"4% is too low." How much will you leave on the table?

[Nords]

I'm trying to banish from my head the vision of a number of e-r.org members at an extremely advanced age and in decrepit condition, trying desperately to act out some rather excessive and inelegant "spring-break" type behaviors while struggling with canes, walkers and electric scooters in an effort to "spend down the stash"

I think the usual spring-break fleshpots would much rather have our free-spending drunken behavior than a bunch of cheapskate college students' drunken behavior...

 

[W2R]

I'm trying to banish from my head the vision of a number of e-r.org members at an extremely advanced age and in decrepit condition, trying desperately to act out some rather excessive and inelegant "spring-break" type behaviors while struggling with canes, walkers and electric scooters in an effort to "spend down the stash"

When I get to that age, I want to be able to afford the coolest looking, prettiest, most ergonomic walker in town. I'm going to be a senior with style! I expect prices of walkers will have gone up by then, too.

Right now, I have a 60" plasma TV but by then I'll bet they will come in much larger versions and I'll want one of those too. Or maybe two, to cover both walls - - I can use the other one for my computer display.

Even though the focus of our desires may change, we may still want some expensive things.

 

[Andre1969]

W
Right now, I have a 60" plasma TV but by then I'll bet they will come in much larger versions and I'll want one of those too. Or maybe two, to cover both walls - - I can use the other one for my computer display.

In the overall scheme of things, TVs are actually pretty cheap nowadays. Just the other day in Costco, I saw some 60" 3D flatscreens that were only around $1400-1500.

To use a reference point in the past, in 1972 my grandparents bought a brand-new Zenith console tv. 25", no remote control, no digital tuner, one speaker. It was $700. Adjust for inflation, and that's around $3800 today!

When I was 13-14, I saved up some money working weekends doing house and yard work for a friend of my grandmother's. I wanted a color tv, and my Granddad said that if I saved up half, he'd pay for the other half. The tv I got was a 19" Toshiba, what passed for a "portable" in those days. I think it was close to $400 with tax, so I put up $200. I can't remember now if that was 1983 or 1984, but adjusting for inflation, that $200 would be either $438 or $457, depending on the year. So, double that for the price of the tv.

However, that 1972 Zenith lasted until 1987, I think. And I think my old Toshiba still works. At least, it did the last time I turned it on, which has been a few years now. I dunno how long these modern flat-screens will go. I had one that only lasted about a year and a half, but in its defense, one of the cats projective vomited off the staircase and plastered the back of it, shorting it out.

 

[Midpack]

+2. The search for that balance never ends. I know I can't really die broke, but if real returns are better than I expect, I'll certainly adjust spending accordingly along the way and more aggressive the older we get.

I'm trying to banish from my head the vision of a number of e-r.org members at an extremely advanced age and in decrepit condition, trying desperately to act out some rather excessive and inelegant "spring-break" type behaviors while struggling with canes, walkers and electric scooters in an effort to "spend down the stash"

I get it. Though I might do a little lavish traveling, buy a better car, eat dinner out more often and more electronic doo-dads. But I'd really enjoy giving even more away later in life while I'm alive, more than just leaving it after I'm gone. I couldn't handle spring break behavior now, not a chance decades from now...

For the next 10-20 years, I'll probably have to plan as though catfood is a real possibility. Time will tell.

 

[Alan]

Good post Marty, one that I also agree with.

So far we are doing all we want to do, with big plans already for 2013 and 14.

With the market doing so well since we RE'ed the WR is well below our target of 3% but we can't bring ourselves to simply spend a lot more.

I'm trying to persuade DW to travel Business Class to Oz and NZ in 2014, but her first response was that she couldn't bring her herself to spend all that extra money over Coach. I'll keep working on her, plenty of time....

 

[traineeinvestor]

I'm trying to persuade DW to travel Business Class to Oz and NZ in 2014, but her first response was that she couldn't bring her herself to spend all that extra money over Coach. I'll keep working on her, plenty of time....

Offer her a compromise - you fly business class and she can stay in economy......

 

[Moemg]

I don't care about leaving money on the table but I care about limiting my experiences . I fully intend to take a few great(expensive ) trips with my daughter & grandson while I am physically able and if my budget exceeds 4% that year so be it . To me great memories are sooooo worth it .

 

[clifp]

Intercst did some work on this concept back in 2003 here although he focused on 40 year time frame rather than 30. Not as rigorous as Wade's work but pretty easy to understand.

