SWR - No Heirs

[mbnj77]

Howdy all, this may or may not be an obvious question but..... When everyone talks about a SWR, (and I understand how varied the methodology is from one person to the next), I make the assumption that market gains over the long run of retirement will compensate for the withdrawals and inflation and hopefully preserve the principal as much as possible.

Assuming this assumption is accurate, what happens when you have no heirs and have no intention to leaving it to anyone. I know that it is our expenses that will ultimately drive withdrawals, but is there any guidance for planning purposes out there for something like this?

Thanks very much.

 

[hnzw_rui]

You also have to take into account market dips and sequence of return risk. SWR was developed based on historical data so you minimize the risk of running out of money. However, more often than not, I guess the constant spending, inflation-adjusted SWR does end up being too conservative so you end up leaving one big pile. You might want to consider other withdrawal methods (e.g. variable percentage withdrawal) which allows for greater spending during "good years".

I don't have kids but in case I end up with significant assets upon my death, those will go to godchildren, nephews and nieces, and to charity.

 

[shotgunner]

If one is using a WR in FIRECALC that provides 95% or better chance of not running out of money (and most people do) it means you have a 95% chance or greater of leaving behind an estate. Should you check out earlier than the 30 year or greater scenario there will also be a balance.

In your case I guess I would simply name the charity/ies of my choice in my will/trust. The fear of running out of money in retirement seems to be greater than the fear of death itself for most retirees.

 

[Fishingmn]

You may want to look at something like the Variable Percentage Withdrawal thread on BH - https://www.bogleheads.org/forum/viewtopic.php?t=120430

It's specifically designed to allow you to spend it all and never run out (unless you die later than you project). The downside is that it requires the ability to change your spending based on the size of your portfolio.

I really like this plan even with heirs as we'd rather spend the money on our kids when we are living than have a bunch left over.

 

[mbnj77]

Thank you, though I think I may have been unclear in what I am asking. I wantto plan to not have anything left. I want to retire as soon as possible; that is as soon as I am FI. I know it is impossible to really plan to "die broke" but I am looking for methodologies of SWR that takes into account not planning or caring about leaving anything behind. This will help determine when I may actually be FI. I have only ever seen the standard 3-4% SWR methods. Thanks very much again for your time and knowledge.

 

[mbnj77]

Very cool Fishingnm, thanks much.

 

[REWahoo]

Thank you, though I think I may have been unclear in what I am asking. I wantto plan to not have anything left. I want to retire as soon as possible; that is as soon as I am FI. I know it is impossible to really plan to "die broke" but I am looking for methodologies of SWR that takes into account not planning or caring about leaving anything behind.

If you really want to accomplish this, why not convert your entire portfolio to annuities? No more worries about SWR, just spend your income so that you leave only enough to pay someone to sweep up when you're gone.

 

[ERD50]

If you really want to accomplish this, why not convert your entire portfolio to annuities? No more worries about SWR, just spend your income so that you leave only enough to pay someone to sweep up when you're gone.

+1 - that's the only way to actually plan for this (though I'm not a fan of annuities for other reasons, but they deserve consideration in some cases).

The various variable withdraw plans can help, but it is still pretty dependent on how the market goes.

-ERD50

 

[Midpack]

If you really want to accomplish this, why not convert your entire portfolio to annuities? No more worries about SWR, just spend your income so that you leave only enough to pay someone to sweep up when you're gone.

+1 - that's the only way to actually plan for this (though I'm not a fan of annuities for other reasons, but they deserve consideration in some cases).

+2. The only way to die broke (without running out of funds too soon) that I know of, though I wouldn't recommend annuitizing until later in life, if then. And now is a historically bad time to annuitize from a strictly payout/yield POV, but that's another (well worn) thread topic (search if interested).

 

[Jack_Pine]

I totally get your questions and why it is important to you. We feel the same way. Even if it is so we can include gifting in our plan while we can enjoy what the gifts bring.

I have kind of landed on what Fishingmn suggests. I know annuities come up all of time as a potential solution but I am not a fan. Guess you can only do the best you can.............

 

[Car-Guy]

I know it is impossible to really plan to "die broke" but I am looking for methodologies of SWR that takes into account not planning or caring about leaving anything behind.

Actually, it's very easy to plan to die broke. The problem is going broke years before you die.

 

[hnzw_rui]

Actually, it's very easy to plan to die broke. The problem is going broke years before you die.

Lol, exactly.

 

[Totoro]

For a better bang for buck you might also want to look into gradually buying annuities (of the SPIA kind) as you age, starting at 70 or so.

This is why: The older you get, the higher the relative uncertainty you get in living for x more years (until you hit 95 or so). Living a long time effectively is a "fat tail" risk.

