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Old 01-12-2011, 04:51 PM   #1
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Yahoo Post on Early Retirement

buck-the-trend-and-retire-early: Personal Finance News from Yahoo! Finance

"Buck the trend and retire early".

The post has standard advice and recommends no more than 3% SWR. It was one of the posters that got my attention, recommending the following formula:

"Take your age at retirement and subtract it from 105.

Divide the value of your financial holdings by that number.

You now have the amount of annual withdrawl you can make. You will also have a cushion of extra money for an unexpected event or age related increase in expenditures."

Is this realistic or too conservative. With a stash of 3 million at say age 47 I could only take out about $52,000 per year. This is much less than $90,000 which is a 3% SWR. Thoughts?
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Old 01-12-2011, 04:59 PM   #2
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Well, the poster did say you'd have a cushion for unexpected expenditures, but he didn't mention just how big it might be.

I think it is much too conservative - unless you have a huge nest egg or retire very late in life.
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Old 01-12-2011, 05:01 PM   #3
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perhaps too conservative. using the 105-age formula would give you a rate (of ~1.7% for a 47 year old) roughly half of what traditional SWR analysis would suggest.

Bernsteins analysis for a stock-bond portfolio suggest maybe 3.33% (less trading fees and fund expense ratios) would be OK. So the 3% after fees would probably be OK.

Personally I would do a variable withdrawal scheme - where your spending amount would go (somewhat) up and down with the markets. there are many variations on this approach.
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Old 01-12-2011, 05:19 PM   #4
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Nobody here (except me perhaps) seems concerned with spending too little of their nestegg. the idea is to fully utilize the nestegg without going broke. Just recall that a SWR is for those very worst markets such as we've just been through. It just may be that the markets won't go to zero during your retirement. In that case your withdrwal rate could potentially be much higher than 1.7-3 %

Gummi did a great little analysis of this topic. I discussed it in a post last year which may be of interest to you:

The New Math of Retirement - Page 2 - Early Retirement & Financial Independence Community



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Old 01-12-2011, 06:47 PM   #5
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I agree with REWahoo - it is very conservative.
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Old 01-12-2011, 07:01 PM   #6
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Masterblaster, I share your desire to spend down our nest egg! As we have no children, there is really no need to retain any of it at death, except to benefit our niece and nephews. I appreciate your discussion of this!
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Old 01-12-2011, 07:07 PM   #7
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You realize what the formula mentioned by Hiredgun is, don't you?

It basically is saying you will live to 105 and the real return on your portfolio will be 0%.
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Old 01-12-2011, 07:17 PM   #8
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Appreciate the responses. First time I have seen such a conservative post on calculations. Freaked me out a bit. I thought I'd be good at a certain number and that told me I needed to work longer

Glad to hear the rationale of those on this board. Thanks,
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Old 01-12-2011, 07:27 PM   #9
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Masterblaster, I share your desire to spend down our nest egg! As we have no children, there is really no need to retain any of it at death, except to benefit our niece and nephews. I appreciate your discussion of this!
+3.

I plan on making the genXer's pay to bury me.
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Old 01-12-2011, 07:32 PM   #10
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If I use that formula to dictate my spending, I'd be pretty disappointed if I didn't live to at least 105.
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Old 01-12-2011, 07:33 PM   #11
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+3.

I plan on making the genXer's pay to bury me.
By the time that happens, I'm sure somebody would have figured out how to turn you into bio-fuel (assuming they get a sufficiently large subsidy from the taxpayers).
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Old 01-12-2011, 07:39 PM   #12
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Just for fun here is one short discussion of three or four of the variable withdrawal strategies that are easily implemented and tracked:

Cash: How to Vary Spending During Retirement

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There also is an opposite risk. A retiree with a strong fear of running out of money might live much more frugally than required. That would be great for heirs, because they will inherit a sizable portfolio, but it reduces the retiree's standard of living.
Unlike the projections in most models, retirement spending does not increase in a straight line. It varies over time. In addition, markets also do not move in a straight line. They are volatile and can have extended bear markets and bull markets. These fluctuations in the portfolio value should influence annual spending.
Kotlikoff (of ESP Planner fame) and others refer to lifetime consumption smoothing where you attempt to level near term and far term spending over your (and your spouses) remaining lifetime.
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Old 01-12-2011, 07:47 PM   #13
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If I use that formula to dictate my spending, I'd be pretty disappointed if I didn't live to at least 105.
I live on about this or less. Usually less. Though it was not always so. My net worth has increased very regularly in the ~ 25 years I have been retired-that is the good part. ( Excepting my divorce). Without that event, my withdrawal rate would be laughable, unless my wife somehow figured out how much money was around. The less good part is that the divisor has also decreased along the way.

I take no pride in living cheaply, and in fact I do not live particularly cheaply. I think much more important is that one does not take dumb risks, though keeping a close eye on outflows counts too, especially the big stuff. I believe in carefully spending only on what makes me happy, or more secure, or more healthy. I would never feel the urge to "find a way to spend some more money". IMO the small, "latte" type frugality is more lifestyle porn than anything important to financial survival. Perhaps very early on, or when one's portfolio is being heavily stressed this would not be true. Another situation where one is forced into this type of living is when extremely early retirement is coupled with extremely low assets, which creates what is for all intents and purposes poverty, though it is usually called something more acceptable.

