Minimum Dignity Floor

[Hopeful]

I have been listening to “The Retirement and IRA Show” podcast over the last year, and have really enjoyed it. There is a lot of banter and they can beat a topic to death, but I think the give a lot of good advice. They have a financial planing business, but refuse to charge an AUM fee. Instead they apparently charge a one time fee for a plan, or a set fee if they are managing for you.

One of their main philosophies is a “Minimum Dignity Floor”. They feel that your basic needs (housing, insurance, food, transportation etc ) in retirement should be covered, preferably by an income stream. The rest of the money is considered fun money to spend on discretionary expenses. Their idea is that many people want to spend more in the early “go-go” years of retirement, and this allows them to do that without the constraints of a fixed annual budget other than their minimum dignity floor. I guess this appeals to me in that while I have no desire to run out of money, I also fear missing out in the early years only to have more money that I can spend in my late years.

I submitted a question to them, which they read on the air this week, about early retirement. I was kind of concerned they would recommend an annuity, but instead I was glad to hear them say they would definitely not recommend an annuity for a young early retiree.

Wondering if anyone else listens to their show? While I oversimplified it, I wonder if anyone else has any thoughts on the "minimum dignity floor” approach to retirement planning?

 

[gauss]

I sleep better at night believing that our 'secure' income streams will just about cover our recurring living expenses. So mark me in the column of saying 'yea' to a “Minimum Dignity Floor".

Note when I first read the title to the thread, I thought the discussion would be around the universal basic income movement political topic. I am glad to see the actual topic instead.

-gauss

 

[mystang52]

I never listened to that show, but it seems to me the "minimum dignity floor" is another variation of LBYM, in a sense. One shouldn't spend money on luxury or fun things unless they are able to pay for the basic necessities, first. Or, reverse that and say allocate enough to pay for basic necessities, and anything above that meets the definition of "extra."
One can debate how much "extra" one can spend, lest some economic downturn take place, but the general concept makes sense.I'm not a fan of annuities, but I believe the paying-foe-necessities is the main selling point of annuities.

 

[Jerry1]

The minimum dignity floor is hard to obtain with an annuity or similar stream of money due to inflation. Even one with a COLA is not likely to keep up with real inflation. I handled the dignity issues by dividing my budget into two parts, essentials and discretionary. My essentials budget is about half my total budget so I’m comfortable that I should be able to maintain that level even with inflation. I also have a large amount of fixed income. I took the pension instead of the lump sum from work and me and DW will have pretty high levels of SS. When we’re both on SS, our withdrawal rate should be less than 2% for our entire budget so it would cover essentials. Which to me means that my portfolio needs to cover inflation. No plan is perfect, but for early retirement especially, a conservative approach is more comforting give the length of time you need to cover. Inflation is real and so is late life medical cost. Both can steal your dignity. I haven’t listened to that show, but I like the focus and bluntness of the term (dignity) that they’re using.

 

[Aerides]

Sounds like a bucket approach to me. Keep XYZ money over here so it always generates, say, $30k, to keep the lights on, etc. No matter what the market does, up or down.

It can make sense for someone who wants that "sleep at night" approach - much like paying off a mortgage early even if the financials don't 100% show that's the best way for a pure bottom line.

 

[jollystomper]

I worked beyond my Megacorp retirement eligibility to let my pension grow until it would more than cover our basic minimum expenses. Though it is not a COLA pension, by the time inflation wears it down to below these requirements SS will have kicked in to more than cover it.

 

[Teacher Terry]

I haven’t heard the show but it makes sense to me. Both our pensions have Cola’s. My husband is not old enough to claim SS. Even though it’s subject to WEP it will be nice to have.

 

[Hopeful]

Three of the main points they make are:

As we age, our ability to manage complex math and finance tends to decrease. Having the basic needs met helps to alleviate some of those concerns.

Also they make the point that transitioning to spending is very difficult for most people. It is the opposite of what they have done their whole lives. Having basic needs mets allows them to feel more comfortable in their discretionary spending. The example the use is a one time world cruise. People are more comfortable if they visualize coming out of a lifetime discretionary budget vs an annual discretionary budget.

They break the discretionary buckets into 3 smaller buckets of the go-go years, slow-go years, and no-go years.