 

[Midpack]

Intercst did some work on this concept back in 2003 here although he focused on 40 year time frame rather than 30. Not as rigorous as Wade's work but pretty easy to understand.

As long as the market performs no more poorly than in any 40 year period in history, who knows. Again, the OP paper is based on having some assured floor income.

 

[btbw2380]

As long as the market performs no more poorly than in any 40 year period in history, who knows. Again, the OP paper is based on having some assured floor income.

Therein lies the key. When I read Hussman's fact based valuation analysis concluding about 4% market returns for the next decade and current interest rates at record lows, we could be facing some challenging times generating returns.

 

[clifp]

I have mixed feelings about this article. I think for the millionaires next door type on this forum (and I count those with pension of >$40K in the same club) who have always LBYM, I think it is not all that important. If you are happy with spending 3-4% SWR, than the admittedly small risk of spending a few years really hungry because you got "unlucky" and lived past 90 is awfully scary.

On the other hand for the far more typical retiree who finds himself at 65 with paid off house (if he is lucky) and above average savings of $250K with 20K income from SS,the difference between being able to spend $10K and $15K is pretty significant.
If the guy runs out of money at 90 well that is kids are for or worse case a social safety net.

On the other hand I think Wade is underestimating the marginal utility of having more money when you are older. I still am puzzling how my mom is worth almost $1 million, when my dad retired early at 55 they sure didn't have that much money. But a nice balanced portfolio of GNMA bonds and Vanguard index stock funds and not much extravagant spending (other than my dad's home built airplane) I guess did the trick.

Mom's traveling days pretty much ended in her early 80s. She does get pleasure giving money to her kids, and grandkids and great grandkids. However, from her kids prospective it is very comforting that mom has money to hire people to help her.

One simple example is medication management. Most retirement place charge around $200/month for a person to make sure that you take the right pills. Now from the prospective of 52 year old spend $200/month to put a half dozen pills in a container marked Mon-Sun is crazy. But when you are 1/2 blind, are frequently confused, and have arthritis in the hands it is money well spent.


I know mom would have enjoyed staying in 5 star hotels instead of 3-4 star in her numerous trips (she was a travel agent) but I am not sure that trade off of nicer hotels would be worth not having money to be able to hire people to make her life nicer.

 

[unclemick]

I am with Ha here. Poverty sucks.

And the pesky habit of cheap er frugal which got me here originally.

So ditch the Chevy and buy that BMW?

Even after 18 yrs of ER I still overreact coming off a bad year porfolio wise and don't give myself permission to party up in good years.

heh heh heh - Is it poverty or hard core cheap? Chevy or BMW? Not getting any younger. No heirs. Decisions. Decisions.

 

[73ss454]

Unclemick, I think it's time to open the wallet and let some of the moths out.

 

[ejman]

And the pesky habit of cheap er frugal which got me here originally.

So ditch the Chevy and buy that BMW?

Even after 18 yrs of ER I still overreact coming off a bad year porfolio wise and don't give myself permission to party up in good years.

heh heh heh - Is it poverty or hard core cheap? Chevy or BMW? Not getting any younger. No heirs. Decisions. Decisions.

It's not my money, so buy that Beemer unclemick. Now, if it was my money... I would probably think a Beemer would be nice BUT there is this great deal on that Chevy Aveo... and after all, they both get you there more or less...

 

[Alan]

Offer her a compromise - you fly business class and she can stay in economy......

I may yet do that. It has happened twice in recent years, in that I've received an upgrade at the gate and have travelled Business Class to England on one occaision, and Paris on the other, with DW in [-]Cattle[/-] Coach Class.

The first time it happened we didn't hear them call my name, and when we came to board I went first - when they called for the "Medallion Members" - to be sure we got overhead luggage space, and they handed me a BC boarding pass. When DW boarded she had to walk past me as I sat there drinking my champagne and eating my warm nuts.

 

[NW-Bound]

Why do I have the feeling that the market return may be so lousy in the years ahead, such that retirees who planned on 3-4%WR will end up with 5-6%WR?

There! No more worrying about "leaving too much on the table". We might even have to sell the table for food.

 

[arebelspy]

Intercst did some work on this concept back in 2003 here although he focused on 40 year time frame rather than 30. Not as rigorous as Wade's work but pretty easy to understand.

