Yahoo Post on Early Retirement

[Hiredgun]

buck-the-trend-and-retire-early: Personal Finance News from Yahoo! Finance

"Buck the trend and retire early".

The post has standard advice and recommends no more than 3% SWR. It was one of the posters that got my attention, recommending the following formula:

"Take your age at retirement and subtract it from 105.

Divide the value of your financial holdings by that number.

You now have the amount of annual withdrawl you can make. You will also have a cushion of extra money for an unexpected event or age related increase in expenditures."

Is this realistic or too conservative. With a stash of 3 million at say age 47 I could only take out about $52,000 per year. This is much less than $90,000 which is a 3% SWR. Thoughts?

 

[REWahoo]

Well, the poster did say you'd have a cushion for unexpected expenditures, but he didn't mention just how big it might be.

I think it is much too conservative - unless you have a huge nest egg or retire very late in life.

 

[MasterBlaster]

perhaps too conservative. using the 105-age formula would give you a rate (of ~1.7% for a 47 year old) roughly half of what traditional SWR analysis would suggest.

Bernsteins analysis for a stock-bond portfolio suggest maybe 3.33% (less trading fees and fund expense ratios) would be OK. So the 3% after fees would probably be OK.

Personally I would do a variable withdrawal scheme - where your spending amount would go (somewhat) up and down with the markets. there are many variations on this approach.

 

[MasterBlaster]

Nobody here (except me perhaps) seems concerned with spending too little of their nestegg. the idea is to fully utilize the nestegg without going broke. Just recall that a SWR is for those very worst markets such as we've just been through. It just may be that the markets won't go to zero during your retirement. In that case your withdrwal rate could potentially be much higher than 1.7-3 %

Gummi did a great little analysis of this topic. I discussed it in a post last year which may be of interest to you:

The New Math of Retirement - Page 2 - Early Retirement & Financial Independence Community

 

[obgyn65]

I agree with REWahoo - it is very conservative.

 

[Sarah in SC]

Masterblaster, I share your desire to spend down our nest egg! As we have no children, there is really no need to retain any of it at death, except to benefit our niece and nephews. I appreciate your discussion of this!

 

[LOL!]

You realize what the formula mentioned by Hiredgun is, don't you?

It basically is saying you will live to 105 and the real return on your portfolio will be 0%.

 

[Hiredgun]

Appreciate the responses. First time I have seen such a conservative post on calculations. Freaked me out a bit. I thought I'd be good at a certain number and that told me I needed to work longer

Glad to hear the rationale of those on this board. Thanks,

 

[Westernskies]

Masterblaster, I share your desire to spend down our nest egg! As we have no children, there is really no need to retain any of it at death, except to benefit our niece and nephews. I appreciate your discussion of this!

+3.

I plan on making the genXer's pay to bury me.

 

[traineeinvestor]

If I use that formula to dictate my spending, I'd be pretty disappointed if I didn't live to at least 105.

 

[traineeinvestor]

+3.

I plan on making the genXer's pay to bury me.

By the time that happens, I'm sure somebody would have figured out how to turn you into bio-fuel (assuming they get a sufficiently large subsidy from the taxpayers).

 

[MasterBlaster]

Just for fun here is one short discussion of three or four of the variable withdrawal strategies that are easily implemented and tracked:

Cash: How to Vary Spending During Retirement

There also is an opposite risk. A retiree with a strong fear of running out of money might live much more frugally than required. That would be great for heirs, because they will inherit a sizable portfolio, but it reduces the retiree's standard of living.
Unlike the projections in most models, retirement spending does not increase in a straight line. It varies over time. In addition, markets also do not move in a straight line. They are volatile and can have extended bear markets and bull markets. These fluctuations in the portfolio value should influence annual spending.

Kotlikoff (of ESP Planner fame) and others refer to lifetime consumption smoothing where you attempt to level near term and far term spending over your (and your spouses) remaining lifetime.

 

[haha]

If I use that formula to dictate my spending, I'd be pretty disappointed if I didn't live to at least 105.

I live on about this or less. Usually less. Though it was not always so. My net worth has increased very regularly in the ~ 25 years I have been retired-that is the good part. ( Excepting my divorce). Without that event, my withdrawal rate would be laughable, unless my wife somehow figured out how much money was around. The less good part is that the divisor has also decreased along the way.

I take no pride in living cheaply, and in fact I do not live particularly cheaply. I think much more important is that one does not take dumb risks, though keeping a close eye on outflows counts too, especially the big stuff. I believe in carefully spending only on what makes me happy, or more secure, or more healthy. I would never feel the urge to "find a way to spend some more money". IMO the small, "latte" type frugality is more lifestyle porn than anything important to financial survival. Perhaps very early on, or when one's portfolio is being heavily stressed this would not be true. Another situation where one is forced into this type of living is when extremely early retirement is coupled with extremely low assets, which creates what is for all intents and purposes poverty, though it is usually called something more acceptable.

