Are Asset Allocating Withdrawal Strategies a Reliable Retirement Funding Method?

[ejman]

My idea is that auto-pilot ERs are really not possible without pensions. No matter what strategy we choose, it will have it own set of risks. I know some here follow this cash flow method, I hope people will comment on how you are feeling about it now. Some members have suggested that if you don't have a pension it is easy enough to buy one. I think the turmoil that has engulfed life insurers along with most other financial firms will put this idea to rest, at least for the thoughtful.

Ha

Well, I ER'd at 52 in December 2002 without a pension. I ran all the simulations, looked at my budget and things looked ok with a 4% withdrawal on my assets. I set up a standard 60/40 AA with 4 years expenses in cash (my sleep well at night point - it varies a lot from person person). Well, so far so good. The 4 years cash reserve is still there and my withdrawal is now 3% since the pot has grown since December 2002 even after all the girations of the last few weeks. Is it absolutely bomb proof? Am sure not- who knows what the future holds- all I know is that I have really enjoyed the 6 years since ER and wouldn't trade them for the continuation of the rat race i was involved in. There are absolutely no certainties in this world. If one waits to ER until there is an absolute guarantee I'm afraid death at the office is the only option...

 

[haha]

Well, I ER'd at 52 in December 2002 without a pension. I ran all the simulations, looked at my budget and things looked ok with a 4% withdrawal on my assets. I set up a standard 60/40 AA with 4 years expenses in cash (my sleep well at night point - it varies a lot from person person). Well, so far so good. The 4 years cash reserve is still there and my withdrawal is now 3% since the pot has grown since December 2002 even after all the girations of the last few weeks. Is it absolutely bomb proof? Am sure not- who knows what the future holds- all I know is that I have really enjoyed the 6 years since ER and wouldn't trade them for the continuation of the rat race i was involved in. There are absolutely no certainties in this world. If one waits to ER until there is an absolute guarantee I'm afraid death at the office is the only option...

Congratulations on doing so well. One might point out that you started at a bottom, perhaps similar to where a new retiree would be starting right now if this in fact is close to a bottom.

I too have been retired without a pension, in my case for 25 years. I raised two kids and got divorced and I am still OK. But I too started at a bottom in the early 80s.

I nevertheless think that absent luck or a fortuitous start date, autopilot has a fair chance of not working out. And we clearly don't know what might happen next in this current situation

ha

 

[clifp]

I am with Ha Ha, absent a COLA pensioned I am not a a fan of auto pilot retirement plans.

I think just as no battle plan survives contact with the enemy no withdrawal plan survives its first bear market.

One of the things I've learned the hard way, is that it is too easy for me use my money market "living expenses" to buy stocks in bear market. I've said for years that I am going set up a CD ladder but never really got around to it. I set one up for my mom that is working out ok.

Interest and dividends are nice, but I think I'd feel much better if I really had 3 years living expenses in cash.

 

[haha]

I am with Ha Ha, absent a COLA pensioned I am not a a fan of auto pilot retirement plans.

I think just as no battle plan survives contact with the enemy no withdrawal plan survives its first bear market.

One of the things I've learned the hard way, is that it is too easy for me use my money market "living expenses" to buy stocks in bear market. I've said for years that I am going set up a CD ladder but never really got around to it. I set one up for my mom that is working out ok.

Interest and dividends are nice, but I think I'd feel much better if I really had 3 years living expenses in cash.

Cliff, this is my problem too. I think the next time we have some decent prices I will sell off at least $100,000 and keep my greedy hands off it.

ha

 

[free4now]

I've not seen any results so far that invalidate any of the firecalc/trinity/etc testing (which made me feel comfortable with getting into ER). But all the smart folks running around like chickens with their heads cut off spouting doomsday talk are definitely making me question my ability to get through this unscathed. It's the talk that's got me down, not the objective market reality.

It was certainly easier to stomach downturns in retrospect, while I was doing my thought experiments before retiring. The difference is that in retrospect we knew where the end of the bears were, but today there's nobody telling us where this is going to end.

I suppose I'm lucky in that I've always thought I'd find some kind of paid work eventually (I'm not yet 40). Hence my username. One advantage to this downturn is that it has gotten me a bit more focused on taking advantage of my free time, knowing that it might come to a close by market force rather than by choice. I'm finding more energy for the difficult-but-rewarding projects in my life, knowing that my time to do them may not be infinite.

And I'm thankful that I had my period of being free of work right at the top of the market. I got to spend that money before it declined in value.

 

[chinaco]

A good discussion..

When the market began to tank, we were holding about 32% fixed... mainly intermediate term bonds. Some of those bonds are index mutual funds. (the disturbing part is that those bond funds hold Fannie and Freddie agency and MBS). Now that there is a credit crunch many corporations may fail (which will affect those bond portfolios with losses).

