When to do you start purposely spending down capital?

[MasterBlaster]

I think a "plan "to spend down capital makes little (no?) sense. Capital is power, it is like a rock at the top of a hill, or a loaded capacitor.

Capital spent no longer exists, it has become entropy.

Many here say that their level of expenditures make no difference to their happiness. If so, why not spend the minimum amount that lets you feel like you are living a satisfying life and leave the rest as stored energy to accomplish whatever you may need or strongly want to do as time goes by?

Ha

ha:

What you say is true.

However wouldn't be a shame to pass on with all of that stored energy. Perhaps one should consider unleashing some of it while you are able to and while it could make a difference.

personally, I would spend half of it on fast women, booze, and wild times...

And the other half I would just blow !

 

[Rustic23]

At some point it becomes the choice of which makes you happier. The knowledge that you have $xxx,xxx in the bank, or a new sports car, big screen tv, computer, latest cell phone, trip to Bora Bora, _______________ fill in the blanks! Now the money in the bank brings me comfort. However, have you seen the new Miata?

 

[NW-Bound]

Now the money in the bank brings me comfort. However, have you seen the new Miata?

Nah! Cars ceased to excite me some 20 years ago. Money in the bank, however, keeps me happy.

 

[LARS]

I think a "plan "to spend down capital makes little (no?) sense. Capital is power, it is like a rock at the top of a hill, or a loaded capacitor.

Capital spent no longer exists, it has become entropy.

Many here say that their level of expenditures make no difference to their happiness. If so, why not spend the minimum amount that lets you feel like you are living a satisfying life and leave the rest as stored energy to accomplish whatever you may need or strongly want to do as time goes by?

Ha

I guess it depends how much capital you have .

Hoarding capital to maintain power makes no sense to me-- I'll never rival Bill Gates so what's the point. The only power money/capital has is to further your goals:whatever those may be. Assuming you have more than needed, it is a complete waste IMHO to grow it for the sake of growing it. That is what this discussion is about.

At some point, saving for a rainy day is crazy... or I should say over-saving for a rainy day is crazy...

 

[Gone4Good]

However wouldn't be a shame to pass on with all of that stored energy.

Nope.

I'll be perfectly happy to see that my life's savings does some good in the world after I no longer need it. I'll spend it the way other rich people do; by making charitable donations. I guess if I were depriving myself of lots of things then there might be "pent up demand" to spend more. But if I felt that way, then I probably didn't work long enough or save enough.

Of all my concerns in life, "dying with millions unspent" ranks somewhere below "having too much fun."

 

[ERD50]

This seems like the stage of life where some form of annuity could be appropriate. If you are at the age that you are convinced you have plenty, the longevity of the insurer is also less of a risk for you.

And with a lifetime cash flow, I think it would be emotionally easier to spend that as you go, you aren't 'tapping into' anything - it's already 'gone'! And you don't need to worry about running out of that income stream.

I think this can also be set up as a (IIRC) a "Charitable Remainder Trust"? Your charity gets a big cash donation, and they provide the life annuity to you, and they take what is left. I don't think you don't get full tax benefits, as the annuity offsets your contribution. But it might work for some?

-ERD50

 

[ziggy29]

At some point, saving for a rainy day is crazy... or I should say over-saving for a rainy day is crazy...

If by "oversaving" you mean depriving yourself of some things and experiences that would enhance your enjoyment of life, I agree. But I also wouldn't spend for spending's sake just because I reached a point where I had more than I needed. I'd do more gifting and donations and look at leaving a nice chunk to my favorite charities. Chances are if I were in this "way more than I can spend" situation I'd derive more satisfaction and enjoyment out of knowing that than on most ways I could convince myself to spend money on stuff that didn't really increase my happiness.

 

[W2R]

Lately I’ve been thinking about the issue of spending capital. In our particular situation we are in our mid fifties and have no real desire to leave a significant estate. Of course, we also have no desire to run out of money before we die. Still, I’m convinced that we have way more money then we need.

I’m curious how others have thought this issue through: I’ve jokingly said that you want to be around my wife and me as we near our deaths as we’re going to spend money like water! Of course, if you knew the timing of your own demise the issue would come down to simple math.