Just an example:
If you are 50 years old, odds are you'll typically live 25 years up to 35 years, with a very unlikely outlier up to 45 years (5% as a male). The outlier is factor x1.5 - x2.

Once you get to 80 years old, you'll typically live 5 - 10 more years, with the outlier at 17 years (5% as a male). The outlier is factor x2 - x3.

So the distribution "flattens out" the more you age.

The effect of that is that you'll need progressively more buffer for the unlikely event you live a very long time. And this in turn gives you a large stash at the end of the line.

If you buy SPIAs at "peak uncertainty" you basically offload your longevity risk to a collective. The side effect is that you'll have much less left for your heirs, but also much more certainty in funds available in your winter years, likely for a higher total spending.

Not sure if that made sense in explaining.

 

[Midpack]

For a better bang for buck you might also want to look into gradually buying annuities (of the SPIA kind) as you age, starting at 70 or so.

This is why: The older you get, the higher the relative uncertainty you get in living for x more years (until you hit 95 or so). Living a long time effectively is a "fat tail" risk.

Just an example:
If you are 50 years old, odds are you'll typically live 25 years up to 35 years, with a very unlikely outlier up to 45 years (5% as a male). The outlier is factor x1.5 - x2.

Once you get to 80 years old, you'll typically live 5 - 10 more years, with the outlier at 17 years (5% as a male). The outlier is factor x2 - x3.

So the distribution "flattens out" the more you age.

The effect of that is that you'll need progressively more buffer for the unlikely event you live a very long time. And this in turn gives you a large stash at the end of the line.

If you buy SPIAs at "peak uncertainty" you basically offload your longevity risk to a collective. The side effect is that you'll have much less left for your heirs, but also much more certainty in funds available in your winter years, likely for a higher total spending.

Not sure if that made sense in explaining.

I wholeheartedly agree with your idea on delaying SPIA's until age 70 or so.

But I also notice that online quotes seem to stop at age 80, there are no quotes for age 85, 90 etc. So I've wondered for quite a while if there's an upper age limit at which an annuity provider will even sell an annuity (IOW, there's an age window to buy) OR does the cost start to increase at some age relative for a given payout. I'm asking...

 

[Ed_The_Gypsy]

Consider that one of you will survive the other and that extended care or end of life care totalling a couple of hundred thousand over time will be needed. Earmark some for that, then spend down the rest. A simple way is to use the IRS'S MRD tables.

Sent from my SM-G900V using Early Retirement Forum mobile app

 

[Ed_The_Gypsy]

Like Car-Guy said, you could also live longer than you expected.

Sent from my SM-G900V using Early Retirement Forum mobile app

 

[David1961]

I look at it as a tradeoff. Which is worse, going broke years before you die, or having a big estate after you die? The former is much worse for me, so I want to make pretty sure I avoid that scenario, even if it makes the second scenario more likely. The more you shoot to avoid the second scenario, it increases the risk of the first scenario happening. Find whatever you are comfortable with.
I agree with others that an annuity is something you may want to look into, though I am generally not a big fan of them.

 

[Independent]

For a better bang for buck you might also want to look into gradually buying annuities (of the SPIA kind) as you age, starting at 70 or so.

This is why: The older you get, the higher the relative uncertainty you get in living for x more years (until you hit 95 or so). Living a long time effectively is a "fat tail" risk.

Just an example:
If you are 50 years old, odds are you'll typically live 25 years up to 35 years, with a very unlikely outlier up to 45 years (5% as a male). The outlier is factor x1.5 - x2.

Once you get to 80 years old, you'll typically live 5 - 10 more years, with the outlier at 17 years (5% as a male). The outlier is factor x2 - x3.

So the distribution "flattens out" the more you age.

The effect of that is that you'll need progressively more buffer for the unlikely event you live a very long time. And this in turn gives you a large stash at the end of the line.

If you buy SPIAs at "peak uncertainty" you basically offload your longevity risk to a collective. The side effect is that you'll have much less left for your heirs, but also much more certainty in funds available in your winter years, likely for a higher total spending.

Not sure if that made sense in explaining.

I tried to put some numbers on this. I used immediateannuities.com to get two quotes for straight life annuities on males with a single premium of $100,000. The monthly payout was:
$491 if the annuity starts at 60
$631 if the annuity starts at 70
$919 if the annuity starts at 80

If I were 60, and had $100k to spend, I could

A) Buy an annuity immediately and have $491 for life.

B)
Use $51,716 of my $100k to buy a zero-coupon 4.17% bond that matures for $77,813 ten years from now. Then use the $77,813 to buy an annuity at age 70 that will pay $491 per month.

Use the other $48,287 of my $100k to buy a stream of 120 monthly payments of $491 each. I can do that if I can find a way to earn 4.17% on the $48,439, recognizing that I will be taking the money on average about five years after I invest it.

So I'm ahead by deferring if I can earn more than 4.17% over various time periods in today's interest environment.

