This week I had a chance to chat with a couple of clients, each of whom are retired, and each of whom try to grapple with that magic 4.4% withdrawal rate.In general terms I am learning that 4.4% is not the difficult part but more the concept of a limit at all. It seems common that people very often need more than whatever amount is prudent as function of very reasonable human nature.
The notion of a limit is new to many retirees and so is not easy. My job is not to tell anyone no but to try to help them see how the probabilities work at various withdrawal levels.
Another fly in this ointment, but it comes up in the planning process, is the unexpected event that must be paid for. One client is having an unexpected come up later this year, their daughter's wedding. It's a positive thing but it is also outside the normal budget for a given year.
If you think about it for a few minutes you could probably come up with four or five positive outlying events that could come up over the course of a retirement that could be budget busters. This makes me wonder if 4.4%, which as I recall does not offer a 100% success rate (more like 96%), is too much?
My personal views on this are rather harsh and I don't lay this on clients when I meet with them but the problem is not that too may folks live beyond their means, I think it is that too many people do not understand the consequences of living beyond their means.
My parents had problems along these lines when they were still married (and my sister inherited this gene as well) and so my thoughts are molded from their mistakes but quite simply; whatever you got, take 4% out and if that plus social security is not enough get a part time job of some sort. You need to do whatever it takes.
I believe I have the cred to say this. A few years ago as I was just getting started in my current phase of my career and only had a couple of clients I did work around Walker that included putting on a roof, logging and building an enormous rock wall. I did it because that's what it took.
I do not minimize the real emotion that this causes, not at all, but the back drop to the dilemma is that the numbers work a certain way regardless of anything else. Emotion is the bigger variable. The magic number is 4.4%, period.
Tough post but I think more thought needs to be given to what this really means in the big picture and what it will mean specifically to you.
The picture is from Hilo, we are headed there Tuesday morning.
34 comments:
Roger,
4.4% is above my rate of withdrawal, but I can live on other income. I agree with your point of view. Unfortunately, the IRS has a different perspective. For holders of Traditional IRAs, the Uniform Lifetime Table mandates withdrawals that progressively increase, regardless that the principal may be needed for the unforeseen. When that mandate arrives for me, I will pay my taxes, use some, and plow the rest into a Roth. Have you any advice on this?
Withdrawal rates, that is.
John, I'm sorry but I don't have any narrow advice. The more detail the further you move to needing a planner to answer the question which I am not. I have help from my colleuges who are CFPs when the clients for whom I am the primary point of contact ask something I don't know.
I will say that the RMDs may not be as large as you think. One client in his mid 70s has what i recall off the top as being $600k in is IRA with an RMD somewhere in the ball park of $25k.
Again those numbers are if memory serves and sorry I do not have any specific ideas but I do think there are ways to minimize the impact of what you mean but do not know them.
Hi Roger,
I agree with most of your comment. My wife and I are relatively young retirees (60 and 54) and our income comes from our portfolio (no big pension or company healthcare). For the last 8 years I have made sure we have not exceeded 4% a year for our normal living expenses but I've had to break that rule when a big expense came up like a new car or, in my case, back surgery.
Where I have some disagreement with you is your statement to "go out and get a job if needed". I DO agree with the concept but, at least in the Prescott area, it is difficult to put into practice. I have four advanced degrees including a PhD in Chemistry and a degree in advanced management. Yet it is nearly impossible for a retiree to get a job around here other than as a Walmart worker or something comparable to that. I did spend a couple of years part time selling on eBay. It actually paid me better than Walmart and I worked from home. There ARE a number of local jobs in landscaping, construction and other heavy manual labor but I doubt many retirees would subject their aging bodies to that.
My best advice is that during difficult periods you need to cut discretionary expenses and hunker down.
I'm not really complaining here. I love being retired. I'm just pointing out that the older you get the harder it is to jump back into the workforce for most people.
Roger, this is fertile ground and more time should be spent on this subject which affects 100% of all of your readers at some point.
For me, it is imperative to plan to leave an estate. The reason being is it is the only way I can see that allows for not outliving my money. It is bad enough to be old but to be old and poor is the worst fate of all.
