Linda Stern: "What all those retirement studies get wrong"

Nords

Nords

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You'd think this thread would belong in "FIRE and money", but retiree behavior is a better fit for "Life after FIRE":
Stern Advice: What all those retirement studies get wrong | Reuters

"There is a significant gap between the behavior implied by economic models and those of real-life individuals," the actuaries concluded. The team of researchers, led by Bonnie-Jeanne MacDonald, identified "three significant conceptual/methodological weaknesses in the relatively recent surge of academic research on this topic."
Put simply, the studies leave out too much: They tend not to include the effect of taxes on withdrawals, or the responsiveness of withdrawals to personal circumstances like unemployment or health problems. And they don't do a very good job of predicting the way real retirees handle their money.
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Here are some of the key omissions and what they may mean for your retirement fund:
-- Retirees are more conservative than they are given credit for.
-- Retirees don't want annuities.
-- Health is a big, and under-addressed, factor.
-- Taxes are a big factor too.
-- There's no substitute for a personal analysis. While the actuaries concluded that academics and industry analysts should broaden their studies, it really behooves every would-be retiree to look at their own situation in all of its specifics.
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Admittedly this study is coming from actuaries, so it'll take a while to filter across to the financial advisors...
 
Nice article. They said,
For example, retirement fund powerhouse T. Rowe Price generally tells new retirees that they can withdraw 4 percent of their retirement account assets in their first year of retirement, and then increase that withdrawal amount by 3 percent a year to cover inflation. But it finds that many of its fund investors do not even increase their withdrawal amount every year.
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That sounds very likely to me, especially if one's personal inflation rate had not increased much, or if the market was falling.
 
W2R said:
Nice article. They said,

That sounds very likely to me, especially if one's personal inflation rate had not increased much, or if the market was falling.
Click to expand...

Me too. Now that I think about it, I'm still drawing my original amount after five years of retirement, no inflation adjustment. I'll increase it when lifestyle requirements seem to need it.
 
The best quote IMO:
There's no substitute for a personal analysis. While the actuaries concluded that academics and industry analysts should broaden their studies, it really behooves every would-be retiree to look at their own situation in all of its specifics. Personal earnings ability, other sources of income, investment risk tolerance, home equity, tax rate, life expectancy and the desire to leave a bequest are just some of the factors that might go into that "how much can I withdraw" decision.
Click to expand...
It's very hard to generalize on this stuff. Who wants to be a victim of someone's statistical study?
 
W2R said:
Nice article. They said,

"For example, retirement fund powerhouse T. Rowe Price generally tells new retirees that they can withdraw 4 percent of their retirement account assets in their first year of retirement, and then increase that withdrawal amount by 3 percent a year to cover inflation. But it finds that many of its fund investors do not even increase their withdrawal amount every year. "

That sounds very likely to me, especially if one's personal inflation rate had not increased much, or if the market was falling.
Click to expand...

harley said:
Me too. Now that I think about it, I'm still drawing my original amount after five years of retirement, no inflation adjustment. I'll increase it when lifestyle requirements seem to need it.
Click to expand...


I have noticed this in other 'annual expenses/how much do you spend' threads on this board.
It seems like when the market is in a down turn, human nature tends to take over and most retirees cut back.
But in reality, the SWR and Firecalc calculations/numbers expect the person to continue on with the same annual spending + inflation factor counted in (3% for the T.Rowe Price model).

So I guess what I am saying is if you run Firecalc and get 100% success rate to age 100 or are going off SWR of 4% for 30 year success rate, then if you cut back in the down years you are actually making the above success rates even better :)
 
Ronnieboy said:
So I guess what I am saying is if you run Firecalc and get 100% success rate to age 100 or are going off SWR of 4% for 30 year success rate, then if you cut back in the down years you are actually making the above success rates even better :)
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Yep! :D

I am actually doing that and feel good about that choice. I plan to use the excess for long term care if necessary. I don't see it getting any cheaper, with the baby boomers on the way.
 
W2R said:
Yep! :D

I am actually doing that and feel good about that choice. I plan to use the excess for long term care if necessary. I don't see it getting any cheaper, with the baby boomers on the way.
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Well W2R, I don't think you have to worry as long as you keep that avatar ;).
 
Ronnieboy said:
I have noticed this in other 'annual expenses/how much do you spend' threads on this board.
It seems like when the market is in a down turn, human nature tends to take over and most retirees cut back.
...
Click to expand...
That's so true. Back before May started our portfolio was making me feel almost giddy. Now with the recent drawdown even with all those studies and simulations I've done, I'm being a bit of a tightwad. Trying not to worry DW.
 
W2R said:
:LOL: Well, unfortunately the days in which I could get by on just a smile are a few decades behind me. Now, if I really looked like Eva (my avatar).... :D
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I just added Lexx to my streaming DVD queue, so I'll be seeing more of her soon.
 
