Another Look at SWR, Near Worst Case

[audreyh1]

I have been plowing my excess back into the portfolio (or not withdrawing it in the first place). I simply earmark it as "excess" on my spreadsheet and don't consider it in calculating subsequent withdrawals. I also adjust the total excess pool up or down annually based on the growth rate of the overall portfolio. I keep a cash cushion within the portfolio that I can tap in a bad year but I figure why not let my "excess" savings sink or swim with the portfolio.

I certainly understand why someone would leave excess in their portfolio. I assume it's for long-term growth reasons, which implies they are hoping for a larger end value to pass along to heirs/beneficiaries.

I, on the other hand, really don't want a larger end value. I want "just enough" and I plan to make withdrawals more aggressive as I get older if necessary.

Audrey

 

[donheff]

I certainly understand why someone would leave excess in their portfolio. I assume it's for long-term growth reasons, which implies they are hoping for a larger end value to pass along to heirs/beneficiaries.

I, on the other hand, really don't want a larger end value. I want "just enough" and I plan to make withdrawals more aggressive as I get older if necessary.

Audrey

If things go well over the years, it will be interesting to see if DW and I start to splurge (1st class air fare anyone?) or just stick with our current consumption patterns. I'm not sure how we will go -- maybe a mix.

 

[bubba]

I can't imagine just blithely withdrawing the inflation adjusted amount year after year like that! Whew. That would take so much courage.

Looking at the figures, it would be hard not to cut back severely for a year at age 67, and then again for an indeterminate period of time at age 77.

Can't add a thing to those comments; read my mind.

 

[ERD50]

Looking at the figures, it would be hard not to cut back severely for a year at age 67, and then again for an indeterminate period of time at age 77.

Can't add a thing to those comments; read my mind.

Really? I agree with the age 77 thing, but at 67? Look, the value came right back. It is totally within expectations to see this kind of volatility. If you can't accept it, you need to save up enough for a really low WR, then keep a conservative AA (and watch your buying power dwindle slowly but almost surely, rather than bounce around).

If we cut back spending at any little downward blip, we may pass up things that we can never capture again. I've been on vacations and seen older people have to pass up 90% of the real interesting opportunities because they just were not physically capable of climbing that staircase, or doing this or that.

Yep, there is a balance in all of this, but I for one (and I'm sure there are others) am so very happy that we didn't cut out things we enjoy just because the market took a dip and then mostly recovered (from the highs, it is up from when I retired at the end of 2003, as is my NW).

Yes, one must be prudent, but also be careful not to over-react to normal 'noise', or risk losing out on un-recoverable moments in life.

-ERD50

 

[Nords]

And it's interesting to think about where on would lose his/her nerve, undoubtedly it would vary considerably.

The part I always wonder about is where to look at the graph of "remaining portfolio" vs "annuity yields" and declare "GAME OVER".

At which point would this hypothetical retiree turn himself in to the insurance authorities? Would he start buying SPIAs 2-3 years early "just in case" and to "diversify"?

I can't imagine just blithely withdrawing the inflation adjusted amount year after year like that! Whew. That would take so much courage.
Looking at the figures, it would be hard not to cut back severely for a year at age 67, and then again for an indeterminate period of time at age 77.

I've been enjoying the discussion of the slow-motion train wreck of Raddr's fabled hapless Y2K ER.
Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update
He picked up the story in progress in March 2005 and he's been updating it at least annually. The thread has gone on for over 300 posts, with commentary along the lines of "You hate to see that happen to a rookie" and "Oooh, that's gonna leave a mark"...

 

[Animorph]

When I run FIRECALC and get a 94.6% probability of success, that sounds really good - and it is [There's no such thing as 100% probability of success WRT retirement plans to begin with, just statistics].

And combined with life expectancy, the "success" rate (to end of life instead of 30 years) should be even better. Probably less than 50% chance of making it all 30 years.

 

[W2R]

I've been enjoying the discussion of the slow-motion train wreck of Raddr's fabled hapless Y2K ER.
Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update
He picked up the story in progress in March 2005 and he's been updating it at least annually. The thread has gone on for over 300 posts, with commentary along the lines of "You hate to see that happen to a rookie" and "Oooh, that's gonna leave a mark"...

