If you outlive your SWR time horizon?

[Onward]

Cheer up!

In point of fact, most of the time the SWR approach is a path to significant wealth accumulation....

Now if we could only eliminate the outliers.

What Happens If You Outlive Your Safe Withdrawal Rate Time Horizon?

 

[MasterBlaster]

Granted SWR's are to keep you going through some dismal markets. In all likelihood you'll do better than that.

here's the flip side of Bernstein's retirement Calculator from Hell series...

http://www.early-retirement.org/forums/f28/beware-the-4-rule-50857-5.html#post952928

 

[WB52]

Good article. But it always seems to me that the authors of such articles are quick to point out the possibility of running out of money, which implies that more money saved will fix the problem. The BIG error with this is that it always pushed folks to save "one more year" for more safety.Thus trading even more years for dollars. I believe each person needs to know their risk tolerance. What cushion they need to in their financial resources sleep at night.
I will plan for 95% confidence in achieving the spending level I desire. If things don't work out, I'll cut back to my "bare bones" budget, when resources are down to 95% confidence of making that work. I know that money is not everything, but I will never get my time back. Odds favour it all work out.

 

[MasterBlaster]

Good article. But it always seems to me that the authors of such articles are quick to point out the possibility of running out of money, which implies that more money saved will fix the problem. The BIG error with this is that it always pushed folks to save "one more year" for more safety.Thus trading even more years for dollars. I believe each person needs to know their risk tolerance. What cushion they need to in their financial resources sleep at night.
I will plan for 95% confidence in achieving the spending level I desire. If things don't work out, I'll cut back to my "bare bones" budget, when resources are down to 95% confidence of making that work. I know that money is not everything, but I will never get my time back. Odds favour it all work out.

The article was pretty much the opposite of what you posted. Their point was that people probably over save and use a too-low SWR most of the time.

The headline of the article is disingenuous.

 

[WB52]

MB,
Thanks. I read through the post to quickly to catch the sarcasm. Anyway, the Gummi chart makes my point in a far more precise and credible fashion.

 

[W2R]

I'm not worried about outliving my money. I think I have this figured out.

Right now my plan should take me to age 93-95. I will revamp my plan at age 85, should I live to that age.

If necessary, at age 85 I'll look into buying an SPIA with 25% of my remaining funds. At such an advanced age, I should get a pretty good boost to my income from doing that. Also I like the idea of automatic, predictable bank deposits at that age, in case I experience a modest degree of mental decline.

However I may not need to do anything at all, since I don't seem to be spending all that I planned to spend right now.

The article was pretty much the opposite of what you posted. Their point was that people probably over save and use a too-low SWR most of the time.

The headline of the article is disingenuous.

Oh!!! I read the article and you are absolutely correct. I am guilty of posting the above before reading it. Still, I think my post illustrates that it is not necessary to plan for the maximum life span right from the start, in order to retire.

 

[donheff]

Decent article. Nothing new but it is good to hear advisors addressing the issue sensibly.

 

[Nords]

Cheer up!
Now if we could only eliminate the outliers.

For those who've paid FICA, I wonder if the study has included the effects of Social Security.

I belatedly came to appreciate the annuity-buying advice discussed in this thread:
http://www.early-retirement.org/forums/f28/new-thoughts-on-the-draw-down-phase-29273.html
on this study:
http://spwfe.fpanet.org:10005/publi...mulation_ A New Strategy for Managing Ret.pdf

And yeah, I know it's tough to find an annuity solution just as the retirement portfolio is about to fail, but the idea is to keep assessing the portfolio's survival and the cost of the necessary annuity and act before extremis is reached.

Ronin also linked a cautionary study:
Revisiting Retirement Withdrawal Plans and Their Historical Rates of Return by Christopher O'Flinn, Felix Schirripa :: SSRN

and a number of articles on Raddr's site suggest that for anything longer than 30 years it might be prudent to stay below 4%.

The "good news" is that plans to retire on a 2% stock-dividend-portfolio or 100% TIPS are probably "excessively safe", unless you really enjoy your occupation.

 

[haha]

SO much about today's economic and social and geopolitical world is unprecedented that planning is a bit hopeless. I do it, I attempt to be careful, but in truth I think it is close to much ado about nothing. The biggest factors will be political, and we don't know how they will resolve, and we aren't allowed to talk them here anyway.

Ha

 

[bamsphd]

I belatedly came to appreciate the annuity-buying advice discussed in this thread:
http://www.early-retirement.org/forums/f28/new-thoughts-on-the-draw-down-phase-29273.html
on this study:
http://spwfe.fpanet.org:10005/publi...mulation_ A New Strategy for Managing Ret.pdf

And yeah, I know it's tough to find an annuity solution just as the retirement portfolio is about to fail, but the idea is to keep assessing the portfolio's survival and the cost of the necessary annuity and act before extremis is reached.

