Being worth more at the end than the start

[NW-Bound]

About my children, they are doing fine with their decent paying jobs in the fields for which they got college training. Depending on how my own financial condition works out, I may give them some help, like funding their Roth accounts. Or I will pay for our family vacation together.

It's easy to spend money. When you don't have enough, it's a lot tougher. By being frugal and conservative, I have managed to survive a few years of working without pay (my choice), and so see no reason to change my habits now. And I already have what I need.

 

[W2R]

Maybe I buy a house in 10 years once those reinforcement arrive?

That's what I did. Started getting SS in mid-2014, bought my dream home in mid 2015.

Actually I did not exactly plan my home purchase with SS in mind. I had been looking for my dream home for several years, and happened to find it in 2015. Still, getting SS helped a lot once I finally found the home I wanted.

There are so many expenses involved in purchase of another home, selling, moving, fixing up, and so on. It's frightfully expensive IMO, more than I had anticipated so I'm glad I didn't spend any more than I did.

 

[jkern]

After 7.5 years of retirement (Mid 2009), my net worth has increased by about 65%.

 

[W2R]

With so many posters talking about having so much money, I think they are overriding your recent restraint on the Wh*** proclamation. I think my early belt-tightening is the proper measure to take.

I think so too. I have been doing a lot more belt-tightening too, although the "once in a blue moon" expenses have all descended upon me in 2016. Like, having to replace my entire HVAC system, having unusually huge uninsured dental expenses, and so on. So, instead of spending less, I think I spent more.

With any luck 2017 will be a great year in which my spending drops like a rock, FINALLY. Like you, I want to prepare for the next recession early, before it hits.

 

[Dawg52]

But our investment accounts are there for us to spend, as it's now our time in life.

My philosophy as well. Of course when I get too old to do stuff, my expenses will go down. Won't have a vacation condo, won't belong to a country club anymore and will just generally spend less. But if my health goes to hell in a handbasket, I might be in a nursing home spending a lot more money. So there has to be a reasonable balance as to what I spend now.

 

[audreyh1]

I've done quite a bit of analysis recently using FIRECALC on the % of remaining portfolio method where you take a fixed percentage of your retirement portfolio at the end of each year (no adjusting for inflation - just whatever the portfolio gains or loses). This is a method where income can vary quite a bit, so it's only appropriate if you have a lot of discretionary expenses, and can cut back in years after your portfolio does poorly. The upside is that you don't run out of money, your income grows more quickly if the portfolio does well during the initial years, and as a consequence, the ending portfolio tends to be smaller compared to the constant spending method. If your portfolio already provides more income than you need, and you have a lot of discretionary expenses, this might be a good choice, especially if you would like to take advantage of initial good market years. This also has pretty good characteristics for ending not to far from where you started, even after inflation.

Assuming 50% total stock market, 50% 5year US Treasuries, and a 30 year period, 106 runs starting from 1871:

If you withdraw 4.25% of the value of the portfolio each year, after 30 years the average remaining portfolio will be 103% of your starting portfolio in real terms (that means after inflation), and the lowest ending portfolio was 52% of your starting, and the highest ending portfolio was 225% of your starting portfolio.

I consider this to be the more or less "break even" case. But you also might have to tolerate a cut in income by slightly more than half, although that is unlikely. Still, you could go through a period of declining real income for several years, so you have to decide how to deal with that, or whether you have enough discretionary spending that you can cut back without it hurting too much.

If you lower your withdrawal rate to something like say 3.33%, the average ending portfolio was 130% of the starting portfolio, in real terms. The lowest 69% of the starting portfolio, and the highest 300% of the starting portfolio. In the 1966 case, the portfolio and thus income would have dropped to 54% of the starting amount, in real terms, and you would have lived with many years of declining real income before recovering. But you would not have run out of money as you would have it you had used the constant inflation adjusted spending withdrawal. And the 1966 run ended the 30 years a little above break even in real terms with the 3.33% withdrawal rate. It was around 80% for the higher 4.25% withdrawal rate.

Here are the rates I have studied. It gives you an idea of how this withdrawal method behaves with a narrow range of withdrawal rates, and gives you an idea of how historically it has behaved, and what kind of worst income reduction and ending portfolios resulted. Again, these are in real terms, so if inflation is high, you might not see an income reduction in nominal terms - it looks like everything is growing, but your spending power would be hit because your portfolio wasn't keeping up with inflation for a while.

