Planning for a More Expensive Retirement

[dixonge]

Blanchett, Finke and Pfau weigh in. I'm no FPA-type but I figure it might provoke some interesting discussions. Mainly I'd be curious to see if anyone here actually agrees with their premise

https://www.onefpa.org/journal/Pages/MAR17-Planning-for-a-More-Expensive-Retirement.aspx

 

[Danmar]

Interesting paper. Thanks for posting. I'm glad I'm already 10 years into a well funded retirement.

 

[RetiredGypsy]

Fama and French (2002) concluded that “the high 1951–2000 return seems to be the result of low expected future returns” (page 658).

I have a feeling I'm missing something. The whole premise seems to be expect lower future returns, but this quote seems to suggest there's a paradox to that mindset being the majority expectation.

 

[PandaBear]

A quote from the paper: "For example, assume a household earns $50,000 at age 25, expects a 3 percent annual real growth rate in income, and wants $1 million in purchasing power after age 65. If they expect a 5 percent real return on investments, they will save 10 percent of their income each year. If they expect 2 percent, they will need to save 18 percent of their income each year in order to reach their $1 million goal."

Actually, I'd be surprised if the average investor, especially in their 20's or even 30's, has any idea of what the varied returns will be and how that will impact how much they have at retirement and what kind of income it will provide. Isn't there lots of research about the percentage who aren't even contributing at all?

I'm not saying this is inaccurate. I'm just saying it takes retirement planning to a much higher level than most people would even envision.

 

[daylatedollarshort]

We're already planning on much lower returns than any of the online retirement calculators. We use a matching strategy and my own spreadsheet where I can plug in real returns. I usually plug in something close to the 10 year TIPS yields for the real return. I'm currently using .5%. The 40 year results only yield half as much as the Fidelity calculator ending balance with a conservative asset allocation.

 

[W2R]

From the article,

Many financial planning assumptions are based on historical returns; however, these historical returns may not be relevant in the future. Prices of bonds and stocks are much higher than in the recent past, suggesting a greater likelihood that portfolio returns will fall below the assumptions commonly used by planners. This study explored how lower expected returns affect optimal saving and spending during working years, retirement replacement rates, retirement lifestyles, and the cost of bequests.

I don't think many of our members would regard a $1,000,000 portfolio today as having an identical value to a $1,000,000 portfolio in March of 2009. Many of us are taking a lower WR than 4% right now.

A topic that we sometimes discuss is flexibility in what we decide to withdraw and spend. Flexibility in withdrawals and spending is important to retirees because of changing returns.

My own strategy has been to minimize my bare bones expenses, so that I can easily cut way back if the market drops. While the market is up, I feel fine about spending more on discretionary "fluff" of the type that is easy to eliminate from my spending later on.

In fact, I think that right now is a good time to spend money, for example paying for long term expenses that aren't emergencies, so I am doing that. I'm having some work done to my house this morning that isn't really necessary for another few years, (replacing some worn looking pillars on the front porch).

 

[kcowan]

Conclusions
Convincing evidence has shown that historically high stock and bond prices will lead to lower future investment returns. The low yield on safe assets, coupled with increases in longevity, has doubled the cost of buying guaranteed income in retirement since 1980. Investors hoping to soften the blow of low safe asset returns by accepting greater portfolio risk are not likely to achieve historical returns on equity investments.

I think if we accept this conclusion, we need to also include the related fact that Firecalc is based on historical data that is no longer representative.

It might be why many people here are more comfortable with <3% SWR?

 

[audreyh1]

Blanchett and Pfau are always writing about current high asset prices, and they are correct even though I rarely agree with their investing advice.

We've been beneficiaries of high asset price rise since 2009, and as a consequence our income is much higher now than a few years ago. So I definitely expect little near future growth. And we continue make our full target withdrawal at these elevated levels even though we don't currently spend it all, because I refuse to reinvest unspent funds at these stock and bond prices.

I expect our portfolio to "normalize" at some point in the near future which probably means a shrink in income, and nothing so rich as what we have now.

But we stay invested, because I don't know how to successfully time market peaks.

 

[W2R]

I think if we accept this conclusion, we need to also include the related fact that Firecalc is based on historical data that is no longer representative.

It might be why many people here are more comfortable with <3% SWR?

