In reading through the comments I had one thought that is almost paradigm shifting. Is the concept of a magic number needed in savings completely useless not for the math but because of the vagaries of human behavior and the frequency of one-off events?
Behavior can include all sorts of things like panic selling, panic buying, denial that is part of the overspending dilemma or anything else you can think of. The notion of one-off events actually happening every month is something I have written about many times and while they are each different they happen all the time and can't easily be budgeted for. This list can include things like new tires, a vet bill, some sort of serious repair on your house, some sort of dental issue or any of the things in your Quicken file from the last 12 months.
If your plan includes retiring at some point and you expect savings to fund some portion of your retirement then you probably have an idea of what portion of your retirement needs to be funded from savings and you can probably put a dollar figure on it. Someone in their mid-40s in 2000 might think of retiring in their mid 60s in 2020. Well if the 17.6 year cycle works this time around (meaning the round trip to nowhere lasts until 2017) then the person now in their mid 50s would appear to be very unlucky compared to the person who will be 45 in 2017 looking to retire in 2037.
If an investor's primetime, so to speak, is during a period like now then they probably won't get they growth they need, they might get sufficient growth but it would be a uphill battle and executing a plan that requires growth becomes very difficult. Then layer on top of that all of the behavioral hangups and other fallacies.I will say that people who can be patient and get a handle on their own behavioral issues (we all have behavioral issues) can successfully execute a financial plan in any market cycle but as most people struggle with issues like this combined with the current market cycle and it makes the "number" concept much weaker.
While having a target number is a very useful thing the fact is that when the time comes you have what you have and that becomes your reality. If someone needs $2 million and they have $875,000 and they want that pot of money to last then something has to give.
It doesn't matter how much you had ten years ago or how much you were ever making before, an investment portfolio can only generate so much and have a reasonable chances of enduring. We all know that 4% is viewed as the "safe" percentage and whether you think the safe w/d rate is a little more or a little less than 4% I think most can agree 10% is not sustainable.
So if getting the number you think you need can be complicated by a long list of factors, some of which are clearly beyond our control but some that can be addressed, then perhaps the orientation needs to shift toward thinking along the lines "I'd like to have $X but can be prepared for $Y." Prepared can mean ready to work longer, take part time work, downsize or anything that fits in.
For most people the entire concept will need to shift one way or another and it can be completely open ended. The best solution needs to include an introspective look at our own flaws and the willingness to adapt.
6 comments:
At some times in the cycle like now I do not think people should take more than 2%. In 2020 a portfolio may easily handle 5% or larger withdraws.
I am more interested in a retirement portfolio that would generate a lot of dividends. I do not have a dollar figure on it as I do not think this is the time to buy a retirement portfolio. I still view this as a bull market after the housing bubble.
SEG
Roger, My timeline is close to your example: retire in 2023.
But I don't see myself as unlucky if the market goes nowhere until then. I see that as more opportunity to accumulate shares at reasonable prices before the next secular bull. I guess you can look at it both ways, either retire after a multi-year market upswing and bank a large portion of your gains, or be buying while the market's flat or down and benefit from the next growth phase while in retirement. Either scenario seems good, and preferable to retiring in, say 2000, if one were to maintain a stock-heavy portfolio that does poorly for 10-17 years.
"Kirk's Market Thoughts" page was blank.
that is from Wikiinvest, other than relying on them to put appropriate content in their script, which they do, I have no involvement with what is there including broken links
One lesson learned in the painful process of dealing with a parent who, both physically and cognitively, is no longer able to adapt is that whatever plan you adopt you must be aware a time will come -- should you be 'lucky' enough to live so long -- when your ability to analyze and execute become effectively nil; whatever you have in place is what will be and if you are unable to manage it then what will be is chaos.
I put lucky here in 'scare-quotes' because personal experience suggests the triumph of longevity can come at bitter cost: Not to be a downer (and certainly not to suggest one should not plan) but there are some things that not only cannot be planned for but for which planning is virtually meaningless; e.g, psychosis in old age is on the rise and hospitalization itself may be a contributor to psychosis in the elderly.
NB: Plan while you are able but be sure to include a trusted surrogate (and power of attorney) in that plan for when you cannot plan or appropriately execute at all.
I find the whole idea of planning to retire on a certain date to be outmoded. Unless you're self employed or maybe a union member, nobody seems to make it to 65 or whatever anymore. They're downsized, rightsized, laid off. Early retirement forces one to make adjustments on the fly.
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