Expected Returns

[eta2020]

https://personal.vanguard.com/us/insights/article/VEMO-highlights-122014

Humbug
I believe more to Vanguard outlook. Given low inflation environment (in fact threat of deflation) outlooks looks reasonable.

 

[ERD50]

I use long term historical average, and i assume the future will look like the past, that is growth will continue.
...

Average? Wow, so that means you run FireCALC with a 50% success rate? That allows for a 6% WR for 30 years, or 5.2% for 40 years, or 5.11% for 45 years.

If i'm wrong, so what, we will all be screwed.

No, if we are well below average, but still not much worse than the worst of the past, someone with a 3%~3.5% WR will likely be in good shape. Someone with a 5-6% WR may well be screwed.

-ERD50

 

[pb4uski]

.....Someone with a 5-6% WR may well be screwed.

Agree, but unless they are really old when they retired if they retired with a 5-6% WR they are likely delusional to begin with so perhaps they won't notice late in life that they can't afford even cat food.

 

[pb4uski]

I use long term historical average, and i assume the future will look like the past, that is growth will continue. If i'm wrong, so what, we will all be screwed. ....

That sounds like a recipe for disaster.

 

[RetireAge50]

If you do 3% withdrawal you will probably end up with a big pile of money. If you do not want a big pile then you will need to take more at some point.

What is wrong with taking more immediately and adjust down instead of up? As long as you adjust spending frequently based on your portfolio balance you should not have to eat cat food.

 

[ERD50]

bold mine...

If you do 3% withdrawal you will probably end up with a big pile of money. If you do not want a big pile then you will need to take more at some point.

Probably. But maybe not. Will you wear a seat belt on your next drive? You probably won't get in an accident.

What is wrong with taking more immediately and adjust down instead of up? As long as you adjust spending frequently based on your portfolio balance you should not have to eat cat food.

Because we can't predict the future?

Once again, for all those who claim they will just 'adjust their spending', I suggest you go into a historical calculator, start with a 6% WR, and then try backing out some spending to try to recover the money that was lost forever. I predict you will be surprised at what little effect it has, even with drastic spending cuts. It sounds nice though.

And also estimate what kind of lifestyle you'd have if you made a drastic cut to spending every time the market wiggles. I can't get back my life in 2008 - I'm glad I kept doing all the things I enjoy, rather than living like a pauper. And the market came back, I'm fine. And if it didn't, my conservative WR should still keep me in good shape.

-ERD50

 

[Chuckanut]

If you do 3% withdrawal you will probably end up with a big pile of money. If you do not want a big pile then you will need to take more at some point.
.

Sounds like a good case for one of the variable withdrawal rate methods that protect one from running out of money to soon, or needlessly avoiding life's good things to save a buck one doesn't really need to save.

 

[RetireAge50]

I will wear a seat belt but will not stop driving altogether (just to be safe).

I think a balance can be had with money as well. Does taking only a 100% safe withdrawal rate really make sense?

I know what you are talking about if you take money early at higher levels in down markets you would be permanently hurt.

But if markets fall 30% and you reduce spending 30% immediately do you still get hurt permanently?

Most calculators use all these rules of thumb and constant spending. I think a custom/flexible/more real life approach is a better way. I may need to build my own model to prove it.

 

[Totoro]

Most calculators use all these rules of thumb and constant spending. I think a custom/flexible/more real life approach is a better way. I may need to build my own model to prove it.

Before you do, look at this one: Variable percentage withdrawal - Bogleheads

And agree with stay flexible, always a good attitude. Especially in yoga classes.

 

[NanoSour]

Personnally, I'm not going to lose any sleep over these financial prognostics and their predictions. I'm finishing my second year of ER and too rely on ESPlanner as my planning tool. I use the Monte Carlo analysis trying to match my AA as close I can with the DFA funds that it provides. For my AA it provides a real return of 5.87%, and our spending is based on receiving half of that, or the "cautious" spending level. Even at that, there is room to adjust the spending downward if hair starts standing up on the back of my neck.