Historical data may or may not be representative of future conditions. Unless we have a prophet among us, we just do not know.

This is why I have always regarded FIRECalc as a great tool to give us a starting point in retirement calculations. I would never suggest that anyone should just run FIRECalc once and then retire without thinking further. But I do think it is probably the best tool available, and it is free, so I think that running it should be part of most retirement planning.

 

[Big_Hitter]

not sure there is any such thing as a "30 year retirement"

these guys need to incorporate life contingencies in the analysis

 

[Fedup]

I was conservative when I planned for retirement, I assume 2%. I know it's low and I've exceeded this rate for many years. But it doesn't matter, my SWR still very low. I think perhaps unconsciously expect some set back.

 

[imoldernu]

Some numbers from a different post that didn't receive much attention, but what I think is important.
Projections... even averages... of market returns can be confusing, and vary according to the objectives of the source. A matter of establishing odds of success in investing.

More important I think, is looking back over time, to see actual numbers, and to look at the variances that happened in real time... in this case, the way that the economy has actually performed over time. The measure is inflation.

As we look forward to our future and the chances that we'll be able to maintain our hoped for standard of living, we can look to actual numbers... that happened.

The numbers below were taken arbitrarily from the government inflation calculator, (dates unimportant) on a ten year basis over the past several decades.
....................................
Ten Year Inflation $
Based on $100.
10 yr, infl $ from
1957 to:1967 $119
1967 to:1977 $181
1977 to:1987 $187
1987 to:1997 $141
1997 to:2007 $129
2007 to:2017 $120
...................................
So, if you had retired from 1967 to 1987, inflation was very high, and if you had funds in a finite amount, or had invested in a fixed income instrument, you probably would have suffered.
Taking the same example for retirement from 1997 to 2017, the effect on lifestyle would have been much less.

Not suggest as a means for planning, but to establish another "what if"... as what if high inflation is ahead? On a personal basis, we reassess our assets on a yearly basis, and consider the neartime outlook for our coming year budget.

 

[Earl E Retyre]

....................................

...................................Ten Year Inflation $
Based on $100.
10 yr, infl $ from
1957 to:1967 $119
1967 to:1977 $181
1977 to:1987 $187
1987 to:1997 $141
1997 to:2007 $129
2007 to:2017 $120
So, if you had retired from 1967 to 1987, inflation was very high, and if you had funds in a finite amount, or had invested in a fixed income instrument, you probably would have suffered.
Taking the same example for retirement from 1997 to 2017, the effect on lifestyle would have been much less.

However, back in the 80's I believe that one could get a CD yielding 15%. So a fixed income may not have suffered.

 

[DrRoy]

I think if we accept this conclusion, we need to also include the related fact that Firecalc is based on historical data that is no longer representative.

It might be why many people here are more comfortable with <3% SWR?

+1. I completely agree that it is not prudent to expect future investment returns to match the past, and that the typically suggested 4% WR is unsafe. I have saved at varying rates from 10-30% over the years, had rather good luck with returns. DW and I will be very comfortable with a <2% WR plus a modest pension. I could do without the pension and still be at 2.25%.

 

[Koolau]

<SNIP>

Not suggest as a means for planning, but to establish another "what if"... as what if high inflation is ahead? On a personal basis, we reassess our assets on a yearly basis, and consider the neartime outlook for our coming year budget.

Oddly (or maybe not) I picked up on the "management costs" issue more than their main point. At least they recognize that they are a part of the problem, though I don't think they like to advertise it too much. But, that's another discussion.

I think the article is more for the young folks here, not so much us old codgers (though you will notice that I still take a theoretical 30-year perspective below, heh, heh.)

At age 70, I don't worry as much about the results shown in the FPA Journal article as I do about inflation, specifically. If inflation stays about where it has been since I ER'd 12 years ago, we should be in good shape to 100. We've never consistently taken 4% WDR (more like 3% on average). But, if inflation should rear its ugly rear, all bets could be off.

Even for relatively high inflation, I think I have enough back-ups to get us through, but hyperinflation could wipe all of us out unless we have been lucky (not so much good) in our planning. Hope we never see such a scenario, but it at least deserves thinking about. YMMV

 

[exnavynuke]

I think if we accept this conclusion, we need to also include the related fact that Firecalc is based on historical data that is no longer representative.