I'm sure some people here will say they're willing to bet that stocks can do that, and deferring to 70 makes sense.
Others will say they can't find bonds with those yields and for them starting at 60 makes sense.

(The same math produces 5.29% as the break-even yield to equate starting at 70 vs. starting at 80.)

 

[youbet]

A) Buy an annuity immediately and have $491 for life.

That is, you'd have $491 "nominally" for life. But, and it's a big "BUT," who knows what the real value of that number will be in buying power as time marches on. I'm guessing if you live 20 yrs, the buying power would be halved.

Inflation has been so benign these past few years, it's easy to disregard. But who knows what the decades will bring? It's a real risk for non-cola'd annuities.

 

[youbet]

I make the assumption that market gains over the long run of retirement will compensate for the withdrawals and inflation and hopefully preserve the principal as much as possible.

Wow, that's quite an assumption! Actually, most people use FireCalc (or other tools) to test WR's to avoid running out of money before some number of years pass given some investment strategy and AA. In the worse case scenario, principal is definitely consumed. In fact, it disappears altogether!

The seemingly unavoidable fact, as previous responses have pointed out, is that we can anticipate a great deal of variation in the performance of our investments much of which is out of our control. Therefore FireCalc outputs show large differences in ending values depending on your role of the dice.

You'll need an annuity to ensure you "spend it all." And having everything in an annuity leaves you subject to the whims of future inflation unless you can find a cola'd annuity.

Also, having heirs or not doesn't effect the situation. If it turns out you have money left at the end (even a lot of money) you won't care, you'll be dead. Leave it to a good cause.

 

[Independent]

That is, you'd have $491 "nominally" for life. But, and it's a big "BUT," who knows what the real value of that number will be in buying power as time marches on. I'm guessing if you live 20 yrs, the buying power would be halved.

Inflation has been so benign these past few years, it's easy to disregard. But who knows what the decades will bring? It's a real risk for non-cola'd annuities.

That's correct. But, the same math would work if I used cpi-indexed SPIAs. I used the non-indexed because quotes are harder to get on indexed annuities.

 

[youbet]

That's correct. But, the same math would work if I used cpi-indexed SPIAs. I used the non-indexed because quotes are harder to get on indexed annuities.

Yes. I wasn't saying your math wouldn't work regarding the required investment return to cover the 60 yrs old to 70 yrs old period. I was just trying to remind folks about the inflation risk (recently very benign but who knows the future?) of non-cola'd annuities. An addition, not a correction.

 

[Rustic23]

Would this work.

Let say you decide you need money for another 30 years. At that point you will be 95 and with your health and family background that is ten years past what you really think you will live. Firecalc says 3.5% (Im making up percentage because I'm too lazy to enter it) So you take your nest egg and live on 3.5% and the world is good.

Five years later, the market has been good to you and you now have 50% more than you had, even with the withdrawals. You run Firecalc again this time for 25 years and it say 4%. You reset and start your retirement over using the new amount, knowing that Firecalc says you will not run out of money before you expect to run out of time.

If the market goes down you just stay the course. You should not have not have to lower your withdrawal from a previous high point, unless you forecast living beyond 95. In my example, you figured your increase on only living 25 years and increased funds. If you now believe you will live to be 100, you would have readjust your SWR. However, that is the same for all of us that decide we are going to live longer than the what original SWR was figured on, and our nest egg is lower.

I will admit that I have not gone through ever scenario, but it seems like anytime your nest egg goes up beyond it's set point, you could reset, using a realistic expected life plus pad. As you get older, the projected end of life date becomes a little easier to grasp.

Now before people jump all over me, I don't do this! As I have posted before, we do not use our nest egg for necessary retirement spending. Currently money from our IRA is rolled over to savings, and will most likely continue to be that way. I have just always pondered why you could not reset your SWR based on expected age and nest egg.

 

[utrecht]

I see no reason that wont work. The market doesnt know when you retire. Neither does FireCalc. If FireCalc says 4% is safe 5 years after you retire, its the same as if the first 5 years never happened and the second FireCalc run was your first run.

 

[ERD50]

Would this work. ...

Five years later, the market has been good to you and you now have 50% more than you had, even with the withdrawals. You run Firecalc again this time for 25 years and it say 4%. You reset and start your retirement over using the new amount, knowing that Firecalc says you will not run out of money before you expect to run out of time.

If the market goes down you just stay the course. You should not have not have to lower your withdrawal from a previous high point, unless you forecast living beyond 95. ....

I see no reason that wont work. The market doesnt know when you retire. Neither does FireCalc. If FireCalc says 4% is safe 5 years after you retire, its the same as if the first 5 years never happened and the second FireCalc run was your first run.

Right, that is essentially the 'Retire Again and Again' method.

-ERD50