My mom is 70(retired in Phoenix) still doesn't understand how quickly she'll run through her retirement savings even though she isn't a big spender. Her mother lived to 96, so I wouldn't be surprised if mom is around for another 30 years.
Paul Merriman has written some good articles on this subject (
http://tinyurl.com/29dmja) and I'm going to buy his book for my mom:
Live it up without outliving your money: http://tinyurl.com/ytca3k
Roger,
How many recessions have been accompanied by a 15 to 20% decline in the value of housing?
I think your 4.4% withdrawal rate is very optimistic looking forward. Perfect rate influenced by the 80's and 90's of high market returns and treasuries rates going from the sky to the ground, but inappropriate looking at the next 5 to 10 years.
The market has been readjusting since 2000 and this will continue for some period of time.
seg
so again magnitude. I see estimates of a general 20-25% decline in housing prices. As that being the most common worst case I have seen, i believe it will not be as bad as that. My thoughts are either right or wrong.
As for 4.4%? That number comes from research that goes back further than the 1980s as I understand them.
I am saying if you have $1 million you can take $44,000. If the next year market dives and you have only $850,000 then you only take out $37400.
I disagree that concept is "inappropriate looking at the next 5 to 10 years."
We'll see.
A follow-up on my 7:53 AM comment:
I did not mention an annuity that I MUST withdraw periodically, else it will be annuitized when/if I reach age 90. I do not want it annuitized. (It's a great choice for them, but not for me.) The annuity was the only tax-deferred instrument available for some money I came by. With his usual "generosity," Uncle Sam has put me in a double bind. I paid tax on it up front. It has grown nicely, and now I can look forward to paying taxes for each withdrawal. Whoopee!!
Roger. Great post today. So often in life, people fail to recognize the consequences of their actions. In regards to retirement situations, it becomes more than an "issue". It becomes a tragic final act of a play that need not have had a sorry ending if discipline and logic were used.
Just another reason to have an excellent financial advisor - and listen to their advice.
T
ty T
Roger,
BTW, the answer to how many recessions have a housing price decline is very small and indicates things might be a little different even if it is only a 15% decline.
4.4% withdrawal is just too simplistic. You are advising not taking to much out and going back to work if need be. I have a different point of view.
Unless you are at the bottom of a bear market assume one will start tomorrow and take out less than 4.4% to start (maybe 3.6%). If you are near the bottom of a bear market go ahead and take out 4.4% as it can not go on forever.
Trying to explain to some one who took $44,000 out last year that they need to readjust to $37,400 next year is going to fail with the people I have met during my life time. It would be hard enough to convince them to hold the line at $44,000 in spite of inflation.
If you can not live on the 3.6% do not retire. Work a year or two more. People make a lot more money before retirement than at Walmart or wherever after retirement. Someone making $40/hour who works one more year would be the equivalent of lots of years of part time work after retirement.
The 4.4% does not account for where you are in the economic cycle. I know it is hard to predict but I do not see people realistically cutting spending a lot in retirement.
The market unfortunately is very non uniform. It has growth spurts of over 10% a years for over a decade and it can be followed by a decade or two where the S&P goes no where.
You say 4.4% works 96% of the time. You do not get a do over if you run out of money.
Roger, as a financial planner who works and has worked with plenty of retirees I can tell you that by in large "most" have the same downfall.
I do no less than 50 financial plans annually and all clients get an annual update on retirement progress as well as probability outcomes annually. I can tell you that at the end of the day most don't care if they run out of money. Exageration? No way.
Routinely I see retirees live and spend beyond their means. I can show them all day long how it's not going to last and by in large they don't care. I mean they might care but their actions and reactions to seeing the data is one of a deer in headlights.
Again, most but not all have a tough time changing their spending habits.
It was once said to me that if you have clients born around the mid 1930's or prior you won't get them to spend money. If you have clients born after the 1940's you won't get them to stop spending money. It's this second group that has never known what it's like to live without food, clothing and shelter.
I am very concerned and saddened for the majority of baby boomers who don't know or want to know how to budget their money.
In addition, I read a nice article this morning in a trade journal that discussed the positives of using Immediate Annuities for up to 40% of someone's portfolio. The research shows that in most any time frame using IA with a diversified portfolio beats not using any IA by a long mile.
The author suggested laddering into IA over a 5 yr period if interest rates are a concern.