But in all seriousness curious for others thoughts/experiences…

Most of the SWR studies are based on probabilities of running out of money in 25 years, 30 years, or whatever is specified. So, if you are thinking of living on 4% then spending of principal is built in.

My SWR is lower, in the hopes of preserving inflation adjusted principal. I would like to leave something to my daughter. But also, in my old age (80+? 85+?) I would like to be cared for in a continuous care facility instead of expecting my daughter to spend the money and time to care for me. I regard my self-reliance in old age as a gift to my daughter that I would like to provide. So, my expenditures could rise at that point and I hope I don't have to begin invading principal.

At any rate, I think that age 80-85 will be the earliest at which I might have to touch the principal, if at all. I plan to reach my early 80's with my inflation-adjusted principal intact. Right now my financial plan goes to age 95, but if I live to age 80-85 I will need to extend that plan past age 95 to age 100-105 due to familial longevity.

So, in my 80's and older there will be a financial "crunch" from two directions: I will be adjusting my financial plan and withdrawal rate to last for 5-10 years longer, and yet I will have greater necessary expenditures. Hopefully the decrease in discretionary expenses will make up the difference but depending on how long I live and how bad my "end of life expenses" turn out to be, there may be a greater need to spend down principal.

 

[ERD50]

Most of the SWR studies are based on probabilities of running out of money in 25 years, 30 years, or whatever is specified. So, if you are thinking of living on 4% then spending of principal is built in.

W2R, this is something you've said a number of times. It isn't true, and it misrepresents what FIRECALC tells us. People are confused enough by what FIRECALC can and cannot do, I hate to see any confusion added to the mix.

If a FIRECALC run gives you a 95% success rate for 30 years, that means that historically, you would have run out of money before year 30 in 5% of the trials. It does not tell us that we spent our principal in the other 95% of the cases. In fact, in roughly half the cases, we will end up with MORE principal than we started with (even after adjusting for inflation), and in some of the cases, much, much more. (edit/add) - and with many of us taking a more conservative WR, it is far more likely that we will have significant principal to spend down, as the OP is considering).

Here's the default scenario - 30 years, 4%, $750,000 portfolio:

The lowest and highest portfolio balance throughout your retirement was $-300,739 to $4,259,606, with an average of $1,313,717.

go here:

FIRECalc: A different kind of retirement calculator

Hit the "SUBMIT" button and see for yourself in the results graph.


-ERD50

 

[ziggy29]

W2R, this is something you've said a number of times. It isn't true, and it misrepresents what FIRECALC tells us. People are confused enough by what FIRECALC can and cannot do, I hate to see any confusion added to the mix.

If a FIRECALC run gives you a 95% success rate for 30 years, that means that historically, you would have run out of money before year 30 in 5% of the trials. It does not tell us that we spent our principal in the other 95% of the cases. In fact, in roughly half the cases, we will end up with MORE principal than we started with (even after adjusting for inflation), and in somef the cases, much, much more.

I don't think she's saying what you are inferring here. I don't think she said FIRECalc assumes you WILL definitely consume principal.

I think the point is this: The calculations in FIRECalc assume you ***may*** have to spend down principal to maintain a given withdrawal rate, but it's not a foregone conclusion. If growth in the portfolio fails to match your withdrawals, it will dip into the principal. If growth is sufficient, it won't eat principal. The more you withdraw, the more likely you'll be to eat into the principal.

It's not that FIRECalc assumes you will eat into the principal, but that its success rates include scenarios where you will have to. And thus to get the success rates the tool indicates, you have to be willing to spend down principal, all the way down to nearly zero if need be. If you are not willing to spend down principal, then FIRECalc's results will overstate your chances of success.

 

[W2R]

Most of the SWR studies are based on probabilities of running out of money in 25 years, 30 years, or whatever is specified. So, if you are thinking of living on 4% then spending of principal is built in.

W2R, this is something you've said a number of times. It isn't true

From the Trinity study, second sentence, "A portfolio is deemed a success if it completes the payout period with a terminal value that is greater than zero."

This is what I am referring to. One can conclude that with a 91% chance of success at an inflation-adjusted 4% SWR, there is a finite probability of dipping into principal.

