Die Broke

[Golden Mean]

So I searched the forum. This book (and idea) didn't appear to be discussed at any length.

The book, by Stephen Pollan, contains all kinds of LBYM ideas like keeping your credit cards at home and using them only for emergencies (and car rentals) and actually pulling out cash for weekly expenses. He explains how this should make you think about your (daily) purchases more carefully. I actually do this.

The core of the book is dying broke though. How? Well, spending capital (at a reasonable rate) and then annutizing yourself late in life.

Now, I know how most of the board members feel about annuties, especially fancy ones. Pollan recommends only the plain vanilla single premium immediate lifetime annuities.

Also, the only SPIA discussion I've seen on the board is about younger folks buying or not buying annuities. Pollan's concept doesn't involve annuitization until you are quite old. At this point (I assume?) the rate you see from a SPIA is more reasonable. He recommends you ladder into these annuities so that you are less susceptible to inflation.

This is attractive to me because the (approx) 4% withdrawal rate seems so inefficient to me. Typically in the end, you'll die with a huge amount of unspent capital, correct?

So I guess the idea is:
Start with a wad of capital that you partially dig into. You don't seek to preserve all of it.
At some point, the interest/dividends/etc plus capital withdrawals will no longer be enough (because your capital has been shrinking)
You begin laddering into SPIA (from well researched ins. co.) at 70~80?
At some point you are fully annuitized, but are getting a reasonable income because the ins. co. tables are betting you'll drop dead sooner than later.

Any insight on the fatal flaws (or brilliance) in Pollans (and my) thinking?

GM

 

[REWahoo]

Any insight on the fatal flaws (or brilliance) in Pollans (and my) thinking?

GM

I think donheff summed it up pretty well here:

Hard to understand why he loves and lives by Die Broke since the post says he retired. I looked up Die Broke on Amazon and the review includes the following:

Die Broke is organized into two sections: the first lays out the principles for dying broke. Pollan bases his whole argument on these four maxims: quit today and work for yourself, not your company; pay cash, melt your credit cards, and don't even think about using your ATM card; don't retire, retirement is a relatively new concept created during the Depression, instead plan to work all your life, and; die broke, after all, you can't take it with you.
The second part looks at specific instances of how to put this philosophy into action, covering everything from "Automated Teller Machines and Cards" and "Umbrella Liability Insurance" to "Mortgage Loans" and "Real Estate Investment Trusts." The book draws on Pollan's experience as a financial and legal consultant and includes many examples from his own practice.
​

Not exactly a philosophy people on this board would embrace.

 

[Animorph]

Annuities do seem to be the safest way to die broke. We've got two kids so we're happy to leave whatever is left to them. If things go better than expected, I'm not sure I could spend it all anyway. I wouldn't mind a Ferrari now, but when I'm 80? Probably just blow it all on medical care anyway.

 

[Koolau]

I personally am still struggling with the concept that, if we live long enough, most of us will eventually see our nest egg decline toward zero. (If not, we will die with bushel baskets of money that, perhaps our kids will spend without much thought.) For so many years, I've watched the nest egg grow (and it still does - at least if measured over a couple of years.) But, at some point, I assume it will make that long slide toward zero. Firecalc says it's very unlikely that I'll live long enough to see zero. Still, watching the balance steadily decline (or maybe just the first real decline) seems almost unthinkable.

How do others deal with this? I would think this irrational desire to grow the nest egg forever would be the main reason to "invest" in annuities. At the point, all (or most) of your money is in annuities, you could forget about the nest egg. It's never going to go up or down. It's "gone". From then on, you simply manage within the budget your annuity payments give you. There is no more concern for what to invest in, when to buy/sell, how much to take, how much to leave, etc. It's simple and it's final.

I suppose this sounds silly. We all saved our nest eggs in anticipation of spending them. Perhaps seeing the value decline at some point (maybe in your 50s or maybe in your 70s) may be like watching the sand of "your" hourglass run out. I have not been able to put a finger on this irrational "fear", but it is a real one for me. Anyone else ever deal with this?

 

[REWahoo]

It's simple and it's final.

It isn't the simplicity part that bothers me, it's the finality.

In my case I'd rather run the risk of seeing a "long slide towards zero" than hand it over to one or more insurance companies. I'm not wired that way.

