More new withdrawal schemes

[explanade]

JP Morgan's "dynamic" withdrawal system:

Rethinking the 4% retirement spending rule - Encore - MarketWatch

And linked from that blog post, a WSJ article about alternatives to the 4% spending rule:

Say Goodbye to the 4% Rule for Retirement - WSJ.com

 

[tulak]

From a quick read of the article, it sure looks like are cherry picking data to make a point.

Bengen used a 60/40 portfolio, why did they use 55/45? And why a fixed 3% for inflation over the same timeframe? Did the Bengen study do the same?

From the article:
If you had retired Jan. 1, 2000, with an initial 4% withdrawal rate and a portfolio of 55% stocks and 45% bonds rebalanced each month, with the first year's withdrawal amount increased by 3% a year for inflation, your portfolio would have fallen by a third through 2010, according to investment firm T. Rowe Price Group. And you would be left with only a 29% chance of making it through three decades, the firm estimates.

 

[explanade]

I thought the second article was going to be tied to some service when they mentioned annuities.

But it's really not, like the first one which is referring to a JPM plan.

 

[growing_older]

Read all the articles, but it looks like this JPM scheme amounts to: You need to use an adviser to increase the risk in your portfolio, then you take out more than 4% on a sliding scale based on age, while absolutely counting on your adviser to zig and zag through any investment issues to maintain this high withdrawal rate. And the advisers better be very very good at what they do, because in addition to the high withdrawal rate you will pay the advisers a 2% fee.

A masterpiece of adviser marketing. "Better let us take care of all your complicated money. We're the experts." Really makes me mad to see such duplicity passed off as if it were useful factual journalism.

 

[Independent]

Read all the articles, but it looks like this JPM scheme amounts to: You need to use an adviser to increase the risk in your portfolio, then you take out more than 4% on a sliding scale based on age, while absolutely counting on your adviser to zig and zag through any investment issues to maintain this high withdrawal rate. And the advisers better be very very good at what they do, because in addition to the high withdrawal rate you will pay the advisers a 2% fee.

A masterpiece of adviser marketing. "Better let us take care of all your complicated money. We're the experts." Really makes me mad to see such duplicity passed off as if it were useful factual journalism.

+1

The paper is here: https://www.jpmorganfunds.com/cm/Sa...endlyURL=contentdet_module&smID=1323375360677

They compare their strategy to a pure 4% rule (i.e. no flexibility in withdrawals) and to a pure RMD rule.

Guess what, they conclude that if you stop occasionally and re-think what you're doing based on actual results, you can probably do better.

Scanning the paper, I did not see any comments on their assumptions regarding fees. People here would be interested in know how a DIY program that uses very low load funds would compare to JPM's program that probably has higher fees.

That said, some of us may want to look at the JPM paper and see if there are some ideas that we would want to include in our DIY approach. When I do that, I think that most of the ideas have already been discussed here, but it does provide an overview of some issues.

 

[marko]

In my working days, we'd go through times when we'd say: "gee, they're talking layoffs at work...maybe we should delay that car/boat/vacation/renovation purchase until things pick up again".

Other times, we'd say: "Hey, got a big bonus in the wings...let's party".

That is sort of how we apply/modify the 4% rule.

 

[imoldernu]

I don't do Investment, so Withdrawal is my game. Not a %, but whatever I need.

Just received a free bonus while waiting for DW at the dentist office. The March issue of Money Magazine... read the whole thing, and was very impressed.
A comprehensive analysis of "The New Retirement"... from asset allocation, to SS to a history of where the retirement money comes from, and predictions of where it should be in the future... both sides of the equation.
Also... lots of stuff about couples attitudes to retirement. VERY interesting.
One of the paragraphs mentioned a multi year recent history of the Vanguard Funds, with a return of 1.9% vs. 2.3% of DIY investing... but who knows?

Really worthwhile for me... Would be worth buying if I didn't get it for free...
here's a link:
Have enough money for the retirement life you want - Feb. 26, 2014

The magazine has charts and more info than the online recap.

 

[Refresher]

How about the lesser of 4% or

Using your nest-egg balance as of Dec. 31 of the previous year, you would look up your age in the IRS table and divide your account balance by the life expectancy given for that age

 

[daylatedollarshort]

Wouldn't I bonds or a TIPS ladder even at zero real provide a 30 year safe withdrawal rate of 3.3%? I am not sure why people who weren't expecting more than 4% SWR wouldn't just do that instead of riskier and commission laden investments, but maybe I am missing something, looking at too short of a time horizon or have misplaced faith in the safety of government bonds.

 

[martyb]

In my working days, we'd go through times when we'd say: "gee, they're talking layoffs at work...maybe we should delay that car/boat/vacation/renovation purchase until things pick up again".

