Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
the problem is sequence risk . the calculator assumes a positive 4% a year every year . the real world does not work like that . some years you are down 40% , 20% etc . you need a lot more in gains to come back . was that 40% drop in the beginning when you had very little money saved , or was that 40% drop at the tail end when your accounts are at maximum dollars ? see the point . the average can be what it is but the dollars acted upon by the sequence of gains and losses is very different .
while sequence risk plays a roll on the accumulation side , when spending down sequence risk determines the entire out come not just some average return figured every year .
does the zig zag matter so much while accumulating? i mean if it zigs, your job still pays a consistent amount so you keep investing regardless so stocks drop and your new dollars would act as the zag that buffers portfolio. in my mind, the job acts as a "cash allocation" that you are didnt have before. ie if portfolio drops 40% but you added 20% via new investment, portfolio only needs to make up remaining 20% i know this is reliant on keeping job, but not touching on this because job loss hurts portfolio no matter how market is doing
seems like the zig zag is the most critical in the 5 or so years before and after the transition between accumulating and spending. where there is no new money to be put in and old money is being taken out. once into retirement, the portfolio settles into its new routine and people can adjust to new conditions.
edit: pretty much, saying that if someone is stocking away a good % of their income, that adds as much or more growth than the market returns. if i can invest $40,000 a year, then unless my portfolio is over $1 million, my additions outweigh what the stock market returns are if tracking an index and not picking stocks for large risk/reward. using round numbers for example, but idea being over a short span of ~10 years, savings play more than what market does since such a short time compounding isnt effective. even 10-20 years out, it is fairly even between growth via saving vs compounding
yes it does matter because we have different amounts that are acted upon at different times in our lives with different time frames left before we may make retirement changes in our portfolio's .
think of it this way . if markets fell 40% when you were first starting out investing you would not be down much dollar wise and have decades to recover .
but if you were already a long term investor when markets fell 40% in 2008 fuel tanks could have been at max and the dollars down an insane amount .
today a mere 7% drop in my portfolio represents 9 years of maxing out my 401k at catch up .
in the early days of my investing maybe it was a handful of contributions .
in 2008 i only had a few years to retirement and i was not going to be 100% equity's in retirement no matter what markets did .
so to answer the question whether sequences matter in the accumulation stage , the answer is yes .
the markets actions are on different amounts of dollars as time goes on and the bigger the number the bigger the effect in dollars .
Everyone knows that markets zig and zag up and down at a furiious pace over time, yet they want to believe that a straight line between some start point and some end point will be the same thing. In a further foolish departure from reality, I didn't see a downside variable for taxes or fees either. And given the huge downside of under-funding versus over-funding retirement, I find it kind of amazing that people still assume net annual real rates of return in excess of 2%. People seem to prefer numbers showing that they will be fabulously wealthy some day over the reality of the matter.
in 2003 i just experienced 14 years of 14% average returns cagr .
if i had to project out the next 15 years my guess would have been some insanely fabulous number .
if i looked at my balance and woke up today i would be like "what the heck happened " the numbers would have been a fraction of the projections .
but i will say this . when you look at a full accumulation time frame spanning decades once we include those fabulous 17 years with the not so fabulous years following the market returns still work out to the same average 10% .
in fact from 1987 to today the growth model i used averaged 10.90 % with no other money added since the 1980's and that includes the crappy equity market growth the last 15 years that money saw .
yeah , we know the past never reflects the future , but we also know the most expensive 4 words in the english language have always been "this time is different "
so better to set projections lower and be pleasantly surprised than plan around numbers that may not materialize .
the problem is sequence risk . the calculator assumes a positive 4% a year every year . the real world does not work like that . some years you are down 40% , 20% etc . you need a lot more in gains to come back . was that 40% drop in the beginning when you had very little money saved , or was that 40% drop at the tail end when your accounts are at maximum dollars ? see the point . the average can be what it is but the dollars acted upon by the sequence of gains and losses is very different .
while sequence risk plays a roll on the accumulation side , when spending down sequence risk determines the entire out come not just some average return figured every year .
I'm honestly using this calculator to prove a point. Your answer is why it stupid for people to say "I'm owed" or "it's mismanagement". No one can guarantee great investments or even consistent income or how much you will emotionally spend on yourself, kids, relatives, vacations. When companies agree to pensions they are trying to compete with the market and due the right thing but the contract everyone is agreeing to has too many assumptions built in to be reliable.
My calculation also assumes no increases in salary. It's literally the bare minimum. I am three and a half years into my career.
My plan is to save a minimum of 17% of salary to 401k (including company match), and another $25.5K a year outside of my 401k in a mix of Roth IRA maximums and brokerage account. Both of these amounts have changed every year because my company changes what they will match and contribute every year and my raises/promotions are unknowns.
I like that they change the plan, it creates unwanted anxiety, but it shows they are trying to do their best but it also means my plan will probably be ever changing!
I'm assuming I can save this because I've done so the last two years making $74,000 and $87,000 (including one time 10% designation bonus). This is the low point for an accounting career in corporate finance. I can't predict if robots will replace my job, it will be outsourced or I will get hit by a car and never be able to work. All I can do is plan, complete it one year at a time and respond to change as it comes.
That's why I like to look at it as positioning. even if I only have 600K by 50 will it suck to be in that position and need to work another 5 years? Not really or really it depends on the other details of my life.
