How long will money last? Money Mag

[earlyout]

Anyone see the latest issue of Money Magazine? Article says you can withdraw $24,000 a year from a portfolio of $225,000. This works out to a little over 10%. Something is amiss when a "financial" magazine tells you to withdraw 10% and you will be OK, on "average".
Could be doomsday advice, not only that but this was advice for his relative.

Any thoughts?

Earlyout

 

[Mr._johngalt]

Yes, I have some advice. Ignore the experts and use your own plan. Everyone has an opinion, but it's your life and your money. I get a lot of input from many
sources, then I plot my own course, ignoring much of
the "conventional wisdom". So far, so good . One
thing that I do habitually is consider the "worst case"
scenario. I believe everyone should.

 

[WRBT]

I imagine if one had taken that advice in March 2000 they'd have beads of sweat forming as their nest egg approached the 120k barrier.

Time to move to Myanmar.

 

[RedOscar]

To sum it all up;

Garbage In - Garbage Out !

 

[JWR1945]

It is exceedingly bad advice. It might come close to working if your portfolio had zero volatility and if there were no such thing as inflation.

The stock market does have volatility. What wipes you out is having to sell too many shares of stock when prices are low. There is also the matter of inflation. The buying power of that $24K if likely to decrease a little bit each and every year.

A reasonable number is of the order of 4% with annual increases to match inflation. Use dory36's FIREcalc and articles at www.retireearlyhomepage.com as a starting point. Always continue to learn. Consider having more diversification than the S&P 500 alone. Doing so will mitigate the damage if future S&P 500 stock returns (and/or inflation rates) are unfavorable. Remember, the stock market is still at historically high valuation levels.

In addition, academic research suggests that adding asset classes might even improve your performance overall. There are many qualifiers. The most important is that you select asset classes with similar growth characteristics and minimal correlation.

The Retire Early Home Page website identifies and rates several books related to investing and retirement.

Have fun.

John R.

 

[Ted]

While publications such as Money Magazine might superficially appear to be sources of advice that is both "expert" and "unbiased," the sad fact is that they are heavily biased by the need to continually come up with unconventional and allegedly "brilliant" advice in order to maximize sales of their magazine (together with the associated advertising revenue).  

Consistent with financial theory, such advice tends to contain inherently high risks that are typically not fully disclosed.  Claiming some "scheme" that allows a retiree to spend 10% of their assets per year is a good example of a bad example.

I have found that the Wall Street Journal consistently provides sound financial advice -- particularly Jonathan Clements and Jeff Opdyke (see note) -- that is based on asset allocation rather than "stock picking" or "market timing."  Another reliable source of advice is Jane Bryant Quinn, who periodically has articles in Newsweek.

And then, of course, there's me here .  People should, of course, be highly skeptical of advice they get in forums, particularly if it is "pitching" one particular investment in which the poster probably has a personal interest.  My only interest, though, is that I like to discuss economics and finance.

Note: For some reason, this software won't allow a Y followed by a K to spell O p d y k e!

 

[Mr._johngalt]

I agree that the WSJ and Jane Bryant Quinn are quite
good sources of financial advice. I enjoy 'Money'
and 'Kiplinger' also, but as you point out some of these
folks have to appear to come up with new innovative
ideas every month. Can't be done. Very soon I will be
awash in cash. This is a problem. Why, you ask?
Well, with my ultra-conservative approach to investing
it is quite difficult to get a safe return above 2-3 %.
Happily I called my broker and after I got him over his
negativity (he even suggested I should call a local bank
as they could better serve me), he came up with a
vehicle which I like very much. Very safe with a locked
in 6% for 5 years. I can live with that.

 

[omni]

John Galt:

In your recent post, you mention an investment vehicle you have that is

Very safe with a locked
in 6% for 5 years.

I'd love to learn more about this...would you please provide more details?

Thanks,

omni

 

[LA_Newsboy]

Howdy all. Not sure if this is the right spot for this query, but I have a question about the "ending balance" calculation done by FIRECalc. Perhaps one of you veterans can enlighten me:

How accurate and reliable is the final balance number?