Six and a half years after hanging it up at age 58, I'm sitting at 90% of where I started - and we drew our expenses exclusively from that portfolio for the first four years. Yes, it dipped down to 65% or so at the depths of the "market unpleasantness", but we weathered that and now that we are both drawing SS, the demands on the portfolio have lessened considerably.

So far, so good...

 

[ERD50]

The book, by Stephen Pollan, contains all kinds of LBYM ideas like keeping your credit cards at home and using them only for emergencies (and car rentals) and actually pulling out cash for weekly expenses.

GM

I do not agree that giving up 2% rewards on almost everything I buy (and 3% at Amazon) is LBYM. Add in extra trips to the ATM and carrying cash that isn't working for you. No, it does not make sense. (edit/add: and a month of float).

I personally am still struggling with the concept that, if we live long enough, most of us will eventually see our nest egg decline toward zero.

I don't think so. Look at a typical FIRECALC run. The average (median would be better for this) portfolio balance is larger than the starting point (even after adjusting for inflation). A 3.5% WR and 35 years provides an average of over 2.5x.

But we can expect some wild rides along the way (historically), with our buying power dropping in half along the way, and often still recovering. IF you are not prepared for that, you might need a really, really big portfolio for a buffer, or be willing to take a chance with an annutiy (who knows what will happen to that industry in 30 years?).

-ERD50

 

[ejman]

I suppose this sounds silly. We all saved our nest eggs in anticipation of spending them. Perhaps seeing the value decline at some point (maybe in your 50s or maybe in your 70s) may be like watching the sand of "your" hourglass run out. I have not been able to put a finger on this irrational "fear", but it is a real one for me. Anyone else ever deal with this?

Not at all silly. I retired at 52 at the end of 2002 with no pension or other sources other than my nest egg income and although my nest egg now is about 60% higher than it was at retirement it was certainly not looking too good in 2009 when it dropped to almost the starting level it was at in 2002. I think that as along as you have a substantial amount of equity in your nest egg (currently 55% for me) its not really like an hour glass with a finite amount of sand at the top but more like a dynamic machine with many moving parts, some of them working with you, some against you, while you are pulling levers that may or may not be connected....

I guess what I'm trying to say is that to me it's not standing by the side watching the sands of time droping by as an expectator. One can certainly control outgo and most of us are LBYM types that can probably get by on vastly less if needed while retaining the essence of what makes life enjoyable. And participating in the investment world makes for a very frustrating but valuable connection to the world that is really enjoyable in retirement. And if it all goes to he.. I see quite a few of my neighbors here in rural SW Oregon doing just fine with SS and occasionally bagging a deer.

 

[JmfromTx]

Typically in the end, you'll die with a huge amount of unspent capital, correct?
GM

This would be my desired financial situation when I die. It would mean I never had to worry about money for the rest of my life.

 

[Koolau]

It isn't the simplicity part that bothers me, it's the finality.

In my case I'd rather run the risk of seeing a "long slide towards zero" than hand it over to one or more insurance companies. I'm not wired that way.

Six and a half years after hanging it up at age 58, I'm sitting at 90% of where I started - and we drew our expenses exclusively from that portfolio for the first four years. Yes, it dipped down to 65% or so at the depths of the "market unpleasantness", but we weathered that and now that we are both drawing SS, the demands on the portfolio have lessened considerably.

So far, so good...

Sounds like at least part of our "stories" are similar as I too retired at 58 and have just passed the 6 year mark. The nest egg grew nicely for 4 years. The only reason my total nest egg dropped briefly below it's eventual peak was that I put some nest-egg money into purchase of a new residence. I don't include residential value in my "net-worth-for-sake-of-RE-planning". i.e., I consider residential property as a place to live as opposed to "investable assets". (Full disclosure - I have had a DB pension which has covered from half to 1/3 of my ER expenses - so not bragging at all).

I mention all this ONLY to stress that my comfort level is in a continually rising (or at least not falling) net worth. I know the fall is inevitable unless I am willing to completely change my ER lifestyle (which, for certain, DW is NOT!) So how does one go, not just from saving to spending (I'm doing that) but from rising NW to falling NW without palpitations or similar stress? I envy you your ability to calmly watch your port fluctuate without too much heartburn. I've gladly forgone significant gains so that my port rarely drops due to results. In the long run (whatever that is), I understand that this conservative approach will pay me less total. So far, the peace of mind is worth it. But, in this climate where conservative investments don't appreciate much, I can foresee the NW going down. I'm almost certain I have "enough", but just the thought of seeing NW sliding gives me the willies. (Where's Ann Landers when you need her, huh?)