 

[Pete]

Lately I’ve been thinking about the issue of spending capital.......

I’m curious how others have thought this issue through........

But in all seriousness curious for others thoughts/experiences…

I don't think my original goal was to retire early. All the money I saved happend because there just isn't anything I want. The good things in life are truly free(except for shelter,food and water). Since I don't want, I don't spend. Instead of doing something unnatural for me, I would give the money to charity.

 

[LARS]

Based upon the reponses it would seem no one has yet to confront the "problem" (albeit a high class one) of substantial excess capital.

And for the record, how to "spend" was never the issue: be it for donations or diamonds.

 

[rescueme]

Based upon the reponses it would seem no one has yet to confront the "problem" (albeit a high class one) of substantial excess capital.

Heck, that's not a problem. I would rather die with money than live without it.

If you don't have the money to live your retirement in the manner you wish, due to not having the money - then you have a problem ...

 

[ziggy29]

Based upon the reponses it would seem no one has yet to confront the "problem" (albeit a high class one) of substantial excess capital.

Because I don't consider it a "problem" to have it and never feel a need (or even a strong desire) to spend it. So if that means I can't relate to angst regarding this topic, so be it.

 

[W2R]

Based upon the reponses it would seem no one has yet to confront the "problem" (albeit a high class one) of substantial excess capital.

And for the record, how to "spend" was never the issue: be it for donations or diamonds.

If you spend your substantial excess capital, or donate it, then isn't it gone and no longer a problem? Perhaps we are unclear as to other issues you are referring to.

As for spending, believe me, the "end of life expenses" that I referred to can eat up substantial excess capital and solve that problem for you nicely (if you wish to spend your last days in comfort with the best of care).

 

[ERD50]

Based upon the reponses it would seem no one has yet to confront the "problem" (albeit a high class one) of substantial excess capital.

I'm not surprised - most of us would have to be pretty far along in life before we decided we had 'substantial excess capital'. One can still be concerned about an extended period of needing nursing care, and not want to burden their children, or end up w/o the money to afford first class care. Even though it's the exception, we can't rule it out.

I don't think she's saying what you are inferring here. I don't think she said FIRECalc assumes you WILL definitely consume principal.

Well, within the context of this thread, I really didn't see anything else to infer from it. She didn't say that maybe half of the people may have to consume principal. This thread is talking about the (looks like more than half on the chart) folks that end up with more buying power at the end of their retirement than they started with. That's even more true of those of us shooting for less than 4% WR.

Plus, she has said it directly a few times in previous threads - but did not reply when questioned (not just by me). Repetition reinforces things, and I wouldn't want someone to get the wrong idea (even if that wasn't the meaning that was intended).

From the Trinity study, second sentence, "A portfolio is deemed a success if it completes the payout period with a terminal value that is greater than zero."

This is what I am referring to. One can conclude that with a 91% chance of success at an inflation-adjusted 4% SWR, there is a finite probability of dipping into principal.

Yes, some will need to dip into principal. But I still don't see how that is relevant to this thread? The OP is talking about those many folks that will end up with more than they started with. And how are they dealing with it? I think it's an interesting question. The 'eat dog food and take in a border' side of the coin has been discussed many, many times. This is refreshing. I think that old guy that married Anna-Nicole was too busy (or tired) to post at the time.

-ERD50

 

[ERD50]

Because I don't consider it a "problem" to have it and never feel a need (or even a strong desire) to spend it. So if that means I can't relate to angst regarding this topic, so be it.

Agreed. Wasn't there a thread recently where the economist referred to any surplus we die with as 'wasted'? Sure, from a purely economic viewpoint, if that happens we underutilized our resources. But given the unknowns in life and death, all we can really call it is necessary 'overhead', under the category of 'being prepared'. In the same way that insurance is 'wasted' if we never need it. So what? You pay your price you take your chances.

But, it's still an interesting question - what to do if we are one of the positive lines on the FIRECALC chart? V8 wheelchair?

-ERD50

 

[RunningBum]

If you spend your substantial excess capital, or donate it, then isn't it gone and no longer a problem? Perhaps we are unclear as to other issues you are referring to.

As for spending, believe me, the "end of life expenses" that I referred to can eat up substantial excess capital and solve that problem for you nicely (if you wish to spend your last days in comfort with the best of care).

