Another twists on portfolio withdrawal

[Martha]

John Clements' article in the WSJ today talks about how to survive retirement even if you are short on savings. He quotes William Bernstein who says this about withdrawal rates: Two percent is bullet-proof, 3% is probably safe, 4% is pushing it and, at 5% you're eating Alpo in your old age.

Trouble is that many don't have enough money to limit their withdrawals to this extent. Clements makes a couple of suggestions. One possibility is to buy an income annuity and delay social security. However, some do not like the idea of not living long enough to reap the benefits.

His other suggestion is to think about retirement in two stages. One before age 85 and one after. He suggests planning to spend down 85% of your portfolio before age 85. Invest the other 15% in stocks and 20 year inflation indexed treasury bonds. Spend that remaining money after age 85 and if necessary, tap on your home's equity.

He is presuming a traditional retirement at age 65 and a plan to spend 85% in 20 years.

Not an ideal plan but one that might help those who would have a hard time living on a lower withdrawal rate.

 

[Rich_by_the_Bay]

That's very thought-provoking for me. There was always something not quite right about planning for retirement as if it were one continuous event with financial needs that don't change with predictable life passages.

Seems like you could trick FIRECALC into this kind of a scenario.

 

[Gumby]

I left the paper on the train so I can't check, but I thought his idea was that the 15% would be annuitized for the post-85 period. I suppose you could do it either 1) with a single premium deferred annuity bought when you first retire or 2) invest the money for the 20 years until 85 and then buy a single premium immediate annuity.

 

[haha]

At present anyway, I don't have to consider these stretch scenarios, because my expenses are well within safe parameters for even my modest stash. Not yet drawing SS, I have still never reached 2%.

But if I did need to push it, I would try to spend my thinking and research time on finding better investments, rather than fiddling with withdrawal rules. The difficulty is that you have to know something about business, and you have to give up the "security " of being able to model it in FireCalc.

Withdrawal rule tinkering reminds me of one of the favorite pastimes of gamblers(the other is lying) - looking for betting rules to avoid the consequences of playing negative expectation games.

Martingale anyone?

 

[Martha]

I left the paper on the train so I can't check, but I thought his idea was that the 15% would be annuitized for the post-85 period. I suppose you could do it either 1) with a single premium deferred annuity bought when you first retire or 2) invest the money for the 20 years until 85 and then buy a single premium immediate annuity.

Yes, he suggested either spending down that 15% you saved in stocks and bonds or buying an annuity with the money.

 

[Martha]

But if I did need to push it, I would try to spend my thinking and research time on finding better investments, rather than fiddling with withdrawal rules. The difficulty is that you have to know something about business, and you have to give up the "security " of being able to model it in FireCalc.

But if you are 65 years old with only a 100,000 dollars saved, you are not going to be able to do a whole lot by investing better. You either have to keep working or figure out how you are going to live on your SS and those savings.

 

[mickeyd]

Spend that remaining money after age 85 and if necessary, tap on your home's equity.

Of course, this assumes that when you reach age 85 that you will remember what your plan was at age 65 and that dementia has not thwarted your entire plan. 8)

 

[Nords]

Of course, this assumes that when you reach age 85 that you will remember what your plan was at age 65 and that dementia has not thwarted your entire plan. 8)

It also assumes that (aside from healthcare) you'll be spending more money at age 85 than at age 65.

What we need is a thumbrule that helps determine how to balance declining activity (leisure spending) with rising healthcare issues (mandatory spending). I'd rather spend more when I'm 65 but I'd sure hate to be on Medicaid in my 80s.

 

[rmark]

Ok,

More activities early and more healthcare later, for nearly level spending until later in life.

 

[Nords]

More activities early and more healthcare later, for nearly level spending until later in life.

It'd be ideal-- except the first is discretionary and the second is pretty much mandatory...

 

[haha]

But if you are 65 years old with only a 100,000 dollars saved, you are not going to be able to do a whole lot by investing better. You either have to keep working or figure out how you are going to live on your SS and those savings.

True. I was addressing the people here. However, many people can live fairly well on their SS alone. And often it would not be much different, or even more expansive, than some of the tighter budgets put forward here, often by people who are still working.

We have had posts by ERs who never topped $50,000 pa working, who have saved >=$1 million. Their budget, often with kids around, couldn't have been any looser than a retired couple living on even median SS payments.

So they will likely be OK; it just may not be what the magazines look like.

Ha

 

[Moemg]

, couldn't have been any looser than a retired couple living on even median SS payments.

So they will likely be OK; it just may not be what the magazines look like.

The problem with that scenario is assuming both people stay alive until a ripe old age to collect their Social Security .

