Many retirees could outlive a million dollar nest egg

[omni550]

NYT article today on why many retirees could outlive a million dollar nest egg:

"A millionaire household lives in elite territory, even if it no longer seems truly rich. Including a home in the calculations, such a family ranks in the top 10.1 percent of all households in the United States, according to Professor Wolff’s estimates. Excluding the value of a home, a net worth of $1 million puts a household in the top 8.1 percent. Yet even such families may have difficulty maintaining their standard of living in retirement."

"Still, the expectation of working longer seems to be the trend. An annual survey for the Employee Benefit Research Institute found that in 1991, only 11 percent of workers expected to retire after age 65, while this year, 36 percent said they would retire after 65 — and 7 percent said they didn’t plan to retire at all."

http://www.nytimes.com/2013/06/09/yo...pagewanted=all

omni

[REWahoo]

Does that article have a point or is it simply a rambling jumble of disjointed quotes?

[jollystomper]

Quote:

Originally Posted by REWahoo Does that article have a point or is it simply a rambling jumble of disjointed quotes?

Scaring people makes for better sales and web page hits than helping them to plan for the future. It also tends to foster the "you can't do it on your own" view than many prefer people to have these days.

[LitGal]

Well, if anything, it motivates me to get seriously educated on making our nest egg last. I would much rather become a savvy investor with a tolerance for risk (to withstand some volatility in equities), than the other alternative: working longer. (Or returning to work.)

Nope-- I just do not want to do that.

So, I'll use some advice in the article that seems salient.......like strategizing carefully about when to sign up for SS.

[joebloe]

I'm confused by this article. Why would a millionaire family have difficulty maintaining their standard of living in retirement? I thought the reason these millionaires 'next door' got to where they are by living a frugally? Why would they change that during retirement?

[Arifriekinel]

Quote:

Originally Posted by joebloe I'm confused by this article. Why would a millionaire family have difficulty maintaining their standard of living in retirement? I thought the reason these millionaires 'next door' got to where they are by living a frugally? Why would they change that during retirement?

I'm with you here. The article seems to be assuming people with above average net worth still have average spending habits, making no nod to the fact they're probably much more frugal around that range. The way I see it, $1M is a bit below the range of many who strike it big through a nice stroke of luck, and just above people with decent incomes who never learned to LBYM.

So maybe it's talking to those hoping they can win $1M and retire, letting them know that they can't probably continue their standard of living? I guess.

[FUEGO]

There's a lot of validity in the article. Heck, many of us here can't even make it into retirement with a mere million, let alone stay gainfully retired on that piddling amount.

[Katsmeow]

From the article:

Quote:

A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.

Well, no. It has never been concerned common or rule of thumb to drawn down 4% with a 100% bond portfolio. The article does mention that all bond portfolios give probabilities that are "remarkably grim." However, given that, why use an example someone who made that kind of bone-headed move? (withdrawing 4% with all bonds). They do point out this is why they recommend people have some equities.

They then point out that if only have $10,000 assets then you have very little flexibility. That is true but seems beside the point in talking about households with a net worth of $1 million.

The article goes on to point that being a millionaire household no longer seems truly rich (I agree). And says people may have difficulty maintaining standard of living in retirement. However, the article sort of begs the question in not describing what they think the standard of living is for the average person with a net worth of $1 million. The article already said that isn't truly rich, but then they seemed to assume that the lifestyle is extravagant.

The article goes on to then discuss the problems with low bond yields and what about when rates go up.

The article then says:

Quote:

Consider again the 65-year-old couple who are starting to draw down $1 million in savings this year: if they withdrew 3 percent, or $30,000, a year, rather than that standard rate of 4 percent, inflation-adjusted, there is still a one-in-three chance that they will outlive their money, under current market conditions.

But again, the point here is that they are still using a couple 100% in bonds. The whole thing in the article seems to be pointing out that if you are 100% in bonds then you have large chance of portfolio failure if you withdraw 3 or 4%.

The article points out stocks will reduce risk of outliving the portfolio but increases the risk of big losses. It then gives as an example a portfolio of 80% stocks and 20% bond. Why on earth is the article solely using as examples ridiculous retirement allocations - all bonds or 80% equities?

So then the article goes on to ask

Quote:

ASIDE from recalibrating a portfolio, what can be done to improve a would-be retiree’s financial situation? One answer is to work longer and retire later. Yet many people can’t do that, often because they are physically unable to do so or can no longer find a suitable job.

Aside from recalibrating the portfolio? Yeah, I can see going from 100% bond to 80% equities might not be ideal. But, why skip entirely over more reasonably asset allocations like 40% to 60% equities?

And then the article gets back to lifestyle:

Quote:

Still, even $61,000 or $71,000 a year — the combined Social Security and cash flow from the $1 million portfolio — isn’t likely to be enough for most people who have grown accustomed to living on $150,000 or more a year. And $150,000 is the median income of a typical household in the top 10 percent, roughly the ranking of a family with $1 million in net assets, Professor Wolff says.

So they have basically assumed that anyone with net assets of $ 1 million had an income before retirement of at least $150,000. And that may indeed be true for many. However, it isn't true for all. And, more to the point, we all know that expenses may decrease sharply after retirement due to kids leaving, no longer saving for retirement, lower taxes, no work expenses, etc. Right now we still have one child in college, one in high school and we are still living on 38% of what we were making before DH retired and I semi-retired. Once the kids are gone we will be living on about 25% of pre-retirement income.

