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6% a year seems pretty fool proof, any thoughts?
Old 09-15-2017, 11:37 PM   #1
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6% a year seems pretty fool proof, any thoughts?

my plan is to take 0.5%per month which works out to 6% per year with a 100 % equity allocation. This plan is guaranteed to never run out of money. Our base expenses are low enough that could easily survive a 50% drop in the stock market. Also we could always start collecting social security if the market drops more than 50% We are 60 years old and are eligible for about 66k in ss payments per year at age 70 which we could survive on worst case.
It seems pretty simple to me so I must be missing something. Please give me your thoughts
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Old 09-16-2017, 12:06 AM   #2
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Good luck with that...

My thoughts are that 100% equities have proven to not be the best AA...

That 6% is not 100% 'guaranteed'....

That if the market goes down 50% then you are at 12% and you will run out of money....


Unless of course you mean to take out .5% each month no matter how much money you have and will reduce your spending accordingly.... then I hope that you will be able to take care of your basic needs if the market drops 50% as your income will also drop 50%....
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Old 09-16-2017, 04:53 AM   #3
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my plan is to take 0.5%per month which works out to 6% per year with a 100 % equity allocation. This plan is guaranteed to never run out of money. Our base expenses are low enough that could easily survive a 50% drop in the stock market. Also we could always start collecting social security if the market drops more than 50% We are 60 years old and are eligible for about 66k in ss payments per year at age 70 which we could survive on worst case.
It seems pretty simple to me so I must be missing something. Please give me your thoughts
This is perfectly reasonable, if your assumptions are correct.

If you truly can live solely on Social Security and don't need anything above that, and if you are withdrawing a percent of the remaining value of your assets, then you can withdraw any percentage you choose - 0%, 4%, 6% 50%.

Just curious though - why did you choose 6% ?
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Old 09-16-2017, 05:23 AM   #4
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A 6% withdrawal rate is way above what everyone else recommends for a 30-year withdrawal rate. You do not need 30 years.

Since you are both 60, you do not have to have a 30-year plan, only ~20 years. And your spending should decrease as you approach 80, especially if one of you passes.

Good luck.
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Old 09-16-2017, 05:33 AM   #5
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I would think you would want to plan for 30+ yrs, not that you might live that long.

As you get older, you may/will find yourself in need of an assisted living situation and your available assets will be needed to be able to have a choice or option as to where you could go. If you are short of funds you may end up somewhere you wouldn't have wanted.
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Old 09-16-2017, 05:44 AM   #6
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If you always take 6% of your nest egg, you will never run out of money.

However, your nest egg may get pretty small if the market crashes, and stagnates for a decade or so, so your 6% may not be very much money. But, if as you say, you don't really need it, and you can live on your SS, and you are sure that 20 years from now your SS payments will still have the purchasing power that you need, after 20 years of inflation, then indeed, your plan is foolproof.
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Old 09-16-2017, 06:12 AM   #7
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As you may know and others have said, with any percentage of balance method you are guaranteed to never run out of money, but you are not guaranteed to have enough to live on.... IOW, if 1/2%/month provides just enough to live on and the market dives 50% right after you retire, then you need to be able to live on 50% of you planned to live on.... but from what you say you have that covered and have SS reinforcements coming soon.
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Old 09-16-2017, 06:15 AM   #8
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A 6% withdrawal rate is way above what everyone else recommends for a 30-year withdrawal rate.
You may be comparing the wrong plans.

Many view 4% as a "safe withdrawal rate". But the OP isn't talking about that. Instead, the proposal is to withdraw 6% of whatever assets remain each year - that's quite different. That will last forever, although the assets could get quite small and that 6% could be a very small amount.


Quote:
You do not need 30 years.

Since you are both 60, you do not have to have a 30-year plan, only ~20 years.
I disagree. These days, a 60 year old can expect to live into their 80s, and can expect a good chance to live into their 90s.

Planning on less than that would be very risky, IMHO.
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Old 09-16-2017, 06:32 AM   #9
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We are 60 years old and are eligible for about 66k in ss payments per year at age 70 which we could survive on worst case.
Others have already covered most of the potential issues with your plan ... just adding that if your worst case plan relies on social security then I would recommend assuming 75% of your social security which would be $49,500. There is no guarantee that social security will continue to pay 100% of what you expect today. I believe 75% is a probable worst case scenario.
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Old 09-16-2017, 07:28 AM   #10
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Worst case scenario for SS also needs to include the early death of one partner, losing their benefit.
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Old 09-16-2017, 07:29 AM   #11
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Based on the assumptions you provided, yes, your plan is foolproof. It is certainly true that if you can pay your expenses with a 6% withdrawal rate even after your portfolio drops by 50%, then you are safe.

Let me use an illustration, let's say you need $60,000 per year to live, and let's say you have $2,000,000 invested 100% in stocks. Let's assume the worst case scenario that your stock portfolio reduces by half and is worth $1,000,000. You could still withdraw 6% and cover your living expenses, so you are safe. You are especially safe since you will have social security to cover all of your expenses in 10 years.
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Old 09-16-2017, 08:24 AM   #12
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From the other thread you posted on I see you are planning on 120K per year of spend, if this is 6% of portfolio then the portfolio must be around 2 million dollars and you are carrying a 30 year mortgage of 350K. With a asset allocation of 100% equities you might be surprised on just how well it works out or how rapidly a market downturn could uppend your plans.

