Withdrawal rates - theory vs practice

[Nords]

Re: Where's the foundation 5% rate come from?

Yeah, it definitely has been the case that wages have risen faster than inflation, though not evenly across the spectrum of salary earners.  Those at the top seem to have walked away with the lions share of the gains, while those at the bottom and middle seem to have been closer to breakeven.  

Sorry, Bob, that was sarcasm. While "average" wages may be up, I doubt the median is keeping pace with inflation. Those wage numbers look a lot worse when you take out the skew caused by CEOs like Larry Ellison & Michael Eisner.

Luckily most Americans skip up the pay scale faster than the ECI goes up at their old scale. Can you imagine working for the equivalent hourly wage you earned at your first job?

As for Americans' improving lifestyle, how many credit cards did the average American own in the 1950s? How easy was it to even get credit? I think those improvements are largely fueled by debt, not earnings. Yesterday's Dr. Phil profiled a couple who've been married four years, have already discharged a bankruptcy that they started at the wedding, and have returned from that "fresh start" to facing another bankruptcy-- all in less than 50 months. They feel obligated to maintain the lifestyle TODAY that took their 1950s parents over 20 years to achieve. Admittedly they're just as extreme an example as Michael Eisner, but the median numbers of eight credit cards & $8K non-mortgage debt per family speak far louder than higher wages.

I think well-meaning hedonics "adjustments" have destroyed the CPI's validity. Then add political & budgetary pressures to the concept and you have something even George Orwell would be afraid of. I think the REAL improvements in affordability are due more to Moore's Law and NAFTA than to worker productivity gains. IOW the computers manufactured overseas are making us more efficient workers, not the enlightened wages & improved quality-training programs of our beneficient bosses.

And while I appreciated Congress' efforts to link military pay to the ECI, I can also appreciate the cynicism of spending a little taxpayer money now to handcuff future govt employee wage growth to an underestimated index. Military pay won't lag the ECI in 20 years but it'll still be far behind "real" wage growth, as evidenced by the same retention problems we face today.

We have (working) friends who accuse us of living a 1950s lifestyle right now, let alone in 2055. But apparently the things that bring us the most pleasure don't cost much money-- except for the kid, of course.

 

[indymom]

What's wrong with a 1950's lifestyle? There was TV (OK, not color), automobiles, store bought clothes, airplanes, decent medical care for the time, central heating (although sans home AC), frozen food, inspected meat, telephones.....

 

[charlie]

Hi indymom,

I graduated from high school in '52 ..... it was the
best of times.

I think it was the late 50's when the invention of
the transistor boot strapped our society about
like the invention of the telephone did for an
earlier generation. I went on to become an
integrated circuit (chip) designer. You can blame
me for accelerating our ascent into electronic nirvana and parallel fall into social chaos.

Cheers,

Charlie

 

[Nords]

What's wrong with a 1950's lifestyle?

Polio, DDT, unlimited public cigarrette smoking ("It's good for you!"), fluoroscope radiation overexposure, rampant drinking & driving, truly impressive pollution (Pittsburgh!), trade tariffs, McCarthyism, nuclear sabre-rattling, racism, religious discrimination, gender discrimination, homophobia, Richard Nixon, LBJ, Joseph Kennedy, the KKK, the John Birch Society, full-price stock-trading commissions, the Bell Telephone monopoly, and explosive decompression of passenger jets. The 1950s lifestyle had a lot of drawbacks even if you were a Republican WASP.

I'm sure we can come up with more, and I'm not trying to claim that any of the above have ceased to be a problem.

We also didn't have the Internet or the WWW. Maybe good, maybe not!

Looking back over the past, I'm not willing to give up any of the "upgrades" in favor of the "good ol' days". Keep moving forward.

 

[indymom]

Nords, you have a point about no Web in the 50's.
I was actually thinking of the possibilities available given location in the USA and the technology of the time. It is still far beyond what many in the world experience yet today. And yes, it was and is beyond many here and now, and there will always be social problems.

