Business Week's retirement math (or not)

[Nords]

I must confess I didn't catch this. I read BW's annual Retirement Issue (the one with the obligatory cover of a geezer carrying a surfboard) and paged through the article "How to Tap Your Nest Egg-- and Not Go Broke". When I saw that the hypothetical "typical retirees" had a $2M portfolio I snorted & turned the page.

Then my FIL called me with a question. First, here's an excerpt from the article (which may require a subscription for access): "With an annual income of $200,000, the Smiths, we figured, were used to a comfortable lifestyle. So we gave them a yearly budget of $10,000 for travel, more than $2,000 for clubs and hobbies, and $6,000 for entertainment and restaurants. Combined with daily living expenses -- including mortgage payments, property taxes, home and auto insurance, maintenance, groceries, and health-care costs -- the grand total came to about $9,000 a month. We also gave the Smiths a $2 million portfolio. We put more than 70% of it into stocks, with the rest divided between bonds, cash, and other ultra-conservative investments.

Unfortunately, we learned that the Smiths' $2 million retirement nest egg wouldn't support that lifestyle -- never mind the $500,000 we had hoped they could leave their heirs -- even when supplemented by Social Security and a pension that together are worth almost $60,000 a year. In fact, Fidelity, Merrill Lynch, and T. Rowe Price all warned us that at this level of spending, the Smiths would run a substantial risk of depleting their assets. All three services project to at least age 90. Why? Because if both members of a couple make it to 65, there's a 50% chance at least one of them will live to 92, according to Fidelity."

My FIL's question-- $60K annual SS/pension, $108K annual spending, a $2M portfolio. The portfolio has to support a $48K annual shortfall. If that portfolio was plunked into 10-year Treasuries at 5% (work with me here) it'd cough up another $100K/year. So how does BW project failure?!?

Even at a 100% TIPS portfolio over 40 years, FIRECalc is snickering too. I finally jacked up the annual withdrawals by $10K at year 10, another $10K at year 20, and finally an additional $10K at year 30 to finally beat the success rate down to 97%.

Al, who's proofreading for these guys?!? It'll be interesting to read their "Corrections" & "Letters to the Editor" sections next week...

[maddythebeagle]

Funny that most of these financial press articles say the same things. Seems to me that some of these folks that like to spend up to their high incomes would be better off just staying in the work force.....

[Martha]

Let's all write them a letter to the editor. These articles never seem to get their facts straight. Last night I read the whole BW issue. Found nothing of interest and nothing helpful.

[Patrick]

Quote:

Originally Posted by Nords My FIL's question-- $60K annual SS/pension, $108K annual spending, a $2M portfolio.* The portfolio has to support a $48K annual shortfall.* If that portfolio was plunked into 10-year Treasuries at 5% (work with me here) it'd cough up another $100K/year.* So how does BW project failure?!?

Could it be due to:

"At first, they won't be eligible to collect Social Security. But they will receive an annual company pension of close to $30,000."* That's a $78K shortfall at the beginning.

and:

"We put more than 70% of it into stocks, with the rest divided between bonds, cash, and other ultra-conservative investments."

and:

" . . . Fidelity assumes health-care expenses will rise 7% annually, with most other expenses increasing by 2.16%. But T. Rowe Price and Merrill use a single inflation rate -- 3% and 2.5%, respectively. The plans also cover different time periods. Merrill projects five years beyond average life expectancy -- to age 90 in this case. To provide some extra insurance, T. Rowe Price targets age 95. Fidelity plans to age 92 for men and age 94 for women. T. Rowe Price's projections assume you'll shift to a more conservative asset allocation over time, while Fidelity's and Merrill's don't."?

[Nords]

Quote:

Originally Posted by Patrick " . . . Fidelity assumes health-care expenses will rise 7% annually, with most other expenses increasing by 2.16%.

Dory, is there any way to choose our own FIRECalc inflation rates, or are we limited to those three PPI/CPI/None options?

[farmerEd]

Also need to factor in state and federal taxes into the equation...still seems the article is off base, but in order to spend $108K per year they probably need to have $150K or so in income.

[MJ]

Dory, I also like the idea of having a variable general inflation rate as well as a separate medical expense inflation rate.
My current inflation rate is 4.8% and medical inflation rate is a very convervative 11%.

[windsurf]

Quote:

Originally Posted by Nords I must confess I didn't catch this.* I read BW's annual Retirement Issue (the one with the obligatory cover of a geezer carrying a surfboard) and paged through the article "How to Tap Your Nest Egg-- and Not Go Broke". Windsurf: That cover caught my eye ("geezer?" ouch!) but I didn't pull it off the rack at Borders to cop a free read with my coffee having assumed what you establish re the warped approach to assumptions and calculations.* *With no surf here in the midwest (there are some who "surf" the Great Lakes), windsurfing is the default soul sport.* Alas, for most of the summer here, there is no reliable f#%*@ wind!*

[Nords]

Quote:

Originally Posted by farmerEd Also need to factor in state and federal taxes into the equation...still seems the article is off base, but in order to spend $108K per year they probably need to have $150K or so in income.

They're not clear on whether that $108K includes taxes or is all pre-tax. I'm sure hoping it includes taxes.

Quote:

Originally Posted by windsurf ("geezer?" ouch!)

Hey, someday I hope to resemble that remark.

Besides, BW seems to think that anything under SS eligibility is "early". The ER ages being batted around on this board would really knot up their knickers...

[MJ]

Quote:

Originally Posted by Nords They're not clear on whether that $108K includes taxes or is all pre-tax. I'm sure hoping it includes taxes.

Nords, I was also under the impression that taxes (fed/local) were not included in firecalc.

[maddythebeagle]

"Besides, BW seems to think that anything under SS eligibility is "early". The ER ages being batted around on this board would really knot up their knickers... "

I always wondered about what is the average. Many state and federal pensions consider normal retirement to be 55-57, I think and many of those have options for health care benies to tide one over until 65.

[Nords]

Quote:

Originally Posted by MJ Nords, I was also under the impression that taxes (fed/local) were not included in firecalc.

Right, FIRECalc doesn't do taxes, you have to input that data yourself. The FIRECalc page has a button in the upper left corner "ER Spending" that gets into accounting for taxes. Portfolio withdrawals have to include money to pay the taxes.