Anyone conquer this irrational fear? What was your secret?

 

[REWahoo]

I'm almost certain I have "enough", but just the thought of seeing NW sliding gives me the willies.

I'm not sure why I don't have a major issue with fluctuating and gradually declining net worth. I did suffer some major heartburn during the steep decline in 08/09 and had things not turned around I'm sure I'd be singing a different tune. I made some adjustments to my AA to help me sleep should the market perform an encore and began drawing SS to reduce withdrawals from the portfolio, and I keep repeating, 'so far, so good'.

I suppose I could also say I built our portfolio to support us in retirement and now it's time it did what it was designed to do. For me, that takes priority over seeing it continue to grow.

 

[haha]

But we can expect some wild rides along the way (historically), with our buying power dropping in half along the way, and often still recovering.-ERD50

That word "often" in the quote is a biggie.

Ha

 

[W2R]

I suppose I could also say I built our portfolio to support us in retirement and now it's time it did what it was designed to do. For me, that takes priority over seeing it continue to grow.

Exactly. I am a worrier by nature, but building my retirement portfolio is a task that was complete once I retired. Now, my job is to use common sense in spending and enjoy my retirement. There's no point in worrying and getting upset about my portfolio getting smaller. It's fun if/when I can manage to allow it to continue to grow, but that's not necessary.

As for annuities, I won't even think of one until I am in my 80's. At that point, I can re-assess. If I am in good health and interest rates are more favorable, I might consider one but if not, then that idea is out of the question for me.

 

[chinaco]

I think donheff summed it up pretty well here:

he made that response to my comment on that thread.

I did take a look at the book. Because of the way the book is laid out, it may not be one of those books that people would read front to back. It is a bunch of short topics (several hundred that are categorized)with a back grounder, the authors opinion and advice about how one might go about handling the situation. Some of it is LBYM oriented other are just common sense (assuming the person knows anything about the topic).

Anyway. That statement from Don, that he got from the AMZN description is misleading. I thought about posting an update on that old thread to clear that up... but didn't do it.

But.... since it seems that others took it to be fact... here goes.

That little writeup on AMZN (IMO) is very inaccurate.

The author has written many books (labeled Die Broke with other words following it in the title pertinent to the topic at hand). In that book that was cited in the other thread... That item (maybe a paragraph) is in the introduction of the book which is really a backgrounder about the author and his philosophy. The book has little to nothing to do with that type of life decision... continue to work.

But even that little statement has some sound reasoning behind it if you read it. Although it is not my choice.

Is the book a good book? I thought it was pretty good. Covered many topics (brief educational descriptions with some insight and advice). Of course some of the topics are very complex and I would not just rely on that information... some of the situation are business oriented and would require several professionals to help out that have expertise. But even in those situations, the snapshot of information seemed to be a good informational starting point... especially if one does not have broad personal and professional experience (i.e., been exposed to many situations in life... experience in some matters). But, if one has deep knowledge in some of those topics, the advice would seem to be very basic.

 

[obgyn65]

Why does the 4% SWR seem to be "so inefficient" to you ? It makes sense to many people planning to ER. You do not have to die with a huge amount of unspent capital following the 4% SWR approach.

This is attractive to me because the (approx) 4% withdrawal rate seems so inefficient to me. Typically in the end, you'll die with a huge amount of unspent capital, correct?

 

[ratto]

This would be my desired financial situation when I die. It would mean I never had to worry about money for the rest of my life.

It's better to die still with abundance left in nest egg. Frugality is a virtue. The unspent wealth can always be donated for scholarship, forest preservation, or helping refugees still suffering from hunger and lack of most basic medical care. Simple solution, no inheritance tax or lawsuit lawyers will get involved.

As for annuities, I won't even think of one until I am in my 80's. At that point, I can re-assess. If I am in good health and interest rates are more favorable, I might consider one but if not, then that idea is out of the question for me.

ditto

 

[Midpack]

Why does the 4% SWR seem to be "so inefficient" to you ? It makes sense to many people planning to ER. You do not have to die with a huge amount of unspent capital following the 4% SWR approach.