Ah, but according to this article:

Quote:

Without another source of income, perhaps from traditional pensions from either or both spouses, he adds, a household like this won’t come close to replacing 80 percent of its pre-retirement income — often considered an acceptable target level.

So basically a million dollars isn't enough because you really need $120,000 to replace the $150,000 you were making before (sigh) and with SS and portfolio only you can't do that ....

And in the end...just work until 70....

Quote:

You can also try to pay off your mortgage, so you have the option of tapping home equity if you need to supplement your income later. And, she suggested, if you’re lucky you’ll find work that you like and can stick with for a long time — until 70, at least.

What a ridiculous article....

[marko]

C'mon. This is a NYT article. Fear, uncertainty and doubt is the goal here. Throw in a little "the rich will get their due" and you've got a column!

[clifp]

You know it is a really bad article when the comments section make a lot more sense. I swear that article looks like the author was paid by the word, but the comments include discussion of the Trinity study and this relatively sensible advice.

Quote:

A million dollars? Buy a list of the great industrial and utility companies. The overall yield will be about 3.5%, and (this is key) the dividend per share will increase by a few percent each year. Then move to a low-tax state, take the $35K/year of tax-advantaged dividends, add another $20K of social security... and I think this is quite livable, without even touching principal.

Sure maybe you are better off buying VTI, and BND, but this approach also works.

[savory]

I have learned that when an emergency, disaster or special event happens, it will take 3 to 4 days for the news to properly report the facts. After reading this article, I need to learn the rule for financial information reporting. I wish I did not waste my time reading this article.

[BTravlin]

The article does seem to be quite the mish mash but I do agree with the major theme. We fit he basic premise as having retired with a little over a million but have done so at ages 55 and 50 and are now living in Mexico. We will be able to maintain our lifestyle here quite nicely on $55k per year but would not be nearly so comfortable living on that amount in the U.S. or as confident in our portfolio lasting throughout our retirement. As always, all things are relative.

[obgyn65]

Being an immigrant myself, one of the first things I did when coming to the US has been to find a good newspaper. I settled for the NYT. It has been invaluable for all the information I found about the American culture and way of life. I think I found this website thanks the NYT. Of course, the many financially savvy and highly educated people here may not share the same view, and that's ok.

Quote:

Originally Posted by marko C'mon. This is a NYT article. Fear, uncertainty and doubt is the goal here. Throw in a little "the rich will get their due" and you've got a column!

[foxfirev5]

Like so many today, the article confuses income with net worth and assets. Most people beyond this forum can not comprehend how someone could accumulate a seven figure portfolio on less than a six fgure salary, let alone live on a five figure budget.

[RockyMtn]

Quote:

Originally Posted by marko C'mon. This is a NYT article. Fear, uncertainty and doubt is the goal here. Throw in a little "the rich will get their due" and you've got a column!

+1. Typical NYT column.

[jkern]

In most cases, I believe that without a pension a person needs a $1M+ portfolio AND Social Security to sustain a middle class standard of living.

Several friends and I have a saying: I am a typical, everyday, middle class multi-millionaire.

[jerome len]

A million bucks goes much further in Montana than California.

It's impossible to set a standard for all. Each individual has to look at their net worth, lifestyle, retirement plans as well as their comfort level based on what they THINK they can take out of their net worth each year to continue their lifestyle.

I'm conservative and plan on withdrawing 2% each year. I have more than a million, the majority in bonds but also heavily in dividend stock ETFs that have increased dividends each year.

I read Money Magazine, listen to CNBC and read these blogs faithfully. With all that said I still don't feel completely secure. But, each article brings something to the table, some I agree with, some I don't. Keep the opinions coming....I learn something from everyone of them.....whether I agree with them or not.

[packrat44]

Quote:

Originally Posted by foxfirev5 Like so many today, the article confuses income with net worth and assets. Most people beyond this forum can not comprehend how someone could accumulate a seven figure portfolio on less than a six fgure salary, let alone live on a five figure budget.

You nailed the true problem.

[haha]

I didn't read the article because I hoard my 10 free articles each month for things I know I want to read. But clearly it is possible to retire at normal age on less than one million dollars, under current conditions. But likely it would not be possible for the majority of NYT readers.

For my asset level I have small SS, but given a modest but adequate owned dwelling I think I could do this, and within my moderately expensive city. I think it could be really tight for a couple, unless they have good SS or could tap subsidies. Base Medicare plus drug plan and Medigap supplements in my locale would cost a couple ~$9000.

But expenses can really go up with lifestyle improvements that may mean little to some but much to others.

I see some fairly free spenders among my retired friends and acquaintances, but they usually have good pensions. These people tend to have no concept of financial risk, as there really isn't much in their lives. It could show up abruptly, but that is another issue. I have one friend who spends plenty money and I think no pension. I believe his comes from SS, inherited assets and TIAA-CREF university system retirement. I would like to know more about this, but I don't think he really knows. My understanding is that this is a defined contribution plan, but he thinks of it as if it were a pension. Maybe he annuitized?

Ha

[scrabbler1]

Quote:

Originally Posted by packrat44 You nailed the true problem.

I agree. Foxfirev5 nailed it.