Withdrawal Rate Increases with Time?

[mccl]

I am a few months from retirement.  Because of a small pension and social security at 62, my initial withdrawal rate from my traditional IRA will be only 1.3%.  That sounds good, but according to projections in a spreadsheet I developed, the inflation-adjusted withdrawal rate will keep increasing over the years:

After 10 years it will be 2.7%.  
15 years 3.7%  
20 years 5.2%  
25 years 7.3%.  
30 years 11.5%

Question 1:  Is this pattern of ever increasing withdrawal rates normal?

The increasing withdrawal percent is driven by two things:

a.  the spreadsheet increases the withdrawal amount by 4.3% per year (I'm figuring higher than CPI inflation because of reports that healthcare costs are increasing at a much higher rate:  8 to 12%).  My pension won't increase with inflation. Social security will increase, but not necessarily at 4.3% per year.  
 
b. The spreadsheet assumes an annualized investment return of 5.5%.  (I'm planning a 60/40 stock/bond mix.)

Question 2:  Are these inflation (4.3%) and investment return (5.5%) assumptions reasonable?  

By the way, FIRECALC shows a 100% success rate and a very large terminal amount for my heirs (whereas my spreadsheet shows a very low terminal amount).  But FIRECALC uses CPI or PPI inflation, and historical investment returns have been higher than 5.5%.  I'd rather believe FIRECALC than my simplistic spreadsheet, but I wonder if I should.

I'd appreciate any comments or answers to my 2 questions. Thanks.

 

[wabmester]

Question 1:  Is this pattern of ever increasing withdrawal rates normal?

Who can say what normal is, but if you withdraw more than you make each year, then yes it would be expected that your withdraw would increase as a percentage of your remaining nest egg.

Question 2:  Are these inflation (4.3%) and investment return (5.5%) assumptions reasonable?

Who knows what the future will bring, but your numbers are very conservative compared to historical averages (about 3% inflation and 10% returns).

By the way, FIRECALC shows a 100% success rate and a very large terminal amount for my heirs

As you know, FIREcalc just finds the worst performing period of the length you specified within the last 130 years or so. If you believe that the future will play out like the recent past, then you're in good shape.

The terminal value FIREcalc spits out is meaningless. It's based on an average over time of both historical returns and historical inflation, so there's no way to compare the value to present dollars or inflation-adjusted dollars. Take it with a large grain of salt.

 

[Michael]

Question 1: Is this pattern of ever increasing withdrawal rates normal?

It is for anyone who gets a defined benefit pension that is not inflation adjusted, although it does not always get up to 11.2%. That may be a bit high, depending upon how you calculated it.

Question 2: Are these inflation (4.3%) and investment return (5.5%) assumptions reasonable?

No mortal knows the future. We can only look at what happened in the past. We can guess at the future based upon trends, but we cannot know.

 

[Bob_Smith]

I think a 5.5% return and 4.3% inflation is too conservative. That's only a 1.2% real return. You can lock in twice that for 25 years with TIPS right now. When using Quicken Financial Planner (to visualize cash flow) I use a 2.5% real return. I think that's probably too conservative. But nobody knows the future, as others have mentioned.

 

[Cut-Throat]

I think a 5.5% return and 4.3% inflation is too conservative. That's only a 1.2% real return.

I agree with Bob Smith on this. I'm using a 3% return for planning and I think that's conservative from what I've studied. My portfolio based on Bernstein's conservative outlook should do 4% real. (If it does, it's a nice problem to have). If I only get 2%, I can adjust and still make it.

Below a 2% return, I could still make it, but that's getting to the point where I wonder if I'd want to.

 

[unclemick]

Plan wise, I'm also sort of in the 3% ballpark in the following sense: SEC yield plus 1% is about 3% - our biggest position vg Lifestategy mod is yielding around 2% (cons and REIT index are smaller). FIREcalc when pensions and SS are added shows a higher rate. That gives us a lot of wiggle room between the two to cope with inflation and unexpected 'life' events.

 

[intercst]

The terminal value FIREcalc spits out is meaningless.   It's based on an average over time of both historical returns and historical inflation, so there's no way to compare the value to present dollars or inflation-adjusted dollars.   Take it with a large grain of salt.

Actually that's not true. The summary results from FIRECALC report the mean Terminal Value based on the actual year by year inflation and investment returns for the 30-year payout period in question. It's not "an average of time".

If you select the FIRECALC "Detailed Report", you'll get the actual terminal values for all 100 plus 30-year periods examined by the program.

If you want inflation-adjusted Terminal Values, the lastest version of the Retire Early Home Page Excel spreadsheet provides that. See Link:

http://www.retireearlyhomepage.com/re60.html

intercst

 

[cute fuzzy bunny]

Cant somebody slap together some kind of calculator that simply tells us what we wanna hear, regardless of input?

Damn, that would save a lot of time.

Here's my calculator. If I think I can do it, I execute. If needed, improvise. If all else fails, then plan.

I suspect Jarhead will approve of this. Its close enough to the Marine Credo for hand grenades. Also known as the "John Galt Maneuver".