I am guessing the poster meant that with any SWR (not WR, but SWR) there's a much better than 50/50 chance that the owner will die leaving funds behind, could be considerable. The method trades safety for $ efficiency by design. Not everyone wants to leave a nest egg behind, history suggests SWR (and the prescribed withdrawal scheme without deviating) will result in money that could have been spent by the retiree much more often than not. I am not advocating annuities, but on paper it is the best way to die broke if that's the goal, and it should provide more income than blindly applying the 4% SWR withdrawal rules. In that sense, SWR is less efficient.

There are many ways to manage a nest egg, no silver bullet (like all of life), and adjustments will almost certainly be required to achieve our desired outcomes.

 

[Animorph]

One reason I don't mind leaving a large portfolio when I die is that it gives me many more options up until that point. While I joke that I'll use it to pay for those future rejuvination treatments that haven't been discovered yet, there is LTC, family emergencies, future technology, and I would assume plenty more things that might require a large expenditure very late in retirement.

I'd be less comfortable if I had mostly a monthly income stream and a much smaller portfolio. I'm trying to maintain a constant lifestyle, with pretty much a constant net worth after inflation. I'll make some adjustments along the way to make sure we don't get too far off track, barring unforeseen events.

Merriman had an interesting white paper comparing a 4% WR and a 5% WR (pure percentage of portfolio each year, not a fixed withdrawal adjusted for inflation). The 5% WR starts off higher and then starts dropping gradually with time (using historical data, though I don't think he goes back past about the 70's). The 4% starts off lower but gradually increases with time, passing the 5% WR payout amount in about 6 years IIRC. That's all average performance of course, our milage may vary.

 

[eytonxav]

One reason I don't mind leaving a large portfolio when I die is that it gives me many more options up until that point. While I joke that I'll use it to pay for those future rejuvination treatments that haven't been discovered yet, there is LTC, family emergencies, future technology, and I would assume plenty more things that might require a large expenditure very late in retirement.

I'd be less comfortable if I had mostly a monthly income stream and a much smaller portfolio. I'm trying to maintain a constant lifestyle, with pretty much a constant net worth after inflation. I'll make some adjustments along the way to make sure we don't get too far off track, barring unforeseen events.

This pretty much reflects my thinking in addition to wanting to leave my kids with some $$$ when DW and I are gone

 

[Golden Mean]

I do not agree that giving up 2% rewards on almost everything I buy (and 3% at Amazon) is LBYM. Add in extra trips to the ATM and carrying cash that isn't working for you. No, it does not make sense. (edit/add: and a month of float).

It's my understanding that people tend to spend more, on average, if they are using a credit card regularly. So if you end up spending 3% more because of the convenience of the credit card, you aren't really coming out ahead. My point is, if I pull out my weekly lunch money in cash at the start of the week, and by Friday I've spend almost all of it, I'm much less likely to have that $18 sushi lunch than if I can just whip out my credit (or debit) card.

This would be my desired financial situation when I die. It would mean I never had to worry about money for the rest of my life.

Me too, but if the cost of is 5,10, 15 years more work to build a larger capital pool that you won't ever substantially spend, it seems like a bad trade off to me.

 

[Golden Mean]

As for annuities, I won't even think of one until I am in my 80's. At that point, I can re-assess. If I am in good health and interest rates are more favorable, I might consider one but if not, then that idea is out of the question for me.

For sure, in your situation I wouldn't think annuities would make sense. You have built up a large enough nest egg to pull a SWR that will preserve your capital (probably) indefinitely.
But I think my point of view is, what if you could pull the plug earlier, which would require you to spend a portion of your capital. Eventually that capital is small enough that it doesn't generate sufficient income (so your depleting it faster too) and market swings increasingly affect your income from it. At (or before) that point you begin annuitizing, to begin creating a more stable income stream. Which only makes sense once the ins. tables begin paying reasonable rates (75 - 80+)?

Why does the 4% SWR seem to be "so inefficient" to you ? It makes sense to many people planning to ER. You do not have to die with a huge amount of unspent capital following the 4% SWR approach.

It's my understanding that the approx. 4% withdrawal rate gives you > 90% of capital survival over a very long (30 years?) period. Obviously nothing is guaranteed.

I'm going to try to put together some numbers as a sounding board and I'll post them. I hope.

 

[rescueme]

Which only makes sense once the ins. tables begin paying reasonable rates (75 - 80+)?

That's not a return "rate", but rather a higher payout/return of your own money, not tied to interest rates, as a major factor - since there are less years to pay out.