Everyone knows that markets zig and zag up and down at a furiious pace over time, yet they want to believe that a straight line between some start point and some end point will be the same thing. In a further foolish departure from reality, I didn't see a downside variable for taxes or fees either. And given the huge downside of under-funding versus over-funding retirement, I find it kind of amazing that people still assume net annual real rates of return in excess of 2%. People seem to prefer numbers showing that they will be fabulously wealthy some day over the reality of the matter.
Your comment is pretty ridiculous. The overall point is people don't know and it's kind of pointless to spend time thinking about all of the various negatives. I've been with the same employer for three years. My company is great and as careful and stable as can be. Every year there have been life changing reductions to what the company pension would provide for retires twenty years from now. EVERY YEAR IN THE THREE YEARS I'VE BEEN HERE.
My company is a fortune 100 financial services company. Measuring risks is our business and they hire the brightest and most well-meaning people on the planet. Guess what? Reality proves our assumptions wrong every year.
I know there is unpredictable market risk. I know returns vary. What is your grand solution?
All you can do is continuously work to keep yourself is a good positions and try to enjoy life along the way. Unless you have access to the alternate universe where the future is known person by person?
There is nothing ridiculous about sequence risk, or about fees, taxes, or the extreme costs of over-estimating the returns that your retirement savings will earn. These are all things that particularly young people early in their careers need to watch out for.
There is nothing ridiculous about sequence risk, or about fees, taxes, or the extreme costs of over-estimating the returns that your retirement savings will earn. These are all things that particularly young people early in their careers need to watch out for.
There is nothing ridiculous about: sequence risk, or about fees, taxes, or the extreme costs of over-estimating the returns that your retirement savings will earn.
But it is ridiculous to say: People seem to prefer numbers showing that they will be fabulously wealthy some day over the reality of the matter. YOU ABSOLUTELY CANNOT PREDICT any of the things you mentioned. I have a detailed plan for savings down to the penny. It will change every year, maybe a few times a year. How can someone predict promotions, company moves, how much your new boss will like you, new industries, regional shifts, company success, when you will meet "the one", how much houses will cost, how smart your kids will be, what schools they will be accepted to?
If every time some one posts a reasonable plan no one wants to post comments that build on it and just posts "you didn't factor in all of these unmeasurable variables" where does that go?
How about pointing to a better tool?
How about showing us how you try to measure these concepts?
so it is better to allow for uncertainty than try to rule it out with above average or even average returns at this point .
plan around the worst and be pleasantly surprised . raises in projected income are always more welcome than pay cuts . all my retirement planning has always been around worst case scenario's .
that is what good calculators stress test against , the absolute worst of the past . that is what firecalc , fidelity's rip planner and a host of top notch calculators do .
the worst of the past for retiree's has had some pretty nasty times , the likes of which have not been seen since the group that retired in 1966.
if you base your plans around the worst case scenario's retiree's have faced , like building a house to stand up to the worst storms , you are at least starting out with a plan that is as solid as you can get .
modern retirement theory is all based on the groups that retired in 1907 ,1929,1937 and 1965/1966 .
those are the benchmarks for laying the ground work .
The old pension was defined benefit based on pay and years of service, fully funded by the company. It was extremely generous but a huge unknown liability. .
My plan is a defined benefit plan, and is based on age, service credit and average final compensation at retirement using a formula. I must contribute 5 percent of my gross pay each month through a pre-tax salary reduction. Contributions are tax-deferred until you withdraw them as part of your retirement benefit or as a refund. My employer makes a separate contribution (14.6%) on my behalf. The contributions are invested to provide for the future benefit payment.
Quote:
Originally Posted by BostonAccountant
The new pension is a cash balance, fully funded by the company. They will contribute 5% of your salary a month and a credit for a return based on treasury yield. It is extremely generous and a huge MEAUSRABLE liability. I believe it's sustainable even if the company runs into trouble.
.
Newer employees (cutoff date around 2010 I think) are offered a "hybrid" plan. This plan is a combination of a defined benefit plan and a defined contribution plan. The defined benefit is based on age, creditable service and average final compensation at retirement using a formula. The retirement benefit is funded through mandatory and voluntary contributions made by employee and employer to both the defined benefit and the defined contribution components of the plan.
It's not a "cash balance" plan. But the first plan is definitely the better one, and certainly the more expensive one. I am fortunate to be in it.
But it is ridiculous to say: People seem to prefer numbers showing that they will be fabulously wealthy some day over the reality of the matter. YOU ABSOLUTELY CANNOT PREDICT any of the things you mentioned.
I could not predict what the weather would be for my daughter's outdoor wedding either. But recognizing the simple existence of rain was enough to prompt reservations for tents sufficient to protect the food, drink, and 200 guests that might have been at risk. That was just a rational thing to do.
Rational retirement planning will similarly take into account the full range of factors that could contribute to an ultimately disappointing outcome. Such factors include but are not limited to sequence risk, fees, taxes, and perhaps especially the all too common fault of over-estimating the rate of return that your retirement savings will earn going forward. In the latter case of course, you will not need to wait until retirement for the disappointment to set in. You are apt to start falling short of mis-projected target balances quite quickly. Since the incomes of younger people tend to be 100% budgeted, the option of increasing retirement contributions as a means of catching up may not be a realistic one, so shifting investments into higher yield -- and therefore higher risk -- assets will be a siren-like temptation. Sometimes that works. Sometimes it doesn't. The better option by far of course would have been development of a rational retirement funding model to begin with.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
