PBS Frontline - Can You Afford to Retire?

[samclem]

Justin,
I haven't run the numbers, and it looks like you have, so take this for what it is worth (i.e. maybe nothing). IMO, (disregarding the variable portion of your withdrawal strategy) the fixed portion (starting at 40K and adjusting for inflation, regardless of the performance of your portfolio) puts you at risk of getting into a bad situation. You could find yourself in the situation youbet described--taking a big % of your portfolio's value because it hasn't kept up with inflation and/or the rate of your previous withdrawals. Are you realy going to take out 40K PLUS the variable portion if your portfolio has declines to $500K? If you think you will, then I think you may need to really reconsider this. If you can see that you'd never do that, then it would seem best to start with a plan that is more tightly pegged to your portfolio's changing value from the start (allowing you to make spending decisions more gradually, rather than getting into a hole). For me, that would be something close to ESRBob's "4%variable with a 95% floor" approach.

But:, re-read the first line above.

 

[youbet]

Maybe it helps that I was working class in my 20s (with kids yet), so I know how to handle it. Also my grandparents lived in a tiny public-housing apartment, and they were happy. Knowledge is power!

It's all in the semantics astromeria.  Many of the items you mention as still remaining after eliminating "discretionary" spending, would be gone with my definition. That's just a personal thing.

In any case, it's nice you have relatives with vacation homes at your disposal, etc.  We don't.  We'll be paying our own way for everything we do. We also postponed some travel and other niceities earlier in life for various reasons and made some other sacrifices.  Therefore we have chosen to plan retirement finances so that our withdrawal rate doesn't need to be reduced even in hard times and allows us to do some discretionary spending, especially for travel.

My advise, for what it's worth, is simply that younger folks consider the concept that when you actually reach retirement age and are about to begin, scratching out expense items like travel or entertainment may not seem as appealing as it did when you were younger.  If it isn't too odeous to increase the nest egg to a point where severe budget cuts are unlikely, even in hard times, it may well be worth it.

You've obviously thought it through and know that living under an extremely restricted budget would be fine for you folks.  I commend you for thinking it through and I'm sure you are correct for yourselves.  A lot of my fellow boomers haven't and the world seems to be full of folks whose retirement budgets will result in a lifestyle that is going to disappoint them.

 

[justin]

Justin,
I haven't run the numbers, and it looks like you have, so take this for what it is worth (i.e. maybe nothing). IMO, (disregarding the variable portion of your withdrawal strategy) the fixed portion (starting at 40K and adjusting for inflation, regardless of the performance of your portfolio) puts you at risk of getting into a bad situation. You could find yourself in the situation youbet described--taking a big % of your portfolio's value because it hasn't kept up with inflation and/or the rate of your previous withdrawals. Are you realy going to take out 40K PLUS the variable portion if your portfolio has declines to $500K? If you think you will, then I think you may need to really reconsider this. If you can see that you'd never do that, then it would seem best to start with a plan that is more tightly pegged to your portfolio's changing value from the start (allowing you to make spending decisions more gradually, rather than getting into a hole). For me, that would be something close to ESRBob's "4%variable with a 95% floor" approach.

I am NOT proposing taking a 4% fixed SWR AND an additional 2% variable withdrawal rate. I'm saying take 3% fixed SWR and 2% variable. That's $30k/yr+inflation plus whatever 2% of the portfolio value is. The $40k yr is the combination of the 3% fixed SWR and the variable withdrawal, given a 50% drop in portfolio value.

Limited downside potential and significant upside potential.

 

[Nords]

Let's say I retire with $1,000,000 and I plan on taking $40,000/yr fixed (w/ inflation adjustments).  That's the default w/ the 4% SWR.  

I'm really having trouble understanding.  Sorry.
If your portfolio drops to $500K and you withdraw $40K, doesn't that mean your withdrawal percentage of your portfolio for that year is a whopping 8%?    How does taking 8% help overcome the massive loss in portfolio value?

I haven't run the numbers, and it looks like you have, so take this for what it is worth (i.e. maybe nothing).  IMO, (disregarding the variable portion of your withdrawal strategy) the fixed portion (starting at 40K and adjusting for inflation, regardless of the performance of your portfolio) puts you at risk of getting into a bad situation.  You could find yourself in the situation youbet described--taking a big % of your portfolio's value because it hasn't kept up with inflation and/or the rate of your previous withdrawals.

You guys are mixing the vocabulary of initial withdrawal rates with annual withdrawal rates.