 

[Options]

Bernstein has said previously that a 2% w/r is "bulletproof" and that one would "probably" be ok with a 3% w/r (he didn't specify years, but I assume he meant for a typical 30 year retirement). Pfau published a recent paper using current valuations and 10,000 simulations to estimate SWR's for (IIRC) 25, 30, 35, and 40 year retirements (sorry, unable to post link here). In that paper, however, he incorporated 1% expense fees. I recall a 2.5% w/r rate for 35 years if one backs out the outrageous 1% expense fee used (personally, my overall VG fees are .11% and about to go lower after transferring employer's investor shares to admiral shares upon FIRE). Another set of predictions, as noted above, are contained in VG's recent paper.

Who to believe in light of such conflicting "predictions"? What's useful? Best to plan conservatively.

 

[NanoSour]

The problem with these SWR studies is that they don't take pending pensions or SS into account. This is a primary reason I use ESPlanner for my calculations. Not to mention tax implications.

 

[Totoro]

I recall a 2.5% w/r rate for 35 years if one backs out the outrageous 1% expense fee used (personally, my overall VG fees are .11% and about to go lower after transferring employer's investor shares to admiral shares upon FIRE). Another set of predictions, as noted above, are contained in VG's recent paper.

Who to believe in light of such conflicting "predictions"? What's useful? Best to plan conservatively.

If you can find an inflation-linked investment and want only a 35 year time frame, 2.85% is the garantueed 100% succes rate. Since 10 year TIPS yield 0.41%, that kind of deal is still available even in this environment.

Why 2.85%? 100% capital consumed / 35 years to eat it up = 2.85%. That's only the value of the principal.

So here is a potentially useful thought: you can safely put your minimum withdrawal rate at (1/ remaining years left).

So for a 65 year old, 3% is as safe as anything. For a 45 year old, 2%. Easy-peasy.

[Edit: of course, this implies you won't become immortal or have life extension therapies ..]

 

[daylatedollarshort]

So what do you all think of this site:

Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living

His chart shows the 30 year SWR on an all TIPS portfolio (using yields from 9/23/2013) would have been 4.37%.

 

[Corporateburnout]

The problem with these SWR studies is that they don't take pending pensions or SS into account. This is a primary reason I use ESPlanner for my calculations. Not to mention tax implications.

I agree that it's a comprehensive tool that uses various methods of planning such as conventional, Monte Carlo and upside investing and I've used it on and off since 2011 to figure out SS benefits , spousal benefits, taxes but one problem I have with it is not been able to figure out how to reduce spending if I want to leave a bequest in my estate. It insists on a higher annual consumption smoothing and then recommends you buy life insurance to achieve that end value bequest.

 

[RetireAge50]

Thanks for VPW link. Have played with this before and agree with the approach.

 

[NW-Bound]

So what do you all think of this site:

Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living

His chart shows the 30 year SWR on an all TIPS portfolio (using yields from 9/23/2013) would have been 4.37%.

If a portfolio merely keeps up with inflation, a 3.33%WR will deplete it in 30 years. What he shows is TIPS gives you another 1%. That's reasonable I guess.

So, you are guaranteed for 30 years, but will be broke if you or your surviving spouse live longer than that. And in addition, you will not be leaving much behind, if you both die before 30 years.

A conventional portfolio gives you a chance to do better than the above, i.e. lasting longer than 30 years and likely with an even higher end value, but carries some risks. Nothing is ever guaranteed. So, one is free to choose his poison. This makes life interesting.

 

[NanoSour]

I agree that it's a comprehensive tool that uses various methods of planning such as conventional, Monte Carlo and upside investing and I've used it on and off since 2011 to figure out SS benefits , spousal benefits, taxes but one problem I have with it is not been able to figure out how to reduce spending if I want to leave a bequest in my estate. It insists on a higher annual consumption smoothing and then recommends you buy life insurance to achieve that end value bequest.

Try this…make a gift expense using the Special tab for the amount you want to bequest. Make the expense for the year of your planned expiration. That should give you an adjusted spending level for that bequest action.

