a lot easier for people who have a defined benefit pension (with cola!) added to their social security etc. You'll always have a liveable base under you. But for those of us with a regular 401k and taxable savings and good genes, then there really is no safety net (except whatever is left with Social Security which is nice but it isn't that much). So I am with TH in looking for a high probability of growing or maintaining the real value of the portfolio more or less in perpetuity (during early retirement at least) and maybe I could switch to a higher SWR decades from now if I thought I was within a decade or two of 'final termination on the planet'. Even if you could coast into the funeral home on your last nickel, do you want to spend the next 40 or 50 years worrying about outliving your savings?

It actually highlights an issue that has been gnawing at me since being part of this board: the folks with a secure Cola-adjusted defined benefit pension are really the royalty around here especially if they are able to draw it early. ER financiing over the long haul gets a whole lot more complex and uncertain if all you have is a nest egg and social security. Not scary, nothing I can't handle, but it is objectively a lot less secure and were we to find ourselves in a systemic downgrade in the worlds economic vitality or its faith in financial assets, could be possibly a lot skimpier as we get old and gray.

 

[JOhn Galt]

My folks are 86 and 85 and in fairly good health,
considering. They have SS and my Dad's
small (non COLAed) pension plus some small CDs. That's it. They live quite simply and
always have (children of the Depression). Anyway,
they have more than enough for their lifestyle and have
since my Dad retired at age 67. I can see some possible
problems coming up, but dare not offer my help just yet.
Dad is quite prickly about finances. Maybe they will
get lucky and just die in their sleep.

John Galt

 

[John Galt]

Well, I guess I am royalty (fully retired with a working spouse). I know I posted before that an old Texas
boy told me "a workin' wife is more valuable than a
pumpin' oil well". I'll tell you this. It sure beats having
a high maintenance wife who refuses to work while
you are trying a "bare bones" ER. I'm pretty
creative but even I could not get around that
situation. Truly, divorcing my first wife (32 years) was
a pretty easy decision. It saved my life.

John Galt

 

[Nords]

Two issues with those thoughts, ESRBob.

I can't stay offended at the characterization of "royalty". But while a military pension could conjecturably be called "royal", I wouldn't use the same adjective to characterize the pensioners.

Perhaps at one time in your life you had an opportunity to become a veteran, maybe even a retiree. If not, then we all certainly had the same opportunity to become civil servants with similar pension benefits. But that's not relevant-- anyone can get a DBP with a COLA by purchasing an annuity.

While we all take a moment to recover from an eye-popping glimpse of the cost/commission of that "royal payout", perhaps it's not inappropriate to compare that fiscal whopper to the risks assumed by those who are currently receiving the benefits.

I've said it before and I'll keep repeating it for the disclosure to young dreamers who may be reading this. DON'T JOIN THE MILITARY FOR THE PENSION BENEFITS. It could be a great gig for the education (both academic & experiential), the testosterone-drenched adrenaline thrill, or, ahem, as an incarceration substitute. It could even honor one's veteran parents & relatives, although I doubt that they'd want you to do so on their account. But DON'T DO IT FOR THE MONEY.

As I've been kvetching in other posts, I only know a couple military ERs. It could be that the military personality is contrary to ER, although the fleet's submarines are filled with left-handed INTJs. Maybe the military ERs are too busy goofing off to hang around here. Or perhaps a very small fraction of the military endures multiple workplace risks to collect that pension, and a tinier fraction survives the health/mental/emotional conditions. (I've learned a lot about the health effects of radiation exposure that I sure didn't see during nuke school or command qualifications.) Even without retiree survivor's guilt, military pensions have some of the world's shortest payouts-- and there's a good reason for the robust survivor benefits plan.

OK, enough of that soapbox. Now here's something that EVERY prospective ER should consider most carefully-- and not just the dreamers. If your assets aren't the equivalent of a COLA-adjusted annuity payout that you can live on-- then you either need more assets, higher investment risk, or less living. I'm not shilling that people actually purchase an annuity. But I am recommending that everyone compare their life's savings to the risk-free equivalent before leaving the workplace. If the financial aspects of ER are "complex", "uncertain", and "a lot less secure", then the plan is inadequately capitalized. If that's still gnawing at you, then you need to work on the income or the expenses. I can't advocate assuming more risk...