 

[Hyperborea]

Re: Where's the foundation 5% rate come from?

Gosh, the ECI rising faster than the CPI would imply that wages are rising faster than inflation.  Or are both numbers equally invalid for different reasons?

I think that the average wage is rising faster than CPI. However, IIRC the wage for the bottom third of the US population has gone backwards over the last 30 or so years in real terms. This doesn't include any extra effects of the non-existence of pensions for current workers. The total family income has gone up but only because of the prevalence of working wives.

For the middle third the wages have been essentially stagnant in real terms. It is only the top third that has had real wage growth over the last 30 years. This has led to huge increases in inequality. The last time they reached similar levels the US was probably close to insurrection and possibly revolution.

 

[ESRBob]

As an example of how lifestyle can fall over time, even if you keep up your spending in inflation adjusted terms, I just found a pretty neat data series kept by the gummint on the sales of exactly the same homes over time.  Some of the data is twisted by refi data (they get a data point when a new mortgage is pulled and an estimate of the house value attached), but even taking that out and just doing actual home sales reveals that nationwide, the prices of homes are up 93% IN REAL TERMS or so since 1980

** EDIT ** This 93% number may be an error, please see my next post

and in blue states like CA and NY prices are up triple in real terms in those 25 years.

Its fine if you dont move out of your house, but it is a huge portion of people's budgets during their moving, mortage paying and upgrading years, that is growing way faster than inflation.

 

[hocus]

the prices of homes are up 93% IN REAL TERMS or so since 1980 and in blue states like CA and NY prices are up triple in real terms in those 25 years.

This goes to the question of whether it is reasonable for an early retiree to count increases in the value of his home as an investmeent gain. I've experienced large real gains on ownership of my home, which I could tap into if other elements of my plan did not work out as expected. However, there was a post at the NoFeeBoards.com's FIRE board once showing that homeowners could only expect real annual gains on their properties of about 1 percent to 2 percent. In my personal experience with home ownership, the gains have been higher than that.

If you have easy access to a link to the data series you refer to, I would be interested in taking a look at it.

 

[ESRBob]

The report is from Office of Fair Housing and Equal Opportunity, connected to HUD and Fannie

Pls see below, though, as I think my 93% number is wrong.

report link is:  http://www.ofheo.gov/media/pdf/3q04hpi.pdf

Relevant data is on pages 9 -11
These indexes are all in nominal terms, started at 100 in 1980,  so I subtracted inflation over that period (about 144%) from the index values (234 for U.S. overall, 443 for New York) to get the percentage change in real terms, since 1980 when it all started.  

(I think I might have bungled the math on the nationwide average, though the tripling in real terms looks accurate for places like NY; tripling would be a200% increase (doubling is a 100% increase)-- if anybody is a stats whiz, could you follow the logic and let me know?  

Page 9 gives a chart with california data, real index up from 100 to 245 or so in 20 years.  That looks to me like a 145% increase, or something between doubling and tripling.

The raw nominal index values for 50 states and the overall US is on pages 10-11.  There, I think I should subtract inflation over the period (144% i believe) from the raw index.  So for US overall, index of 234, I should subtract 144 to get 90.  That I believe tells me the index in constant 1980 terms (real terms) has gone from 100 to 90, which would imply a 10% real DECREASE for the US overall same home prices.  So I think I had it wrong because initially I was not remembering that the original index was 100 (mixing indexes and growth rates etc got my head muddled.)

(As a check on this math, the California raw nominal index is 386; subtracting 144% inflation gets you to a real index of 242 or so, which looks about right reading from their real index graph on page 9.)

So at the end of all that, it looks like housing isnt such a great hedge after all, unless you've been on the coasts.  If my corrected analysis holds, it means that housing, (same exact house, US average)  has actually dropped 10% in real terms over the past 25 years.  Could this be true?  Maybe the perceived home prices increases are all about people buying bigger fancier homes?