And if that figure is much larger than you want to leave as an estate is there a safe, sensible way to avoid that, short of withdrawing it all when you hit 95?

Thanks very much for any elucidation.

 

[dory36]

I have a question about the "ending balance" calculation done by FIRECalc. Perhaps one of you veterans can enlighten me:

How accurate and reliable is the final balance number?

Let me explain.

When you run FIRECalc, we look at a hundred or so different (but overlapping) historical periods of 30 years (or whatever retirement period you indicated).

The 100% "safe withdrawal rate" is that withdrawal rate that would have always left something -- even if only $1 -- in the portfolio for each of those historical periods.

Of course, some of those periods would have produced fantastic returns. Less than 100% safe means some periods resulted in a loss before the end.

For example, here are the results of a 91% safe rate.

​

As you can see, then ending balances are all over the place. The average ending balance is just the average of all those ending balances.

Now, is it accurate and reliable? Well, yeah, BUT...it's accurate regarding what already happened, but only useful as a guide as far as what will happen next.

FIRECalc's results are meant to allow you to say "taking x% out of my portfolio per year for y years would have been OK during the worst that we've ever seen in this country, so I can feel somewhat comfortable that it will be OK for the next few years as well."

And if that figure is much larger than you want to leave as an estate is there a safe, sensible way to avoid that, short of withdrawing it all when you hit 95?

Actually, yes. The shorter the withdrawal period, the less risk that volatility will clobber your portfolio, and thus the more you can withdraw as a percentage.

Say you are planning on a 40 year retirement term. To minimize the ending balance, you withdraw a safe rate for a 40 year period for a few years (4.02% using the sample entries). At a future point, say after 5 years, you switch your withdrawal to the safe rate for a 35 year period. You keep doing this, and your last 5 years withdrawals will be at 13.36%. By gradually increasing your withdrawals as you put volatility risk behind you, you will be pushing that average ending balance down.

Dory36

 

[Ted]

What Dory36 says is correct. However, as a matter of maximizing one's enjoyment of retirement, people generally want to spend more (in real dollars) during their early retirement years, and progressively less as they age. The possibility that a person might not live long enough to enjoy their wealth is a particularly compelling reason to not scrimp too much in early retirement.

One way to resolve this dilemma (which can not be analyzed by FIRECalc) is to purchase an annuity. This will guarantee to pay a specified number of dollars per year to you for the rest of your life. The risks are (1) that inflation will excessively erode the purchasing power of these payments and (2) that the insurance company will become bankrupt and default on the payments. (The latter risk may be reduced by owning multiple annuities from different companies, in addition to the "annuity" called Social Security that is more or less guaranteed by the U.S. government.)

Another way to reduce the uncertainty of your future net worth is to invest a substantial part (or all) of your assets in TIPs, which will provide a very predictable and secure return that is adjusted for inflation. You can check out the implications of this strategy using FIRECalc, since it has a provision for TIPs. Assuming that the "annual withdrawal amount" that you input is adjusted for inflation (which is the default option), there should be very little "scatter" in the results of the FIRECalc analysis. Of course, it still won't tell you how long you will live, which is the most important input variable :-/ .

 

[LA_Newsboy]

Thanks very much, gentlemen. That helps a great deal.

 

[amt]

I imagine if one had taken that advice in March 2000 they'd have beads of sweat forming as their nest egg approached the 120k barrier.

Time to move to Myanmar.

Just wondering....... Why Myanmar? I was born in Myanmar and I'd like to know what you are implying.

 

[BigMoneyJim]

Just wondering....... Why Myanmar? I was born in Myanmar and I'd like to know what you are implying.

It looks like WRBT hasn't been around (or posting, at least) since April, so I don't know if you'll get a comment from him.

I'm not at all familiar with Myanmar--other than it used to be called Burma--but I assumed he meant that a battered retirement savings would last longer in Myanmar than in the U.S. due to cost of living differences and the exchange rate. Of course I could be wrong on all counts.