It might be why many people here are more comfortable with <3% SWR?

I think many people here are likely to die with significantly more money than they retired with....

 

[GravitySucks]

I'm glad I retired before I ever heard of Wade Pfau.
I was introduced to his work by this forum in 2013. How many years of pessimism must one exhibit before being labeled a perma-bear?

 

[kimcdougc]

Did my research before we retired. Used FIREcalc and Fidelity's calculators. We are 100% on FIREcacl till 92. Everything I read shouts doom and gloom for the future of our $.

Isn't that what all the businesses out there are suppose to do so they can use our money to pay their paychecks?

Think I am smart enough to cut back if the market and our funds go down and smart enough to spend more if our accounts are doing good.

No rocket scientist needed.

Just my 2 cents.

 

[ejman]

I think the elephant in the room is high inflation for a sustained period of time. Most plans based on financial instruments (i.e. stocks and bonds) become unsustainable once inflation hits 8-12% for a a number of years.

 

[nun]

I'm glad I get my retirement income from a COLA'ed pension and rent, and when UK and US SS start I'll be in the accumulation phase again. It's nice to not be directly coupled to the markets.

 

[RobbieB]

I don't read any "guru" sites, too busy having fun!

 

[Danmar]

Think I am smart enough to cut back if the market and our funds go down and smart enough to spend more if our accounts are doing good.

No rocket scientist needed.

Just my 2 cents.

This is my view as well. Once one has retired not much need to forecast these things as the actuals are available to us. Flexibility is key.

 

[brucethebroker]

A topic that we sometimes discuss is flexibility in what we decide to withdraw and spend. Flexibility in withdrawals and spending is important to retirees because of changing returns.

My own strategy has been to minimize my bare bones expenses, so that I can easily cut way back if the market drops. While the market is up, I feel fine about spending more on discretionary "fluff" of the type that is easy to eliminate from my spending later on.

This is a similar point I thought of while reading the article. Having room to slash your budget if needed takes much stress out of planning for the (unknown) future. Many early retirees have taken small mortgages into retirement and might travel more now than in the future. In a dozen years, if the mortgage is paid off, and the need for travel reduced, that would be a huge impact on future budgets.

 

[alaska55]

1st of all all you hippies from the 60's and 70's must be smoking again. A 3.5% wd rate has never failed a 30 year retirement and how many of you plan on living past 90. I'm pretty sure all I'm going need is a loud TV and a computer with large fonts after 80.

 

[kcowan]

Some numbers from a different post that didn't receive much attention, but what I think is important.
Projections... even averages... of market returns can be confusing, and vary according to the objectives of the source. A matter of establishing odds of success in investing.

More important I think, is looking back over time, to see actual numbers, and to look at the variances that happened in real time... in this case, the way that the economy has actually performed over time. The measure is inflation.

As we look forward to our future and the chances that we'll be able to maintain our hoped for standard of living, we can look to actual numbers... that happened.

The numbers below were taken arbitrarily from the government inflation calculator, (dates unimportant) on a ten year basis over the past several decades.
....................................
Ten Year Inflation $
Based on $100.
10 yr, infl $ from
...
1967 to:1977 $181
1977 to:1987 $187
1987 to:1997 $141
...
...................................
...
Not suggest as a means for planning, but to establish another "what if"... as what if high inflation is ahead? On a personal basis, we reassess our assets on a yearly basis, and consider the neartime outlook for our coming year budget.

Yes that was my point. The Firecalc history is during a period of very high returns which implies that 4% was a reasonable expectation in those days.

+1. I completely agree that it is not prudent to expect future investment returns to match the past, and that the typically suggested 4% WR is unsafe. I have saved at varying rates from 10-30% over the years, had rather good luck with returns. DW and I will be very comfortable with a <2% WR plus a modest pension. I could do without the pension and still be at 2.25%.

Agreed. The lower the better.

1st of all all you hippies from the 60's and 70's must be smoking again. A 3.5% wd rate has never failed a 30 year retirement and how many of you plan on living past 90. I'm pretty sure all I'm going need is a loud TV and a computer with large fonts after 80.

With technology, you can count on good vision and good hearing until you die. But good luck with 3.5%!