% withdrawal remaining portfolio	average ending portfolio real	lowest ending portfolio real	highest ending portfolio real	Worst case real income reduction (1966 run)	Ending real portfolio(1966 run)
4.25%	103%	52%	225%	46%	78%
4.00%	112%	56%	244%	48%	85%
3.50%	130%	66%	287%	52%	99%
3.33%	137%	69%	300%	54%	105%
3.25%	141%	71%	308%	54%	107%
3.00%	152%	77%	333%	57%	116%

 

[NW-Bound]

... there has to be a reasonable balance as to what I spend now.

I have been having fun planning for a 6-week trip in Europe late next spring. Can't even think now of an RV trek late next year, but I certainly do not rule it out. Or I can take the children down to the Mexican resort on the Sea of Cortez like earlier this year.

All the above is within my plan of reduced spending. Yeah! It's more about whether I get my fill of travel, and just want to stay home.

 

[street]

I've done quite a bit of analysis recently using FIRECALC on the % of remaining portfolio method where you take a fixed percentage of your retirement portfolio at the end of each year (no adjusting for inflation - just whatever the portfolio gains or loses). This is a method where income can vary quite a bit, so it's only appropriate if you have a lot of discretionary expenses, and can cut back in years after your portfolio does poorly. The upside is that you don't run out of money, your income grows more quickly if the portfolio does well during the initial years, and as a consequence, the ending portfolio tends to be smaller compared to the constant spending method. If your portfolio already provides more income than you need, and you have a lot of discretionary expenses, this might be a good choice, especially if you would like to take advantage of initial good market years. This also has pretty good characteristics for ending not to far from where you started, even after inflation.

Assuming 50% total stock market, 50% 5year US Treasuries, and a 30 year period, 106 runs starting from 1871:

If you withdraw 4.25% of the value of the portfolio each year, after 30 years the average remaining portfolio will be 103% of your starting portfolio in real terms (that means after inflation), and the lowest ending portfolio was 52% of your starting, and the highest ending portfolio was 225% of your starting portfolio.

I consider this to be the more or less "break even" case. But you also might have to tolerate a cut in income by slightly more than half, although that is unlikely. Still, you could go through a period of declining real income for several years, so you have to decide how to deal with that, or whether you have enough discretionary spending that you can cut back without it hurting too much.

If you lower your withdrawal rate to something like say 3.33%, the average ending portfolio was 130% of the starting portfolio, in real terms. The lowest 69% of the starting portfolio, and the highest 300% of the starting portfolio. In the 1966 case, the portfolio and thus income would have dropped to 54% of the starting amount, in real terms, and you would have lived with many years of declining real income before recovering. But you would not have run out of money as you would have it you had used the constant inflation adjusted spending withdrawal. And the 1966 run ended the 30 years a little above break even in real terms with the 3.33% withdrawal rate. It was around 80% for the higher 4.25% withdrawal rate.

Here are the rates I have studied. It gives you an idea of how this withdrawal method behaves with a narrow range of withdrawal rates, and gives you an idea of how historically it has behaved, and what kind of worst income reduction and ending portfolios resulted. Again, these are in real terms, so if inflation is high, you might not see an income reduction in nominal terms - it looks like everything is growing, but your spending power would be hit because your portfolio wasn't keeping up with inflation for a while.

% withdrawal remaining portfolio	average ending portfolio real	lowest ending portfolio real	highest ending portfolio real	Worst case real income reduction (1966 run)	Ending real portfolio(1966 run)
4.25%	103%	52%	225%	46%	78%
4.00%	112%	56%	244%	48%	85%
3.50%	130%	66%	287%	52%	99%
3.33%	137%	69%	300%	54%	105%
3.25%	141%	71%	308%	54%	107%
3.00%	152%	77%	333%	57%	116%

Very nicely done! Outstanding and very easy to understand. Thanks

 

[Teacher Terry]

My Mom and DAd retired at 60 and 54. My Dad due to health issues and my Mom to take care of him. My Mom lived just short of 90. Property taxes were so high that they rented a very nice apartment cheaper then taxes. They had 1 pension, SS, savings and $ from selling the home. She traveled a lot and did the stuff she wanted to. When she was dying she told us to sell her car and furniture once she was gone to pay for the funeral expenses that she had not already pre-paid. Perfect! If she had lived longer she had enough income coming in to live fine and she no longer wanted to travel at that age.