Withdrawing 4% of a $1M portfolio, and raising that initial withdrawal rate for inflation, works just fine according to FIRECalc.  You have to hope that the early bear market (with its occasional annual withdrawal approaching 8-10%) doesn't drain the portfolio before it recovers.  If the portfolio zooms up on a bull market right after retirement, then the annual withdrawals are down in the 3% range-- which makes the "initial 4% SWR" look pretty smart.

Bob Clyatt's book also uses the "4%" vocabulary but his withdrawal rate is annual, not initial.

What I would do is pad your ER portfolio calculations with a ridiculously long lifespan, a budget with discretionary spending that stays constant with aging (just in case you stay constant despite aging!), and even some provision for a variable withdrawal for capital expenses.  If you add international investments, commodities, & REITS (plus other asset classes that haven't necessarily accumulated a century of data) to that portfolio then you're probably even more survivable. And if you can live off your dividends without touching the principal, you've arrived at a self-sustaining portfolio! However I doubt that most people are willing to work/save for such a lofty goal.

I don't know about you guys, but having made those assumptions (except for the self-sustaining part) encouraged us to work for a bigger portfolio that easily handles our non-discretionary spending (including our mortgage payment). A 20% decline in the portfolio isn't a concern. 40% might make me crunch some numbers but we've made it through that before. Maybe our teenager is cramping our empty-nester spending opportunities (hard to believe that) but our spending has actually declined during the first few years of ER. I can only buy so many longboards, and frankly we're having a little trouble "ramping up" our spending during the good years. (But I'm no fool, either-- I'm not going to share TH's Lexus thread with my spouse!) When you watch the market drop like it's been doing this month, it's a comfort to remember that we're sitting on at least two years' cash. We're only trying to figure out how big the dip is before we start buying into it... which excites me more than the prospect of upgrading my vacation airfare tickets to first-class seating.

What I wouldn't do is fling apples & oranges between the "initial SWR" and "annual withdrawal" camps.

 

[samclem]

Justin,
I underestand the 3% fixed plus 2% variable (I just didn''t apply to dollars correctly). My point is: Basing a strategy on a fixed amount plus inflation (even if it is three percent) entails the risk of outspending your assets (since your portfolio may or may not be tracking inflation).
I think a withdrawal strategy based on inflation has considerable downside risk (running out of money, or doing damage to the portfolio balance from which recovery is not possible). I would not be comfortable with a 3% fixed rate (though historically it has done okay), never mind a 3% fixed rate plus a variabe component.


But--that what gives us lots to talk about here.

 

[youbet]

What I wouldn't do is fling apples & oranges between the "initial SWR" and "annual withdrawal" camps.

Interesting comments Nords.  Actually, there is no confusion between initial SWR and annual withdrawal when discussing justin's plan.  He's proposing both.  A 3% initial SWR plus an additional 2% of the actual portfolio balance for the particular year.

Regarding budgets.........  There sure seems to be a lot of confusion regarding the relationship between SWR and budget.  Actually, they are totally independent.  For example, if you calculate SWR with the Firecalc methodology, you believe 4% is the number.  If you have $100, you withdraw $4 per year and adjust for inflation going forward.  If your desired budget is $3, the SWR is still $4.  If your desired budget is $5, the SWR is still $4.  If you begin SS and need to withdraw less from your portfolio, the SWR is still $4. 

SWR is simply the withdrawal rate you believe is safe calculated by the method of your choice and it is what it is regardless of your budget needs or other income sources.

I know I'm preaching to the choir in your case Nords.........

 

[justin]

samclem,

So in other words you don't use FIREcalc to estimate a safe withdrawal rate?

Most here assume 4% SWR to be very safe. I would posit that the 3% fixed SWR plus 2% variable SWR is similarly safe. Now if you don't believe that 4% SWR is safe, that is a different discussion that has been discussed here before. Based on historical market returns over the last century or so, and assuming the future is no worse than the past, 4% is "safe".

 

[justin]

That's a good point youbet. Just because one's portfolio can support a 4% SWR doesn't mean one has to take out 4%+inflation every year. That was an unstated implicit assumption in my hybrid withdrawal method - at some point the SWR gets a lot higher than I would really care to withdraw and spend, so in effect I would "reinvest" what I didn't spend.

If done often enough, I should be able to "cheat" in down years and exceed the 3% fixed/2% variable withdrawal rate.

 

[obryanjf]

Before I started on the Guyton model, I was playing around with a fixed + variable model and it works pretty well.  I was somewhere around 3%Fixed + 2.5%Var or 3%Fixed + 2Var, no failures. 