Yes! Results such as the updated 2011 table in that thread (in this post) inspire me to put on the breaks when the market is down, at least until I know whether it is going down further or back up. However I need to read the thread so that I can find out more about his methodology.

In real life I might be even more conservative. I even cut back a little bit last summer when the market was enduring summertime doldrums.

 

[audreyh1]

I'm a 1999 retiree

Fortunately, I retired with belt and triple suspenders since I retired very young. And I had investments outside of my "retirement" portfolio that I was able to draw on most years. The goal was to let it build as much as possible during the next 10 years.

Still, it's just incredible looking at the past 12 and seeing how many tough bears/corrections we have had.

Could it please be better going forward? Pretty please?

Audrey

 

[ejman]

I'm a 1999 retiree

Still, it's just incredible looking at the past 12 and seeing how many tough bears/corrections we have had.

Could it please be better going forward? Pretty please?

Audrey

Yes, it sure would be nice to contemplate some of those lines in the firecalc graphs that plot their way up and up and up for our own retirements. Dreaming is nice...

 

[jclarksnakes]

Big thank you to Midpack for doing the work and posting this. It is interesting to me that so many people describe the results displayed on the table as scary. I look at it and think that it is really pretty comforting. A worst case scenario runs out of money at age 95, hmmm? Okay so I am not really as tough as I talk. At age 90 when the portfolio went down to 435K I would be very nervous and would probably consider a SPIA. So I went to the USAA website to see what sort of income a 90 year old could get buying a SPIA for 435K today. The answer is 6,061.93 per month. About 11K less per year than the 83.7K income on Midpack's table for that year. In exchange for that loss of income I would get the ability to sleep better knowing that I would never be penniless with a totally depleted portfolio. I would also of course lose value due to future inflation. At age 90 would I be at the point where I really did not care too much about future inflation? I hope so. If I had lost my nerve a couple years before age 90 when the portfolio was still near 600K and bought a SPIA the results would have been nicely in favor of the SPIA.

 

[Aiming_4_55]

And combined with life expectancy, the "success" rate (to end of life instead of 30 years) should be even better. Probably less than 50% chance of making it all 30 years.

+1 While I plan for age 95 with the various retirement calculators, no one on my side of the family lived beyond 75 on the male side or 82 on the female side, I don't want to be penniless in my 80's or 90's, so I save and target a 3 - 3.5 SWR when I pull the plug.

 

[Nords]

At age 90 when the portfolio went down to 435K I would be very nervous and would probably consider a SPIA. So I went to the USAA website to see what sort of income a 90 year old could get buying a SPIA for 435K today. The answer is 6,061.93 per month. About 11K less per year than the 83.7K income on Midpack's table for that year. In exchange for that loss of income I would get the ability to sleep better knowing that I would never be penniless with a totally depleted portfolio. I would also of course lose value due to future inflation. At age 90 would I be at the point where I really did not care too much about future inflation? I hope so. If I had lost my nerve a couple years before age 90 when the portfolio was still near 600K and bought a SPIA the results would have been nicely in favor of the SPIA.

Good to know the numbers. Thanks for doing the research!

A 90-year-old shopping for SPIAs must attract the annuity salesmen from three time zones...

 

[NW-Bound]

I strongly suspect the chance of me living to 90 is fairly slim.

And if I get there, I also do not think I would remember what SPIA means.

 

[W2R]

Good to know the numbers. Thanks for doing the research!

A 90-year-old shopping for SPIAs must attract the annuity salesmen from three time zones...

Priceless!

 

[obgyn65]

Interesting question. I have been playing with my spreadsheet using different annuity scenarios. Mathematically, in my case (small pension, no SS), buying small annuities every year with monies not spent makes more sense.

At which point would this hypothetical retiree turn himself in to the insurance authorities? Would he start buying SPIAs 2-3 years early "just in case" and to "diversify"?

