How Much Is A Future Year Worth?

[donheff]

I think of it like a 4% of portfolio value per year kind of rule, but as you age you can increase the percentage because you have fewer possible years to worry about. It is intended to maximize your spending, but in an arguably "safe" way. No way a 100 year old needs to take just 4% of their portfolio value per year if the intention is not to leave anything.

Here's the last post Dr. Pfau posted about this:

Retirement Researcher Blog: Retirement Planning Horizons and IRS Required Minimum Distributions (RMDs)

If that is all Pfau is saying then he is not using the RMD tables to counsel a larger spend now with a shorter spend later. He is just using them to calculate a realistic horizon based on starting age. I don't disagree with people who want to spend a bit more now with the expectation that they can cut back later but that is a different concept than using RMD tables.

 

[MasterBlaster]

I think of it like a 4% of portfolio value per year kind of rule, but as you age you can increase the percentage because you have fewer possible years to worry about. It is intended to maximize your spending, but in an arguably "safe" way. No way a 100 year old needs to take just 4% of their portfolio value per year if the intention is not to leave anything.

Here's the last post Dr. Pfau posted about this:

Retirement Researcher Blog: Retirement Planning Horizons and IRS Required Minimum Distributions (RMDs)

William Bernstein had similar ideas... Here's his chart(s) of safe withdrawal rates versus payout period:

 

[ocdokie]

I plan to defer Social Security to age 70 and treat it more or less like a hedge against outliving my money. If I live past 70 there is decent chance I AM going to run out of money, BUT will have $3,100 per year coming in from Social Security which I feel can provide a comfortable existence for somebody that age.

Did you mean you'll have $3,100 per month, instead of per year? If not, I'm curious what your definition of a "comfortable" existence is for a 70-year-old.

 

[haha]

Did you mean you'll have $3,100 per month, instead of per year? If not, I'm curious what your definition of a "comfortable" existence is for a 70-year-old.

A plot in a nice graveyard, with paid upkeep? Spring bouquets in spring, autumn colors in fall.

 

[Independent]

I don't have to actually spend the money on Corvettes to get value from having it. I value the security it gives me in knowing I can reasonably deal with what the unexpected future brings.

Burns' probabilities point to the rational decision of buying an SPIA. It doesn't cost much to insure yourself for those years in the longevity tale.

Retirement planning gurus are always baffled by the fact that so few people actually do that.

I think you've explained why.

 

[skyvue]

Did you mean you'll have $3,100 per month, instead of per year? If not, I'm curious what your definition of a "comfortable" existence is for a 70-year-old.

Sorry, yes, $3,100 per MONTH according to my current estimate. Thanks for the correction.

 

[bamsphd]

If that is all Pfau is saying then he is not using the RMD tables to counsel a larger spend now with a shorter spend later. He is just using them to calculate a realistic horizon based on starting age. I don't disagree with people who want to spend a bit more now with the expectation that they can cut back later but that is a different concept than using RMD tables.

The Scott Burn's article reminded me of a Pfau article because both were using life expectancy numbers to help calculate withdrawal rates. The biggest difference that I noticed was that the Pfau approach was based on recomputing withdrawal rates (probably annually) to account for the fact that for example an 80 year old is likely to live to an older age than a 60 year old, simply because they have already made it through 20 additional years. My own father was quite surprised when he noticed that his life expectancy expressed as age of death was greater than his children's life expectancy expressed as age of death, simply because he has lived longer already.

As I recall, the Pfau article was also trying to incorporate other factors such as current portfolio balance, not just life expectancy, to create an adaptive withdrawal plan.

 

[Purron]

Which for us (having an adult, disabled "child") is the case.

We certainly have much more (financially) than we will ever need, to live retirement as we wish. However, as responsible parents (which ours were not) we are driven in our financial decisions for not only our, but his future needs, which we calculate at a minimum 20+ years after we're gone since he suffers from a condition that will not reduce his expected lifespan.

There are many different situations. An article written for the "general public" dosen't necessarily apply.

Your child is very lucky to have parents like you. One of my oldest and dearest friends has had MS for over 30 years now. Her parents are gone but she is well provided for. I knew them well and they were not rich people. They just made sure she would be taken care of - and she is. I admire them, and you, so much.

 

[Katsmeow]

I found it an interesting article and, in fact, says in a better form what I was trying to say in this thread:

http://www.early-retirement.org/for...-90-to-85yo-75-to-95yo-61725.html#post1203408

Anyway, in the Burns article he says:

Financial planners are savers. That’s why they want us to be 95 percent confident we can finance a 30-year retirement even though, as I have noted a number of times, there is an 82 percent probability of being dead by then. Somehow, it doesn’t seem sensible to be 95 percent prepared for something you only have an 18 percent chance of experiencing. Honk if you feel the same way.

Which is really making the same point I was making. I do wish he had told us what to do with numbers and made a suggestion on how it should influence retirement spending.