Thanks all

 

[hocus]

Thanks very much for providing the link, ESRBob. I will watch to see what others say about it, and add the material to my files. It certainly is a plus to have some additional data to look at in trying to develop a better-informed take on this question.

 

[Cut-Throat]

If my corrected analysis holds, it means that housing, (same exact house, US average) has actually dropped 10% in real terms over the past 25 years. Could this be true? Maybe the perceived home prices increases are all about people buying bigger fancier homes?

I would not doubt it at all.

Everyone has a story about how great real estate is. But you can usually take the same story and invest it in Microsoft when they went public and really 'blow your eyes out'

 

[Jarhead*]

The report is from Office of Fair Housing and Equal Opportunity, connected to HUD and Fannie





















So at the end of all that, it looks like housing isnt such a great hedge after all, unless you've been on the coasts.  If my corrected analysis holds, it means that housing, (same exact house, US average)  has actually dropped 10% in real terms over the past 25 years.  Could this be true?  Maybe the perceived home prices increases are all about people buying bigger fancier homes?

Thanks all

ESRBob:
Even though I am a native Californian, and have done alright on all the homes that I sold. The house i currently live in was the 3rd. move up house since buying our first house in 1964. I have always approached a home as a place to live in, and not as an investment. (But the fact that you can pull out $500,000 tax free on an owner occupied house is a pretty nice touch.)
In my experience, leveraged real estate, individual homes, apt bldgs., office bldgs. is a pretty hard strategy to beat for a young person that has the energy, and the need for tax advantaged investments.
Without Real Estate, I would not have been able to retire at 49. (Not for everyone, because it can be damn
frustrating and time consuming.)
The home you live in is, as you stated, very location specific.
Our home, cash on cash, has given us a 7 and a half percent compound return since 1987, and the average cost for living here is less than $550.00 per month. (Rent on like kind and quality would be in the $4,000.00
range). Added to the fact that it is tax free up to $500,000, makes it not too shabby.
Disclamer: That was then, this is now.

Jarhead

 

[ESRBob]

Jarhead,

Picking up on the tax-free issue:  it has always bugged me that govt gets to tax us on investment capital gains which are really not gains at all, but just keeping real value stable.  (To say nothing of bracket creep -- getting to tax people at higher rates when their nominal incomes rise -- the whole AMT mess revolves around this particular little gem).  Homes give you a way to get your inflated dollars out without tax.  Wish we could get capgains taxes tweaked to let you pay tax only on the real gain on our funds and other financial assets, too!  Well, we all gotta dream, right?

I was also thinking that leverage might be the answer to how people turned an investment performing, say, just at the rate of inflation, ie keeping up in real terms but not actually appreciating, into a winning investment.  But then I looked at it some more and realized that over time people are paying off their mortages, with interest, so they may start off leveraged, but they don't stay leveraged.

Maybe this really is one of those myths -- home as an investment that hedges against inflation and grows over the long run.  Maybe, at least for the average American, it just ain't so.  Funny thing about myths...  

 

[hocus]

Maybe this really is one of those myths -- home as an investment that hedges against inflation and grows over the long run.  Maybe, at least for the average American, it just ain't so.

I have not studied this question in any depth. So anything I say on it should be taken with a grain of salt.

My sense of things is that ownership of a home gemerally does provide a positive real return over time, but not as much as could be obtained through ownership of alternative investments. The most convincing explanation I have heard of why the return on one's investment in one's home is generally less is that the owner of a home gets to enjoy living in the home. That is an additional benefit of some significance. Add the benefit of living in the home to the benefit of the small real investment gain over time, and you have a total "return" on your money that is probably competitive (in the right circumstances) with the total return on an investment in an alternate investment class.

I count the value of my home (which I own in full) as part of my investment "portfolio." But I don't presume a 4 percent real return on the amount invested in my home. Currently, I am going with the expectation that this "investment" will earn me an average real return of betwen 1 percent and 2 percent.