This is an unprecedented financial crisis (in our life time). Today things are different in many ways from 1929. There are some similarities... but too much direct comparison might lead to the wrong conclusions.

I am concerned that this event could affect my ER plans. The traditional safe haven of Bonds does not look so safe. I am beginning to wonder if the only safe bond is a US government bond... but since they are running the U$D printing press at full speed I am not sure how safe that is over the longer haul.

I am confident that things will mend. I am not sure when it will look better and how long it will take... or how much damage (losses) will be sustained.

One big problem for the average American is that defined benefit pensions are a thing of the past for most of us.... we are on our own to figure out how to deal with it.

I believe one important fix needed is a regulatory framework that works....

 

[dm]

dm..... what do you use for triggers to jump from one budget to the other? Decreases/increases in net worth? Or? If you haven't jumped to Budget 2 or Budget 3 in the crummy market of the past year, what would it take to trigger you to make the jump?

Budget 1 is what firecalc say's we can spend.

Budget 2 is what I think we should be spending.

Budget 3 I'm not playing country club golf and the Porsche's dont get replaced.

I have been tracking my spending for years and we generally spend $5200 per month on average, and do pretty much what we want. Since the recent downturn we are starting to watch our spending alittle more and hopefully will be closer to Budget 2.

I hopefully will never have to worry about budget 3, but I know I could get by on that amount. We would have to cut back on things that we like to do, no trips, spending on the kids, ect.

 

[ejman]

Congratulations on doing so well. One might point out that you started at a bottom, perhaps similar to where a new retiree would be starting right now if this in fact is close to a bottom.

ha

I agree that in a scary way this may be a great time to start ER! If a persons portfolio is still able to support say a 4% WD now after all these debacles, then much better to retire at this time rather than at the top back in October 07 when the Dow was at 14,000. 4% withdrawal of assets at that time would have shrunk to maybe 2.5% now.

All I can say is that we are surely closer to the bottom now than we were Oct 07 and that several years worth of cash is very very important. I certainly don't intend to divert my 4 year cash cushion to stock purchases no matter how cheap the market looks. My AA supports the life style I've chosen and to to risk its fundamentals for some potential gains that I really don't need makes no sense to me.

 

[ziggy29]

One big problem for the average American is that defined benefit pensions are a thing of the past for most of us.... we are on our own to figure out how to deal with it.

IMO, this is a big reason why so many more people are "feeling" the pain of this crash than previous crashes.

A generation or two ago, anyone who had job security and the promise of a great pension after 30 years of service, plus Social Security, had little reason to even invest in the market, let alone depend on it for their retirement hopes. I think a lot of people shrugged off the '73-74 debacle because people didn't need to be heavily invested to expect a comfortable retirement back then. That has changed.

I know I'd be a hell of a lot calmer if I had one that met most of my living expenses. And the longer this goes on, the more I wish I could go back and change decisions about my occupation and my employer.

 

[haha]

Budget 3 I'm not playing country club golf and the Porsche's dont get replaced.

I have been tracking my spending for years and we generally spend $5200 per month on average, and do pretty much what we want. Since the recent downturn we are starting to watch our spending alittle more and hopefully will be closer to Budget 2.

So, you belong to a country club, have kids and a wife, drive Porsches, and live on $5200/month?

Sure you do!!!

Ha

 

[Freeatlast47]

Wow my bare bones budget is $4000 a month maybe because I live in a high tax state... It does not include buying stuff for the grandkids, just groceries, utiliites, clothing and property taxes , auto and home insurance and no boat.


My mortgage is paid off, 4 year old car is paid off it is no porsch by any means and I have no credit debt and I still can't travel with this budget. Most of my major expenses go to property taxes and state taxes and my husband still works so we have health insurance. We are still scraping by... Please tell me what state you live in ...[/quote]

 

[Freeatlast47]

Budget 1 is what firecalc say's we can spend.

Budget 2 is what I think we should be spending.

Budget 3 I'm not playing country club golf and the Porsche's dont get replaced.

I have been tracking my spending for years and we generally spend $5200 per month on average, and do pretty much what we want. Since the recent downturn we are starting to watch our spending alittle more and hopefully will be closer to Budget 2.

I hopefully will never have to worry about budget 3, but I know I could get by on that amount. We would have to cut back on things that we like to do, no trips, spending on the kids, ect.

Please tell me what state you live in our minimum is budget is number 1..... If we wanted to pretty much due what we wanted to travel spend on kids it would be twice that

 

[dm]

Please tell me what state you live in our minimum is budget is number 1..... If we wanted to pretty much due what we wanted to travel spend on kids it would be twice that

I live about 40 miles outside St. Louis, Mo. Here is a pic of our paid for house and Porsches. My silver one is 35 years old though. And the clubs around here are begging for members. I belong to a very nice Tom Fazio designed club and it runs around $4,000 per year.