Along a similar vein from my previous post and considering the FL show last night, I have thought of a new presentation on the failures data for my 5 models.  The graph is below, but let me explain.
I have graphed each model using the starting withdrawl rate against the time in the plan(death-retirement, presumably).  I start at a 10 year plan and go out to 50 years.  The withdrawl rate graphed is the first instance of the model failing during the cycle. 

Take the fixed model at 30 years which yields a reading of 4.5%.  Using a withdrawl % less than 4% would have no failures.  Anything equal or above has an increasing number fo failures. So anything below the  model in terms of withdrawl rate is a SWR for that model and time frame. 

Now the graph looks as one would expect, declining as the plan becomes longer.  Note the fixed model and blob #1 which is where most here operate at 4% Fixed SWR model for 30 or 40 years.  Below the model line are the SWR's.  Using one of the other models, I could operate at 5% or maybe slightly higher. 

Note blob #2 (10 to 20 year plan) in an area I would term for very late retirees.  It could also be a bridge area where a draw down plan is in place until the pension and/or SS starts.  Depending on the model withdrawls for 10 year are from 8% to as high as 10.5%.  For 20 years, the range is 5.5% to 7%.

Now blob #3 for very early retirees or those that are planning on living a very long time, a 50 year horizon.  For this timeframe the fixed model starts to breakdown quickly.  The other models settle out at around 5% to 5.5% but breakdown eventaully but at different rates. 

For those currently in a 30 to 40 year plan, they could increase (reset) their withdrawl % as their plan horizon shortens over time.

BTW the numbers in this chart differ slightly than the individual simulations previousily shown beacuse the run is based on increments of .5% moves rather than .2% increments.




job

 

[haha]

Productivity gains are more important than population gains for growth, and will be even more so in the future. One smart guy who invents a machine that makes car parts instead of a hundred thousand humans making those car parts is doing more for the economy than thousands and thousands of immigrant laborers.

Heck, most unskilled immigrants probably cost the economy a bit more than they add to it, or barely break even.

I agree with both your statements here.

It is a mistake to assume that social security payments can only come from SS taxes. Why should this be true? Because that is how it has always been done? That leads to some very stupid economic policy, and if we are thinking, we will avoid that. There is no good reason why a robot working in Detroit can't contribute the same or more to social security funding as any number of uneducated immigrants, who are mostly off the books anyway. And the robots won’t be going on welfare or filling up our prisons. Or creating what Wab refers to as “people who are so poor the only way they can help themselves is through crime.”

Warren Buffet addressed this at the recent Berkshire annual meeting. He says there is no real finance problem, only a lot of political smoke.

I posted the link to his comments earlier- it got 0 responses. 

Ha

 

[Papi]

Ha,

Sorry, I missed it. Could you kindly post the link again for a lazy bum like myself who can't find it in the thousands of messages.

Thanks!

 

[haha]

Ha,

Sorry, I missed it.  Could you kindly post the link again for a lazy bum like myself who can't find it in the thousands of messages.

Thanks!

Gladly, Papi.

http://early-retirement.org/forums/index.php?topic=7548.msg135111#msg135111

I guess it is OK to quote the relevant part. It's from Tom Brown's "Bankstocks.com" Moderators please remove if the quote is too long. I think the subject is quite important. WB is Warren Buffet; CM is Charlie Munger.


"Where should a rich country like the U.S. draw the line on entitlements?

WB: Every society decides what to do with its oldest and youngest members. They are its least productive members; they don't turn out goods and services, but consume them. In 1935, the country decided that the federal government should play a role in helping to take care of older citizens, when it enacted the Social Security program. There is some merit in the idea that 65 is too low a retirement age. That's in the process of being changed. But in a society as wealthy as ours, where GDP per capita is $40,000, there are plenty of resources to use to help support older people. Not everyone needs help. Some people, like Charlie and me, have been wired to be able to make money. Those people will have more than enough to provide for themselves as long as they live. But not everyone is wired that way. They won't be able to take care of themselves once they stop working. The country is wealthy enough that it can easily handle the Social Security question.

I find it ironic that this administration, which thinks nothing of running up fiscal deficits of $300 billion to $400 billion per year, is so concerned about the idea that Social Security could have a $100 billion deficit several years from now.

It's true that the ratio of workers to retirees is only 2 to 1. But worker productivity is going up every year. There's always been a struggle over how to divvie up the wealth pie. But that pie is big, and it's growing. This is a problem that the country can easily take care of.

