That is the title of the annual BusinessWeek retirement guide from the current issue. The focus was retiring early.There were a couple of interesting ideas along with some "building blocks" of retirement planning which included the need for equity exposure well into retirement and to plan on drawing only "4%-6%" out of your nest egg every year.
I would say don't exceed 5%. Lately I have become more aware that very few people are willing to plan for 5% and that very few people are willing to concede that their plan may have to change as a result of what they want to spend.
I am not a financial planner but I have made a couple of good planning decisions for myself. While I always get comments disagreeing... don't plan on drawing X dollars, plan on whatever you got; taking just 5%.
If you're living on $80,000 and you have $1 million the day you retire taking $80,000 has a high probability of leading to failure. If you need $80,000 and you have $1 million you also have a problem in the making. You either need to keep working or spend less money.
Work doesn't need to be the 9-5 you hate it can be something you want to do. I have written in the past about my 75 year old neighbor who does backhoe work for $60 per hour, he can get as much work as wants with his big Tonka Toy. Here in Prescott there are a couple of companies that provide shuttle service to the Phoenix airport (two hours away) and every time I have ever taken it it has been a "retired" person doing the driving.
One "tip" along these lines in most magazine articles is to consult, part time, in your field. I am doubtful this is easily available for people but if this could pertain to you I would start lining up ducks long before you actually retire.
One idea that I don't think I have read anywhere that you make your plan to retire at age X, squirrel away with that in mind, plan whatever it is you need to to make X happen and then stay 12 more months. I have read"work longer" but that always seems vague. This is a specific idea to plan retirement at age X and work until X+1. It doesn't come up much but the number of people that should have worked for 12-24 months more could be quite high. For many people they make their highest income right before retirement and maybe they spend a little less in that last year or two as well.
I'll conclude by saying that I am not trying to be overly harsh about perceived income needs. We all have our various financial blindspots, realizing that you too have blindspots is important and that if you do not yet know what your blindspots are you should take some time to sort it out.
16 comments:
Very good advice, Roger. At the meetings I was at last week, older friends and acquaintances of mine asked me how much was safe to withdraw, and I said 4-5%, and don't presume on the 5%.
Early retirement is a huge luxury for the top 2% of Americans -- most people will need the extra years of earnings. As for me, I like my work; I only hope to be doing it from my modest home in my 50s, should I live so long.
Roger is correct. The earlier you retire the lower you need to keep the initial withdrawal rate because, presumably, the money has to last longer. I retired along with my wife at 52 and 46 respectively. We make sure not to exceed 4% withdrawal on an annual basis.
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I have followed the SWR debate closely as I retired at 49 from a Gov't type job. My perspective is a little different than most early retirees. I believe that your health should factor into your SWR decision. We plan on taking a higher % while we are able to enjoy travel and using a lower % later on when our health prevents us from traveling.
I firmly believe that one should spend more of the assets when you CAN enjoy them. I have seen too many of my elderly friends and relatives sitting at home with health problems that prevent them from traveling and enjoying that large nest egg.
Enjoying your early healthy retirement years should be a priority as well as preserving your assets.
North end of Walker
Ed
Roger, looks like we avoided any major fires this past weekend - now we just have to survive the 4th. Good luck - you look great in your hotshot outfit! Where are the summers showers?
Ed, LOL I am no Hot Shot, I am a toothless yokel from the local VFD who better not get in the way....funny stuff.
your point about spending more early on for the reasons you state are valid but at a certain number it does become very risky.
I would say the combo of 10% spent with a down 20% year and you might be headed back to work very quickly especially if it goes that way in year two and then year three and four turn out to be flat.
If one takes two trips a year before retirement and then takes two a year upon retirement they are still within their original life style...if that makes sense.
There must be a way to combine your idea with prudent personal financial management.
Roger, I agree with your premise. All plans need to be amended as circumstances change. My main point is that I read many discussions of the SWR with the goal to make the $ last forever. But many retirees forget that their health will most likely limit their future travel and entertainment. This equates to lower overall money needs. Why not spend a little more when you know you are healthy and can enjoy it.
You are no Yokel - I've met you and you definitely look the part of big strapping Type 1 hotshot.
From the very North end of Walker Rd this is an early retiree thankful for not seeing any further air tanker drops near Lynx Lake.
all the best
Ed
I have a simulation model to evaluate the probability a retirement portfolio will be solvent after 30 years of withdrawals. To simplify the calculation, I limited the study to four broad asset classes: Large Cap Stocks (LCS) 25%, Small Cap Stocks (SCS) 12%, Corporate Bonds (CB) 10% and US Gov Bonds (USGB), 53%. The distribution of returns for the assets are based on historical data from 1926-2003. For the demo, the annual withdrawal rate is set at 5% and is inflation adjusted with inflation set at min = 2%, max = 5.5% and mean = 3.25%.