We generally don't spend alot on vacations, around $2,000 to $3,000 a year, our real estate taxes are $2,800 a year.

I rechecked my spreadsheet and last year we spent $5690 per month and that includes $5000 to the kids, a $3500 transmission for the truck, and $10,800 in medical insurance. This year we are averaging $5,400 per month. These are after tax numbers.

 

[dm]

So, you belong to a country club, have kids and a wife, drive Porsches, and live on $5200/month?

Sure you do!!!

Ha

Yes I do. Or actually close to that, I said I think that we should be spending $5,200 per month

Well my kids are 25, twins, so they dont' cost as much as they use to. And I am debt free.

My wife actually drives my Chevy Avalanche more than anything else these days.

 

[ejman]

Yes I do. Or actually close to that, I said I think that we should be spending $5,200 per month

Well my kids are 25, twins, so they dont' cost as much as they use to. And I am debt free.

My wife actually drives my Chevy Avalanche more than anything else these days.

Good Points DM. I think that a lot of people don't quite realize that once you have NO DEBT i.e. house, cars etc are fully paid for -the cost of living is very reasonable and manageable. Owing on those big ticket items has become so ingrained in a lot of people's psychology that quite a few are unable to conceive the amount of freedom that's gained by not following that line of thinking.

 

[Freeatlast47]

I live about 40 miles outside St. Louis, Mo. Here is a pic of our paid for house and Porsches. My silver one is 35 years old though. And the clubs around here are begging for members. I belong to a very nice Tom Fazio designed club and it runs around $4,000 per year.

We generally don't spend alot on vacations, around $2,000 to $3,000 a year, our real estate taxes are $2,800 a year.

I rechecked my spreadsheet and last year we spent $5690 per month and that includes $5000 to the kids, a $3500 transmission for the truck, and $10,800 in medical insurance. This year we are averaging $5,400 per month. These are after tax numbers.

I live in Maine and our property taxes are three times yours and our house is smaller . Sales tax is 6% on everything except for food that isn't processed (Snack foods are taxed) and we have a huge auto excise tax annually to register our 4 year old Acura. Income tax is 8%. If I wanted to forego all travel, entertainment, clothing and eat just macaroni and cheese for my food, no health insurance . The minimum would be $2300 a month. My in-laws moved out of state and retired in Arkansas because they couldn't afford to retire here.

According to the statistics Maine has 1.5 million pop. and most are wealthy retirees..(must be movie stars 10 mil?) why they would want to move here and have their retirement savings eaten up by taxes and shovel snow is so confusing ...

 

[M Paquette]

I live about 40 miles outside St. Louis, Mo.... This year we are averaging $5,400 per month. These are after tax numbers.

Beautiful house and location. I think this might be an example of how retirement costs and lifestyles can vary across the country. On Da Left Coast, costs are a tiny bit higher. OK, much higher. The higher fixed costs naturally cut down the discretionary spending, so just by moving here you'd probably be on your Budget #3.

At least you wouldn't have to mow the huge lawn. The next door neighbor's house would be 10 feet away. A developer here would probably put a subdivision on your lawn.

 

[clifp]

I live in Maine and our property taxes are three times yours and our house is smaller . Sales tax is 6% on everything except for food that isn't processed (Snack foods are taxed) and we have a huge auto excise tax annually to register our 4 year old Acura. Income tax is 8%. If I wanted to forego all travel, entertainment, clothing and eat just macaroni and cheese for my food, no health insurance . The minimum would be $2300 a month. My in-laws moved out of state and retired in Arkansas because they couldn't afford to retire here.

According to the statistics Maine has 1.5 million pop. and most are wealthy retirees..(must be movie stars 10 mil?) why they would want to move here and have their retirement savings eaten up by taxes and shovel snow is so confusing ...

Wow taxes sound worse than Hawaii. Not sure what this snow thing is
My mom said that leaves are beautiful in Maine around this time of year though.

 

[yakers]

It will be interesting to see how it works out for us. So far we are only 7 months into retirement and our expenses have not yet stabilized. I do know how much we spent on a gross level just from doing taxes each year. There is income --taxes--savings==living expenses. Oh, our younger son is still in college but his expenses are quite manageable, he is at a state school and we have saved enough in a separate account to cover most of his expenses so far. I also go over the quicken account and can see how much goes to charity, travel, utilities and a lot of categories. We did have a larger expense last year as we got a new(er) Jeep and a small travel trailer
I have allowed $6,000 to $6,200 each month for our total living expenses, after taxes. One new thing is that we are no longer saving, too bad with the market at current lows it seems like a good time to buy.
We live pretty simple; our house is modest, 1K SQ FT, 2BD 1BA, we do not have a boat, our sports car is a 1997 Miata. We did give our 1985 VW camper to older son and its nice to see the grand children camping. but that may have actually lowered our expenses.
At the end of the month there isn't much money left, it all pretty much gets spent. DW wonders where the large fund for more exotic travel is? (Without tapping the 401k/Roth.)
So its interesting to see 'how others live' on various amounts of funds, seems like we should have 'more' funds to play with (though I love(!) now having the time to play.

