Bloomberg.com: Opinion
The above link (via MarketBeat) is a Chet Currier article about whether people save too much.
The idea that brokerage firms want you to save more than you need so that they can earn more fees has an element plausibility.
But more importantly the argument could create a false sense of security for people that don't understand how far (or not) their money will go.
Someone with $2 million saved living an $90,000 lifestyle would appear to be OK. But what if in year two of retirement the market drops 20% and they take out their 4.5%, they are now down to about $1.5 million and $90,000 becomes a tad more risky.
Down a lot in one of the first couple of years of retirement is probably a function of luck more than anything else but if it happens and all you did was just enough when you could have done more you will have made retirement a little more difficult; unnecessarily so.
Wikinvest Wire
12 comments:
Someone with 2 million in a retirement account, or any investment account, should employ an exit strategy designed to avoid going down 20%.
To simply follow the mindless Buy & Hope approach is asking for trouble.
Ulli…
Ulli, while I would not argue with your sentiment the post really meant to focus on numbers and how easily a plan can unravel.
Roger, I agree completely with your view on this. With the vagaries of the market, real estate, inflation and national security, professionals stating that one can save too much for retirement is naive at best and practically catastrophic in a worst case scenario.
Of course if you make a good income and live in a cardboard box,that presents a mental health issue and is beyond the scope of the financial planner.
....or a mining shack on a mountain in the woods, lol.
Hi Roger,
Do you think a (retired?) investor with $2M in his retirement account who has so much market exposure that his account could suffer a 20% decline is taking on too much risk?
Is it plausible to create a diversified retirement portfolio that would provide an average return of perhaps ~6%/yr with a low STDEV such that the chances of a 20% drop in the total value would be improbable? If so, what might that portfolio allocation look like? I'm guestimating that a 6% average return would be enough to keep the $2M ($90K/yr) retiree solvent throughout retirement.
Many thanks for your comments.
Rich
Rich,
No offense but I think your question forgets about inflation. Using postage stamps as a proxy, the $90,000 will be $120,000-$130,000 in ten years.
Assuming no bump in the road, 2% growth after taking the income probably does not cut it, now factor in there probably will be bumps in the road.
The intent of this post was really just to think about numbers as opposed to various strategies. Knowing the potential of the numbers is a building block to the strategy.
Hi Roger,
No offense taken -- I'm still learning.
I ran the numbers through MS Excel and found that if an inflation rate of 3.5%/yr is assumed, in 10 years the $90K withdrawal would need to be increased to $126954 to compensate for inflation. At that rate, the retiree would run out of money at the age of 95 (assuming he retired at 65).
So I would agree that the 6% return might not be enough if inflation remains somewhat high. Either the retiree needs to save more before he retires and lower his withdrawal amount, or he would need to increase his investment risk in order to get a better return, correct?
Rich
Here's an article recently released by Ibbotson Assoc (now part of Morningstar) regarding retirement savings rate guidelines for individuals. Interesting to see the recommendations, if nothing else.
http://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/NationalSavingsGuidelines.pdf
..maybe try this instead
http://corporate.morningstar.com/ib/documents/
MethodologyDocuments/IBBAssociates/
NationalSavingsGuidelines.pdf
Don't forget to emphasize personal inflation in planning. Now in my 4th year of retirement, and private med.insurance up $100/mo for a 2d year, my forecast with 3% PALES beside my med.cost inflation of 12% (vs.national med.inflation of 6.2% in 2006). Because of it, my total weighted average inflation for 2006 was 4.6%. I've "re-forecasted" using 6% inflation for myself. Still, I'm better off than many: I learn alot from Roger & contributors on this site. Thanks.
I see some people in the blogosphere stuffing every dollar into accounts they can't access till age 60 without paying penalties and wonder why....
I increasingly think that the optimum for retirement is to get enough capital to live off dividends and invest it in dividend paying stocks and maybe other income-producing assets like real estate. Seems like that gets around the whole issue of running out of money. Unless companies plan on reducing the real value of dividends over time. Then we don't need to argue about how much is safe to withdraw your income is the passive income on the investments. And until you get there you need some more active way of making money.
Below is a link to a relevant article ("Live Forever and Spend Money") by Scott Burns.
http://assetbuilder.com/?p=37
In the article, Mr. burns estimates that "If inflation averages 3 percent, you’ll need to have your portfolio grow by at least that much each year — after you have taken your income and paid for investment management. If you start at 4 percent income — which is what most financial planners recommend these days — you’ll need a total portfolio return of 7 percent net of investment expenses."
He also states "Sadly, it isn’t easy to get objective advice about this because the financial services industry is structured so that it gets the most income when you take the most risk — by investing in equities. Worse, I know of no major firm that considers its charges when it tells you how much income you can take. The net result is that most people are likely to have significantly more risk in their portfolios than they should have."
He goes on to recommend that "A conservative 40 percent equity/60 percent fixed-income portfolio could be expected to produce a long-term annualized return of 7.34 percent"
Rich
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