I like it and think more people should annuitize a portion.
John, you said that Annuitization is a bad deal for you? Why? You do know that there are multiple payout options and you could choose a refund type of annuitization that pays your spouse/estate the balance on your initial deposit of any money left minus your withdrawals. At your age the guaranteed paycheck could be way higher than anything you could conceivable invest into.
great insight from the planner's perspective.
For anyone who is unclear portfolio management is different from planning.
anyone wanting to do it on their own needs to know the difference between the two and needs to do both manage the portfolio and plan properly. Both are vital.
One small point. Your withdrawal is supposed to creep up by inflation, correct?
Hey, it's almost an extra K on top of the $37,400 if inflation is 3%.
i would say it is your portfolio that should creep up w/inflation (more actually).
If your portfolio averages 6% the 4.4 is not a problem...hopefully
A lot of interesting posts today.
FWIW, I plan on working 1 extra year (Roger's earlier suggestion); make use of IA's and the new income replacement products recently rolled out by fidelity and vanguard, in addition to what I assume will be a slew of new products introduced in the next 10 years before I retire - a little of this and a little of that. But the most important thing will be to distinguish between "wants" and "needs" before I dip into my retirement funds.
Roger
Actually I think the 4.4% withdrawal rule is as follows. That you can take 4.4% of the original amount,with the added inflation kick each year. This is independent of the stock market results. Eg. on 1Mill take 44000 the first year, next year 44000 + 1320. etc.
If you actually take a predefined percentage of the new portfolio every year then I believe you can take a larger percent.
There have been studies that show that you can take a lot more (all this of course is looking in the rear view mirror) if you obey certain rules, eg, dont take an inflation bump in a year when the market declines.
Roger
Actually I think the 4.4% withdrawal rule is as follows. That you can take 4.4% of the original amount,with the added inflation kick each year. This is independent of the stock market results. Eg. on 1Mill take 44000 the first year, next year 44000 + 1320. etc.
If you actually take a predefined percentage of the new portfolio every year then I believe you can take a larger percent.
There have been studies that show that you can take a lot more (all this of course is looking in the rear view mirror) if you obey certain rules, eg, dont take an inflation bump in a year when the market declines.
Dow Jones 1 PM,
Re, the annuity multiple payout options--thanks. I'll look into that.
Clearing up the guidelines on what you can take 4.4% +/-, inflation bumps, etc would be very interesting.
Go Giants!
and if not Giants at least more scoring
the Pats need some big changes.
I still think the idea is that the portfolio generally inflates over time. If the w/d percentage increased you'd be up to 8% at some point.
For those who are interested, there are several threads on this subject in the Morningstar forums. Most, but not all, conclude that the safe withdrawal rate is 4% plus inflation. Like most retirees, I cheat; I'm taking 5% but promise myself that I'll do better when I can collect SS. We'll see.
I also use these figures to calculate my investment goal. I figure 5% withdrawal, 3% inflation, 1% for my financial advisor, and 1% for fees (I use a lot of ETFs and CEFs.) In other words, I need about 10% annually to maintain my nest egg's purchasing power.
A strategy that's gaining traction in the currently depressed market is simply to construct a portfolio of good stocks that pay 4% dividends and you'll be fine. I find that to be a good start but dangerously naive.
Slow game.
Great discussion today.
I would love any advice on how to get to a good financial planner (a couple of my experiences have resulted in my receiving fairly non-csutomized answers).
Does look like this will be an exciting finish to the superbowl!
- S
18-Noooooooooooo
Sorry Roger. Great game though. Super.
"I figure 5% withdrawal, 3% inflation, 1% for my financial advisor, and 1% for fees (I use a lot of ETFs and CEFs.) In other words, I need about 10% annually to maintain my nest egg's purchasing power."
This does not look realistic unless you are very lucky
anon 12:31--
No question it's tough, but SPY has returned 10.28% since its inception. The building blocks are out there.
Bogleheads could probably cut another 1 1/2% in costs from my needs, but I value the advice of my advisor.
I've updated my post and charts: Fed CHANGES Really Scary Fed Charts
Removing TAF makes a significant difference.
$50 billion to be exact.
TAF operations are ongoing. So this discrepancy would just continue to grow.