 

[Freeatlast47]

Wow taxes sound worse than Hawaii. Not sure what this snow thing is
My mom said that leaves are beautiful in Maine around this time of year though.

I meant to say who wants to pay high taxes and shovel snow for four months in while retirement. The leaves are gorgeous but expensive to look at the summers are nice too and my DH swears that its worth living here as the quality of life in Arkansas is not the same. Since we are foodies and like to cook gourmet meals there isn't any lobster, arugula, or porcini mushrooms to cook with, but with the state taxes we pay we could be living in Arkansas and hire a personal chef for the year .

 

[ziggy29]

Good Points DM. I think that a lot of people don't quite realize that once you have NO DEBT i.e. house, cars etc are fully paid for -the cost of living is very reasonable and manageable.

Agreed. And right now -- in a small paid-for house with low property taxes (by state standards) and a low local cost of living, we could comfortably live on about $3,000 a month today. That would include some belt-tightening but not draconian -- just reasonable frugality. Add in health insurance and maybe it's $3,500.

If we lived up to our current means in terms of income and cash flow -- say a $400K home with a big mortgage, a new $40K car being financed for five years and a few other extravagances, we couldn't live on twice that. And I'd spend my time fretting about whether I could hold onto my j*b for 20 more years to pay for it all.

It's priorities and, to some degree, risk tolerance. My priority is for economic security and less reliance on my current j*b than for more and more stuff. And to be able to take the "career cuffs" off myself MANY years sooner.

 

[Freeatlast47]

I retired in 06 and traveled a lot when the market was good but it looks like the stock market will be stagnant for the next few years plus we have major repairs on the house like painting and a new furnace. I would have been able to do both on 10% annual returns. With possible 0% returns and a even a 40% loss the travel is out of the question but I don't want to work, I'd rather eat macoroni and cheese 7 times a week than going back to Mega Corp and the politics. I occasionally see my ex-co workers and they ask if I found a job yet. My job was outsourced and it was perfect timing as I was going to quit within the next year. I haven't really told them that I retired because I am 48 . So when they ask what I do I tell them watercolor, cooking and gardening.

 

[Canadian Grunt]

haha,

I'm not trying to be too patronizing here, but you do realize that spending the dividend from the stock or selling shares of a stock is essentially the same thing. A dividend is just a forced sale of part of the company. I always have trouble understanding why people can't get past this little mental accounting trick. I'm not saying that dividends are a good or bad thing, just that not reinvesting the dividend or selling shares is more or less the same thing.

- Alec

edited to add: After reading what I posted, that did sound pretty confrontational. Apologies in advance. It was a tough day with the kids [who are lucky they're still alive].

Dividends are earnings of the company, don't compare them to the stock or retained earnings. The majority of the return from a portfolio is made up of dividends. Dividends are life savers during bear markets. Growth stocks kill you in a bear, and during a protracted bear your portfolio will not recover near as well if at all.

 

[Canadian Grunt]

My idea is that auto-pilot ERs are really not possible without pensions. No matter what strategy we choose, it will have it own set of risks. I know some here follow this cash flow method, I hope people will comment on how you are feeling about it now. Some members have suggested that if you don't have a pension it is easy enough to buy one. I think the turmoil that has engulfed life insurers along with most other financial firms will put this idea to rest, at least for the thoughtful.
Ha

Ha,

I started a thread about this topic two months ago, and also argued that a 4% withdrawal rate for early retirees is not sustainable over a 40-50 year time horizon without extreme risk. I also provided a lot of factual based research.

I still think the research applies and anyone retiring with a 40-50 year time horizon is taking a huge risk. I encountered large resistance to the facts I presented. I am interested to see what transpires over the next few years.


However, studies also show that the first 5 years of retirement is critical. Those people who retire at the bottom of this recession assuming it doesn’t last too long should have a higher success rate assuming they only have a 30-40 year horizon.

 

[ronin]

According to the statistics Maine has 1.5 million pop. and most are wealthy retirees..(must be movie stars 10 mil?) why they would want to move here and have their retirement savings eaten up by taxes and shovel snow is so confusing ...

Because it's still cheaper than (the people's republic of) California!