When to do you start purposely spending down capital?

[Finance Dave]

LARS, what I've done in the past is separate your anticipated budget into a couple different sections.
1) Necessities such as 'regular' food (no fancy restaurants, eat mostly at home, etc.), utilities, housing/rent, property taxes, gasoline, 'average' car payment, maybe 1 modest vacation/year, basic clothes, toiletries, house maintenance, auto insurance, 1 round of golf at a public course every two weeks, etc.

2) luxuries - this would include incremental, such as the difference between your "desired" car and an "average" one, eating at a fancy steakhouse twice a month, starting your gem collection, taking 2 MORE vacations each year, membership to the country club, diamond cufflinks and rolex watches, granite countertops in the kitchen, the new jacuzzi you've always wanted, etc.

Then, set up an annuity to pay for item 1 for eternity. With the remainder, put it in an account and divide the amount by the number of years you expect to live (make an adjustment for inflation, and spend that much per year on the luxuries.

Re-evaluate annually. So if you have a good year in the stock market, spend more on luxuries. If a bad year, skip one vacation and delay the Lexus SUV purchase.

Enjoy!

 

[LARS]

LARS, what I've done in the past is separate your anticipated budget into a couple different sections.
1) Necessities such as 'regular' food (no fancy restaurants, eat mostly at home, etc.), utilities, housing/rent, property taxes, gasoline, 'average' car payment, maybe 1 modest vacation/year, basic clothes, toiletries, house maintenance, auto insurance, 1 round of golf at a public course every two weeks, etc.

2) luxuries - this would include incremental, such as the difference between your "desired" car and an "average" one, eating at a fancy steakhouse twice a month, starting your gem collection, taking 2 MORE vacations each year, membership to the country club, diamond cufflinks and rolex watches, granite countertops in the kitchen, the new jacuzzi you've always wanted, etc.

Then, set up an annuity to pay for item 1 for eternity. With the remainder, put it in an account and divide the amount by the number of years you expect to live (make an adjustment for inflation, and spend that much per year on the luxuries.

Re-evaluate annually. So if you have a good year in the stock market, spend more on luxuries. If a bad year, skip one vacation and delay the Lexus SUV purchase.

Enjoy!

I think in the end the approach of trying to quantify several tiers of expenses makes sense.

Extrapolate out basic expenses until age 80 to 85 and then a second set of expenses of 5 to 10 years of assisted living/nursing home. Once you've set aside sufficient for those categories, what ever remains can be designated as "excess capital" and "spent" if so desired.

Where I differ with you is that I think it makes sense to self-annuitize at least at this juncture given the current inflation/yield curve.

 

[Finance Dave]

I think in the end the approach of trying to quantify several tiers of expenses makes sense.

Extrapolate out basic expenses until age 80 to 85 and then a second set of expenses of 5 to 10 years of assisted living/nursing home. Once you've set aside sufficient for those categories, what ever remains can be designated as "excess capital" and "spent" if so desired.

Where I differ with you is that I think it makes sense to self-annuitize at least at this juncture given the current inflation/yield curve.

I don't think we differ in that regard....I think annuitizing makes perfect sense.

 

[rayvt]

Isn't "self-annuitize" just a fancy phrase for "put some money into the fixed-income asset class"?

Extrapolate out basic expenses until age 80 to 85 and then a second set of expenses of 5 to 10 years...

On the surface, this seems to make sense, but I think this idea incorporates the fallacy of false accuracy.
When I ran various scenarios through a number of different retirement calculators it became evident that the end results were like a teeter-totter. Very bang-bang one way or the other. There was virtually no area in the middle where you'd die with a medium or large and stable amount of money. Either you ran out of money, or you account value was growing to the sky, limited by your death.

There is no finely-tuned SWR value that will let you spend what you want during your lifetime and will also not leave oodles of money for your heirs.
Thinking about it gave me a "Well, DUH" moment. The growth of an investment/savings portfolio is an exponential curve, and exponential curves have the characteristics of rapidly falling to zero or growing to the sky, depending on the exact parameters. Exponential curves never stay flat.

 

[NW-Bound]

The way I deal with the vagaries of investment return is to try to keep my fixed expenses as low as possible (easier said than done!). I then splurge on discretionary spending during good years and cut back in lean years. I don't see that skipping fancy foreign trips for a couple of years or delaying a new car purchase would hurt anybody.

The above does not guarantee that I will consume all of my assets as I die, but that is never the goal. However, it will allow me to reasonably enjoy my savings, yet not to have to worry about running out. And that's good enough. There's nothing wrong with leaving something behind for your offsprings or for charities.

 

[LARS]

Isn't "self-annuitize" just a fancy phrase for "put some money into the fixed-income asset class"?

If I really wanted to be fancy I could've said "self-defease" .

Extrapolate out basic expenses until age 80 to 85 and then a second set of expenses of 5 to 10 years...

On the surface, this seems to make sense, but I think this idea incorporates the fallacy of false accuracy.
When I ran various scenarios through a number of different retirement calculators it became evident that the end results were like a teeter-totter. Very bang-bang one way or the other. There was virtually no area in the middle where you'd die with a medium or large and stable amount of money. Either you ran out of money, or you account value was growing to the sky, limited by your death.

There is no finely-tuned SWR value that will let you spend what you want during your lifetime and will also not leave oodles of money for your heirs.
Thinking about it gave me a "Well, DUH" moment. The growth of an investment/savings portfolio is an exponential curve, and exponential curves have the characteristics of rapidly falling to zero or growing to the sky, depending on the exact parameters. Exponential curves never stay flat.

Clearly the ability to plan to die with next to zero is not realistic. The real objective is to not end up with "oodles of money". I remain convinced that there is a point, in the not too distance future in our case, where the crossover will occur that the ability to increase spending will not cause net worth to so rapidily fall as to jeopardize our final years. Again that will mean "leaving" capital on the table, but hopefully not an amount measured in the millions (in today's dollars).

At the end of the day this is an issue that is more art than science and so must be actively managed with mid-course corrections as many have stated. I suppose to be on the safeside of this issue, an other aspect is that "excess" spending should be tilted toward "tangible" assets (i.e. homes/art) as they can always be liquidated to cover future expenses if you've "over-spent".

 

[ziggy29]

At the end of the day this is an issue that is more art than science and so must be actively managed with mid-course corrections as many have stated. I suppose to be on the safeside of this issue, an other aspect is that "excess" spending should be tilted toward "tangible" assets (i.e. homes/art) as they can always be liquidated to cover future expenses if you've "over-spent".

This is another area where, if you *want* to increase spending if you thought you could do so safely, a form of the "one more year" syndrome can rear its ugly head. You may think you're fine now, but you'll hold off "one more year" to start increasing your burn rate. (Never mind that you could be dead in "one more year.")

Obviously, if someone has more than enough and really doesn't have the desire to spend more, it's a moot point but for those who do, this is very similar to the decision as to when to retire because it requires you to determine that you "have enough" (plus some delta for safety, perhaps) before taking the plunge.

 

[rescueme]

The real objective is to not end up with "oodles of money".

What does it matter?

Once you're dead, I don't think you will be worrying about what you "left on the table".

As for myself (and I read this on another forum)? "I would rather die with money than live without it" ...