Interesting link, thanks.

I'm assuming the typo in this line:
"A 57-year old has a 10% chance (90th percentile) of living another 40 years to age 91."

Is that the 91 should be 97, rather than 57 being 51 or the 40 being 34, based on the context and conclusions.

That's one case though where you don't want to be a 1%er.

 

[2B]

It's interesting that Scott managed to publish his article about "leaving money on the table" just as the market seems to be going into a serious correction. It's still too early to say "serious" but it looks like we're going to revisit the PIIGS credit rating again. That could trim a good 10%+ off before we're done.

Personally, I think the euro as it once was is about to disappear forever. Only the Irish seem to have buckled down to "austerity" but they are seeing that Italy and Spain aren't meeting their targets without official sanctions. Greece is about to re-default on their new written down bonds since the politicians that will take over won't continue with the agreed austerity package. How long will Germany continue to fund the PIIGS? Will Ben Bernacke step in again?

 

[akck]

I may yet do that. It has happened twice in recent years, in that I've received an upgrade at the gate and have travelled Business Class to England on one occaision, and Paris on the other, with DW in [-]Cattle[/-] Coach Class.

The first time it happened we didn't hear them call my name, and when we came to board I went first - when they called for the "Medallion Members" - to be sure we got overhead luggage space, and they handed me a BC boarding pass. When DW boarded she had to walk past me as I sat there drinking my champagne and eating my warm nuts.

If that ever happened to me, the upgrade that is, I'd be getting up and moving to my wife's seat. The mental daggers coming from the back would have been too much to take. Also, I don't think the remainder of the trip would be much fun. It definitely would be more costly.

 

[Gone4Good]

I never really understand the feeling that we should increase our spending on silly things so as to not leave money on the table when we die. There is a simple way to spend every dollar of your fortune. It's called a will. I know I won't have any regrets dying with a small fortune that ends up doing tremendous good in the world. It's certainly not an outcome I worry about. Nor one I want to take extra risks to avoid.

 

[haha]

I never really understand the feeling that we should increase our spending on silly things so as to not leave money on the table when we die. There is a simple way to spend every dollar of your fortune. It's called a will. I know I won't have any regrets dying with a small fortune that ends up doing tremendous good in the world. It's certainly not an outcome I worry about. Nor one I want to take extra risks to avoid.

I'm with you on that. Why spond on something that may or may not be a net increment to your life satisfaction? I could spend a lot of money to buy a motor home and travel to NASCAR events. Then I would have to shoot myself. Money left on the table means a life lived with discrimination as a guiding principle.

Ha

 

[arebelspy]

100% agree with you Ha and Gone4Good.

Don't spend more if it won't improve your life or increase your satisfaction, just for the sake of dying broke.

On the other hand if you are depriving yourself and you could be happier spending more, and aren't just to leave a good chunk behind, spend more!

 

[Nords]

I still am puzzling how my mom is worth almost $1 million, when my dad retired early at 55 they sure didn't have that much money.

My father was the same way. Living in a cheap apartment, hiking the Rockies for entertainment, no major health problems most of the time, banking over half his pension for over 20 years. It compounds...

 

[ERD50]

I would be happy to spend 4x more. What would not make me happy is being transformed into a poor person. This author seems completely to have failed to understand the principle of marginal utility. "Only 4 years of being broke". That would give plenty time to get hungry.

Ha

Agreed. All these 'leaving money on the table' threads downplay how ugly it is to not have money.

Here's a method I thought of to illustrate it differently than just numbers:

Imagine you are led into a room with two roulette-style wheels. You are told you must choose any one, spin, and follow the directions or be eaten alive by rats (or whatever your nightmare scenario is).

The first wheel has 50 slots marked "take $59,000 annual income for life" and 50 slots marked "swallow this poison pill".

The last wheel has 99 slots marked "take $37,000 annual income for life" and just one slot marked "swallow this poison pill".

OK, a poison pill now is probably worse than running out of money in the future, but it kinda shows that the incremental difference in income can have a large effect on reducing the chances of running out of money along the way. And those are the results for a 30 year, $1M portfolio from FIRECALC.

-ERD50

 

[Nords]

70-some posts later, it's interesting how some of you think you'll end up poor... and a few of you think you'll end up penniless.