 

[ERD50]

I found it an interesting article and, in fact, says in a better form what I was trying to say in this thread:

http://www.early-retirement.org/for...-90-to-85yo-75-to-95yo-61725.html#post1203408

Anyway, in the Burns article he says:

Financial planners are savers. That’s why they want us to be 95 percent confident we can finance a 30-year retirement even though, as I have noted a number of times, there is an 82 percent probability of being dead by then. Somehow, it doesn’t seem sensible to be 95 percent prepared for something you only have an 18 percent chance of experiencing. Honk if you feel the same way.

Which is really making the same point I was making. I do wish he had told us what to do with numbers and made a suggestion on how it should influence retirement spending.

I'm not honking, I don't feel the same way as Burns. While the math is correct, I think this is a case of misapplying the math to the situation (depends on your POV).

Let me give another example where the math says "YES, YES, YES!", but most of us would say "NO WAY!":

Let's play a game. If you want to play, you have to bet your entire portfolio. I give you a single die, you get one throw. If you throw a "4", you win (1:6 chance). The payout for a win is 18x your bet. Wanna play?

That is a 1:6 chance to win and an 18:1 payout. The math says that is a 3:1 expected return. That is a screaming good deal. But.... the downside of losing is more 'painful' in real life terms than the big win. I think most of us would not play, regardless of the math. It works if you get to throw the die 100 times, but in this game (and in life) we get one shot.

This is the way I view the 18% chance that DW or I may live to 95. I don't want the downside of not being prepared, and I will pass on 'optimizing' my portfolio and choose instead to protect myself. Leaving money on the table isn't always so bad, sometimes it is prudent.

You can even change that game so you win on anything but a "4", with a 3.6x payout. That still gives a 3:1 expected return, you have a 5:5 chance of winning, but you have a 1:6 chance of losing everything. Wanna play that game? One throw, bet the entire nut. Not me.

-ERD50

 

[NW-Bound]

Good example, ERD50, but it does not have to be that way.

Scott Burns did not say that we had to structure our spending so that our entire stash would be gone by 85. What I got from him is that we should front-load our expenses so that we spend more in earlier years, when we still have our health to "rent" whatever happiness our money might bring, and these are the years we most likely to live, statistically speaking. Indeed, many do not even make it to 85.

In my view, what he says does not at all contradict what people are actually doing, as Bernike found out from actual statistics. That is people cut back their spending as they age, obtensibly due to health reasons. I saw that in plenty of elderly relatives around me, my mother included.

Of course, if an early retiree's budget does not have much room for leisure then it is a different situation.

 

[ERD50]

Good example, ERD50, but it does not have to be that way.

Scott Burns did not say that we had to structure our spending so that our entire stash would be gone by 85.

Understood, I made it pretty extreme just to illustrate the point.

And while on average, people may spend less as they age, some may spend more as they age - they may need to hire help or have other health related expenses. So again, do we spend more earlier because of the averages, or do we move more towards saving some in case we need it in our old age. What are the consequences if we are on the 10% area of the distribution curve? A 1:10 chance isn't something I feel comfortable to hand-wave away. By the time we find out which camp we are in, it's too late if you spent it already.

We can't cover every possibility of course, but an 18% chance of one spouse living past 95YO just isn't something that screams "That will never happen!" to me. That's an almost 1:5 chance that it will happen. People w/o mortgages carry fire insurance on their house, and those odds are much lower.

 

[rescueme]

And while on average, people may spend less as they age, some may spend more as they age - they may need to hire help or have other health related expenses. So again, do we spend more earlier because of the averages, or do we move more towards saving some in case we need it in our old age. What are the consequences if we are on the 10% area of the distribution curve? A 1:10 chance isn't something I feel comfortable to hand-wave away. By the time we find out which camp we are in, it's too late if you spent it already.

We can't cover every possibility of course, but an 18% chance of one spouse living past 95YO just isn't something that screams "That will never happen!" to me. That's an almost 1:5 chance that it will happen. People w/o mortgages carry fire insurance on their house, and those odds are much lower.

I agree with you on (the bold/underlined) points. Just being in retirement 5 years has shown me that I spend more today than at the time of retirement, and I expect that trend to continue. Not that I/DW change our lifestyle, but rather that we will have to pay others to maintain that lifestyle - be it a home health professional/companion or installing an elevator to help us between floors (we have no current intention of moving).

The other point is that when I read the obits (to see if I am listed ), I see more and more of those folks that have met/surpassed the century mark (mostly women, but a few men) in our area of the country.

It all comes down to (my) old saying of "I would rather die with money, than live without it"...

 

[Animorph]

Understood, I made it pretty extreme just to illustrate the point.

And while on average, people may spend less as they age, some may spend more as they age - they may need to hire help or have other health related expenses. So again, do we spend more earlier because of the averages, or do we move more towards saving some in case we need it in our old age. What are the consequences if we are on the 10% area of the distribution curve? A 1:10 chance isn't something I feel comfortable to hand-wave away. By the time we find out which camp we are in, it's too late if you spent it already.