Other times, we'd say: "Hey, got a big bonus in the wings...let's party".

That is sort of how we apply/modify the 4% rule.

Pretty much how mine will go, I would imagine.

 

[Independent]

Wouldn't I bonds or a TIPS ladder even at zero real provide a 30 year safe withdrawal rate of 3.3%? I am not sure why people who weren't expecting more than 4% SWR wouldn't just do that instead of riskier and commission laden investments, but maybe I am missing something, looking at too short of a time horizon or have misplaced faith in the safety of government bonds.

The JPM paper is talking about withdrawals rates above 5.0%.

 

[mathjak107]

How about the lesser of 4% or

Using your nest-egg balance as of Dec. 31 of the previous year, you would look up your age in the IRS table and divide your account balance by the life expectancy given for that age

why bother with the irs tables. just use bob clyatts method.

look at your balance each year and take either 4% or if markets fell take 5% less then you did the year before, which ever is greater.

nice ,simple , and dynamic .

 

[Hermit]

For me, now that I am comfortably in retirement, I believe I will continue to be fixated on this kind of puzzle while in reality I will spend what I want and my portfolio will continue to grow.

 

[jerome len]

Boy I agree on the value of money magazine....get it for almost free.....I think it is 800 Delta frequent flyer miles. I have to add Warren Buffet's plan for his widow some day, which he guessed she would be about 70 when she becomes a widow.......her portfolio would be about 90% S&P 500 index fund.....didn't say what the other 10% would be. Now I know he would leave her enough to handle downturns but.......isn't simple better? And, why pay 2% when a simple solution would do. Also, WSJ had a story in their weekend edition, business section about high fees....they are going down.....it was on the front page.....sorry I didn't save it to give more info but they talked about a provider that built portfolios averaging .14% designed for the individual based on age, portfolio size etc. My good news is that we have enough....to live modestly on what we have invested conservatively......good day to all!

 

[Corporateburnout]

Boy I agree on the value of money magazine....get it for almost free.....I think it is 800 Delta frequent flyer miles. I have to add Warren Buffet's plan for his widow some day, which he guessed she would be about 70 when she becomes a widow.......her portfolio would be about 90% S&P 500 index fund.....didn't say what the other 10% would be. Now I know he would leave her enough to handle downturns but.......isn't simple better? And, why pay 2% when a simple solution would do. Also, WSJ had a story in their weekend edition, business section about high fees....they are going down.....it was on the front page.....sorry I didn't save it to give more info but they talked about a provider that built portfolios averaging .14% designed for the individual based on age, portfolio size etc. My good news is that we have enough....to live modestly on what we have invested conservatively......good day to all!

Buffet said for the 10% his widow would be in bonds so she does not have to sell stocks on a downturn.

I guess I would be OK with $5.8 billions to wait out a market upturn.

 

[growing_older]

The JPM paper is talking about withdrawals rates above 5.0%.

There have been discussions of methods like this. The 4% was settled on as a Safe Withdrawal Rate because it worked in all the historic periods studied. But in a very large subset of historic period, higher withdrawal rates do just fine. If you don't miond rolling the dice, you can start with a higher withdrawal rate, and maybe you will do fine, or maybe you will see you are NOT doing fine and need to tighten your belt considerably. JPM in not original in coming up with this idea. They are promoting it as a way to get business because they claim they will provide guidance in how best to know how high you can go and how quickly and how much you must tighten your belt when needed. For an annual management fee, of course.

 

[Independent]

why bother with the irs tables. just use bob clyatts method.

look at your balance each year and take either 4% or if markets fell take 5% less then you did the year before, which ever is greater.

nice ,simple , and dynamic .

The paper will say that this method usually leaves an awfully lot on the table.

 

[mathjak107]

i don't think so ,only because if you are getting on in age and you see to much money accumulating you will find a way to spend it .

you give a bunch of 80 year olds an extra million bucks i guarantee you they will have no trouble spending it.

what they wouldn't spend on themselves would be spent on kids and grandkids.

no one just spends like a robot.

 

[tuixiu]

i don't think so ,only because if you are getting on in age and you see to much money accumulating you will find a way to spend it .

So you are basically saying to just use Clyatt's method... except when it seems like you shouldn't use it.

How is that any different than the people saying they'll take a dynamic approach to spending based on stock market performance? Seems like both are part rule based with a dash of adjustment based on reality and common sense.

 

[Independent]

i don't think so ,only because if you are getting on in age and you see to much money accumulating you will find a way to spend it .

you give a bunch of 80 year olds an extra million bucks i guarantee you they will have no trouble spending it.

what they wouldn't spend on themselves would be spent on kids and grandkids.

no one just spends like a robot.

It sounds like you'd advise periodically stopping and reviewing your situation. In particular consider your reducing life expectancy as you grow older. And then adjust your spending accordingly.