 

[amt]

I'm not at all familiar with Myanmar--other than it used to be called Burma--but I assumed he meant that a battered retirement savings would last longer in Myanmar than in the U.S. due to cost of living differences and the exchange rate. Of course I could be wrong on all counts.

Thanks for your comment. It's true that cost of living will be cheaper in Myanmar, much cheaper (about a half to a fourth of what would be in Thailand). I just wondered if he had lived there and if so what he thought of it from a Westerner's perspective. In my opinion, the standard of living there would be quite less than here. Power outages are routine.... water for daily use can be a problem sometimes. Internet is highly scrutinized, ie, if you can get one. and on and on. I think one may be better off in Thailand (if language and culture are equally limiting factors).

 

[Ed_B]

Advising someone to spend over 10% of their nest egg per year borders on criminal irresponsibility, IMHO. On the face of it, the stock market has returned around 10.5% for the past 70 or so years. IF it should continue to do that, and there is no guarantee that it will, then the maximum amount that one should take from a nest egg would be 10.5% minus 3-3.5% inflation. This amounts to 7-7.5% and I emphasize that this is a maximum withdrawal rate... unless one does not mind returning to the work force at age 75 or whenever the money runs out. Personally, I would mind that a great deal.

I would feel comfortable with a withdrawal rate of around 4.5-5% but then that may be just me. My portfolio is very well diversified and is returning a bit over 8%. When times get better, I'm sure that it will increase in its growth rate and I can reevaluate the situation then. In the meantime, this rate of growth, withdrawal, and inflation means that my portfolio would continue to grow slightly under this scenario.

12 months to ER... and counting...


Ed_B

 

[earlyout]

Congratulations on your er. i am 6 months into er.

earlyout

 

[Ron Byrd]

LA_Newsboy said "...if that figure is much larger than you want to leave as an estate is there a safe, sensible way to avoid that, short of withdrawing it all when you hit 95?"
dory36 said one strategy is to raise withdrawal rates every 5 years, for example, as your time horizon shrinks.
There is another approach that can be used with or without the dory36 approach: Each year if your portfolio reaches a new high reset your withdrawal rate to that new value. For example, if you started with 4% of 1,000,000, you have $40,000/year (times inflation adjmt). If, in a few years you find your portfolio is worth 1,500,000 then recalculate that 4% using the $1,500,000. So now your withdrawal rate is $60,000, inflation adj'd. Using this strategy plus dory36 will automatically lower the likely terminal amount. And, if during your 30-year time horizon the market doesn't do too well the 4% (or whatever) rate and its statistical results still give you a very high likelihood of success.

 

[unclemick]

Back in 1993 when I ER'd 6-8% was considered a safe rate. My INTJ brain has serious heartburn with retirement calculators - it's like handing me a skill saw and expecting - instant master carpenter.
Understanding a given model and how it relates to your ER is not as it looks. It had better come out with a number between the SEC yield of the portfolio and 8% for 30 year horizions or the alarm bells go off.

 

[unclemick]

I mean't - not as easy as it looks-.

 

[earlyout]

Law of Averages and the Effect of Variation,

Thought for the day,

From 1969 to 1998 (30 years) average return was 11.71% for this portfolio: (asset allocated: 60% S&P, 30% US bonds, and 10% T-bills).

If someone had withdrawn 8% of there portfolio each year, by the end of 1981 (13 years) they would have been broke. This despite over the 30 year period the average return on their portfolio would have been 11.7%.

Reminds me of the 6 ft gentleman who drowned crossing a river with an average depth of 4 feet.

Helps explain the importance and difference between average return and variation of investment. Also, on % withdrawal

Have a good day

earlyout

 

[earlyout]

Follow-up to average vs variation

Firecalc shows that the portfolio has a 73% chance of success, starting in 1968 and therefore a 37% failure rate (broke). Firecal shows to get to 95% success would need to reduce withdrawal to approx 4%.

earlyout