 

[cute fuzzy bunny]

I'm not royalty. I'm just being partially supported in a style which is less than the one I'm accustomed to.

I s'pose I'd feel bad if I hadnt paid off her house, done $40k in repairs to it, and bought her a car

 

[Bob_Smith]

Re: Two issues with those thoughts, ESRBob.

...anyone can get a DBP with a COLA by purchasing an annuity.

Nords makes a good point here. In fact, Financial Engines is based upon that premise.

Another point to consider. If someone has a pension without a COLA, simply cut the monthly amount in about one-half and invest the rest. That would (roughly) enable the pension to keep pace with inflation based upon the worst case scenario to date.

So just about anyone can be royalty with a COLA'd pension.

 

[unclemick]

The COLA concept was the vague idea behind my DRIP hobby stocks. At 49 I knew at 55 my reduced (versus 65) pension was non COLA so I took an early start at div/div growth stocks to compensate. Took pension in 98 and it looks like by old age - 65 in 2009 I will equal/surpass the pension bogey had I waited and have the COLA effect of div growth.
Taxable div income is roughly half my pension amount and climbing (no sharp pencil calc vs inflation) but happy so far - 1993 -2004.

Suffering a little mission creep - starting to lean a little more toward div gowth/fallen angels - The Monty Python effect - ie the one great stock. As along as the part between my ears(POGO effect) doesn't screw me up and the bulk keeps cranking out div/div growth, a little adventure into wild speculation won't hurt too bad. Aetna was my last and looking a gambling on AT&T - pretty speculative stocks for a div guy.

 

[ESRBob]

Nords,
No 'French Revolution' going on here -- nothing against royalty! Actually I'm glad to know our Vets are being well-looked after; you've earned every penny twice over.

Re: the idea of a 'synthetic defined benefit plan with COLA' -- a great observation, and one that I guess we could look to the Safe Withdrawal Rate studies to implicitly calculate for us, and build our ER plans around. But SWRs aren't 100% safe even if the historical statistics suggest they are; who knows what the future will bring in asset values? (Bernstein now seems to be saying on his website that anything over 80% success rates is illusory in an unknowable future). So a simple SWR approach applied to a portfolio isn't quite the same as a Colad DBP.

But as you suggest, you get closer to certainty buying a COLAd annuity -- sort of your own pension. My issue there (and I haven't done a lot of research on this) is that you don't get anywhere close to a SWR rate from an immediate annuity if you are in your 40s. I was looking at Vanguard's a while back and I am pretty sure I was topping out at about 2.5%, whereas I am relatively convinced that 4% is a reasonable SWR for the way I invest. Maybe that differential (1.5%) is a way to quantify the value of a DBP -- the extra margin of safety of a DBP could be gained by dropping withdrawals from normal 4% SWR ranges to a 2.5% withdrawal range? (And as I remember, that 2.5% rate left them holding the assets -- there was nothing in it for me or heirs after I died, unless I had the good sense to go very quickly. Doing an apples-to-apples on these immediate annuities can get tricky)

The only other thing about an annuity that I've always been a little uncomfortable with is credit risk, even from someone trusted like Vanguard. You are counting on this money being there for you for decades. What if you are 45 now (me) and have good genes (thanks grandpas-- they both lived to 100 or near enough) and think you might need to plan to live another 75 years. Would anyone trust any organization short of the US Treasury to be there for you 75 years from now?

I guess there is no true security anywhere, really, but I retain a healthy respect for the value of a govt-backed Colad DBP to keep you going over the long run. In that sense, I've decided that Social Security is nothing to sniff at. (a conclusion probably reached already by a few hundred million others -- sometimes I'm a little slow).

 

[unclemick]

There is of course the legendary second place - the Norwegian widow - perhaps distant, but like the old movie 'The Graduate' - whisper "dividends," er was that plastics. I would hesitate to assign a success rate other than pretty good

 

[John Galt]

With some luck, I expect to have all of my "base"
intact when I die or have to have a level of care that will
eat into it. My Dad and I joke about what I like to
call the "Hemingway exit". I tell him if he decides to go that way be sure to use
enough gun. Not sure if he is just joking. I'm not.

John Galt