Obviously I believe in the 4% (or less) rule but I concede that I am very conservative and this is something that people with investment portfolios need to figure out for themselves. I will continue to make the case for 4%, depending on your interest level you may read other articles that compel you to be comfortable with some other number--6% represents a 50% raise after all.
If the 6% scenario above played out exactly as the numbers indicate then you'd better hope that social security is still there and paying what you need it to pay. When I wrote about social security a few days ago one reader seemed to be saying the social security is just fine. I'm sure that is the conclusion he draws and I am sure we all draw our own conclusions about the likelihood of getting all or some of our social security.
I assume I will get nothing. Some may assume they will get the entire payout (this is certainly reasonable for people above a certain age) and some might assume some reduced portion. Whatever you believe you will get from social security would play into whether a 6% withdrawal rate makes sense for you. If you are expecting any number greater than zero, then you need to figure a confidence level in that assumption.
I'm pretty confident about zero.
A personal concern I have with most of these articles is the assumption of linear returns combined with one-off expenses. For someone with a $600,000 portfolio the combination of a year like 2008 and needing to replace the roof could be devastating. Let's say these people take out their 4% plus another $20,000 for a roof (does that number make sense?) and the $360,000 in equities (so a 60/40 portfolio) went down by 25% (a pretty good result by 2008 standards). So what started the year as a $600,000 portfolio is now down to $476,000 to start 2009.
I would submit that many people will have more than one really expensive one-off during their retirement. What if the next really expensive one-off comes during the next bear market? This sort of stuff contributes to my being very conservative on these issues. Obviously you reading this must decide for yourself and then own the success or failure of your decision.
18 comments:
Roger, I think you missed the point of the first article. The author showed that drawing a constant % each year results in diminished real spending power over time. I did not read that he thought 4% was too conservative.
Also, the author clearly stated that he used 10,000 Monte Carlo simulations, not linear returns.
A personal concern I have with most of these articles
Poorly spelled out context. Pfau also said you'd never run out of money either. I was trying to zoom out beyond jut the two articles I linked to.
I believe that point that Pfau was making about not running out of money is that a certain % of a small amount of residual retirement funds is technically not running out of money but the small amount available could be inadequate to meet one's needs.
I agree that sometimes academics don't do the best job conveying their ideas.
I do think however, Pfau is a serious researcher with a solid body of peer reviewed work. He is a frequent contributor to the Journal of Financial Planning.
His post seemed to be about exploring loss of purchasing power.
I live in proximity to many retirees who would be considered to be affluent.
Frequently,the topic of retirement income/portfolios turns up in conversation.
I notice a profound difference those who are 1. well grounded, highly educated and have obviously put some thought into "what ifs" for their retirement plan and 2.,those that came by their retirement through, say, the UPS windfall, inheritance or as a post office or public sector career bigwig.
Generally,
The one's who are in category 1
are generally upbeat, have diversified portfolios and still remain engaged with part time employment in an area of interest. They volunteer helping others and fish/golf sporadically.
The one's in category 2 are less educated, express angst at every turn, have investments either in one company, in cd's or all over the investment spectrum with no plan, worry about their money drain all the time. They have no part time employment, rarely volunteer and regularly boat and golf.
Group number 1 is primarily Republicans. Group number 2 have Obama stickers on the rear bumpers on their Prius or Buick.
Granted, my observation has limitations. It certainly is not a scientific sample. Yet, I know enough of these two groups to accurately predict in advance where the financial conversation is headed.
That said, both groups intermingle and we all get along just fine -at least until Groups 2's money runs out!
Does anyone else have a different take on this...the divide between retired based upon employment class?
T
Roger, the Pfau article assumes a 60%/40% portfolio allocation and presumably is based on historical returns for bonds and stocks. Wonder what the numbers would look like if he assumed that interest rates return to their historical values over the next 10-20 years?
O7:55
We have a slightly different take on it here in southern Wisconsin. The disgruntled losers have republican stickers on their bumpers. Other than that, your observations about two groups is pretty okay.
T,
Your observations are similar to mine.
Roger,
What would you think of scaling into withdraw rates? Such as in a four year time frame...3% 3% 3% and then 7%? Quite often the market/economy falls into a 4 year (approximate) cycle and if the 4% is the target then an investor can "bank it", only take out 3% and then take it all out on the 4th year. Or if the markets/investments under-performed only take out the 3%. Thoughts?
Jeff
The difficulty in answering your question is that anything can work. Much is dependent on what happens in the future which is of course unknowable. I imagine that from 1982 until 1999 a 10% withdrawal rate would have worked.
The idea of setting a little aside for one big year four years from now certainly could work, but so could anything.
Pfau's focus on maintaining purchasing power seems spot on to me, at least if maintaining standard of living is a priority.
OT: My own circle of friends mainly includes technicians, scientists and entrepreneurs (biotech), most of whom are fairly liberal, but there are enough conservatives in the mix to acquire a modest sample and I see none of the patterns T observes: Inappropriate approaches to longitudinal finance and retirement as well as a general lack of economic acumen appear to be independent of political affiliation.
There are certain topics that tend to be be treated more gingerly in mixed political company of course but virtually all of us respect evidence and logic as well as each other so there's no Obama - Kenyan - anti-colonial - commie-socialist - Muslim - shiftless freeloaders - gonna steal our money, freedom and guns imbecility to deal with.
t, you left something out. The Republicans run most of the companies. Most pensions have been cut while the upper echelon achieve pensions and stock options. Many use accountants to pay less taxes. I'm not complaining, just letting in more of the facts
T: My observations on the relative education, astuteness, and energy level of Republicans and Democrats, while irrelevant, like yours, would almost exactly reverse your witty if somewhat smug descriptions. It must be very reassuring to be so satisfied with yourself and your group. Give yourself a pat on the back!
You're confident about zero for Social Security? Really? If there were a market for it, would you sell your stream of income from future social security checks, whatever they may be, for $0? I doubt it. I think you would ask for a little more than that.
S.S. is likely to exist in some form for years to come. I think we can fairly expect the payouts to be lower because of demographic changes (more retirees, fewer workers), but I don't see it going away entirely. Perhaps you don't like S.S. which is fine, but financial planning should be based on what's likely.
Richard,
I have posted numerous times that I would walk away from what I have put in with the trade off being no limit to how much I can put into and deduct for my SEP.
That would be an extra $16,000-$17,000 per year into my SEP with getting no social security/ medicare benefit.
That would not be selling for zero. If we do get a payout then my hope is that will be gravy to our financial situation at the time.
I guess we all now know you earn at least the maximum amount subject to self-employment taxes $106,800.
For 2011, max SE tax rate is 13.3%. Apply that to $106,000 and max contribution is $14,200. When the rate reverts back to 15.3% then you get hit with the $16,300 you mentioned.
Nonetheless, nice gig you created for yourself!
3:08
I spent a career in public education, as well as developing my own business.
I straddle both sides.
T
8:35,
I have been candid in the past about paying the max for FICA however President Obama would not consider me to be wealthy.
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