Ha

 

[Dawg52]

I live on about this or less. Usually less.

Same here. Some of it is due to staying close to home and keeping an eye on Mom. Down the road my spending will increase as I travel more. But, I will be adding SS to my current number by then so I may not tap much more of my nest egg. I may have to figure out a way to spend some.

 

[skyvue]

You realize what the formula mentioned by Hiredgun is, don't you?

It basically is saying you will live to 105 and the real return on your portfolio will be 0%.

Agreed. My plan is essentially the same except I will use 70, not 105 as the worst case scenario. I retire at 50 and will plan to spend the next egg until 70. At that point I would begin taking social security with the max amount due to defering to that age. If my money earned 0% over the 20 years that's all I would have (worst case) but in reality whatever I earned over those 20 years will supplement the post-70 income stream. I am fine with the idea of living off social security only (the max amount) post 75 or so if I need to. My lifestyle and family history tells me I am unlikely to live past 70 anyway.

 

[skyvue]

If I use that formula to dictate my spending, I'd be pretty disappointed if I didn't live to at least 105.

Agree. I hate these overly conservative approaches because it seems to lose site that people will not be spending much money after 80 if they do live that long. At that point in your life your expenses would essentially be food, utilities, medicine, property taxes and a few gifts. I would think most people could live on social security at this point in their life couldn't they? (I am perhaps naive but people I know over 80 aren't spending a lot of money traveling, entertaining, etc....)

 

[haha]

Agree. I hate these overly conservative approaches because it seems to lose site that people will not be spending much money after 80 if they do live that long. At that point in your life your expenses would essentially be food, utilities, medicine, property taxes and a few gifts. I would think most people could live on social security at this point in their life couldn't they? (I am perhaps naive but people I know over 80 aren't spending a lot of money traveling, entertaining, etc....)

Lots of questionable assertions. I am sure some 80 year olds live just like this, but many others do not. Many of those who live the constrained lives you mention will be doing so because they cannot afford, or think they cannot afford, any other behavior. Do you want to bet that you will either be too sick or too broke to do what you would like to do?

IMO it is fine to say, I don't care what my life is like after I am 80, I'm living for now. But not to say "after 80 no one spends anything on anything fun anyway". The first statement may turn out to be false, you may really wish you had planned differently. But the second statement is counterfactual at the time it is made.

My ex FIL, who is 96 and whose homebase is Maryland, in the past five years has been to Normandy, Crete, on a Rhine Tour, to Paris, to San Francisco about 12 times, to DC approvimately weekly, to Dallas maybe 10 times, to New York City several times a year. Just look around an airport at all the white heads! Count auburn haired women too.

It can be lots of fun to imagine how things will go, but it is a lot safer if these imaginings are leavened with a just bit of reality.

Ha

 

[skyvue]

Lots of questionable assertions. I am sure some 80 year olds live just like this, but many others do not. Many of those who live the constrained lives you mention will be doing so because they cannot afford, or think they cannot afford, any other behavior. Do you want to bet that you will either be too sick or too broke to do what you would like to do?

IMO it is fine to say, I don't care what my life is like after I am 80, I'm living for now. But not to say "after 80 no one spends anything on anything fun anyway". The first statement may turn out to be false, you may really wish you had planned differently. But the second statement is counterfactual at the time it is made.

My ex FIL, who is 96 and whose homebase is Maryland, in the past five years has been to Normandy, Crete, on a Rhine Tour, to Paris, to San Francisco about 12 times, to DC approvimately weekly, to Dallas maybe 10 times, to New York City several times a year. Just look around an airport at all the white heads! Count auburn haired women too.

It can be lots of fun to imagine how things will go, but it is a lot safer if these imaginings are leavened with a just bit of reality.

Ha

Good points. I should have simply said, "if I live to be 80 and out live my money, I will be fine with living off social security because I would have traveled and lived the earlier retirement lifestyle the prior 20 years!".

Essentially I am willing to gamble on not living to 80 or living very frugually past that point, so that I can retire at 50 instead of 58 or 60.

I think it's great if people in their 80's and beyond are still healthy enough, energetic enough, wealthy enough and willing to still travel around the world. That just hasn't been what I have observed from friends and family. But of course most of these people didn't do that when they were 40 either!

 

[MasterBlaster]

I suspect that Ha's FIL is the exception rather than the rule. Many people in their 80's have slowed down quite a bit and stick very close to home.

At some stage you realize that, a bag of Cheetos and some premium cable channels are all that are required to live the good life.

 

[tuixiu]

Nobody here (except me perhaps) seems concerned with spending too little of their nestegg.

I'm with you. I put more weight in our ability to react than working the extra years to increase our portfolio to accommodate an extremely conservative withdrawal rate.