 

[rmark]

I suspect its about as good as it gets for a rule of thumb. I think that you are anchored to what amount a person is used to living on, maybe adjusted down for a mortgage paying off or kids finishing college, but avoiding the temptation to assume early falling costs that may not occur. For example, in my experience -

One grandmother with Alzheimers - costs certainly didn't fall in late life
Co-worker's heart surgery - will probably live much later than expected
Father in law, almost Soc. Sec. only - somewhat forced lower spending

 

[haha]

, couldn't have been any looser than a retired couple living on even median SS payments.

So they will likely be OK; it just may not be what the magazines look like.

The problem with that scenario is assuming both people stay alive until a ripe old age to collect their Social Security .

Good point; I didn't think of that.

But then again one could move in with brother or sis. If you can't come up with BF/GF. Or if you prefer brother or sister to putting up with BF/GF.

Ha

 

[SteveR]

A living example is my mother. She is self sufficient on SS and a small teacher's pension. She lives in an Assisted Living center and her expenses are quite low. Her room and board and minor nursing care are self-funded through her SS and pension. She has other assets that are cashed out annually to re-fund her spending accounts---very very conservative stuff by her wishes (demands). She is doing fine. Her money will outlive her even if her expenses increase by 100%. At age 84 she has already lived longer than any of her family members.

Will she spend more in the next 5 years vs the previous 5? I believe she will since her health will most likely get worse and her medical expenses will increase. However, Medicare will cover most of it and even if she needs full-time nursing care the increase in her living expenses would be well within her ability to cover it.

My parents never had much in the way of money or investments. They managed to live a good life on an annual income that is far less than what most folks relate here as an average post retirment income level. I guess being frugal was always a way of life for them and retirement really had no effect either way.

For folks who spend a ton while working and then retire on a much smaller income I can see where they would be in a world of hurt. On the other hand, if one lives below their means while working, retirement should be a breeze.

My retirement models were based on spending more in my early retirement years followed by a gradual reduction in expenses down to a minimal level late in life. My life expectancy is estimated at 90 but I doubt this ole bod will make it that far.

Can't see living it up at age 90. Maybe I will opt for the Premium brand of Geritol rather than the Walmart brand so I can spend my kids' inheritance before I go.

 

[rmark]

Its bad enough trying to model investments and portfolios. Now we have to add in biology.

 

[cute fuzzy bunny]

Eh, its good advice. In my dads community of well to do old folks (most are over 70), except for a handful that travel most of them hardly come out of their houses except to shop.

Thats what makes the whole "put off your social security and further reduce your earned income by buying an annuity so you can have more money in your late 80's and 90's" argument sort of counterintuitive to me.

My dads been roughly tracking his expenses over the last 5 years. He seems to be spending about 3-5% less each year and in a few years may reach parity with his social security income. The value of which has been dropping in "real" dollars in comparison to his expenses. He's playing less golf, sold his golf cart, isnt eating out as much, etc.

The only thing in his lifestyle going up is the medicare payments getting sucked out of his social security and his payments to his HMO medigap...which is also raising the co-pay rates along with the monthly costs.

Pretty easy to 'fool' firecalc into this. Just put in some negative withdrawal changes that increase every 5-10 years starting when you're in your mid 70's or early 80's. My bet is the numbers it throws back allows you to spend more while younger or it lets you stay at 4% and not sweat your old age as much.

 

[jdw_fire]

Eh, its good advice. In my dads community of well to do old folks (most are over 70), except for a handful that travel most of them hardly come out of their houses except to shop.

Thats what makes the whole "put off your social security and further reduce your earned income by buying an annuity so you can have more money in your late 80's and 90's" argument sort of counterintuitive to me.

My dads been roughly tracking his expenses over the last 5 years. He seems to be spending about 3-5% less each year and in a few years may reach parity with his social security income. The value of which has been dropping in "real" dollars in comparison to his expenses. He's playing less golf, sold his golf cart, isnt eating out as much, etc.

The only thing in his lifestyle going up is the medicare payments getting sucked out of his social security and his payments to his HMO medigap...which is also raising the co-pay rates along with the monthly costs.

Pretty easy to 'fool' firecalc into this. Just put in some negative withdrawal changes that increase every 5-10 years starting when you're in your mid 70's or early 80's. My bet is the numbers it throws back allows you to spend more while younger or it lets you stay at 4% and not sweat your old age as much.

This sounds like Bernicke's study.

 

[Rich_by_the_Bay]

Thats what makes the whole "put off your social security and further reduce your earned income by buying an annuity so you can have more money in your late 80's and 90's" argument sort of counterintuitive to me.

It's about the uncertain health care, assisted living, or even nursing home care costs for many in that age group. The enhanced income in those years isn't all going to cruises.

It's good to be healthy, and it's unimaginably expensive to have poor health, in some cases even if you do have the best health insurance money can buy.