CM: I've read the evidence put together by people like Pete Peterson, but have come to a different conclusion. If the country grows in real terms by 2% to 3% per year, it should be child's play to take a share of that pie and divert it to older people. It's crazy to freeze the share of wealth devoted to retirees at some arbitrary level set sometime in the past. The society has a responsibility to pay a little more than it has in the past, as the population of retirees grows. Social Security is one of the most successful programs in the history of the country. It is very efficient and has low overhead.

WB: The government had no reluctance counting the Social Security surplus as part of the overall fiscal surplus, when the budget was first unified in 1969. But now that the trust fund is set to go into deficit, suddenly the system has pay for itself."

 

[slepyhed]

I've got a question about productivity in a service-based economy:

GDP is the total value of all goods and service produced/performed. We can grow GDP by increasing the productivity of those producing goods; they make more stuff for the same cost.

With services, the value of the services is equal to the cost... So if we just start tipping the wait staff more, that increases the restaurant GDP?

Is that the future? We have to switch to consuming luxury services to increase the "productivity" of our service sector?

That doesn't sound too bad....

 

[Papi]

Thanks for the link, Ha.

Interesting how WB compares the current deficit spending to the SS problem.  It's a nice way for a laymen like myself to get a feel for the magnitude of the problem.

I wonder how WB is determining that (American) worker productivity will increase in the future?  That seems like a big assumption to me that addresses the 2:1 worker to retiree ratio.  I just checked with my trusty oracle (that is NEVER wrong  ) and she says that worker productivity will stay flat to a slight increase over the next few decades.  That is until the next big technological advancement gives productivity a shot of adrenaline in the arm.  Case in point is that I'm posting here while I should be debugging this nasty C++ problem 

 

[Nords]

Case in point is that I'm posting here while I should be debugging this nasty C++ problem 

Well, your productivity will never rise if you're still programming in C++. Although it's nice to see that not all the COBOL & C++ programmers have left us...

 

[samclem]

So in other words you don't use FIREcalc to estimate a safe withdrawal rate?

Most here assume 4% SWR to be very safe. I would posit that the 3% fixed SWR plus 2% variable SWR is similarly safe. Now if you don't believe that 4% SWR is safe, that is a different discussion that has been discussed here before. Based on historical market returns over the last century or so, and assuming the future is no worse than the past, 4% is "safe".

Justin,
Yes, I use FIREcalc to estimate a safe withdrawal rate. I use the new version which allows use of a % of the portfolio every year, with a "floor" reduction amount of a specified percent of last year's withdrawal (aka "ESRBob's 95%" method). I believe it makes a lot of sense and that it better replicates the way folks will really behave in retirement.
To me, taking a fixed amount and adjusting for inflation each year, irrespective of the remaining value of the portfolio, is not a prudent way to manage my withdrawals. Yes, it is good to know that 4% fixed at the begenning and adjusted only for inflation has historically worked. But I'm much more comfortable adjusting withdrawals as I go based on how my account is doing so I don't get into a hole from which recovery is impossible. To me, taking a fixed amount and adjusting for inflation (even 3% , then a variable rate of a percent or two) would be like setting off on a 500 mile cross country flight, setting a course, and then not looking out the window again or crosschecking other sources. "Okay, I set the right course and stayed directly on it, the book said that with the winds others have experienced before that this course would have worked 95% of the time." After flying the required time, I just don't think I'd magically see the airport right off the nose. I'd be much more comfortable checking my progress against a map every few miles and adjusting as required.

I do think your use of the variable component with a smaller fixed withdrawal has an advantage over the straight fixed withdrawal, but I wouldn't go with any fixed amount--the effects of an error in its size , compounded over decades, will be huge. If (as some folks do) we accept this problem and say we'll reset the fixed amount every few years (based on the existing portfolio size--just like you do the first year), then why not go all the way and re-adjust it every year for this same reason?

I think we've probably killed this issue.

 

[perinova]

Sam
Nice post explaining well the downside of withdrawing a fixed % during bad year. I am currently looking at what I will do when in retirement so my decision is not made.

The drawback of the yearly adjustment to current value is that your postfolio will not be growing as fast compared to the fixed method. ie if you widthdraw during good years the subsequent lean years could be a lot leaner.

We historically know that most years will be good years and the fixed SWR lends to a much higher portfolio value over time. So after 10 years of growth what the Heck a down year will not matter.
If you got used to spend a lot, go into a long term debt situaiton while withdrwaing to your current portfolio value that's another story...

A good solution is to use minimum of the initial or current value or a hybrid solution.

