My post from the other day about BusinessWeek's retirement planning section drew a lot more comments than I would have expected and I can see a lot of click throughs from other places that have picked up the post.
From the comments it seems like there may be a little confusion about some of the basics which is a surprise to me. One reader got very hung up on growth rates, inflation and the like. Another reader left a complicated actuarial question.
My original statement tried to be very concise and blunt; whatever you have, don't spend more than 5%. That's it.
Filling in some detail; this 5% idea pertains to not outliving your money. The idea of having your check to the undertaker bounce is one I don't get. What if you live ten years longer than you plan for?
You can make this as black box as you want but market up 20% this year; don't take more than 5%. Market down 20% this year; don't take more than 5%. In a way this is a big simplification but starting as simple as you can and then building in the details of your life seems logical to me.
Another aspect to this that I believe is potentially crucial is the notion of different income streams; meaning working after you retire. It is possible that you will not be able to work after you retire and a plan that hinders on working in order be successful is risky but those caveats aside some sort of part time work gives you money, gives you purpose and means your portfolio has to do less.
One neighbor of ours is 75 and can have as many hours as he wants doing backhoe work at $60 per hour. His backhoe is his toy so after expenses maybe he makes $40 per hour to play in the dirt on his toy. How many hours at $40 would it take to relieve your portfolio?
If you have crap that people want, eBaying can be a hobby that generates income. Finding the right crap to sell is not that easy I have to say.
Prescott (the city where I live) is two hours from Phoenix so there are a couple of shuttle services to the Phoenix airport. Most of the drivers (the ones we've had) seem to be retirees working two days a week. With wages and tips this could add up to $1000 per month. For someone that needs $4000 per month to live on $1000 is significant.
One more comment came in, as I was writing this post, deriding most web planners for assuming all expenses have to be paid for from your nest egg (never say nest and egg in the same sentence). This is not bad conceptually. It is more of a worst case scenario which I think is more prudent where planning is concerned.
My bottom line take on this is to be overly conservative at every turn and do what you have to to make the numbers work. Spend less, work a little longer, whatever.
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15 comments:
In college my math professor used to say you study math with a pencil. Investors need to understand the information printed in many magazines is often recycled and generalized financial information. That is why you need to take the pencil and determine what your expenses are employed vs. retired. Yes living on 70% is possible if you consider you don't pay Social Security taxes, contribute to your 401K when employed, cost of working, i.e., lunch, dry cleaning, clothing, office contributions to retirements, birthdays, baby showers,etc., and gasoline for travel to work.
Yes it is important to factor in those cut expenses.
The other fact is that what you plan to spend in retirement is not all "income." So the idea that you need 70% of your pre-retirement "income" is not exactly accurate. That is, while working you may have to earn $100 in order to have $70 to spend, but when retired, if you take $70 out of your mattress (or savings account), you can spend ALL of it. The taxes are already paid. You only need to draw down $70 in order to have $70 to spend. Consider the tax status of the sources of your spending money.
Those with more "mathiness" may want to put maximum withdrawals in terms of after-tax inflation-adjusted long-term expected compounding rates, but for the target audience, who must likely are passive portfolio-theory types, 5% will work OK.
The other key is budgeting. If all someone does to budget their retirement is to cut out expenses they won't have once not working, then they must be planning to sit at home all day during their retirement. Have fun!
Once budget and withdrawals are figured, the equation can be solved for "how much do I need?" At this point, the importance of SAVINGS is paramount.
Those who do today what others are not willing to do, can do tomorrow what others will not be able to do.
By the looks of Roger's wardrobe, he should be able to get by on a couple hundred dollars a month.
Why save? Just make sure Democrats are elected. Then, declare yourself a member of the vast victim class and wait for the freebies.
Roger,
Your approach to retirement is not far from what CFP Ray Lucia preaches. I use his "buckets" strategy where I have 15-20 years income (I'm conservative) in short and medium term fixed income buckets. My equity portfolio then has between 15 and 20 years to grow. In good years when market is up more than 8%, I skim some off the top of the equities and add to medium term income bucket. I keep expenditures to around 4% of assets each year. Seems like a very good common sense plan (and it is endorsed by Ben Stein, too).
What tends to bother me about the underlying issue in the original post - what % of your income will you need at retirement? - is that there seems to be little fact based research to support the opinions offered by the so called experts.
Setting aside lifestyle choices, simple intuition would suggest that there must be a relationship between the level of income at retirement and the % of it needed after retirement. Simply, if you are making $30,000 at retirement it is likely that much of your income is spent on true "necessities." Therefore, a household in this situation will need to replace a very high % of the income upon retirement.
Compare this to an household earning $250,000 at retirement. Perhaps individuals in this situation have more expensive "necessities" but it is not likely that all of the income would have to be replaced to live well in retirement.
The point simply is that 70% for the $250K household might be "enough" where 70% for the 30K household likely is not.
to 4:36, you make good point about the potential that individual circumstances shape the plan which is of course a given.
As far as fact based; what facts? The outcome of any plan is very dependent on future outcomes that are not knowable.
Further I am suggesting that people don't think in terms of % of income but instead think of expenses and whether those will or will not change.
Regardless of how much you need the odds of running out of money greatly increase when you go above a 5% annual withdrawal.
The person needing to take out $40,000 with only $600,000 in assets is in a bad situation.
I was very impressed by the work of John Barber and Dan Laimon on this topic. They published a piece entitled MANDATING THE PROBABILITY OF SUCCESS: A NEW APPROACH TO RETIREMENT PLANNING in the "Journal of Retirement Planning" (Nov-Dec 2006). I recommend this without hesitation as Step One of a successful retirement plan.
Anon 1:47 said:
"Why save? Just make sure Democrats are elected. Then, declare yourself a member of the vast victim class and wait for the freebies."
LOL! That reminds me...
It's so cold up here in the Pittsburgh area that today I saw a Democrat with his hands in his OWN pocket.
Why save? Just make sure Republicans are elected. Then when you get poor enough, they drown you. Or let you freeze.
Then they blame it on you for being poor.
Sounds like a winner to me Anon 2:45; guilt-free euthanasia.
Reminds me of a comment John Kenneth Galbraith made in addressing a crowd of upper middle class, upwardly mobile types: "You will belong to that minority which, according to current Washington doctrine, must be protected in its affluence lest its energy and initiative be impaired. Your position will be in contrast to that of the poor, to whom money, especially if it is from public sources, is held to be deeply damaging."
He made that comment nearly two decades ago but it remains so true, so true; makes one ponder, eh?
When the Bourbon monarchy was restored in France after the defeat of Napoleon, Talleyrand is supposed to have said "They have learned nothing and forgotten nothing."
A more perfect description of conservative Republican orthodoxy since Reagan does not exist. And now we even have our own monarchy!
Frankly it probably doesn't mayyer which party is in office. We get screwed either way.
Which reminds me of another John Kenneth Galbraith quote:
"Under capitalism, man exploits man. Under communism, it's just the opposite."
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