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Old 01-13-2011, 10:38 AM   #14
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I live on about this or less. Usually less.
Same here. Some of it is due to staying close to home and keeping an eye on Mom. Down the road my spending will increase as I travel more. But, I will be adding SS to my current number by then so I may not tap much more of my nest egg. I may have to figure out a way to spend some.
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Old 01-13-2011, 10:45 AM   #15
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You realize what the formula mentioned by Hiredgun is, don't you?

It basically is saying you will live to 105 and the real return on your portfolio will be 0%.
Agreed. My plan is essentially the same except I will use 70, not 105 as the worst case scenario. I retire at 50 and will plan to spend the next egg until 70. At that point I would begin taking social security with the max amount due to defering to that age. If my money earned 0% over the 20 years that's all I would have (worst case) but in reality whatever I earned over those 20 years will supplement the post-70 income stream. I am fine with the idea of living off social security only (the max amount) post 75 or so if I need to. My lifestyle and family history tells me I am unlikely to live past 70 anyway.
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Old 01-13-2011, 10:50 AM   #16
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If I use that formula to dictate my spending, I'd be pretty disappointed if I didn't live to at least 105.
Agree. I hate these overly conservative approaches because it seems to lose site that people will not be spending much money after 80 if they do live that long. At that point in your life your expenses would essentially be food, utilities, medicine, property taxes and a few gifts. I would think most people could live on social security at this point in their life couldn't they? (I am perhaps naive but people I know over 80 aren't spending a lot of money traveling, entertaining, etc....)
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Old 01-13-2011, 11:01 AM   #17
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Agree. I hate these overly conservative approaches because it seems to lose site that people will not be spending much money after 80 if they do live that long. At that point in your life your expenses would essentially be food, utilities, medicine, property taxes and a few gifts. I would think most people could live on social security at this point in their life couldn't they? (I am perhaps naive but people I know over 80 aren't spending a lot of money traveling, entertaining, etc....)
Lots of questionable assertions. I am sure some 80 year olds live just like this, but many others do not. Many of those who live the constrained lives you mention will be doing so because they cannot afford, or think they cannot afford, any other behavior. Do you want to bet that you will either be too sick or too broke to do what you would like to do?

IMO it is fine to say, I don't care what my life is like after I am 80, I'm living for now. But not to say "after 80 no one spends anything on anything fun anyway". The first statement may turn out to be false, you may really wish you had planned differently. But the second statement is counterfactual at the time it is made.

My ex FIL, who is 96 and whose homebase is Maryland, in the past five years has been to Normandy, Crete, on a Rhine Tour, to Paris, to San Francisco about 12 times, to DC approvimately weekly, to Dallas maybe 10 times, to New York City several times a year. Just look around an airport at all the white heads! Count auburn haired women too.

It can be lots of fun to imagine how things will go, but it is a lot safer if these imaginings are leavened with a just bit of reality.

Ha
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Old 01-13-2011, 02:26 PM   #18
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Lots of questionable assertions. I am sure some 80 year olds live just like this, but many others do not. Many of those who live the constrained lives you mention will be doing so because they cannot afford, or think they cannot afford, any other behavior. Do you want to bet that you will either be too sick or too broke to do what you would like to do?

IMO it is fine to say, I don't care what my life is like after I am 80, I'm living for now. But not to say "after 80 no one spends anything on anything fun anyway". The first statement may turn out to be false, you may really wish you had planned differently. But the second statement is counterfactual at the time it is made.

My ex FIL, who is 96 and whose homebase is Maryland, in the past five years has been to Normandy, Crete, on a Rhine Tour, to Paris, to San Francisco about 12 times, to DC approvimately weekly, to Dallas maybe 10 times, to New York City several times a year. Just look around an airport at all the white heads! Count auburn haired women too.

It can be lots of fun to imagine how things will go, but it is a lot safer if these imaginings are leavened with a just bit of reality.

Ha
Good points. I should have simply said, "if I live to be 80 and out live my money, I will be fine with living off social security because I would have traveled and lived the earlier retirement lifestyle the prior 20 years!".

Essentially I am willing to gamble on not living to 80 or living very frugually past that point, so that I can retire at 50 instead of 58 or 60.

I think it's great if people in their 80's and beyond are still healthy enough, energetic enough, wealthy enough and willing to still travel around the world. That just hasn't been what I have observed from friends and family. But of course most of these people didn't do that when they were 40 either!
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Old 01-13-2011, 04:09 PM   #19
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I suspect that Ha's FIL is the exception rather than the rule. Many people in their 80's have slowed down quite a bit and stick very close to home.

At some stage you realize that, a bag of Cheetos and some premium cable channels are all that are required to live the good life.
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Old 01-13-2011, 06:54 PM   #20
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Nobody here (except me perhaps) seems concerned with spending too little of their nestegg.
I'm with you. I put more weight in our ability to react than working the extra years to increase our portfolio to accommodate an extremely conservative withdrawal rate.
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