 

[obryanjf]

The drawback of the yearly adjustment to current value is that your postfolio will not be growing as fast compared to the fixed method. ie if you widthdraw during good years the subsequent lean years could be a lot leaner.

We historically know that most years will be good years and the fixed SWR lends to a much higher portfolio value over time. So after 10 years of growth what the Heck a down year will not matter.

I would state it a bit differently, Using 4% Fixed and 4% Hybrid, the fixed leads to higher terminal values because the hybrid enables increased withdrawls when the markets are good, which has an upward bias over the long term. The fixed withdrawls are locked in at retirement time with no feedback from the portfolio growth. More consumption now equals less later.

However we seem to be to be talking about 4% Fixed and ~5% Hybrid which is apples and oranges in terms of terminal values and purchasing power risk, but nearly similar in terms of success rates. In this case the Hybrid allows higher absolute withdrawls with the trade off being the on average lower terminal value (less estate for kids). Works for me.

I'll bore you with another and perhaps final graph.

job

 

[perinova]

This is GREAT graph showing the paradoxal tread-off we are facing:
higher portfolio values but higher risk of failure - or the opposite.
The Guyton and Hybrid methods are a middle of the road solutions.

Another interesting feature can be the average consumptyion vs the withdrawal rates. As the variable withdrawal rate increases, above a certain point, the average consumption is actually lower over the considered 40 years.

I had graphed this in he past using historical data. I had found the optimum consumption with the Variable rate only around .5% and the fixed portion could be adjusted depending on the desired safety. My computations are certainly not as sofisticated as yours so I might not right about that.
If someone has an idea about this optimum value please chime in.

 

[Papi]

Well, your productivity will never rise if you're still programming in C++.  Although it's nice to see that not all the COBOL & C++ programmers have left us...

Nords, you have been ER'd too long C++ is probably still the top programming language. I don't know about Cobol, don't even know anyone that uses it. I have many engineer buddies around the US and they all have jobs using C++. Only a couple use Java. Were you a Cobol programmer in a past life?

As for productivity, mine went through the roof in 1989 when the company I was with switched from C to C++. But in all honesty, it is the engineer that dictates the productivity, not the programming language.

 

[Nords]

Nords, you have been ER'd too long    C++ is probably still the top programming language.  I don't know about Cobol, don't even know anyone that uses it.  I have many engineer buddies around the US and they all have jobs using C++.  Only a couple use Java.  Were you a Cobol programmer in a past life?
As for productivity, mine went through the roof in 1989 when the company I was with switched from C to C++.  But in all honesty, it is the engineer that dictates the productivity, not the programming language.

No C++ experience, C & LISP quenched my thirst for higher education.

I know COBOL from Monterey and the legendary Grace Hopper stories but I don't have any programming experience in that one. My sister-in-law has been programming COBOL for over 20 years (I think she's 45 now). She has lifetime employment with BG&E (or whatever the company is called now), although I sure hope that's not the code controlling their utility distribution grid. During 1999 she was sent home with a laptop, a free broadband login, and an expense account-- and told not to come back to work until the company was Y2K compliant. Best year she ever had.

I just wonder how much of what has been optimized for C++ compilation can be done even more quickly in PHP or Java or other modern languages. I'm still pissed at DoD for having to learn Ada...

 

[Bimmerbill]

Ha! I learned assembly (8086), Fortran, and Cobol in college. I did sign up for an Ada class, but it was cancelled.

 

[Bimmerbill]

Oh, and I finally watched Frontline last night, thanks Tivo!

I thought it was a good program. I found the comments about the best paid people earning the best returns (% wise), and the worst paid people earning the worst returns very interesting.

Wonder why? It can't be all education. Maybe interest in financials?

 

[Arif]

For those that are out of the country and don't get PBS or just happened to miss the program it is on their website at: http://www.pbs.org/wgbh/pages/frontline/retirement/view/

I did find the historical portion about how the companies transitioned more and more of the burden onto the employee. I think most folks are unrealistic as for what they want the company to do for them (not counting the promises made by the company) for instance, IIRC they had a survey and overwhemingly the employees would rather the company handle their 401k. Let me get this straight, the same folks who bankrupt the company would be the entity of choice to manage something as important as their retirement funds.

When I was in the Army we invested 50% of our income. Not because our pension might not be there after 20 years but because stuff happens and I like to have choices. If we said "shoot uncle sam will give us a pension we don't have to worry about it" we would still be working fulltime now. Nothing like options.

 

[d]

just an observation: retirement as we know it (or would like to have it) is a relatively recent phenomenon. is there any reason to believe it is an inalienable right?