Interesting thread that I missed the first time around. The first issue I see with that approach is that while immediate annuities certainly tend to decline in cost as the applicant increases in age, they are also strongly correlated with interest rates. Wouldn't such continuous comparisons cause one to buy the annuity when the price of the annuity was unusually high?

 

[LOL!]

Interesting thread that I missed the first time around. The first issue I see with that approach is that while immediate annuities certainly tend to decline in cost as the applicant increases in age, they are also strongly correlated with interest rates. Wouldn't such continuous comparisons cause one to buy the annuity when the price of the annuity was unusually high?

It has been pointed out that most of the money paid to you with an immediate annuity is principal and not interest, so prevailing interest rates do not matter as much as many people believe.

 

[2B]

This is why I'm planning on a modified Bernicke withdrawal rate. I'll start out high; but depending on how the portfolio performs, I can switch back to the "classic" SWR method if necessary.

Our basic life style can be maintained easily with much less money than we currently have in our portfolio. The extra money is available for luxuries such as nicer vacations and toys.

 

[2B]

It has been pointed out that most of the money paid to you with an immediate annuity is principal and not interest, so prevailing interest rates do not matter as much as many people believe.

The prevailing interest rate has a bigger effect the longer a person's longevity is estimated to be. Think of it as comparing someone's 30 year mortgage versus someone else's 5 year mortgage. The person with 30 years of life expectancy/mortgage will have their payment significantly increased but the person with 5 years may not notice much of a difference.

 

[Silver]

Maybe I missed it, but I didn't find where the AA was assumed to be in the article. Was there an assumption I missed?

 

[MasterBlaster]

Maybe I missed it, but I didn't find where the AA was assumed to be in the article. Was there an assumption I missed?

You didn't miss anything. use your generic retiree AA.

Again The article points out the vast difference between the worst case scenarios and more typical expected scenarios. SWRs are, by design, made to get you through those worst case scenarios.

Since the worst case scenarios don't happen all that much, you can almost certainly expect to go with a large unspent nest egg if you stick to SWRs.

Financial planners can verify this phenomenon based on thier clients, that most retirees go out with a large unspent (ie. remaining) nest egg.

 

[kumquat]

I understand that if people are denying themselves a few comforts in order to exit the rat race, it may be cause for some regret that "we coulda/shoulda" as they get to the point where "we can't, even if we can afford it" but is there a downside to dying with a large portfolio if you always had "enough".

It makes me think about a story my brother told me. He lives in a small town (population about 100 at the time of the story). He lived next door to the town drunk. "Bob" was an old bachelor farmer and quite well to do. One day Bob told DB that all his old drinking buddies were either dying or drying. One talked him into going to an AA meeting. "Going back?" asked DB. "Don't think so" says Bob, "all they did was stand at the front of the room and talk about how much money they saved since they quit drinking. You know me, I have more money than I can ever spend".

In our case, we have a WR of 2.5 - 3%. We aren't trying to be safe, it's just that we don't [-]need[/-] want to spend more. There is a good chance that our assets will allow our kids to ER. Is that a bad thing?

 

[Danmar]

@Kumquat. No I don't think it's a bad thing. We find ourselves in a similar situation only spending pensions and dividends. I am only 60 and the DW is 53 so hopefully we have a long way to go. Seems to me more fun to give it away while still alive to see the impact of the gift though? This becomes a bit of a challenge as you don't want to run the portfolio down too fast at this point. Good problem to have I guess.

 

[chinaco]

Yes... there is so much attention paid to the "failure" scenario that is it easy to lose sight of the high probability of having a lot of money in the portfolio at the end of the term (e.g., 30 years).


Plus, assuming that many would adjust spending downward if the bad scenario were detected and seemed likely... and the outcome would likely change also.


We will probably leave a sizable estate... Which is why it is very important for me to do estate planning and tax prep/planning (e.g., roll trad to roth IRA).

We have taken some steps and have a plan in place along with the legal documents. But the approach we have in place is really designed mainly for me and my DW as a survivor. But I intend to improve upon it over the next 15 years.

 

[rescueme]

To add to the annuity discussion, a recent article by Barron's (FWIW):

Picks the 25 Best Annuities - Barrons.com

As some know, I do have an SPIA (life, for DW/me, with a guaranteed payout if we pass early).

For those of you that believe current interest rates are of upmost importance (I don't BTW), assuming you had no other sources of retirement income (beyond your savings/investments) - in other words you are in an ER situation, no pension nor SS to be applied for till sometime in the future (depending on your personal SS plans), how would you fund your retirement income needs while waiting till you got old and had a higher "return rate" (which is driven by return of your own money, as discussed earlier)?

I see many postings (here and other places) saying you should wait till interest rates get higher. The questions are wait till when, and how do you get income (without market or current interest risk)?