 

[NW-Bound]

...

% withdrawal remaining portfolio	average ending portfolio real	lowest ending portfolio real	highest ending portfolio real	Worst case real income reduction (1966 run)	Ending real portfolio(1966 run)
4.25%	103%	52%	225%	46%	78%
4.00%	112%	56%	244%	48%	85%
3.50%	130%	66%	287%	52%	99%
3.33%	137%	69%	300%	54%	105%
3.25%	141%	71%	308%	54%	107%
3.00%	152%	77%	333%	57%	116%

What is interesting in the data presented by Audrey is this: reducing your WR from 4.25% to 3% does not help as much as one expects.

Here is how it looks. Starting with $1M and initially drawing $42.5K, in the worst case your spending will be down to 46% of that, which is $19.55K.

If you use 3% WR or $30K initially, then in the worst case you are down to 57%, or $17.1K. This is 87% of the $19.55K above, compared to the initial ratio of 3%/4.25% = 70.6%.

The 3% WR may scrimp your lifestyle quite a bit compared to 4.25%, yet during bad years, you are not helped that much. Looks how you do not go broke with either 4.25% or 3%, but with the 3% you are always spending less, in good times and also in bad times.

Unless I find something wrong with the data, I would vote for 4.25% of remaining portfolio.

Hallelujah! Now, how do I change my flight to extend my 2017 european trip from 6 weeks to 12 weeks?

 

[daylatedollarshort]

We use liability matching so except in the event of an asteroid strike we plan to have our net worth dip a bit until the last kid is out of college and we're on SS, then net worth will hold steady for the rest of our lives. No plan to spend down the portfolio. We have a nice house in the Bay Area, can do a bit of travel and go out to some event like a play, hike or museum most days, which is what we like, so there is not a big desire by either of us to spend more. What we don't need for long term care, can go to the kids and charity. Plus I have hobby income that is not in the budget so I've been using that for extra savings and fun stuff like Groupons and theater tickets.

 

[audreyh1]

What is interesting in the data presented by Audrey is this: reducing your WR from 4.25% to 3% does not help as much as one expects.

Here is how it looks. Starting with $1M and initially drawing $42.5K, in the worst case your spending will be down to 46% of that, which is $19.55K.

If you use 3% WR or $30K initially, then in the worst case you are down to 57%, or $17.1K. This is 87% of the $19.55K above, compared to the initial ratio of 3%/4.25% = 70.6%.

The 3% WR may scrimp your lifestyle quite a bit compared to 4.25%, yet during bad years, you are not helped that much. Looks how you do not go broke with either 4.25% or 3%, but with the 3% you are always spending less, in good times and also in bad times.

Unless I find something wrong with the data, I would vote for 4.25% of remaining portfolio.

Hallelujah! Now, how do I change my flight to extend my 2017 european trip from 6 weeks to 12 weeks?

This is very true - even though your income can drop more with 4.25% draw, in comparative $ terms your income is higher both in best case and worst case with the higher draw than the lower ones. You just have to understand that the higher your withdrawal, the more your income can drop during bad times, so maybe don't get too used to that higher income such that your fixed expenses grow to use up most of it?

So it probably makes more sense to calibrate withdrawal rate in terms of what final portfolio you would like on average, or what "worst case" portfolio you prefer. If that's your goal.

What is wrong with the data? It's historical, and it's assuming a 0.18% expense ratio. We don't know if a worse case is facing us around the corner, and that's a really low ER.

I haven't done higher runs than 4.25%. I think samclem has done. He's got some results for slightly above that over on the Kitces thread. Enough to know that getting much above 4.25% you can see the portfolio is starting to shrink. http://www.early-retirement.org/for...er-long-term-returns-80745-6.html#post1802271

Here is an illustration assuming a $1M portfolio to start with. All results are real numbers.