I think that's what the paper is recommending.

 

[Animorph]

Following a 4%-based withdrawal scheme will seem a little strange if you are taking 4% out when you are hitting 100. 4% is intended for a 30 year future period. By 100 you will have a much higher SWR. Hence the RMD-based schemes, which have you taking much higher percentages as you age. Calculating a new SWR every year would do the same thing. Not sure that will mean much to me if my portfolio is doing well at age 100, but it will be important if my portfolio has been declining. I'll have no problem taking 10% of my portfolio at age 100 if that's what's required to support my normal budget.

 

[FUEGO]

I'm 33 and retired, and even though my spouse still has a year or two left in her career, we are pretending we are in ER and mostly ignoring her salary (which keeps building up in a cash account along with some smallish income from my side hustles).

We have budgeted $32,000 per year for retirement spending and that includes $5,000 or so for travel. $32,000 is less than a 3% withdrawal rate (which is comfortable for us given we have 5-6 decades of ER to fund).

This year we might spend $6000-7000 on travel since we are planning a trip to Canada for 5 weeks for the whole family and we already booked a week-long cruise to the Caribbean and Mexico (for the four of us, leaving the toddler back in the States).

I figure this is one of those good years of plenty. We are making a killing in the market, so we can afford to live it up some. That may mean blowing our $32k budget by a few thousand dollars.

If we were to lose 30% of the portfolio next year, I doubt we would spend anywhere close to $5k on travel!

Now that I'm ER, I "get it" with regard to withdrawals. No way could I stick to a fixed percentage plus an inflation adjustment. If the market goes bonkers (up), and we have $2-$2.5 million, we'll definitely spend significantly more than $32,000 per year.

 

[pb4uski]

FUEGO,

A bit off-topic, but my sense is that being a stay-at-home-dad and being retired are two entirely different things.

When I was working and DW was a SAHM we never considered her to be "retired".

Though I must admit, I'm not sure how to describe the difference for people who are retired and still have kids living at home, so if you prefer retired, so be it!

Once your DW retires and neither of you are working then I get it. I wish I could have done it at 33. Good for you!

 

[CaliforniaMan]

I'm 33 and retired, and even though my spouse still has a year or two left in her career, we are pretending we are in ER and mostly ignoring her salary (which keeps building up in a cash account along with some smallish income from my side hustles).

We have budgeted $32,000 per year for retirement spending and that includes $5,000 or so for travel. $32,000 is less than a 3% withdrawal rate (which is comfortable for us given we have 5-6 decades of ER to fund).

This year we might spend $6000-7000 on travel since we are planning a trip to Canada for 5 weeks for the whole family and we already booked a week-long cruise to the Caribbean and Mexico (for the four of us, leaving the toddler back in the States).

I figure this is one of those good years of plenty. We are making a killing in the market, so we can afford to live it up some. That may mean blowing our $32k budget by a few thousand dollars.

If we were to lose 30% of the portfolio next year, I doubt we would spend anywhere close to $5k on travel!

Now that I'm ER, I "get it" with regard to withdrawals. No way could I stick to a fixed percentage plus an inflation adjustment. If the market goes bonkers (up), and we have $2-$2.5 million, we'll definitely spend significantly more than $32,000 per year.

I may be a bit off the mark here with my comment, but with three young kids $32K seems very low, even for a LBYM type. It is barely above the poverty level and in 10 years you will have the first of three kids starting college. In my experience kids don't get cheaper as they get older.

Also at 33 you could just be entering the rising part of your career, which could bring your earnings up quite substantially. And of course staying out of the workplace too long has ramifications for this. Another 10 years of earnings with your kind of savings rate could get you past all of this, and you could still retire early and comfortably.

If it were just the two of you, then it would be fine, but I would be very worried if I were in your position quitting work now with only $32K and three young kids.

 

[FUEGO]

FUEGO,

A bit off-topic, but my sense is that being a stay-at-home-dad and being retired are two entirely different things.

When I was working and DW was a SAHM we never considered her to be "retired".

Though I must admit, I'm not sure how to describe the difference for people who are retired and still have kids living at home, so if you prefer retired, so be it!

Once your DW retires and neither of you are working then I get it. I wish I could have done it at 33. Good for you!

Yeah, that's why I poke fun at myself and say I'm a stay at home dad (labels don't really matter to me, so call me what you want!). If we weren't FI, I'd go get a job so we can hit FI sooner. DW has a pretty sweet set up at work (40 hours/wk, frequent telecommute, extra 5 weeks paid vacation this year, 2-3 months extra paid vacation next year). So for a year or two, she'll be "full time" (if that's the right word for working 8-9 months each year) and I'll be retired. After that we'll be retired. Or 2 stay at home parents, if you like.