LIBOR is also starting to misbehave, again. Nothing too serious yet (not like before Christmas) but you get my drift. Stress is creepying back into the system.
The (counter trend) rally in risky assets should just about be over, if I've interpreted this correctly.
TheFinancialNinja
We have the same harsh light of day unfolding in Australia. Too many retiring baby boomers, and their offspring tainted with progressive parenting techniques, just don't know how to budget or recreate for free.
It is mass delusion of course, brought about by a 40 year diet of colourful electronic advertising and the self help and motivational (sham) religion telling us we all DESERVE another brand new shiney thing this week.
I even have my own particular sexist skew on things- that the liberation of women and introduction of them into the workforce has forced men to meet the rise in their new found capacity to spend not only the money they make, but also their wannabe partner's. Any guy who doesn't meet their demand for more shoes and bigger houses quickly finds the light of his life trading up, or at least attempting to.
But many of us guys are just as bad...a guy's not a guy without a late model SUV or bling studded blackberry, hey?
Hi Guys,
I ran some of these scenarios through a monte carlo simulator that I use to give you an idea about the probabilities of running out of money for 4.4%, 5%, and 6% withdrawal rates.
I couldn't post all the data here but here is a link to the tables and my observations (on my blog)
http://tinyurl.com/24e7e2
A few of my thoughts on withdrawal rates. I think it has to be thought of in three buckets
- 4% non-discretionary items required to live (food, shelter, utilities,clothes, etc)
- 1 % discretionary....go ahead and splurge on items as long as your investment returns are average or better (i.e. 8+%)...but be prepared to give up these items if things go really bad. (golf, eating out, movies, etc.) This addresses the other side of these calculations that say there is a good chance that 4% withdrawal will accumulate a large "terminal value"
- "capital expenditures" - throw in a few big items every few years. i.e. $10k every few years for some health event, new car, etc and net present value it back to a current lump sum.
Add those three components together to get your required portfolio value.
before i retired in 2006 i ran many many scenarios using firecalc. (search for firecalc to find it). one can put in the size of their portfolio, the allocation of their assets among stocks, bonds, 5-year t-notes etc, their expectations for their future social security payments, and a few other items, and then ask how much one could have spent at any time over the last 130 -plus years and still be safe that they would not run out of money. retiring at age 56.5 and investing around 35% in stocks, i appear safe spending around 3.5% of my portfolio. firecalc inflation adjusts as well.
as for increasing the withdrawal rate, clearly it should move up over time. for example, for someone at 100 years old, the withdrawal rate could easily be in the 15% range as the life expectancy would not be much more than 8 years under virtually any circumstances (unless someone in florida stumbles across the long sought after fountain of youth--of course, then they could go back and get a job better than walmart too.) so, a withdrawal of 8% makes sense at some age.
finally roger, regarding weddings: i have three daughters and i budgeted for weddings for all three. i incorporated the cost of all three weddings in my financial plan by fixing it at a certain amount. after watching steve martin in father of the bride, i realized that the chaos that his wife and daughter brought to his life during the wedding flowed from the carte blanche spending he gave them (contrasted with his desire to maintain some sense in the spending.) before any of our daughters talked of weddings, my wife and i agreed that we should pay a fixed amount to each daughter as she became a bride; the bride and groom would then have total control over that money. we decided that the reception and all the trappings are really a big party for the bride and groom, not a business deal for us, so we let the bride control everything around the wedding. i have seen statistics on the cost of the average wedding in the united states and they tend to run in the $23,000 to $27,000 range. we decided to set a number in the low-20s for daughter number one's wedding, slightly below average, but that creates an incentive for the bride and groom to economize and make rational choices. we inflation indexed that number for daughters two and three. we find that giving the bride one check simplifies our lives greatly and also challenges the new bride and groom to resolve a lot of things before they marry--how about that, communication before they get married. the bride and groom have to do all the economic tradeoffs within their budget such as whether to invite more guests, display flowers everywhere, hire eighteen photographers, buy a mega-bucks wedding dress etc. my wife and i highly recommend giving a check and allowing the bride and groom to spend the money to identify their economic utility and eliminating stress for the parents(witness poor george banks and his hot dogs and hot dog buns episode.)
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