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August 18, 2010

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tmgbooks

This question is easier to answer for some of us than others. For example, I receive a government pension and my monthly expenses are one-half of my monthly benefit check.

My pension benefit is also adjusted for inflation every year. I see nothing on the horizon that would indicate my monthly expenses will double but, if they did, it would have to be due to inflation, and, so, my income would keep pace, as well.

If I had to depend on savings, alone, I would be real nervous. Most of us have at least some of our retirement money in the stock market; that money is, I think, at serious risk and cannot be counted on at all for the next five years or so.

I would only feel safe if I could afford to retire with my retirement savings invested where the capital and return were both guaranteed, in other words Fed bonds or an annuity.

In your article, you allude to the "safe withdrawal rate;" I do not believe there is such a thing if your money is in the stock market; 50 year averages don't do much for someone already in their 50s or older.

See my post on the subject here:

http://financialindependenceextreme.blogspot.com/2010/08/stupid-safe-withdrawal-rate-debate.html


And how have investors in stocks and bonds and, even, CDs done lately? The safe withdrawal rate has been almost non-existent.

And, if you have been withdrawing three or four percent for the last few years, you have almost certainly been dipping into capital.

In the absence of a pension like I have, all other planning is a guesstimate: My guess? 40 or 50 times annual income requirement, minimum.

Or, you could go with some lower figure and plan to work part-time but even that is a little risky in this economy!

I don't consider myself retired and I have had a couple of part-time "jobs" since the day I began drawing a pension, although, thank goodness, these involve self-employment and I have not had a boss for years now.

Steve

@tmgbooks - the only thing that is certain is that nothing is certain. Your inflation adjusted pension is a great asset for you. I sure hope it continues but even that could change. Look what's happening in Colorado, where they are trying to (or may have done already) cap the adjustment on some public pensions at 2%. The unfortunate reality is that there are not unlimited resources and there's a financial breaking point for everything. Sure, it's not fair to those who planned on that pension for life. To my point, nothing is certain. So we do the best we can with the information we have, think about future scenarios, attach a liklihood to their happening and be ready to adapt to what life throws at us while making sure we live each day to the fullest.

Retired Syd

@tmgbooks & Steve:

That's exactly right, nothing is certain, you have to do the best planning you can based on the best information you have. The reason I like the work of Bengen and Bierwirth so much is they are NOT relying on historical averages. What they have done is sliced that 80-year study period into periods of time (30- 40- and 50 years) and studied each and every such time chunk for that period. What you get then is a picture of how it would have been for a retiree in the worst phase of that 80 years.

True, if you think the next 50 years (my time horizon since I retired at 44 and can possibly live to 94+) are going to be worse than any of the 50 year chunks studied (including the 1929 stock market crash and Great Depression) then a 3% withdrawal rate wouldn't work for you.

But you see, that 3% rate does include dipping into principal some of the years in the study (in fact going down to zero by the end of the period). They just figured out how high that number could be (while even dipping into "principal" in those years) and still have at least $1 left at the end of the period.

Certainly 40 or 50 times your expenses would be "safer," so would 80 or 90 times--but likely it's overkill. Unless of course you think the next several decades are going to look a whole lot different than anything we've ever experienced in modern history. Possible, but then we have far bigger problems than whether we have enough retirement income . . .

tmgbooks

Nothing is certain, that's for sure. That is why the old adage, if you want to make God laugh, tell him your plans!

As to how much would be sufficient, I think would depend first on where the majority of your assets are invested. If you need the average return of the stock market and you are heavily weighted there, that is an absolute crap shoot but the future is not looking good.

If, instead, you can make it on the guaranteed returns of a 30-year bond, then you know exactly what your returns will be and the only question is inflation. Then maybe 25 or 30 times annual income requirement will work.

Also, Social Security can be figured into the equation obviously and it also has some inflation protection so some of your income is protected in this regard at least.

As for the security of my Federal pension and comparing it to state pensions, there is a critical distinction between the two: States cannot print money. If Feds roll over on pension obligations the end is near.