 

[NW-Bound]

My ex FIL, who is 96 and whose homebase is Maryland, in the past five years has been to Normandy, Crete, on a Rhine Tour, to Paris, to San Francisco about 12 times, to DC approvimately weekly, to Dallas maybe 10 times, to New York City several times a year. Just look around an airport at all the white heads! Count auburn haired women too...

My FIL, in his early 90s, has been in a nursing home, and has been steadily losing whatever mobility he has left. My wife told me he recently had difficulties feeding himself with a spoon, because his elbows and wrists were getting stiff and he could no longer bend them to bring the spoon to his mouth. My MIL in her late 80s no longer wants to travel far from home due to her arthritic joints.

But my inlaws are still doing better than my own father who did not make it to 80. And visiting the hospitals, convalescent homes and nursing homes, I have seen many in their 60s and 70s.

So, that certainly influences the dim view of my "golden years". I do not expect myself to be globe trotting in my 90s, in fact doubt that I would even make it that far.

 

[harley]

Good points. I should have simply said, "if I live to be 80 and out live my money, I will be fine with living off social security because I would have traveled and lived the earlier retirement lifestyle the prior 20 years!".

Essentially I am willing to gamble on not living to 80 or living very frugually past that point, so that I can retire at 50 instead of 58 or 60.

I'd be willing to bet that you would regret that decision. I can't imagine living the last years of my life with major financial limitations because I was impatient when I was younger. Pete Townsend and Roger Daltrey may have sung "Hope I die before I get old", but I don't see them putting the hose in the exhaust pipe. When I was 20, 50 sounded ancient. Now that I'm 55, 80 doesn't sound that old. IMO, if I don't need as much money when I'm 80, no problem. But no way I'm going to run out of money before I die, if I can do anything about it. Good luck to you, though. Hope it doesn't work out badly.

 

[haha]

Good points. I should have simply said, "if I live to be 80 and out live my money, I will be fine with living off social security because I would have traveled and lived the earlier retirement lifestyle the prior 20 years!".

Essentially I am willing to gamble on not living to 80 or living very frugually past that point, so that I can retire at 50 instead of 58 or 60.

I think this is a completely respectable position to take, as long as one understands the bet, which definitely seems to be the case here. I just wanted to point out that it was a bet, not a fact of life that there is nothing worth paying for beyond rent and medicine after 80.

My own Dad assumed that he wouldn't last far beyond 60- he had a number of serious chronic illnesses, but in fact in lived in good health until he was 86, and then spent the last 2 years in assisted living which is not what anyone would like, but he wasn't really ill, was not in pain, could take care of himself, go out on group trips to the symphony, etc. He was definitely glad that the had the money to live in a nice place, around people much like himself, and actually to know that he was finishing the 4th quarter with some class.

Ha

 

[pb4uski]

Nobody here (except me perhaps) seems concerned with spending too little of their nestegg. the idea is to fully utilize the nestegg without going broke. ....

That's the retirement planning dilemma, isn't it - life is too short.......... but it could be too long.

It seems foolish to not enjoy life NOW when so many people die young - you can pick up the paper any given day and find some examples. On the other hand, if you are one of the lucky ones and do live long you want to be sure that you don't run out of money (live long and prosper?).

As for me, I'm planning to delay drawing SS until I'm 70 as a hedge of living too long - will live off the nestegg from when I fully retire until then.

My plan also anticipates a slowdown in spending at the later ages (20% at 75 and and additional 10% at 85). I hope I'm wrong and my health is such that I'm spending MORE at those ages, but looking at others I know in those age groups it does seem that they slow down some.

Have already told the kids that the plan is to die broke (not really, but I want to shape their expectations).

 

[traineeinvestor]

Nobody here (except me perhaps) seems concerned with spending too little of their nestegg. the idea is to fully utilize the nestegg without going broke.

While I am neutral on whether or not I leave anything to my childen (after the point which they achieve independent adulthood), two issues which concern me about plans to spend the last penny on my last day are:

1. I do not know how long I will live - actuarial tables give me something of an average expectation but I could live a lot longer than the averages (or not);

2. I do not want to spend my declining years worrying about whether I will have enough money to live whatever lifestyle I am capable of right to the end, pay for a hip replacement (or even for the basic living expenses).

Based on the above, I have assumed a very long life and no fall off in spending as I age. Add in my paranoia about inflation, and the result is that I will most likely leave a substantial inheritance unless (i) I live well beyond the expectations of the actuaries (ii) I increase spending and (iii) inflation ends up being less than the long run average I have assumed (or (iv) I really stuff up my investments).

I accept that it is likely that I will spend "too little" as a result but, for me at least, better that than the alternative. I also don't mind leaving my daughters a meaningful amount of money.

Edited to add: It's likely that my views are affected by the absence of either a pension or social security as fall back - the consequences of running out of money are much greater without them