Cheap SOB is hard to quantify on a calculator. Along with short spurts of - Hey! I'm not getting any younger.

heh heh heh - I still don't like the part where you can't take it with you. The most 'souped-up hot rod Hover Round in the nursing doesn't really appeal to me. Unless they have really fun drag races. :D
 
Nice article. They said,
Quote:For example, retirement fund powerhouse T. Rowe Price generally tells new retirees that they can withdraw 4 percent of their retirement account assets in their first year of retirement, and then increase that withdrawal amount by 3 percent a year to cover inflation. But it finds that many of its fund investors do not even increase their withdrawal amount every year.
Click to expand...
For example, retirement fund powerhouse T. Rowe Price generally tells new retirees that they can withdraw 4 percent of their retirement account assets in their first year of retirement, and then increase that withdrawal amount by 3 percent a year to cover inflation. But it finds that many of its fund investors do not even increase their withdrawal amount every year.
That sounds very likely to me, especially if one's personal inflation rate had not increased much, or if the market was falling.
Click to expand...

What you and T-Rowe Price refer is to is the basis for the "Bernicke Reality Retirement" model. Bernicke as well as many a financial advisor have noted the trend that nominal spending remains flat in retirement even though the spending amount in real terms is dropping. This is true of retiree's who could indeed afford to spend more.

I suppose at some stage one just doesn't have a need for all that stuff anymore.
 
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MasterBlaster said:
Bernicke as well as many a financial advisor have noted the trend that nominal spending remains flat in retirement even though the spending amount in real terms is dropping. This is true of retiree's who could indeed afford to spend more.
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Well, it's true of some retiree's........

DW and I (5+ years into full retirement) continue to spend at our original plan levels + inflation or more. It was a tad worrisome during the depths of the recession but we wanted the travel and experiences we had been putting off during our career years and in hindsight, we sure don't regret it.

I don't doubt that Bernicke's findings apply to many. But we find ourselves happier when we just keep on keepin' on despite getting older. We would increase our budget by much more than the inflation rate for next year if we thought it wasn't too risky. There are so many places we still want to see and so many things to do....... while we still can.

We understand many prefer to just hunker down at home and spend their days looking out the window or watching TV as they age. So far, that's just not us.
 
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youbet said:
...(snip)...
We would increase our budget by much more than the inflation rate for next year if we thought it wasn't too risky. There are so many places we still want to see and so many things to do....... while we still can.

We understand many prefer to just hunker down at home and spend their days looking out the window or watching TV as they age. So far, that's just not us.
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That is the spirit! We have to remember that those FIRECalc simulations that show we have a decent ending portfolio might just have a point. As long as those drawdowns in all the intervening years keep to a decent minimum amount, I prefer to continue to spend with an inflation kicker thrown in. And that is a hard thing for me to do being naturally conservative. DW, being the fun loving type, keeps me honest.
 
Lsbcal said:
As long as those drawdowns in all the intervening years keep to a decent minimum amount, I prefer to continue to spend with an inflation kicker thrown in. And that is a hard thing for me to do being naturally conservative. DW, being the fun loving type, keeps me honest.
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We look at it this way....... When you make your annual withdrawal, you don't know with certainty what the long term impact will be on your portfolio. The magnitude of future bumps and dips won't be revealed until they happen. But, if you don't make the withdrawal or you reduce the withdrawal and subsequently cancel plans for travel or activities that you likely won't want to do or won't be able to do later in life, you can be sure that those opportunities are gone forever.
 
youbet said:
Well, it's true of some retiree's........
We understand many prefer to just hunker down at home and spend their days looking out the window or watching TV as they age. So far, that's just not us.
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I think another side of Bernicke's point is that retirees find enjoyable things that don't cost much money: like DIY projects, surfing, hiking, writing, reading library books...

It doesn't all have to be travel and entertainment expenses.
 
Regarding the last 4 posts, The Bernicke model makes no judgement whatsoever as to why spending tends to falls with age. The model just notes the trend. The trend may be best measured by the decade though rather than just over a few years.

For those that keep up your (inflation incremented) spending to maximize your retirement enjoyment, You have my blessings. I too intend to spend the nestegg and don't plan on leaving much.
 
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The consumer expenditure survey shows spending declines with age but income does as well, and the % of spending vs after tax income jumps at age 65 to 93% and by age 75 to 100%. In other words, spending falls because income falls. See the data here
 
The Bernicke model is based on empirical observations from financial planners/account managers and such that watch retirees spending patterns. What has been observed is that spending stays roughly flat nominally and declines in real terms.

These observations are for people with somewhat substantial nest eggs that could indeed support higher spending. It suggests nothing for people who are forced into lower spending patterns by their circumstances.

Evidently, nest egg size (and income) are not the only driving factor in retirement spending.
 
MichaelB said:
The consumer expenditure survey shows spending declines with age but income does as well, and the % of spending vs after tax income jumps at age 65 to 93% and by age 75 to 100%. In other words, spending falls because income falls. See the data here
Click to expand...
Very interesting data Michael. thanks.

ha
 
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