% withdrawal remaining portfolio	$1M starting portfolio income	$1M starting portfolio lowest income (1966 run)	Ending portfolio 1966	average ending portfolio	lowest ending portfolio
4.25%	$42,500	$19,558	$784,430	$1,032,020	$518,901
4.00%	$40,000	$19,192	$848,258	$1,115,994	$561,123
3.50%	$35,000	$18,248	$991,311	$1,304,200	$655,754
3.33%	$33,300	$17,858	$1,045,063	$1,374,917	$691,310
3.25%	$32,500	$17,661	$1,071,322	$1,409,464	$708,681
3.00%	$30,000	$16,990	$1,157,558	$1,522,919	$765,726

 

[NW-Bound]

...I haven't done higher runs than 4.25%. I think samclem has done. He's got some results for slightly above that over on the Kitces thread. Enough to know that getting much above 4.25% you can see the portfolio is really shrinking. http://www.early-retirement.org/for...er-long-term-returns-80745-6.html#post1802271

4.25% is OK. Along with future SS, at 4.25% I have more than I have ever spent, and I thought I already spent too much.

...in the event of an asteroid strike ...

I would drive around town to gather up all the bottles of Louis XIII Cognac I could get my hands on ($6K at Total Wine). I want to drink to a stupor watching that asteroid entering the atmosphere.

Just joking. I know you use it as a metaphor.

 

[gauss]

Of course this is possible. Just as it is possible to ER with the proper planning and life choices. It is all a matter of priorities and planning.

-gauss

 

[Chuckanut]

I certainly respect this viewpoint and agree our children's retirements are their own responsibility. However, others often want to give their kids as good a "boost" as they can within the constraints of their (parents)resources and lifestyle desires. Without knowing your demise date, it is difficult to spend it all. You could of course annuitize the whole thing but most here wouldn't consider that.

One thing I have decided is that I don't want my kids to have to wait until I die to get some help. For example, if I can pay for some education that will give my child significantly higher earnings for the next 20+ years until I pass on, Is that not better than giving them a big pile of money in 20+ years? I think so. It's all relative of course, and depends on one's values and the needs and values of one's potential heirs.

OTOH, I will not pay for them to live higher on the hog than they can with their earnings. LBYM is something they seemed to have learned and are putting into practice, albeit, not always in the ways I would have chosen. But, my father would have said the same about me.

 

[Teacher Terry]

We helped the kids when they were younger and needed it. My inlaws and parents did that for us too. Often by the time people die the kids don't need the $.

 

[NW-Bound]

One thing I have decided is that I don't want my kids to have to wait until I die to get some help. For example, if I can pay for some education that will give my child significantly higher earnings for the next 20+ years until I pass on, Is that not better than giving them a big pile of money in 20+ years? I think so. It's all relative of course, and depends on one's values and the needs and values of one's potential heirs.

OTOH, I will not pay for them to live higher on the hog than they can with their earnings. LBYM is something they seemed to have learned and are putting into practice, albeit, not always in the ways I would have chosen. But, my father would have said the same about me.

+1

My children graduated with no student loans, and are now making a good living. Barring some catastrophe, they will do well without my help, the same way I did without parental help.

I can spend a lot more now, but I am so used to having a decent stash, just to look at for that feeling of security. Call me Scrooge, but a lifetime habit is hard to change.

 

[Chuckanut]

One problem with having a successful safe withdrawal rates (and its a good problem to have) is that in order to get a 90+% success rate, one often has to risk leaving huge amounts of money unspent, thus denying oneself potential enjoyment and comfort in the later years.

One suggestion to 'fix' that problem is to have a variable withdrawal rate - a bit more in up years, a bit less in down years. In theory, it preserves a high success rate while allowing me to spend more total dollars than using a simple fixed rate. Of course, that means the heirs will get less when one passes on.

 

[daylatedollarshort]

I run our retirement plan using liability matching and a straight .5% real, which is about what 30 year TIPS were at not too long ago. When we started our retirement planning 30 year TIPS were paying ~2% real, and we just thought, eh that's good enough if we can get more or less 2% real yield without any stock market worries, portfolio depletion or sequence of returns risk. But we keep lowering our basic run rate over the years on the kinds of changes that do not lower our lifestyle, like making making the house energy efficient or getting rid of the landline, so .5% real still gets us the same lifestyle now as the 2% in our original plan because our run rate is lower.