I agree it is very much a bucket strategy. Some probably unknowingly do something similar without a formalized bucket plan.

 

[REWahoo]

First though that came to mind when reading the title: ceramic tile or wood?

 

[rodi]

First though that came to mind when reading the title: ceramic tile or wood?

LOL - that was my thought.... along with - is vinyl undignified, even though it's easy to mop up "accidents" as we get older.....

After reading the OP of this thread... I think it fits well into the model that many of us have here... Needs vs desires... Needs have to be covered first, no matter what.

I have a non-cola'd micro pension, hubby has no pension. We'll have decent SS, and we have rental income.... But no plans to buy annuities... As long as we keep our withdrawal rate reasonable, we're ok. As soon as the kids are fully launched (ages 17 and 19) we'll be splurging, while still staying within the 3% withdrawal rate.... Our dignity should be covered.

My MIL spent very little prior to going into memory care. She has a small federal pension, small SS, and RMDs... Even with only $32k of income when FIL was still alive, she managed to save every year. (Paid off house made a difference.) She's finally drawing down the savings now that she's in memory care...Didn't start drawing down till age 88. So the 'dignity floor' can be quite low.

 

[GravitySucks]

I have not heard of this show but sounds like good advice.
SS at 70 and a paid off house will cover my essential spending plus a little fun. This with a few hundred thousand at 70 should be enough to maintain a certain level of ease.
But let's see if I can actually start spending down the stash.

 

[RobbieB]

I keep trying to spend down the stash, but after 5 years of retirement I have more than I started with.

 

[Hopeful]

I keep trying to spend down the stash, but after 5 years of retirement I have more than I started with.

I hear you. Since October we bought a piece of property and a new Lexus. Our portfolio has already recovered to the same level before these purchases in just a couple months. But this can't last forever.

 

[Independent]

One of their main philosophies is a “Minimum Dignity Floor”. They feel that your basic needs (housing, insurance, food, transportation etc ) in retirement should be covered, preferably by an income stream. The rest of the money is considered fun money to spend on discretionary expenses. Their idea is that many people want to spend more in the early “go-go” years of retirement, and this allows them to do that without the constraints of a fixed annual budget other than their minimum dignity floor. I guess this appeals to me in that while I have no desire to run out of money, I also fear missing out in the early years only to have more money that I can spend in my late years.

My boss used the words "basic" and "target" spending. Back when I retired, it was possible to buy a decently priced CPI indexed SPIA. For some people, that could be part of the "basic" package.

I'd say that one part of the "Dignity Floor" is the ability to fund a long stay in a private pay nursing home that you consider "a decent place to live". That can complicate planning.

 

[NW-Bound]

First though that came to mind when reading the title: ceramic tile or wood?

Is there any honor left in vinyl or linoleum floors?

I thought that as long as one has a roof over his head (a freeway overpass or a refrigerator carton does not count), one still has a modicum of dignity left.

 

[ExFlyBoy5]

I keep trying to spend down the stash, but after 5 years of retirement I have more than I started with.

Funny how this works, eh? When I first retired, I expected my mil pension as well as dividend returns would cover all of our expenses. As it turns out, everything is covered by the pension while our investments continue to grow at an exceptional rate. Of course, I think that there will be some sort of correction, but that's OK...we are still living off the pension alone. The only fly in my ointment is convincing the DW to *finally* retire...that is a battle that is hard to win!

 

[NW-Bound]

I keep trying to spend down the stash, but after 5 years of retirement I have more than I started with.

Maybe a market crash will come along to help out?

 

[ncbill]

There's no need for an income stream to cover required expenses as long as your withdrawal rate is sustainable.

That kind of thinking leads to emotionally-driven behavior like cash buckets or chasing dividends, which result in underperformance vs. a total return strategy.

Using MaxiFi (the free Flexible Retirement Planner gives similar results) we could spend, if retired today, twice as much on discretionary wants as on required needs given our portfolio's value and our required, non-discretionary monthly expenses.

The latter are pretty low, since as I've said before we live a LCOL lifestyle in a MCOL area.

 

[Hopeful]

There's no need for an income stream to cover required expenses as long as your withdrawal rate is sustainable.

That kind of thinking leads to emotionally-driven behavior like cash buckets or chasing dividends, which result in underperformance vs. a total return strategy.

