Another Look at SWR, Near Worst Case

[haha]

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.

The actuarial data gets pretty thin at that point.

 

[mh]

The actuarial data gets pretty thin at that point.

Yeah it wasn't suprising. i suppose at that stage in life you might as well
put it in something very conservative and just go with that..

 

[ERD50]

Yeah it wasn't suprising. i suppose at that stage in life you might as well
put it in something very conservative and just go with that..

I think that what haha was saying, is that the ins cos would not have very many customers at that age. They need bigger numbers to average out to their actuarial data.

I didn't look it up, but on average we'd be talking just a few years of payments. But just a few of those living past 100 (becoming more common) would throw off their averages. I think it is business they can afford to pass up.

So, I guess we should be watching as we age, and make the annuity decision before the option is no longer available.

-ERD50

 

[Lsbcal]

May be explained by your earlier observation and conclusion. Look for yourself, FIRECALC does not kick out actual income withdrawals or corresponding inflation so I used their default 3% inflation constant (knowing it's not right year by year) for lack of anything else to illustrate.

Hi Midpack, I know you are aware of this and maybe I'm reading this too fast, but FIRECalc's default for inflation is the CPI (not 3% constant). By using CPI one will get the bad post WW2 inflation and especially important, the 1970's inflation that tends to make the retirement start year of 1968 the worst scenario (in modern market times).

Would it perhaps be better to use CPI and independently calculate the inflation adjusted spending level based on known CPI data from the St. Louis Fed? Let me know if you want a link.

 

[Gumby]

Even this is much more open to question than commonly assumed. It is a lot easier to cut spending if you are living on $80,000/yr than on $25,000. The other aspect is that there is a lot of non-discretionary spending.

Our current plan is for cola'd pension income to cover the basic cost of keeping a roof over our heads, food on the table, and gas in the car (with SS providing a 50% kicker after a few years). If things go as planned, the portfolio should (at a 4% WR) throw off at least an amount equal to the pension income. This portfolio income will go to the discretionary items, like vacations, fancy restaurants etc., so we can cut back as necessary. Of course, as Robbie Burns said, "the best laid schemes o' mice an' men gang aft agley".

 

[Danmar]

IMO psychologically and practically practically it is easier to implement this with a dividend interest strategy that a fixed percentage withdrawal.

I totally agree with this. I figure I would always sell the wrong stock otherwise.

 

[Nords]

IMO psychologically and practically it is easier to implement this with a dividend interest strategy that a fixed percentage withdrawal.

Everyone agrees with that, but I wonder how many would volunteer to work longer to achieve a dividend portfolio ER instead of a portfolio-consumption ER.

 

[REWahoo]

Everyone agrees with that, but I wonder how many would volunteer to work longer to achieve a dividend portfolio ER instead of a portfolio-consumption ER.

I would not - and did not. My kids may not be happy about it, but I can [-]die[/-] live with it.

 

[Animorph]

I think that what haha was saying, is that the ins cos would not have very many customers at that age. They need bigger numbers to average out to their actuarial data.

Not only a data problem, but a risk problem as well. Not enough customers that age to safely average out the results even if the actuarial data was perfect.

 

[haha]

Not only a data problem, but a risk problem as well. Not enough customers that age to safely average out the results even if the actuarial data was perfect.

That is true. The reason there isn't much data, and a parallel problem, is that 90 year old annuity applicants are thin on the ground. So not very reliable data, and even more important, not enough customers. The law of large numbers only works with large numbers.

Ha

 

[walkinwood]

Thanks for the post. I could feel my stress levels increase as I read down that list.

For now, at least, we use a % of portfolio like Audrey does. I recommend this only to people who have a good spending buffer because the year to year withdrawals can be very volatile.

 

[hankster]

Hi everyone. I haven't posted in quite some time. I'm eligible to retire in December of this year and this discussion of SWR is of great interest to me.

The timing of SS benefits has been on my mind with regards to portfolio drawdown. With both parents still living independently in their 90s, I like the idea of delaying SS to age 70 as a type of longevity insurance. However, I wonder if a down market and dwindling portfolio in my early 60s might prompt me to pull the trigger early on SS benefits. I guess I won't know for sure until I get there. Lots to think about.

Thanks to all for a great thread.

 

[photoguy]

For now, at least, we use a % of portfolio like Audrey does. I recommend this only to people who have a good spending buffer because the year to year withdrawals can be very volatile.

Just to clarify, do you consider the buffer to be separate from the rest of your portfolio? So if your portfolio drops and if you were on say a 3% of the current year's portfolio plan (which is not enough for the year) you make up the difference from the buffer (a completely separate stash of money)?