You can take a lower payout at an earlier date (somewhat like SS), or you can delay with a higher monthly income, by just returning your own money to you over a shorter period of remaining expected lifetime.

It may make sense to use a (SPIA) annuity at an earlier age (as I did, at age 59). It depends on your own (and DW/DH's) situation, and your own goals for overall retirement income. It's certainly not for everybody/every situation, but it is an option depending what your overall retirement income goals are.

For me, it was the opportunity to reduce future RMD's, maxing out my SS at age 70 (primarily for the benefit of DW, assuming I pass first), along with not having a pension when I retired.

As for the original question? I would rather die with money, than live without it (as any "die broke" scheme is a major risk, IMHO).

Additionally, money is for the living, not the dead. If you "pass with a stash", I'm pertty sure you won't worry about it the second after you have died ...

 

[youbet]

It's my understanding that people tend to spend more, on average, if they are using a credit card regularly. So if you end up spending 3% more because of the convenience of the credit card, you aren't really coming out ahead. My point is, if I pull out my weekly lunch money in cash at the start of the week, and by Friday I've spend almost all of it, I'm much less likely to have that $18 sushi lunch than if I can just whip out my credit (or debit) card.

That is true for you, Golden Mean, but apparently not for many posters here. Another example is that most Americans are not saving enough for retirement, but, again, that's not true for most posters here.

You might try thinking about what personality traits you have that make you use the crutch of a "currency" only spending regime to control yourself. Many of us use credit cards, ATM cards, etc., without any propensity to spend more because of it. I bet you could too if you worked to understand yourself and why you behave the way you do.

 

[Golden Mean]

he made that response to my comment on that thread.

That little writeup on AMZN (IMO) is very inaccurate.

The author has written many books (labeled Die Broke with other words following it in the title pertinent to the topic at hand). In that book that was cited in the other thread... That item (maybe a paragraph) is in the introduction of the book which is really a backgrounder about the author and his philosophy. The book has little to nothing to do with that type of life decision... continue to work.

But even that little statement has some sound reasoning behind it if you read it. Although it is not my choice.

I did forget about the "work forever" part, but you know I don't think Pollan's "work forever" is all that different from Joe and Vicki's Your Money or Your Life idea about how, once you're FI, you are free to volunteer or work part time in something you want to do.

Pollan's deal is actually "quit now, work forever". He talks at length about how you want to become "free agent" of sorts where you are always networking and always trying to get yourself into more money for the same (or less) time. I take that not as trying to "get over" on your employer, but making yourself more valuable, more concentrated.

He does have IMHO a lot of good advice, such you are much more likely to become disabled than die. So insure accordingly.

GM

 

[ERD50]

Originally Posted by ERD50
I do not agree that giving up 2% rewards on almost everything I buy (and 3% at Amazon) is LBYM. Add in extra trips to the ATM and carrying cash that isn't working for you. No, it does not make sense. (edit/add: and a month of float).

It's my understanding that people tend to spend more, on average, if they are using a credit card regularly. So if you end up spending 3% more because of the convenience of the credit card, you aren't really coming out ahead. My point is, if I pull out my weekly lunch money in cash at the start of the week, and by Friday I've spend almost all of it, I'm much less likely to have that $18 sushi lunch than if I can just whip out my credit (or debit) card.

But what 'most people do' is irrelevant. If you are going LBYM and aggressively saving for ER, you are not trying to emulate 'most people'. Ignore them.

That $18 sushi lunch is something you put a value on and is either within your budget or it isn't. The method of payment (cash or credit paid off in full when due) should not affect the decision. If it does, then in my mind, you have not really embraced LBYM.

Putting every purchase I can on a 2% rewards CC saves me hundreds of $ per year. DD college accepts the card for tuition/room/board - that's hundreds in rewards right there. I'm not going to give that up because of what some other people might do - no way!


ooops - I see I'm cross-posting with youbet (great minds think alike? )!


-ERD50

 

[Golden Mean]

As for the original question? I would rather die with money, than live wihout it (as any "die broke" scheme is a major risk, IMHO).

Additionally, money is for the living, not the dead. If you "pass with a stash", I'm pertty sure you won't worry about it after you have died ...

I would also rather die with money than live without, but that's not really what I'm proposing. It's more, would you rather die with money having worked some (many?) additional years, or have worked less years and have less capital to work with in retirement. This less capital would of course necessitate a plan somewhat different than a 4% SWR one.

GM