The simulation results indicate the mean portfolio value after 30 yrs will be 2.1 M$ with an 80% certainty of being solvent. In other words, there is a 20% probability the retiree will be broke after 30 years!
I looked at some of the simulations where the account went broke, and in all cases the portfolio took big losses (> 20%) early in retirement. Bottomline, even a conservative 5% withdrawal rate is not necessarily safe if you decide to retire at the onset of a bear market like 2000-02.
thanks Ed, hopefully that was our one fire for the year.
Greg, thank you for the detail left on your work. I am surprised at the 20% failure rate, I hope its wrong (insert nervous smile).
The idea that it can boil down to luck in the first couple of years certainly calls into question the need for some of the science?
Ed, I've been doing a lot of reading about this lately and I think you may be operating under a false premise.
Healthcare cost are currently increasing at 7.5% annually (and that percentage has been going up). Imagine the compounding effect of those costs over 20-30 years. Don't lead yourself to believe your late years of retirement will cost less - they might end up being your most expensive years.
A recent study by Fidelity Investments estimated that an average person beginning retirement in 2006 will need $216,000 to cover their healthcare costs for 20 years. The Employee Benefit Research Institute estimates that couples retiring today at full retirement age will need $300,000 to cover medical costs if they live to age 90.
Tom , Greg & Roger,
I understand and accept what you guys are saying but I do believe that a retiree should give some consideration to his current health and current lifestyle compared to one at age 80. I have seen too many retirees lament not doing certain things when they had their health.
Hopefully Medicare and our Gov't supplemental health coverage will bail us out of major health costs. But who really can predict the future.
Each individual must decide based on his own situation. I prefer to spend a bit more now when I can enjoy it.
All the best
Ed
Great post Roger, I really enjoyed it. Here are some numbers that I found in a Franklin Templeton presentation that I have. It shows the probability of your money lasting for your life expectancy at different allocation scenarios and different withdrawl rates. Here are some numbers:
100% US Stock & 0% Bond:
3% Withdrawl-99%
4% Withdrawl-98%
5% Withdrawl-95%
6% Withdrawl-89%
50% US Stock & 50% Bond:
3% Withdrawl-100%
4% Withdrawl-99%
5% Withdrawl-98%
6% Withdrawl-93%
0% US Stock & 100% Bond:
3% Withdrawl-100%
4% Withdrawl-99%
5% Withdrawl-92%
6% Withdrawl-72%
28% US Stock & 12% International Stock & 40% US Bond & 20% Short Term:
3% Withdrawl-100%
4% Withdrawl-100%
5% Withdrawl-99%
6% Withdrawl-94%
I thought this would be interesting given the conversation, I know I thought it was helpful. What are your opinions on the variable annuity contracts that guarantee a 5 or 6% withdrawl rate without annuitization?
the data you left is great, thank you.
I am not an expert on insurance products. I will say that despite most of them being very expensive, I have met a lot of people with annuities that are glad they have them.
They are not right for everyone (I don;t really think they are ideal for even half the people) to be sure but what product is?
Matt,
Life expectancy is extremely variable depending on your current age, health and gender. Without knowing the detail behind Franklin Templeton's calculations, it is difficult to comment on their probabilities. My 2 cents is they are way too optimistic.
Roger.
You mentioned: "If you're living on $80,000 and you have $1 million the day you retire taking $80,000 has a high probability of leading to failure. If you need $80,000 and you have $1 million you also have a problem in the making. You either need to keep working or spend less money."
It surprises me that in most projected retirement models that the mathematical assumption is that the retiree with stop investing in any form when they retire.
Using the above fictional couple; if they have 1 million and safely put their 1 mill in Fidelity Cash Reserves that is currently yielding 5.07%, after the .45% expense they would get 4.62% or $46,200 a year. Add in a conservative $1,500 a month Social Security or $18,000, (even if only one person worked in the family) you have a free (but taxable unless in a Roth IRA) $64,200 a year before even taking any percentage from their principal. Never mind actually doing some good conservative investing where at 8% a year on average they would be getting $98,000 a year.
So I don't see the couple going broke for years even using Cash Reserves unless a catastrophe of some sort happens.
the buying power of the $64,000 will be noticeably (but probably not painfully) less in as soon as five years.
I may have missed it, did you account for inflation?
No Roger, I didn't account for inflation. I was only addressing the 'need' of the couple to maintain an 80k income as you stated:
"If you're living on $80,000 and you have $1 million the day you retire taking $80,000 has a high probability of leading to failure. If you need $80,000 and you have $1 million you also have a problem in the making. You either need to keep working or spend less money."
I suppose that they could take on more risk or become Walmart greeters. :->
My main point is that one can still conservativally invest during retirement, and may only need 2-4% of their principal holdings to maintain their life style. Some may even lessen their livestyle and live off their investments and SS and only tap into their core holding for travel or emergencies. Most retirees have paid off their home.
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