 

[Midpack]

Hi Midpack, I know you are aware of this and maybe I'm reading this too fast, but FIRECalc's default for inflation is the CPI (not 3% constant). By using CPI one will get the bad post WW2 inflation and especially important, the 1970's inflation that tends to make the retirement start year of 1968 the worst scenario (in modern market times).

Would it perhaps be better to use CPI and independently calculate the inflation adjusted spending level based on known CPI data from the St. Louis Fed? Let me know if you want a link.

Thanks! You're right, I overlooked that. However, most long term inflation/CPI averages I've seen have been in the 3.0-3.3% range. Hopefully the numbers I used were close enough to illustrate what it might feel actually making large withdrawals during a worst case real return period, that's all I was really after.

 

[Midpack]

Everyone agrees with that, but I wonder how many would volunteer to work longer to achieve a dividend portfolio ER instead of a portfolio-consumption ER.

Including those of us who would rather 'die broke' and plan to deplete principal at some point...

 

[Danmar]

Everyone agrees with that, but I wonder how many would volunteer to work longer to achieve a dividend portfolio ER instead of a portfolio-consumption ER.

I'm not sure everyone would agree with this. Studies have suggested that an income based approach may not be optimal. If the dividend yield of your portfolio approximates a reasonable SWR (my case) you wouldn't have to work any longer to put this strategy into effect. It just seems inherently safer and easier to me to take this approach versus a liquidation/selldown approach.

 

[FUEGO]

I would worry a little at age 67, then again at 73. At age 77 when the portfolio drops to $742k and the withdrawal rate jumps to 7.7% I would be really concerned.

As my worry increases, I would try to reduce spending. At age 77 when my withdrawals hit 7.7% I would cut spending a lot. Or I would be thinking about putting in an application at Walmart.

What this doesn't reflect is that this retiree would typically get some sort of SS. I guess depending on how much of my basic expenses were covered by SS, I might not be so worried.

My personal situation:
If this was my trajectory as someone who intends to ER around 35, then I would be 47 (instead of 77) when the $hit really hit the fan. I would probably have cut back expenses some and/or would have gone back to work (full or part time). Although this is very unique to my personal situation, at 47 (when the portfolio in this scenario takes a big nosedive) I would hopefully be getting my 2nd child completely off my payroll (finished with 4th year of college) and as a result I could trim spending even more.

 

[FIRE'd@51]

Dory (FIRECalc) author has been running the case of the poor Y2K retiree for many years now. This is certainly a scary table. Doubly so for me being both a very early retiree and a Y2K retiree. With only $367K remaining in the 1Mil portfolio odds are very good the retiree will run out of money by 2020 or so.

Or sooner, if we have a bout with inflation like we had in the late 70's and early 80's. It was this higher inflation that ultimately caused the Firecalc failures for the 30-year periods beginning in the mid to late 60's. So far since 2000, inflation has remained low, allowing bonds to be a good investment.

 

[Lsbcal]

... So far since 2000, inflation has remained low, allowing bonds to be a good investment.

Just have to chime in that real rates came down in the 2000's partly due to Fed policy (which was helped out by lower inflation as FIRE'd@51 points out). Unfortunately for bond holders this bonanza will not be repeated. Savers (FDIC insured savings) are already complaining and bond holders may not yet have started to feel the pain since last year Treasury rates went down.

I expect that future years will see all manner of posts on how much a problem bond investing is and how unjust the market gods are.

 

[walkinwood]

Just to clarify, do you consider the buffer to be separate from the rest of your portfolio? So if your portfolio drops and if you were on say a 3% of the current year's portfolio plan (which is not enough for the year) you make up the difference from the buffer (a completely separate stash of money)?

Yes & no.

I do have an emergency fund that I keep separate from my portfolio & is not used to calculate the budget for the year. This is for emergencies, though - and I try not to touch it.

The annual budget (calculated as 4% (in my case) of the portfolio on Jan 1) is volatile. And we live within that budget. By "buffer", I mean that if your budget in year 2 is 25% less than in year 1, you'll still have enough money to live a good life - however you define that. That's more or less what happened to us in year 2. Now, if we have a significantly worse annual performance than 2008, we may be forced to dip into our emergency fund just to see us through. But we've taken steps to increase our buffer.

Last year, we moved from NJ and were a little over our fixed percentage budget for the year due to moving costs. Since this was a one time event, we dipped into our emergency funds.

I hope that explains my comment.