 

[ERD50]

...

I think a balance can be had with money as well. Does taking only a 100% safe withdrawal rate really make sense? ....

I think it does, but others may feel OK taking their chances.

If you knew that a certain area had experienced snow loads of X#/square foot (or however they measure it), wouldn't you want your house to be designed to handle that snow load, with a little buffer for good measure? Or would you be OK living in a place for 30-40 years, figuring there was only a 10% chance the roof would collapse on the house and do major damage over that time, and maybe kill someone in their sleep?

You'd have to know what the cost difference is between a roof with a buffer, and a marginal roof. And the difference between a historically safe WR and a marginal one is probably less than 1% point. Put another way, a 3.25% WR versus a 4% WR means saving ~ 23% larger portfolio (or cutting spending) - so then you decide.

For me, I'd hate to end up in a position where I needed support from my kids. But if I do, at least I can say I planned for the worst in history, plus a little buffer - what more could I do?

But if I went in knowing my plan had failed in X% of past scenarios, I just wouldn't feel right.

I know what you are talking about if you take money early at higher levels in down markets you would be permanently hurt.

But if markets fall 30% and you reduce spending 30% immediately do you still get hurt permanently?

Sure you would still get hurt permanently, because you were drawing down a higher % WR in the time before the fall, and some ways into it, before you decide to cut back.

Most calculators use all these rules of thumb and constant spending. I think a custom/flexible/more real life approach is a better way. I may need to build my own model to prove it.

They are out there.

-ERD50

 

[daylatedollarshort]

If a portfolio merely keeps up with inflation, a 3.33%WR will deplete it in 30 years. What he shows is TIPS gives you another 1%. That's reasonable I guess.

So, you are guaranteed for 30 years, but will be broke if you or your surviving spouse live longer than that. And in addition, you will not be leaving much behind, if you both die before 30 years.

A conventional portfolio gives you a chance to do better than the above, i.e. lasting longer than 30 years and likely with an even higher end value, but carries some risks. Nothing is ever guaranteed. So, one is free to choose his poison. This makes life interesting.

I'm thinking if I make it to 80 I'd start buying annuities when they are cheaper to buy at that age. Plus we'd still have SS, pensions and a mortgage free house in 30 years so we wouldn't be broke at 90 even if we spent down the portfolio to zero and didn't buy any annuities.

Immediateannuities.com shows $600 monthly income (if DH was 80 today starting our annuity income next month) for each $100K purchase.

This is similar to what is outlined here:

http://www.texasenterprise.utexas.e...sk-investments-can-protect-retirement-payouts

"The amount of money investors should spend on TIPs and annuities, as well as the proportions of the two products, depends on current interest rates and other market conditions. In today’s financial markets, an investor can invest $100,000 in TIPs and annuities to fund an annual inflation-adjusted payout of about $4,700 starting at age 65. The specific implementation would require an $85,000 outlay to TIPs and $15,000 to a deferred annuity. "http://www.texasenterprise.utexas.e...otect-retirement-payouts#sthash.1CbkeTIb.dpuf

 

[RetireAge50]

For the 1 point (probably $15,000/year) I would probably hire someone to shovel the roof in the rare snow event and be using it in the meantime to go skiing and snowmobiling.

 

[ERD50]

For the 1 point (probably $15,000/year) I would probably hire someone to shovel the roof in the rare snow event and be using it in the meantime to go skiing and snowmobiling.

It's only an analogy - maybe you can buy your way out of a record snow build up, but you can't buy your way out of running out of money!

-ERD50

 

[Corporateburnout]

Try this…make a gift expense using the Special tab for the amount you want to bequest. Make the expense for the year of your planned expiration. That should give you an adjusted spending level for that bequest action.

Thanks. It worked

 

[Gatordoc50]

Most state pensions are still using 7 to 8% expected returns in their calculations. I wonder why that is. Do they know something we don't?

 

[sanfanciscotreat]

SS will kick in a year from now with $40K extra per year and wife's SS will kick in a few years later. That will help offset lower total returns in the market.