Being worth more at the end than the start

[W2R]

Quote:

Originally Posted by NW-Bound No more Wh***?

"Wh***" might change to "Whoa!!!"

[scrabbler1]

I ERed in late 2008 when the markets were crashing. Despite spending about $24,000 per year in my budget, my portfolio has risen about 40% since late 2008, 8 years ago.


I have run Fidelity's RIP program several times and each time it shows me, under pessimistic conditions, that by age 92 I will be far wealthier than I am today (adjusting for inflation). This is mainly due to the reinforcements which will arrive when I am in my 60s. Those include unfettered access to my IRA (which won't make me any wealthier), SS, and my frozen company pension. And that doesn't count a reduction in my health insurance costs when I become eligible for Medicare in 12 years.


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

[pb4uski]

Quote:

Originally Posted by street Here is another question I have for the retired people. What are the odds or percentage would you think that a person retiring and can structure their spending relatively close to what they had at the start of retirement to death. That a person would be worth more at death then you had at the start of retirement. So at death you will be worth more then when on the first day of retirement.

The odds are very high if one is following the 4% rule or some similar approach because those approaches are typically designed to ensure that you still have money left in your old age under some very draconian scenarios, which leaves many scenarios where the results are much better.

For example, if you plug in Firecalc with a $1m starting portfolio at age 60 and living to age 100 and 4% WR ($40k in first year) and a 60/40 portfolio (and leave all other inputs as default) then you get:

Quote:

FIRECalc looked at the 106 possible 40 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter. Here is how your portfolio would have fared in each of the 106 cycles. The lowest and highest portfolio balance at the end of your retirement was $-925,081 to $7,802,709, with an average at the end of $1,520,715. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.) For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 21 cycles failed, for a success rate of 80.2%.

Note that there are many scenarios where the ending balance exceed $1m

As for my personal experience, I'm coming up on 5 years and our portfolio is 12.5% higher than when we retired, and 21% higher if I include in the ending value our winter condo that we bought from portfolio funds.

[Danmar]

Quote:

Originally Posted by Bamaman 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. .

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.

Not sure how you determine how much lifestyle someone deserves?

[NW-Bound]

Quote:

Originally Posted by W2R "Wh***" might change to "Whoa!!!"

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.

[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]

Quote:

Originally Posted by scrabbler1 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]

Quote:

Originally Posted by NW-Bound 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]

Quote:

Originally Posted by Bamaman 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]

Quote:

Originally Posted by Dawg52 ... 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]

Quote:

Originally Posted by 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%

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]

Quote:

Originally Posted by audreyh1 ... % 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]

Quote:

Originally Posted by NW-Bound 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/foru...ml#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]

Quote:

Originally Posted by audreyh1 ...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/foru...ml#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.

Quote:

Originally Posted by daylatedollarshort ...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]

Quote:

Originally Posted by Danmar 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.