It doesn't sound to me like the problem is how to get rid of the money, but when it is safe to start splurging. Like, maybe they are traveling where they want but would like to start going first class, but not if it's going to make them run out. But there's no reason to deprive themselves of luxuries if they have no one to leave the money to. That's the "problem", as I see it. I could be wrong.

It seems to me that if you've been withdrawing considerably less than 4% (or 3 or 3.5% if you want to be conservative), you can start withdrawing that amount, and also the amount you had not been withdrawing over the years is also safe for splurging. I would probably start with 3%, and see if you earmark that extra amount for luxuries, if it still makes sense.

So for example, say you started off with $5M 10 years ago, which at a 3% SWR rate lets you withdraw $150K/yr. But, say you've only been pulling out $100K/yr, leaving $50K in the nest egg each year.

Now, you could withdraw $150K/yr, plus you could earmark 10 years of the $50K you hadn't been touching, or $500K, for your luxury fund to spend anytime. This actually ignores what the $500K has been earning over those 10 years, but the last 10 years haven't been great for most of us anyway.

Then you do a sanity check on what your net worth is now, and whether it makes sense to essentially take $500K out of it, and still withdraw $150K/yr.

Or maybe I missed the whole point.

 

[ziggy29]

It doesn't sound to me like the problem is how to get rid of the money, but when it is safe to start splurging. Like, maybe they are traveling where they want but would like to start going first class, but not if it's going to make them run out. But there's no reason to deprive themselves of luxuries if they have no one to leave the money to. That's the "problem", as I see it. I could be wrong.

Keep in mind that the 4% rule is designed to allow you to "reset" at any time. (The same would be true for any withdrawal rate under 4%.)

Let's say you started with 3.5% to add a margin of safety. So if your portfolio performs well and, after a few years, your initial 3.5% is down to 2.5%, you could increase your withdrawals by 40% and "reboot" with a 3.5% withdrawal rate moving forward. Alternatively, you may take out a one-time lump sum that lowers the portfolio value but keeps future inflation-adjusted annual withdrawals below 3.5% of the new portfolio value.

And again, your point about "depriving themselves of luxuries" is well taken **if** those luxuries are something they'd find adds to their quality of life, and I don't think anyone has argued to the contrary. I think what some of us are saying that if that is *not* the case, spending simply for its own sake -- where it really doesn't add to your ability to enjoy the rest of your life -- makes little sense.

 

[MasterBlaster]

The 4% rule is based on a worst-case 30 year retirement model.

If you just happen to retire into a better than horrible market or if you are older and only need say 10 or 20 years then your safe withdrawal rate can be considerably higher.

The chart below is from Bernstein. Notice that when you have 10 years left it is indeed safe to withdraw 7.5%

 

[rayvt]

Because I don't consider it a "problem" to have it and never feel a need (or even a strong desire) to spend it.

My wife informs me that she can always manage to find something to spend excess money on.

 

[Khan]

I'm going to start drawing money from my retirement accounts in January. I'll be 60 and I would be forced to withdraw by 70.

Don't have to spend it all. Will spend some and give away some.

"Money's like manure; it's no good unless you spread it around and help things grow."

 

[NW-Bound]

Many of the posters have brought up the possibility of needing to spend a lot of money in the final stage of life. Having seen my late father several times a week in his last 6 months of life, and now with my father-in-law in a nursing home, I can say that one can spend a lot more money and it would not make that much of a difference. I have discussed this with my wife, my siblings, and my brothers and sister-in-law, and that has been our consensus. There is of course a difference between a hobo lying in a gutter waiting to expire and a billionaire being pampered by a personal nurse like Anna Nicole, but for the rest of us, it hardly matters if one spends twice or three times more money.

A recent movie that I saw, "The Savages", portrays that very well.

 

[haha]

I can say that one can spend a lot more money and it would not make that much of a difference.

Just be sure to get a place that can at least keep you from getting bed sores. By the time many of us reach life-end, we will be "offered" euthanasia. Probably not a bad deal. It is made less attractive today because it has a stigma attached to it, for the sick person and for his family. And also because someone else is often paying for "care".

Ha