You are planning on a worst case scenario of 50% drop and in 10 years SS kicks in with 66K per year in today's money, that is a very nice insurance policy. If the market were to drop 25 % in each of the first two years of your retirement and 10% in the third year for the unfortunate start of a bad bear market your 6% withdrawal would be $57,132 and your portfolio would be worth $751,000 in year 4 and you would have an outstanding mortgage of $350,000 against that ---- consuming $14,400 for mortgage payments leaving $43,132 in living expenses which would be around 37-39K after tax. This is the downside that could happen certainly not the worst case but a very bad case, won't be known for another 4 years.

The second part of the equation that is not mentioned is the possibility either you or your spouse would die (about a 25% chance of occurring)
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Old 09-16-2017, 08:42 AM   #13
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If you always take 6% of your nest egg, you will never run out of money.

However, your nest egg may get pretty small if the market crashes, and stagnates for a decade or so, so your 6% may not be very much money.
Right. 6% of a $100 nest egg is $6. So you're good.
Could even up it to 10%
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Old 09-16-2017, 08:46 AM   #14
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Interesting point... with a % of portfolio approach then ANY percentage less than 100% is technically guaranteed to never run out of money... whether you will eventually not have enough to live on is a whole different question.
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Old 09-16-2017, 08:49 AM   #15
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Since you are both 60, you do not have to have a 30-year plan, only ~20 years.....


I would think you would want to plan for 30+ yrs, not that you might live that long......


These days, a 60 year old can expect to live into their 80s, and can expect a good chance to live into their 90s.
Planning on less than that would be very risky, IMHO......
Agreed, for example, this is from Actuaries Longevity Illustrator - Welcome to the Actuaries Longevity Illustrator

My example is based on 2 non-smokers, in average health, starting at age 60. There is a 62% chance that one of the two will live for 30 years and 13% that one of us will live for 40 years.

If starting at age 65 those drop to 34% and 2% respectively.

I don't think anyone here would RE if the calculators suggested a 66% chance of success (100-34).

I would not plan for a lifespan that suggested a 34% chance of outliving the rest of my compadres. Personally, we are "planning" for at least one of us to reach 100 years. I'd hate to have no money left in my or DW's last 10-15 years. Not very responsible IMO after 85+ years of living and planning. I'd consider it a FAIL.

Everyone has their own "plan". I get it. It is what makes us unique. For some very good planners, savers, and LBYM'ers that post here, some recommendations about expected lifespans for planning are very short IMO.
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Old 09-16-2017, 08:50 AM   #16
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It sounds like you are willing to risk long term 'guaranteed' income for higher withdrawals right now. If you got $2mil and need 60k/yr - why not follow the standard for 4% plan? You will miss out on 40k the first few years for eliminating risk of income volatility.

Or even better, let's say you want income after ssi to be 80k=SSI+4%swr. If ssi is 50, you need 30k from 4% or 750k. That means you have 2mil-0.750=1.25mil to pad your 30k/mo income until you hit SSI. Look at a SWR on 1.25 for however many years until you hit SSI
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Old 09-16-2017, 09:00 AM   #17
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One thing I see as a basic fault in the logic is that the stock market is not a consistent straight line increase. Some years it goes up way more than 6%, but other years it is flat or can lose a significant expense. The stock market over long term does have higher than 6% returns. Whether you can live through a downturn or live long enough for it to recover is the question.

FWIW, I am firm believer in having a pretty high equities allocation. But not 100% now that I am retired. I try to target 80% max, with the great returns over this past year it is time to consider some rebalancing. Speaking of rebalancing, the whole point of having some fixed income type investments in your retirement savings is to provide some moderating effect to those stock market swings.

It is great that OP has a good SS to potentially fall back on. That SS can be considered like a fixed income once in place, but I would recommend that some fixed income now until SS is a good idea to counter a serious drop potential in the equity portion of savings between now and when SS kicks in.
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Old 09-16-2017, 09:00 AM   #18
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So if one didn't have 100% equities, but say 80% equities, wouldn't one be able to have a slightly higher expected success rate? That is, if one accepts the risk of failure with 100% equities and 0.5% a month, could one accept the same risk of failure and get a higher withdrawal rate with a different asset allocation?
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Old 09-16-2017, 09:11 AM   #19
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It sounds like you are willing to risk long term 'guaranteed' income for higher withdrawals right now.
OP-

If this is indeed your goal, I think there are better, more structured ways to achieve this goal. Two that come to mind are: Guyton-Klinger & VPW. You can check them out here (and BH) by searching for threads.
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Old 09-16-2017, 09:35 AM   #20
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So if one didn't have 100% equities, but say 80% equities, wouldn't one be able to have a slightly higher expected success rate? That is, if one accepts the risk of failure with 100% equities and 0.5% a month, could one accept the same risk of failure and get a higher withdrawal rate with a different asset allocation?
No, because the rate of return is not higher. They key to a more balanced allocation is that it provides consistency of return with less risk. The key is the amount of risk in the return. As most are aware, higher risk can lead to higher returns (on average), but with much higher volatility.
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