 

[John Galt]

Being a very confident sort (and a numbers guy), I was
going to give you folks a couple real life scenarios to demonstrate what just a little real estate can do for you.
It got too compilcated real quick (back of the envelope)
so I gave up. I'll just repeat one man's plan. We own 2 homes, both well located (waterfront or near waterfront)
and bought right; 50% of our net worth. No debt.
In a pinch
we could sell/and or lease one or both, or in 18 months
we could reverse mortgage the primary res. And, if we
sold the house, we could downsize (again) and keep maybe 25% of the proceeds in our pocket. Maybe will
do this (sell and keep the profit) even in the absense
of trouble.

JG

 

[thebacchus]

We include home equity in Net Worth calculations. (Generally put together for business/investment loans for our businesses)

When calculating income producing assets on which we could base our income/survival, we exclude our home.

Our theory is that unless you are willing to sell your home and live off of the proceeds, it is an expense, not an income producing asset.

-TheBacchus

 

[John Galt]

Hello Cut-Throat. Amusing tho it was, I see one flaw in your point about "everyone having a story about how great real estate is"
and comparing that to a Microsoft investment
(at the right time) "blowing your eyes out". And, of course there are other "Microsoft-like" situations out there
all the time if we could only recognize them. However,
in real estate you can literally finance your entire ER,
by yourself, with no money, and do it in your own neighborhood in many cases. You don't need to pick the
next Microsoft. You only need brains and guts.

JG

 

[thebacchus]

I think the asset versus expense argument would definately be different for each of us, especially the liberals among us.

We also have quite a bit of residential & commercial real estate experience. I try to keep it simple and have two sides to the equation, one is the side that produces the income (business & investments) and the other is that which taketh away (expenses). Hopefully we can keep the scales tilted in the right direction!

I agree there definately is some value in the asset as our expenses would also definately be higher if we did not own our house as well, although the disparity would not be as large as yours. Our costs for maintenance/taxes, etc. are around $300-450/mo and the rental of a like property would be approx. $1,500-$1,800. (I don't include utilities as you would have those whether you owned or rented.)

So I guess you could look at it that it produces a "phantom" income of sorts in the way of the savings by owning outright versus renting and the "phantom" expense might be the opportunity cost of not have the equity invested in an income producing asset.

The savings difference could probably also be divided into the equity amount to give you an "Equity rate of return??" Could be an interesting comparison if the $$'s are producing a higher or lower rate of return than if you invested the equity in another type of investment.

-TheBacchus

 

[mike_91361]

I modified the original retire early spreadsheet to allow for a withdrawal growth factor above and beyond inflation. If anybody wants a copy please email me at mike_91361 @ yahoo.com.

I figure about 2% above inflation should keep up with wages, but if anybody has long-term figures I'd be interested. I'm planning on 50 yrs of retirement and the idea of a living 1950s lifestyle today doesn't seem too much like fun. Sure they had jet airplanes, but it wasn't a realistic mode of travel for the average wage earner.

 

[Cut-Throat]

Hey mike, after 40-50 years of retirement, you won't want to ride on a Jet Airplane!

The rocker may even be too exciting by then.

 

[mike_91361]

Maybe they'll have transporters like in Star Trek I'd sure hate to be stuck with on a plane because I couldn't afford to pay Scotty to beam me up.

 

[Zipper]

Scotty and Bones died years ago.

And Spock looks like he should be in a coffin.

On the other hand, Captain Kirk is still goin' strong.

 

[larry]

Scotty hasn't died yet! Although James Doohan has been recently diagnosed with Ahlzeimers, he is still very much alive.
Beam me up.

 

[MJ]

Scotty and Bones died years ago.

Don't bury Scotty (James Doohan) yet because he is still alive although he may not still be kicking as much.

 

[larry]

but he is correct about Nimoy, he does look like he's pre-prepped for the ol' pine box. All those years of being logical and no time for fun I guess!

Kinda like ER, sometimes you can't be too logical about it all, gotta let go a few times and party with the Klingons!