We can't cover every possibility of course, but an 18% chance of one spouse living past 95YO just isn't something that screams "That will never happen!" to me. That's an almost 1:5 chance that it will happen. People w/o mortgages carry fire insurance on their house, and those odds are much lower.

I agree with all of that. But, if you have a 20% chance of living to 95 and a 10% chance of being broke at 95, then you have a 2% chance of being both 95 and broke. So the SWR failure rates are overstated to that extent. 90% SWR success is actually a 98% chance that you will not outlive your money. One of the reasons I'd happy to use an WR that is not 100% successful. Of course the other reason is that I will adjust my spending. Then it becomes a 2% chance that I'll have to seriously reduce my spending. Not that it means a whole lot to those looking for 100% success.

 

[NW-Bound]

The main reason for my pessimism regarding expenses in the really old age is that my wife and I have been living close to our parents who are all living in town, and have spent time with them to take care of them to our abilities. And it is disheartening to imagine ourselves in the same state.

In his early 90s, my FIL could no longer eat solid food. Everything had to pureed. Slowly, he has developed problems with just swallowing. He chokes often, and drinking requires some efforts. He slowly lost his mobility 5 years ago. When he was in his 80s, everyone who saw him commented on how sprightly he was. Filet mignon or hamburger? No difference now, after it got all pureed. How long will it be until they put in a feeding tube? Then, it will be even worse, as there's no more taste as it all bypasses his tongue and palate.

Hence, I chuckle when reading of people planning to be globe trotters in their 80s and 90s. I have no doubt that some super elders could do that, but why do I keep seeing myself more like the residents of these nursing homes, many of whom are much younger than my FIL? At this point, he could not care less about most things. If he were rich and had a vamp nurse (like a millionaire who left his fortune to that nurse and caused a legal battle between his heirs and the nurse), would that make that much of a difference?

 

[Katsmeow]

I agree with all of that. But, if you have a 20% chance of living to 95 and a 10% chance of being broke at 95, then you have a 2% chance of being both 95 and broke. So the SWR failure rates are overstated to that extent. 90% SWR success is actually a 98% chance that you will not outlive your money. One of the reasons I'd happy to use an WR that is not 100% successful. Of course the other reason is that I will adjust my spending. Then it becomes a 2% chance that I'll have to seriously reduce my spending. Not that it means a whole lot to those looking for 100% success.

This is the point. It not that people should go fritter it away so they are broke at 85. I doubt many here recommend that. It is more that recognizing that a plan that has a 90% success rate to 95 when you are 65 has a much greater success rate that you won't run out of money before you get to 95.

 

[ERD50]

I agree with all of that. But, if you have a 20% chance of living to 95 and a 10% chance of being broke at 95, then you have a 2% chance of being both 95 and broke. So the SWR failure rates are overstated to that extent. 90% SWR success is actually a 98% chance that you will not outlive your money. One of the reasons I'd happy to use an WR that is not 100% successful. Of course the other reason is that I will adjust my spending. Then it becomes a 2% chance that I'll have to seriously reduce my spending. Not that it means a whole lot to those looking for 100% success.

I agree that it hits a point of diminishing returns, but I still think that the math fails us, to a degree.

I guess what I'm saying is, if there is a roughly 1:5 chance one of us will live to 95, then I want to plan for that, there is just too high a possibility that it could happen. And then I'll need that money, it makes no difference what happened to the other 4 hypothetical people. And a 95YO female has a 50% chance of living another 3 years.


I guess it comes down to gut feel for me. A 1:5 chance just seems like such a real possibility, that I can't discount it at all. Even 1:10, I'm still thinking, ' but what if I'm that 1?". Getting to 1:20, I guess that's starting to get 'out there' on the odds for me (again, just gut feel). And there is a 5% chance of one of a 65YO couple living to 100. And a 43% chance that a 100 year old female will need money for another 3 years!

Another way to look at it (I may have pulled this one out before) - If you're going on a car trip, and your mechanic says he found a possible issue with the transmission, but he's 95% sure you can make your trip w/o a problem, you wouldn't decide to budget for less gas based on the 5% odds you might not make it, would you? They are two different things.

The main reason for my pessimism regarding expenses in the really old age is that my wife and I have been living close to our parents who are all living in town, and have spent time with them to take care of them to our abilities. And it is disheartening to imagine ourselves in the same state. ...

I'm sorry to hear your father's having those problems. But I also know some elders whose later years have been enhanced because they had the money to spend on better care, or have their home remodeled to accommodate their needs, or maybe they can afford to fly relatives in for a visit, etc. I'd hope to avoid saddling my kids with expenses that I couldn't handle, if it were to come to that.

Obviously, there is no clear or right/wrong answer on this. I guess I even start with feeling like a 100% FIRECALC profile is still risky - things could be worse than past history, my personal spending could go up above inflation - who knows. If preparing a bit better for these other possibilities means shaving a few tenths of a percent of the WR, that's a good balance for me. YMMV.

-ERD50