 

[NW-Bound]

One problem with having a successful safe withdrawal rates (and its a good problem to have) is that in order to get a 90+% success rate, one often has to risk leaving huge amounts of money unspent, thus denying oneself potential enjoyment and comfort in the later years.

One suggestion to 'fix' that problem is to have a variable withdrawal rate - a bit more in up years, a bit less in down years. In theory, it preserves a high success rate while allowing me to spend more total dollars than using a simple fixed rate. Of course, that means the heirs will get less when one passes on.

It is most likely prudent people who are able to ER and know enough to plan their spending will leave a substantial amount of money behind. Perhaps they will not leave behind the same original stash they start out with, but 1/2 or 1/4. It is for the simple reason that they would throttle back if the economic conditions get tough, and then they do not know their exact expiration date to spend the last dime.

Even if they can see the approach to the end, when it comes they are in no mood to splurge, or even have time to. Sad, but true. I can see myself in that situation, but that's the way it is.

 

[foxfirev5]

+1

My children graduated with no student loans, and are now making a good living. Baring some catastrophe, they will do well without my help, the same way I did without parental help.

I can spend a lot more now, but I am so used to having a decent stash, just to look at for that feeling of security. Call me Scrooge, but a lifetime habit is hard to change.

Agree 100%. We got the kids through college (well two out three ain't bad) and they can support themselves. Anything beyond that is gravy for them.
However I am finding myself stashing a portion of my monthly living expenses just like we did for the last four decades. All for plan A, B, C, D etc. Once a saver always a saver.

 

[audreyh1]

One thing I have decided is that I don't want my kids to have to wait until I die to get some help. For example, if I can pay for some education that will give my child significantly higher earnings for the next 20+ years until I pass on, Is that not better than giving them a big pile of money in 20+ years? I think so. It's all relative of course, and depends on one's values and the needs and values of one's potential heirs.

Since we don't have children, but I do have younger siblings as heirs, our strategy will be to gift what we can while we are living. Like us, they will be better able to use it when they are younger, rather than waiting for us to die.

So, I'm not so worried about whether I can spend all our income in older years, as what we don't don't spend on ourselves will be gifted as we can while we are alive.

 

[kgtest]

Hallelujah! Now, how do I change my flight to extend my 2017 european trip from 6 weeks to 12 weeks?

simple, call the airlines and for a small fee, anything can be changed. Don't forget to factor 2x the lodging and food budget though

 

[Bamaman]

My wife and I got our education and had good jobs for 36 and 30 years. We worked very hard. We lived within our means, saved for our retirement and took some moderate investment risks that paid off in the long run.

After retiring at 58 and 50 years of age, we are financially stable. But we're going to continue living a reasonable standard of living in retirement.

We don't owe our children a better living than they deserve, and it's up to them to make their own lives and save for their own retirement. Up until now, we've dedicated our lives to our children and grandchildren. Our real estate is substantial, and they'll inherit that. But our investment accounts are there for us to spend, as it's now our time in life.

I figured there'd be a little conversation on this one. Our children were offered a free education without student loans, and one took advantage of it. Our youngest is 29 years old and makes bad life decisions. I finally bought a 2800 square foot house to get her to step up and be a better mother to her two children. The son's life was 20 years of a blur smoking pot, but he's been clean for a number of years. Our oldest died in Sept. with a heart attack, and she buried a daughter a year ago and a husband 6 years ago (cancer.)

We've finally reached normal retirement age. We worked very hard, saved hard and want to enjoy our remaining years without everyone spending our retirement money. We'd like a little less drama and looking forward to be a little bored. The kids will have real estate to liquidate, and they'll be okay.

 

[NW-Bound]

simple, call the airlines and for a small fee, anything can be changed. Don't forget to factor 2x the lodging and food budget though

The doubling of the other expenses is a given. But the flight change will result in a repricing of the airfare, in addition to that fee. The former is what will void out the good deal that I have been patting myself on the back for scoring.

Nah, I will keep the existing travel plan. Extending the trip will keep me there into the summer, when it is hot and no longer that comfortable. Better save something for next year.