Using MaxiFi (the free Flexible Retirement Planner gives similar results) we could spend, if retired today, twice as much on discretionary wants as on required needs given our portfolio's value and our required, non-discretionary monthly expenses.

The latter are pretty low, since as I've said before we live a LCOL lifestyle in a MCOL area.

I tend to agree with you. But one of their arguments is that as we age we may not cognitively be able to manage all of the complexities of managing portfolios and sustainable withdrawal rates. A person may not recognize the cognitive decline, and at that point it would be too late. He gives the example that his father has admitted to him that he no longer understands fractions.

 

[gauss]

My boss used the words "basic" and "target" spending. Back when I retired, it was possible to buy a decently priced CPI indexed SPIA. For some people, that could be part of the "basic" package.

I'd say that one part of the "Dignity Floor" is the ability to fund a long stay in a private pay nursing home that you consider "a decent place to live". That can complicate planning.

Statistically, don't very few Americans spend long stays in Nursing Homes (ie. skilled nursing). Assisted Living yes, but full skilled nursing, for a multi-year stay, I think is much less prevalent when I looked into this.

-gauss

 

[karen1972]

I guess I can see people using this who want to early retire too, the number to get to a "minimum" is way easier than to get to a desired level of spending. Then it is just a matter of risk/reward for most people. Do you justify OMY to get to that next level of guaranteed luxury or leave it to luck or the chance of having to find some side income at some point. aka the people who pull the plug at sub 90% on the Firecalc.


I was one of those, just about 5 years ago now and with the good stock market, we would be at 100% (if someone.. ok me.. hadnt seen a shiny new home with a massive kitchen I couldn't say no to)..which now fits in our "minimum" if I rerun Firecalc and once again not guaranteed the extras...but oh well I can do without fancy vacations if need be.

 

[candrew]

I thought that as long as one has a roof over his head (a freeway overpass or a refrigerator carton does not count), one still has a modicum of dignity left.

A freeway overpass or refrigerator carton? Luxury!

 

[NW-Bound]

I guess I can see people using this who want to early retire too, the number to get to a "minimum" is way easier than to get to a desired level of spending. Then it is just a matter of risk/reward for most people. Do you justify OMY to get to that next level of guaranteed luxury or leave it to luck or the chance of having to find some side income at some point. aka the people who pull the plug at sub 90% on the Firecalc.


I was one of those, just about 5 years ago now and with the good stock market, we would be at 100% (if someone.. ok me.. hadnt seen a shiny new home with a massive kitchen I couldn't say no to)..which now fits in our "minimum" if I rerun Firecalc and once again not guaranteed the extras...but oh well I can do without fancy vacations if need be.

If you don't mind working for a few more years to get that upgraded home with the "massive kitchen", then your job is not so terrible that you have to quit right then and there. There's really nothing wrong with working if you still enjoy the rewards that it brings. No one really likes her work so much that she would work for free, right?

A freeway overpass or refrigerator carton? Luxury!

The homeless usually find a piece of discarded carpet to use as the floor. It provides a bit of insulation from the cold ground, and some cushioning from the hard surface.

 

[karen1972]

If you don't mind working for a few more years to get that upgraded home with the "massive kitchen", then your job is not so terrible that you have to quit right then and there. There's really nothing wrong with working if you still enjoy the rewards that it brings. No one really likes her work so much that she would work for free, right?

Oh I'm not working, my honey is. Given our net worth is 95% mine and we are not married, he volunteered to consult 3 years to pay the delta on the house. I can afford the "massive kitchen" but that and a boy toy...so the boy toy sucked it up and became a working man. Hes typically starving artist who was happy putzing and now he has a goal so he is willing to do corporate life for a few years for us.

 

[Chuckanut]

Oh I'm not working, my honey is. Given our net worth is 95% mine and we are not married, he volunteered to consult 3 years to pay the delta on the house. I can afford the "massive kitchen" but that and a boy toy...so the boy toy sucked it up and became a working man. Hes typically starving artist who was happy putzing and now he has a goal so he is willing to do corporate life for a few years for us.

You sound like the gal an acquaintance of mine hooked up with. She is a widow who has a big paid off house, a chunk of her deceased husband’s pension, her SS, and all the savings from 30 years of marriage. He has his SS check, good looks (a real silver fox), and is a great conversationalist.