Anthony

Hello Retired Sid,

I created my own excell spreadsheet to look at the 3% withdrawl rate. I started with a withdrawl of 3% at the beginning of the year, took the leftover principal and applied a return (i start with 6%), the next beginning of the year I took 3% + 2.5%, so a $100k withdrawl in year 1 became a $102,500 withdrawl in year 2 and so on. The sheet shows me running out of money in 25 years, not 50. Any comments? I also tried doing the withdrawl starting at the end of year 1 and after the 1st year return happened, did not change it much.

Anthony

Hello Ritired Sid - I failed to mention that I started with 33 times my current consumption.

Anthony

Wsharpe1934

Ok article for feeding the media and getting your name out there but you missed a lot of more recent research on the matter. Namely, a series published in the JFP recently by Klinger on using modeling to create custom withdrawl profiles.

Look here for the publications and licensing the model:
http://www.b-k-ind.com/Retirement_Quant_TM/Publications.htm

Christopher

Anthony,
Sharpe had a good suggestion. Check out the link above and try using Klinger's personal edition of the model. It's a little* more powerful than excel and a steal at $50.

*-LOT

Retired Syd

@Anthony: Without seeing your spreadsheet it's hard to see the problem. But if you are starting with $100k, 6% rate of return, 3% withdrawal rate, and increasing your withdrawals by 2.5% each year, the first five years should be looking like this:

1 100,000 (3,000) 97,000
2 102,820 (3,075) 99,745
3 105,730 (3,152) 102,578
4 108,732 (3,231) 105,502
5 111,832 (3,311) 108,520

If you carry this out it goes well beyond 50 years. In my own spreadsheets, I don't usually assume that earnings will beat inflation by such a wide margin as you have (6%-2.5%=3.5%), which is why the money is lasting so much longer than 50 years--worst case 50 years were not this good--which is what the "safe" rate is getting at, the worst case scenario.

Retired Syd

@Wsharpe1934: Yep, you've hit the blogging constraints on the head. That's why I put a link to exactly the research to which you are referring in the final paragraph of my post (pointing to that Klinger and Guyton research) for those wanting to delve further. (You have to click on the word "studies" in the last paragraph to get to the research.)

fred doe

well,well,well we're all going to retire at 50 and live another 50 years.NOT! your going to go around 80. good lord willing. it's like the social security equation of 62 vs 66 i followed mine out to 80 and the difference was about 8000 dollars. i think i'll take the money at 62. as far as retiring and expenses goes you should have no bills,no mortgage or credit card debt. that's about 1/3 of the fight right there. and steve if the state governments renege on their pensions don't stand near those cops when they tell them.

Anthony

Retired Sid - Thank you for the information. I found my mistake.

Anthony

Jay

When you came up with the nest egg of 35 times one’s annual expenses, do you include the equity of your primary residence?

Retired Syd

@Jay, When you're figuring the 25-33 times (as the case may be), you wouldn't include your home equity unless you were planning on selling it to fund retirement. The other option is including the % that you would be willing to tap into on a reverse mortgage. (That's in my plan.)

Tom Wilson

To be frank, money is indeed an issue when we talk about retirement. Retiring without it means putting yourself in a scene of you re-applying for another day job just to survive. But the real deal here is finding your happiness after 40 long years of establishing a name and a career. All said, you have to have financial security, a savings or an insurance, to be exact, but the entity of real happiness should not fall on money itself.
The option of settling down to adult communities― Charlotte, New York, all over the States, name it― is a golden idea. This would let you mingle with the people of your age, with same level of success and experience to meet, And this would lessen the idea of you bothering your children building their career at the moment.
Money and happiness should not come as one, because money is a need and happiness is the product of what we truly need.

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Penta

Joining this conversation late but have had a nagging question about interpreting the 3% withdrawal rate...Where do you account for taxes? For example, if taxes on interest and dividends are 15%, is my actual "useable" withdrawal rate= 0.85*3% = 2.55%? Implications on a hypothetical $3M dollar nest egg are: Do I get to safely spend 3%*$3M = $90K; or do I get to spend 2.55%*$3M= $76.5K?

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