11% swr?

[teejayevans]

Retired early and still coming up short - Feb. 23, 2010
After 40% decline, he is now at a 11% WR,
by my math he started at 7% before the meltdown, YIKES!
What was he thinking?
TJ

[traineeinvestor]

I suspect he wasn't thinking at all.

Absent a disability, this guy either needs to go back to work or needs to drastically cut living costs.

Financial literacy should be a mandatory subject at schools and passing an annual refresher course should be pre-requisite to being allowed a credit card.

[RunningBum]

The picture that the columnist uses cracks me up. He seems very proud of how thin he is, with that side shot and jacket pulled back.

[Onward]

I've seen Dave Ramsey tell millions of people that stocks will give you an 8% withdrawal rate sustainable for 30+ years. Yikes.

It is a funny pic of the columnist, Walter Updegrave, but I generally like his column.

[plex]

I don't have any problem with what the author said in his article, but I cannot believe this author points to a calculator that uses 75% of pre-retirement income to calculate expenses. This is the most conservative assumption I have ever seen.

How can the author, who apparently knows how to use the SWR rule, point to a calculator that completely ignores it? The calculator certainly is a smooth piece of code, but under the hood it is using assumptions that only a novice would make.

By making this assumption, the calculator will very regularly predict someone will "need" to spend 2-10x (depending on their savings rate) during retirement, than they spent while working. This sort of very poor spending assumption is one of the main reasons SWR is used instead, along with SWR's automatic inclusion of inflation.

[Zathras]

That 75% number has been around for a while now.
Not sure where, but there was some research done showing how much less people spent in retirement.
However, I don't think that is a good idea to plan on that 75% unless you also budget for it. Just assuming you will magically spend less in retirement is a recipe for disaster.

[plex]

The 75% number T Rowe is using is based on pre-retirement income, not spending. That means that, minus taxes, a retiree will either be living on their savings+make significant additional contributions to it each year (about the same size contributions they were making before retirement), or drastically increase what they spend since they no longer need to contribute income to their savings, as it is self-sustaining.

I am also pretty sure that while people may spend less during retirement, it is not much less, as it is very jarring (or impossible due to pre-arranged commitments) to significantly decrease spending, especially all at once. For me, a 25% decrease in my spending would be very uncomfortable.

[teejayevans]

The problem with the 75% is it assumes little or no savings rate. If I'm saving 40% of
my income, then a 75% rule gives me a raise in retirement. I wonder how many spend
more in retirement than they do working?
TJ

[samclem]

Quote:

Originally Posted by traineeinvestor Financial literacy should be a mandatory subject at schools and passing an annual refresher course should be pre-requisite to being allowed a credit card.

Maybe those with a 401K should have to enroll in a no-frills, default option annuity plan unless they "test out" and are then allowed to buy other assets.
This is written in jest. Still--we all pick up the pieces for those who can't/won't care for themselves. If we can force people to wear seatbelts . . .

[audreyh1]

Quote:

Originally Posted by teejayevans The problem with the 75% is it assumes little or no savings rate. If I'm saving 40% of my income, then a 75% rule gives me a raise in retirement. I wonder how many spend more in retirement than they do working? TJ

We do - quite a bit more

1) because we can.
2) because we were saving like crazy during the working years.
3) because we didn't have time to spend money while working - especially not on things like travel.

But yeah - I never put any credence in the % of pre-retirement income idea because it's all about what you want to be able to spend when retired - i.e. your anticipated expenses, which may be quite different from your working expenses.

Audrey

[unclemick]

I understand from watching Charlie Rose on his Brain Development program - the best time to learn Norwegian is between age 3 to 7.

Reminds me of the kinds of articles I read in the waiting room(eye doc., dentist, or reg. doc.).

heh heh heh - At least he touched on some solutions.

[leftbucket]

Quote:

Originally Posted by teejayevans Retired early and still coming up short - Feb. 23, 2010 After 40% decline, he is now at a 11% WR, by my math he started at 7% before the meltdown, YIKES! What was he thinking? TJ

Actually, if he's counting on some healthy SS benefits 12 or so years into the
future (risky) and using some fairly rosy return predictions, his pre-decline portfolio
would have been pretty close to being able to give him the 6k desired income with a reasonable SWR. Still too risky for my blood, but unfortunately all too common.
(as you all have mentioned)

-LB

[unclemick]

Interestingly - when I got to age 55 after being in ER since 49, one of the non cola defined pension options I had was a higher pension upfront which went to zero at 66 when SS kicked in. I declined.

heh heh heh -

[Nords]

Quote:

I require about $6,000 a month to live on.