Also, the "4% rule" may not apply in those situations for those that retire before "traditional age" (whatever that is), as it does for DW/me. I've been retired a bit over four years (DW is expected to retire within the next year - we're the same age). To reduce the market risk out of our retirement income, we purchased the SPIA (using 10% of our combined portfolio value, at the time of purchase four years age) along with coming up with an SS scenerio that uses joint SS income options (e.g. DW files at FRA age of 66, I file for 50% spousal benefits at the same time, and I delay SS till age 70).

That means that (my) portfolio withdrawls are in excess of that magic 4% (even with the SPIA income), but by the age of 70 when all of our "income sources" come on-line (including two small single-life non-COLA'ed pensions for DW), our WD rate drops to just over 2% (even with "excess withdraws" in the previous 11 years), and stays there for our expected passing.

The SPIA does not guarantee all of our retirement income, but it does provide a "tool" that along with other options (such as those related to SS) provides options for the future, in our case. Granted, our situation (or solution) applies to us. If it would for others? That's their decision - each person/couple must come up with a decumulation plan on their own - with the exception of course of those that have an inflation adjusted pension that covers most/all of their expected retirement expenses (lucky them).

Just another post on my POV on the subject...

 

[donheff]

As some know, I do have an SPIA (life, for DW/me, with a guaranteed payout if we pass early).

For those of you that believe current interest rates are of upmost importance ... The questions are wait till when, and how do you get income (without market or current interest risk)?

+1 If your evaluation shows a benefit to replacing a portion of your portfolio with an SPIA isn't sooner safer than later? If you wait and it turns out we are at the beginning of a bad scenario your portfolio will erode with each passing year making it more difficult to divert money into an SPIA.

 

[Nords]

The first issue I see with that approach is that while immediate annuities certainly tend to decline in cost as the applicant increases in age, they are also strongly correlated with interest rates. Wouldn't such continuous comparisons cause one to buy the annuity when the price of the annuity was unusually high?

The only time you'd be whipping out your wallet to actually purchase the annuity would be when your portfolio was failing. It seems that you'd have two choices under those circumstances:
1. Bite your lip and buy the annuity, or
2. Stop spending from your portfolio, put it into CDs or Treasuries, get a job (or cut your spending back to Social Security or live off your kids), ... and wait for annuity prices to improve.

Otar would suggest not even retiring until the portfolio was bulked up enough (or buttressed with annuity protection) to avoid that failure in the first place.

In our case, we have a WR of 2.5 - 3%. We aren't trying to be safe, it's just that we don't [-]need[/-] want to spend more. There is a good chance that our assets will allow our kids to ER. Is that a bad thing?

We don't seem to be spending it fast enough either, but I still haven't found a good solution to our concerns of affluenza & entitlement. It's interesting that the IRS' annual gifting limits aren't too far off from the max amount of money that can be socked away in tax-deferred accounts each year.

Of course we could skip a generation, make a (hypothetical) grandkid a Roth IRA beneficiary, and essentially gift them their own annuity. But again affluenza, entitlement...

That means that (my) portfolio withdrawls are in excess of that magic 4% (even with the SPIA income), but by the age of 70 when all of our "income sources" come on-line (including two small single-life non-COLA'ed pensions for DW), our WD rate drops to just over 2% (even with "excess withdraws" in the previous 11 years), and stays there for our expected passing.

Our ER epiphany was realizing that our portfolio didn't have to last the rest of our lives. It only has to last until spouse's military pension starts in 2022. That's when we started loosening the purse strings...

 

[MasterBlaster]

+1 If your evaluation shows a benefit to replacing a portion of your portfolio with an SPIA isn't sooner safer than later? If you wait and it turns out we are at the beginning of a bad scenario your portfolio will erode with each passing year making it more difficult to divert money into an SPIA.

if you can cover your basic income needs with SPIAs/pensions/SS then the remaining nestegg can be treated somewhat more aggressively.

You could either have a more aggressive asset allocation with (expected) better returns on the nestegg. Or use a somewhat higher (ie. non-safe withdrawal rate in worst case scenarios) to decumulate the nestegg better.

An approach like that just could give you more spendable income in the living years.

 

[rescueme]

if you can cover your basic income needs with SPIAs/pensions/SS then the remaining nestegg can be treated somewhat more aggressively.

True.

Ours is 50/50 (50% equity, 50% bond/cash) at this time.

While some would argue that is an agressive target in our situation (mid-60's; I'm retired - DW is expected to do so in the next year), it certainly is down from our 90/10 during our accumulation years when we both were working on "our number".

We could probably get by with a less agressive AA at this time in life, (like the 10% equity discussion going on), but than again, we're investing for the future for our adult (disabled) "child".

Our forecast along with our risk profile allows us to be comfortable with our 50/50 AA, at this point in time. Not for everybody, but it is for us.

 

[lonnie]

Delaying social security for as long as possible is one way to obtain some "longevity insurance". Still, living longer than expected seems like a good problem to have in any case!

 

[obgyn65]

It cannot be a bad thing to be in this situation.

Is that a bad thing?