 

[John Galt]

Hey TH................I thought only my wife and a few
ex girl friends knew about the "John Galt maneuver"

John Galt

 

[cute fuzzy bunny]

No no no. Thats a different "John Galt Maneuver". I think you're talking about the one that ends with a lot of apologizing?

 

[John Galt]

I'm confused. The "maneuver" I recall involves a lot of moaning
and insistence on further "investment". Unlike our
subject, "withdrawal" was vigorously opposed.

John Galt

 

[mccl]

Thanks for all the insights and answers to my questions. I agree that I was being a bit too convervative in my assumptions and perhaps causing myself unnecessary concern.

I gotta say that going into a forced retirement (job being sent to India) with smaller than planned retirement savings is quite worrisome. But from my reading of this forum I think some of you retired with smaller than planned portfolios and are making it just fine. That's good to know.

As some of you pointed out, the future returns can't be predicted. But I increased my investment return assumption to 1.7% over inflation instead of 1.2%. That lowered those projected long term withdrawal rates quite a bit. It's amazing what a difference a half percent makes when you compound it for a few decades.

 

[skay]

mccl, maybe the person doing your job in India will meet the one doing my husband's old job. Just a thought.

 

[db]

MccL:
I have spent very little time agonizing about investments.
I have always (when coming to a crossroad), figured what's the worse that can happen?  In probably at least 10 times in my life, I've asked myself that question.
Knock on wood, the worst hasn't happened yet.

I used to worry about worst cases, churning in my mind all the bad outcomes that could occur. But eventually, perhaps in my 40's or 50's, I began to realize that these worst case outcomes had not been experienced, and I began to develop a more optimistic view of impending events. I think planning for optimization, while trying to cover downsides, has served me far better than planning to avoid imagined worst cases. Made my life happier too.

So, at 68, I continue with a 60/40 equity/fixed income split, although some would argue that 32/68 or 42/58 is more prudent. Our annual income from Social Security is about $30K; my wife's inflation-adjusted pension is about $31K; my optimism suggests neither will go away. Except for the RMD from an inherited IRA, we don't draw on investments.

db

 

[cute fuzzy bunny]

I'm confused. The "maneuver" I recall involves a lot of moaning
and insistence on further "investment". Unlike our
subject, "withdrawal" was vigorously opposed.

John Galt

I'm sure there was a lot of insistence up front and a lot of moaning afterwards

(rofl)

Some day we need to have a "worlds biggest ego" contest, followed by the "worlds biggest put-down" contest.

I'm too tired right now.

 

[Jarhead*]

TH:
You would need a rocket launcher to penetrate the first layer of skin

 

[cute fuzzy bunny]

Damn. All i've got is a really pointy stick.

 

[John Galt]

Reminds me of a girl I used to know who was covered
with red spots from being touched with 10 foot poles

John Galt

 

[Jarhead*]

John Galt

Pole had to be over 10 feet

 

[Jarhead*]

DB:

Don't understand your point.
You stated that your soc. Sec. for you and wife is $30,000, and her inflation indexed pension is $31,000.
You have an inheritence on top of that, and do not have to draw on your own savings.
I don't know anyone who would not be optimistic with that type of security.

 

[John Galt]

Hello ex-Jarhead. Re. db's post, sure you do. You have met some of these worry warts right here. You know,
guy writes in and says he's collecting SS and a pension,
and has a net worth of $2,000,000, not counting the houses, $500,000 and $200,000, and no debt. Wants to know if he has enought to retire. Makes me smile every time.

John Galt

 

[cute fuzzy bunny]

I have a gosh darn simple solution for people worrying about whether they have enough or not.

Send me a check in the amount that would be required for you to get your portfolio down to the point where you're SURE you dont have enough.

Oh, and should you ever amass further monies and this becomes a regular problem, I'm certain I can arrange for a quarterly, monthly, or bi-weekly electronic transfer system to automatically resolve any unnecessary overages.

Worrying solved. Whose your buddy?
8)

 

[db]

ex-Jarhead, John Galt, & TH,

Well the point of my post is I used to worry about things like whether someone might ask an obvious question I couldn't answer when I made a presentation, and so forth. Re causes to worry about investment strategy, they are those who would argue that social security and a pension could go away, or be dramatically diminished. I didn't mean to imply that I felt we were in a precarious financial state, and I'm sorry if I gave that impression. I inherited my dad's IRA and am the sole heir to the remainder of the estate that was left to my mother. And, of course, we have our own IRAs, so I'm not complaining. Just meant to say I don't worry about our social security or pension going south.

db

 

[cute fuzzy bunny]

Dude...dont take it seriously, we're messing with you!!!

Besides, John G is really a 15 year old, Unclemick is a 13 year old girl and I'm just a dog!

 

[cute fuzzy bunny]

I think they should do "celebrity boxing".

Fighting each other would be good, but I'd like to see:

Bill Gates vs Mr. T. (I pity the richest fool in the world!)

Michael Dell vs the guy who used to play "Lurch" on the addams family. Have to dig him up, and I'll bet he doesnt smell too good, but it'd be a good match.