Retirement rate.

[Merron]

In the summer Voyager 2005 edition of The Vanguard, there was a case study on long term care in which the persons in the study, 65 and 61 years old, were told by a Vanguard Asset Management Services Manager, Ms. Rhoads, that they could safely withdraw $94000 per year over a 30 year period from an initial portfolio of $1200000. Thats 7.8% per year.

I have run the numbers through Firecalc, with and without SS, and can not see how a 7.8% withdrawl rate is possible. Can any one explain this to me. I have Emailed The Vanguard but got no response.

 

[maddythebeagle]

I ran this one through my spreadsheet and the higher withdrawal rate seems reaonable and with just a 7-8% return, it can get them into their 90s. I think folks talk about a 4-5% SWR are talking about retiring earlier than their 60s. I think also the assumption can be made that it is not that big of a deal to draw down into your 90s.

 

[wildcat]

65 and 61 years old

Bingo...couple already tapping SS + no need to tap retirement until forced. Older folks different strokes.

 

[JWR1945]

A smooth talker could easily suggest withdrawing 7.8%. He would talk in terms of post World War 2 stock market data and nominal dollars (i.e., not adjusted to keep up with inflation).

A 30-year withdrawal rate of 7%+ is a common result when there are NO ADJUSTMENTS FOR INFLATION as with most pension plans and traditional annuities.

I ran FIRECalc with a 7.5% (constant-nominal) withdrawal rate:

1) with 50% stocks and 50% commercial paper, 65.9% of the portfolios survived and
2) with 75% stocks and 25% commercial paper, 72.7% of the portfolios survived.

In both cases, there were NO FAILURES after 1940.

Have fun.

John Russell

 

[cute fuzzy bunny]

Hmm, we must be using different 'tools' because I see a failure in 1966, and of course all the data sets from 1974 on are shortened, so some of them may have failed had they been full 30 year data sets.

My first thought was they must be presuming 'consumption' of the portfolio principal but from the article they clearly think they'll take 7%+ and have a growing portfolio.

It appears that they did indeed leave inflation out of the withdrawal calculation, and they also only used return data from 1960 on, probably with a monte carlo style tool?

In other words, the results are absolutely, completely, and totally incorrect on a number of fronts...

 

[Merron]

How do you leave out inflation from the withdrawl amount when running Firecalc? I would like to duplicate the results by John Russel and 0.

Isn't this a very non professional advice from Vanguard, especially since the couple were paying for it.

 

[cute fuzzy bunny]

You use a withdrawal rate of zero, and further down where you see an 'additional withdrawal in year xx', put in their 94k-whatever amount, starting in year one, and uncheck the inflation adjustment box...i'm doing this from memory so I hope it makes sense when you actually see it.

I dont think its very good advice, nor do I think its something vanguard would want to showcase in their newsletters or web site. What they're basically saying is that you can almost count on a 10-11%+ return. I wrote a letter to the asset management rep who is quoted in the article and suggested they make a few changes or pull that article...someone forgot something.

 

[JWR1945]

Hmm, we must be using different 'tools' because I see a failure in 1966, and of course all the data sets from 1974 on are shortened, so some of them may have failed had they been full 30 year data sets.

I had used a withdrawal amount of $75000, not $78000, with an initial balance of $1000000.

I looked at 50% stocks and at 75% stocks.

I put the inflation adjustment button on NONE instead of the CPI or PPI.

I left everything else at their default settings.

When I increase the withdrawal amount to $78000, I get a failure in 1966 when using 75% stocks. There is no failure in 1966 when using 50% stocks.

I expect the post-1974 partial sequences to end well (in the future). They got a tremendous boost in the 1982-2000 bull market.

Have fun.

John Russell

 

[Telly]

Like Merron, when I first read the article, I thought "Whaaa?"

I think the devil is in the details:

Allocation - 65/35% Stock/Bonds.  Bonds, not Commercial Paper.

Funds available & data span - "she projected the impact of the three scenarios on the Davidsons' investable assets over the next 30 years in 44 hypothetical investment-return patterns based on actual returns beginning in 1960."

I interpret "investable assets" to exclude SS.  And 44 patterns lines up with years 1960 to 2004, and she says data began in 1960.

Inflation, method, etc. - The litmus test of the Vanguard exercise was the size of the ending portfolio balance.  Under the decision tree graphic on whether/when to buy LTC was a whole lot of fine print which said:

"All projections are in 2004 dollars, based on the average returns of stocks (as represented by the Dow Jones Wilshire 5000 Composite Index from 1975 to 2004 and by the Standard and Poor's S&P 500 Index from 1960 to 1974) and bonds (as represented by the Lehman Brothers U.S. Government/Credit Bond Index from 1973 to 2004, the Citigroup High-Grade Index from 1969 to 1972, and the S&P High-Grade Corporate Index form 1960 to 1968) since 1960 and adjusted for inflation."

Whew! Hey, can we change indexes a few MORE times?

I don't think I could model that with FireCALC.  With this additional info from the article, make of it what you will.  I think its beyond me!  That said, my gut feel is that the "modeling" in the situation is constrained to a level that I would not feel comfortable with.  But that's just a gut feel.

 

[cute fuzzy bunny]

The researcher that wrote the article just responded to me, to wit:

"We apologize if the article caused any confusion regarding the material that was covered within the case study. The article was written with the intention to not overbear the reader with the specific steps taken to determine the situation for the Davidson couple. The reduction of specific information was done in efforts not to have the readers draw a conclusion for their own circumstances. Also note that the $94,000 amount was a spending rate and not a withdrawal rate. The $94,000 expense total has several different factors that were used in the calculation process. The expense total was not based solely on a reduction from the retirement account.

Vanguard was concerned that providing specific details in the case study to shareholder's requesting them might encourage an incomplete analysis. The decisions surrounding potential long-term care costs are highly specific to each individual (or couple) and must take into account all of their own circumstances (as opposed to the Davidson's listed in the case study). For this reason, Vanguard would encourage shareholders who are interested in learning more about Vanguard's Asset Management Services to work with a Vanguard Personal Financial Planner, or with the financial planner of their choice."

In other words, the 94k included a variety of other sources of income, and was not the 'withdrawal rate', and the article was shortened to avoid confusing the highly confusable...

 

[moghopper]

...the article was shortened to avoid confusing the highly confusable...

Gee that worked well