One advantage of annuitizing a portion of the portfolio is that you've hedged your longevity risk. Yeah, assuming the insurance company pays off. And assuming Social Security is still there. And assuming that a Greek butterfly flapping its wings doesn't cause hurricanes in Hawaii. And a bunch of other peripheral risk factors.

Another advantage of annuitizing a portion of the portfolio is that you can choose a more aggressive asset allocation with the rest of the portfolio. Before you had to hedge/diversify against loss of principal. Now if you happen to lose all of your remaining principal, well, at least next month you'll get an annuity check.

You still retain the flexibility of variable spending. I wish there was a better way to model variable spending in retirement, or at least a better way than ORP. Other than Bob Clyatt's 4%/95% rule, though, or Bud Hebeler's one-year negative-feedback loop, I don't know of any other method of deciding how much (less) to spend in a down year. But if a portion of the portfolio is annuitized to your bare-bones lifestyle then you can cut your remaining portfolio's spending to zero.

The reason I give a crap about this study is because of the nine million or so veterans of the U.S. military, approximately a million of them are drawing some amount of a military pension. Conventional wisdom among military retirees has been "You won't starve, but you can't live on your pension." Well, that conventional wisdom misses an important point: it's a COLA annuity that affords a bare-bones lifestyle. If you could save enough during the 20 years it took to earn it, then you can invest the savings more aggressively than someone who didn't have a COLA pension.

We've all agreed (as much as this board agrees on anything) that we should have enough of an ER portfolio to cover our spending gap between our expenses and our income. The percentage math works the same for a retiree with a spending gap of $40K/year and an ER portfolio of $1M as it does for a retiree with a spending gap of $250K/year and an ER portfolio of $6.25M.

The difference is what's below the spending gap. Almost every version of a retirement plan, no matter the SWR or the system, includes some form of annuity against longevity risk-- even if it's just Social Security. If your annuity happens to be too small for you to live on, then your spending gap could lead to failure. But if your annuity happens to be "just barely enough" for your lifestyle, then screwing up your spending gap won't doom you to Friskies.

If one ER with a spending gap of $40K has purchased a COLA annuity for $20K/year, then if he still has $1M left he can spend $60K/year. If an ER with a spending gap of $60K/year has no annuity, then he can still spend $60K/year but he has to figure out how to hedge longevity risk on his own. The first ER only needs a remaining portfolio of $1M to cover his $40K/year spending gap. The second ER still needs a portfolio of $1.5M to cover his $60K/year spending gap. The trick for the first ER is persuading an insurance company to sell him a $20K/year COLA annuity for $500K. Probably not achievable, and probably not financially trustworthy, not even for the Thrift Savings Plan.

But the solution to this multi-variable problem is somewhere among the parameters of a bare-bones budget, an annuity to cover that budget, an ER portfolio (with a suitable asset allocation) to cover the rest, and a plan to reduce spending if the market has a down year. Consider it the design criteria for FIRECalc v2013-- simulating not only variation in market returns but variation in portfolio spending.

A portfolio with an annuity will always survive a portfolio without one. But how much more aggressive does the non-annuity portion of the partially-annuitized portfolio have to be to outperform the portfolio without an annuity? Another design criteria for a new retirement calculator.

Perhaps the trick is to design two budgets, one for a bare-bones survival and the other for an ER standard of living that you're willing to keep working for. Then the intermediate step is being able to annuitize the bare-bones survival budget while you continue to accumulate a big-enough portfolio for the full ER. Once you're ER'd, the annuity hedges your longevity and frees you to have an 80/20 equity/bonds asset allocation. Or even a 92/8 equity/cash asset allocation.

The point is that you annuitize some of your portfolio to afford some minimum standard of living. If you end up poor-- or even penniless-- then it's your own darn fault for picking the wrong standard of living.

One variable in this spending model is medical care during the later stages of life. That bare-bones budget has to somehow afford the premiums for Medicare supplemental insurance and prescription drug coverage, or set aside enough money to pay for it. We can still utter platitudes like staying healthy and slim, but even a few skinny triathletes may need blood-pressure medication or heavy-duty arthritis anti-inflammatory/painkillers.

Once again, the military version of that solution is Tricare For Life.

I'll edit this for a blog post to go live in a week or two. If you subscribe to the blog or its Twitter feed or its Facebook page then you'll know when the post goes up. If you have a comment on the implications of this study for military retirees then you could post here or send me a PM.