 

[Midpack]

+1 While I plan for age 95 with the various retirement calculators, no one on my side of the family lived beyond 75 on the male side or 82 on the female side, I don't want to be penniless in my 80's or 90's, so I save and target a 3 - 3.5 SWR when I pull the plug.

I plan for 97 (95 for DW), though I truly hope I don't live that long (yes, I know not everyone feels this way). But my parents are both 90 and completely independent, so I think I have to plan on a long life.

FWIW, when I was getting the online quotes, the site would not provide a quote beyond 90. Frankly I was surprised they didn't stop quoting at an earlier age, but maybe they want to quote case by case at advanced ages. Like Nords mentioned, you would think they'd love to sell annuities at an age.

 

[donheff]

FWIW, when I was getting the online quotes, the site would not provide a quote beyond 90.

Maybe they are afraid someone that old looking for a life annuity has discovered the fountain of youth.

 

[Midpack]

Maybe they are afraid someone that old looking for a life annuity has discovered the fountain of youth.

Indeed!

 

[jclarksnakes]

If I was selling a SPIA to a 90 year old I would at least take the time to look at them in person and try to make a dumb guess about how long they might live. Lots of money for the insurance company to make or lose depending on how long the SPIA purchaser lived. It surprises me that many (maybe even most) companies selling life insurance require a physical before they will quote a price. The same companies seem to not require a physical when selling a SPIA. Some things just seem odd to me?

 

[Gone4Good]

It surprises me that many (maybe even most) companies selling life insurance require a physical before they will quote a price. The same companies seem to not require a physical when selling a SPIA. Some things just seem odd to me?

With life insurance the provider is at an informational disadvantage . . . they don't know if you've just been diagnosed with a terminal illness that will cause them to lose money on the policy. With an SPIA, they'd be delighted if you just got bad news from your doctor. If on the other hand, you just got a clean bill of health, they have far better information on your likely longevity than you do, and price the policy accordingly.

 

[Danmar]

Great thread. Otar talks about giving up and buying a SPIA. I forget what the trigger is and not sure it can be applied prospectively. I wonder if just taking dividends would increase the probability of success?

 

[Animorph]

Great thread. Otar talks about giving up and buying a SPIA. I forget what the trigger is and not sure it can be applied prospectively. I wonder if just taking dividends would increase the probability of success?

Seems like just taking dividends would be a "forced" reduction in spending during bad times, in addition to a likely lower than 4% withdrawal rate to start. It will clearly work, same as taking 3% of the portfolio will always work, but you have to have good flexibility in your spending.

 

[Danmar]

Seems like just taking dividends would be a "forced" reduction in spending during bad times, in addition to a likely lower than 4% withdrawal rate to start. It will clearly work, same as taking 3% of the portfolio will always work, but you have to have good flexibility in your spending.

Yes I agree although my dividends have been very stable with only one case (immaterial) of reduction during the crises. Having a large cash balance equal to more than one year's worth of dividends can also reduce the need to reduce spending.

 

[clifp]

The discipline of (except for 2008) of only spending, interest and dividends has kept this Y2K retiree from avoiding the fate of Radr's (I previously misidentifed him as Dory's) of soon-be-broke retiree.

It is certainly true that a 3% withdrawal (or more like 2.5-3% in my case) would accomplish the same thing. IMO psychologically and practically practically it is easier to implement this with a dividend interest strategy that a fixed percentage withdrawal.

Throughout most of the 2000s an AA of say 60/40 with bonds/cd ladder yielding 5-6% provide 2%+ of the income, an equity portfolio with a combination of index funds with a 2% dividend yield, some individual dividend payers with 3-6% (mostly master limited partnership pipeline) provided the other 2%+.

My portfolio is finally producing record income after taking some big hits in 2008 and bit in 2009. However it is worth noting that more of the income loss was from the drop in interest rates as much as the dividend slashes by banks and a few others. Still the large number of recent dividend increases are not enough to make my real income keep up with inflation.

 

[mh]

Maybe they are afraid someone that old looking for a life annuity has discovered the fountain of youth.

I was looking at the Berkshire annuity calculator for an elderly friend of mine and it did not allow ages greater than 85 if I remember correctly.