Oh, hey, waitaminnit, I think I see the problem right here...

[akck]

My projected withdrawal rate starts in the 10-14% range until SS kicks in and the house is paid off. After that, it drops to 0% for many years before I again need to make withdrawals and ends up averaging about 2.75% over 35 years. I don't think the person in the article has a plan like mine.

When I started planning for my retirement, I used 100% of income as my starting point. Now that I'm closer, I use actual expenses plus any health & LTC insurance available in retirement as my starting point. I update my expenses annually to stay closer to current. I'm looking at about 70% of PR income in retirement. This drops to around 50% when the house is paid off. I've fretted over expenses for a number of years, but I've heard from some retirees who confirmed their expenses went down after retirement, so I know it's possible.

Hopefully, everything will work out within the plan. I'll let you know in 4+3 years.

[W2R]

Quote:

Originally Posted by akck My projected withdrawal rate starts in the 10-14% range until SS kicks in and the house is paid off.

Wow! I hope it isn't too long until SS kicks in and the house is paid off. That could really reduce the size of your nestegg if it went on too many years.

My house is already paid off, and like you I am withdrawing more until SS kicks in than I will be withdrawing afterwards. But, I am not withdrawing quite enough to completely compensate for not having SS. Right now I am withdrawing 3.5%, and after SS kicks in, it will go down to 3%.

Quote:

Originally Posted by akck After that, it drops to 0% for many years before I again need to make withdrawals and ends up averaging about 2.75% over 35 years. I don't think the person in the article has a plan like mine.

That's a very unusual plan, I agree! I see what you are doing, now. Your portfolio will have a chance to grow and recover for many years. I just hope that SS alone will be enough for you to live on after your withdrawals drop to 0%.

[akck]

Quote:

Originally Posted by W2R Wow! I hope it isn't too long until SS kicks in and the house is paid off. That could really reduce the size of your nestegg if it went on too many years. My house is already paid off, and like you I am withdrawing more until SS kicks in than I will be withdrawing afterwards. But, I am not withdrawing quite enough to completely compensate for not having SS. Right now I am withdrawing 3.5%, and after SS kicks in, it will go down to 3%. That's a very unusual plan, I agree! I see what you are doing, now. Your portfolio will have a chance to grow and recover for many years. I just hope that SS alone will be enough for you to live on after your withdrawals drop to 0%.

I'm hoping as a safety cushion that the portfolio ends up higher than what I'm planning, but I think we're okay because the portfolio will survive with a 2% rate of return and I expect to do better. The house will be paid off 2-3 years into retirement and SS starts 2 years later, so the drain won't be for long.

Besides SS, we also have pensions providing a large portion of our needs. Also, during those 0% years, the pensions and SS will provide more than our expenses so we have some cushion there too.

[Moemg]

Quote:

Originally Posted by akck I'm hoping as a safety cushion that the portfolio ends up higher than what I'm planning, but I think we're okay because the portfolio will survive with a 2% rate of return and I expect to do better. The house will be paid off 2-3 years into retirement and SS starts 2 years later, so the drain won't be for long. Besides SS, we also have pensions providing a large portion of our needs. Also, during those 0% years, the pensions and SS will provide more than our expenses so we have some cushion there too.

They thing that to me looks dangerous is you are depleting your savings and then counting on two pensions and SS payments . What happens if one of you dies ? They are now left with less savings , one pension and one SS and knowing from experience your expenses do not drop significantly if one person dies .

[akck]

Quote:

Originally Posted by Moemg They thing that to me looks dangerous is you are depleting your savings and then counting on two pensions and SS payments . What happens if one of you dies ? They are now left with less savings , one pension and one SS and knowing from experience your expenses do not drop significantly if one person dies .

No, we'd still have both pensions available, but at a reduction. If I die, my wife will get 75% of my pension. If my wife dies, I get 50% of hers by plan. Since we are married, the pension system requires that we take a survivor option unless your spouse signs off on it. As long as the house is paid off either of us should be able to survive on that reduction. In essence, taking the early hit to savings will help the plan to succeed.

I figure our expenses will be reduced by 25% if one of us dies. Looking at the numbers, my wife can survive on her pension and 75% of mine and I can survive on just my pension and a portion of SS. Her pension can be directed to savings.

I know I can survive on any reduction because I'll make any necessary changes to my expenses, including moving to a smaller, less costly house. My wife on the other hand, probably won't be able to do so until forced, but I'll do my best to plan for her well being (i.e., if we move, we move to a house that's equal to or lees costly than our current house).