Modern retirement income principles.... (funds, pay, million, rate)

[wawaweewa]

I'm a little confused as to what some advocate for retirement.

It seems that the principal itself is never calculated into the retirement income? Retirement advisers always talk about the earnings that your investments should/could net the retiree but what about drawing down the principal as retirees get older and eventually die.

Isn't the optimal solution to have 0 net worth upon death? Is the principal always counted on to be transferred to kids, grandkids, etc.?If so, why not transfer it earlier?

[mathjak107]

if you knew the day you and your spouse would die the above is exactly how you would want to do it . i would want the check to the funeral home to bounce.

there are 2 main reasons you cant allow principal to spend down to far.

the first is that market performance and interest rates are unpredictable. balances over 30 years can range from being whopping positive numbers left to being minus numbers way to early and broke if principal is spent down to far. those that retired 12 years ago may be in a real jam just taking the standard 4% withdrawl amount because without even trying to touch their principal a considerable amount was spent down..


the real answer is depending on market performance and order of those gains or losses coming in your principal can go to zero. until 12 years ago when the new norm started we havent lived that failure rate so balances remained high.

the other reason is its hard to inflation adjust a declining balance.

if you needed 50k first year, well 25 years from now you may need 100k to pay those bills. if your spending alot of your principal down how are you going to draw double without destroying the following years balance.

for some reason the way things work out you always need budget breaking expendatures as well.

my wife went to the dentist in december and needed 6600.00 in work.

my daughter went last month and she needes 8500.00. guess who has to help her with that?

imagine if you had a pension and they gave you a choice. take more in the early years but get a smaller pension in the later years?

even though many would do okay over time the taking more up front is something most will not.


people like the security of knowing they can endure the expenses in life down the road.


most retiremet calculators assign a passing grade to withdrawls that have allowed people to draw around 4% a year inflation adjusted and retain an 80-90% chance of not outliving your money.

while i would love to know i had a 100% chance the real world says if i hold to 4% withdrawl based on the last 100 years of data i may still only have an 80% chance and thats without planning on the principal going to zero.


i also think 4% inflation adjusted today may be very high based on the new norm we have been stuck in for the last 12 years but thats another discussion.

[slackjaw]

Originally Posted by wawaweewa

Isn't the optimal solution to have 0 net worth upon death?

If it was possible we'd like to die waving our very last dollar bill. Hell even more optimal is die owing a ton of debt.

Sadly the timing on death and market performance make that difficult to arrange.

[mathjak107]

here is an example of why you can not spend down to much because of the unknown of market returns and the order of those returns .
according to ibbotsen research if you took 100 years of stock market and bond history and were 60 years old many financial calculators would tell you if you saved 500k by age 60 that by retirement at 70 you would have about 1 million dollars if you had a 50/50 mix of bonds and stocks.

you could buy an annuity at todays rates under normal circumstances that would pay you 87k a year for life.

well as reality played out if you had that 500k in 2000 at 60 and were retiring today you would have just a tad above the 500k you started with , not the 1 million history and the calculators says you should have had. . buying that same annuity today would pay you 39k a year.

the difference in your balance between returns and the order of them can be huge. while in one scenerio you may have a big balance left at the end ,in another you may be broke.

[slackjaw]

Originally Posted by mathjak107

well as reality played out if you had that 500k in 2000 at 60 and were retiring today you would have just a tad above the 500k you started with , not the 1 million history and the calculators says you should have had

How would you have had to invest that 500k to only be a tad above where you started with?

Growth of 10k from 2000 to today, for various from VG:

500 Index: 14k
Balanced Index (60/40): 17k
Wellesly (40/60): 25k

Some did better than others but I don't there are many balanced investment portfolios that didn't have some gains from 2000-2012. What allocation are you using for your 500k?

[mathjak107]

ibbotson did the math so im not sure what they figured as their funds. im not sure either of the their exact date of computation . they are looking at a 10 year window from 2000-2010..

i figured about 14k would be about right for a retiree portfolio of 50% equities and the other 50% bonds and cash. by my figuring i would say about 700k which is still pretty far from from the statistical 1 million.

interesting enough In actual returns achieved by investors from 1991 right through 2010 dalbar says they got 2.6% even though the funds did way better . the majority of small investors bailed at all the wrong times being scared off so they really did pretty poor as a group but thats a different view then the ibbotson data.

[mathjak107]

Originally Posted by wawaweewa

I'm a little confused as to what some advocate for retirement.

It seems that the principal itself is never calculated into the retirement income? Retirement advisers always talk about the earnings that your investments should/could net the retiree but what about drawing down the principal as retirees get older and eventually die.

Isn't the optimal solution to have 0 net worth upon death? Is the principal always counted on to be transferred to kids, grandkids, etc.?If so, why not transfer it earlier?

i had mentioned this on another thread but how much principal can i spend is one of the biggest questions retirees and pre-retirees have as well as a concept they dont have..

thats a question that really has no answer if you are dependant on maximizing your income from your nest egg and are invested in anything that has no fixed guarantess like the markets..

the difficult thing about spending principal is the many variables.

not only dont we know the future market performance or where rates and inflation will be but the most important aspect about spending down your principal is the fact that the order of market gains and losses make it very difficult to plan.

even assuming fabulous gains ,the order of those gains and losses can leave us either very rich or broke way before our lives end.

i know i mentioned this before but its such a great illustration of why you have to keep alot of powder dry and not hit principal very much ..

the old rule of thumb of drawing 4% inflation adjusted from a nest egg came to be because looking at 30 year chunks of time a portfolio of about a 50/50 mix had average returns of 7% .

if inflation was 3% then you could take a 4% withdrawl and each year up that withdrawl by 3% inflation. that let you take a 4% withdrawl inflation adjusted and have around a 90% chance of not out living your money.



one of the best bull markets in my time was 17 years from 1987 to 2003.

the s&p500 averaged almost 13% a year.thats an amazing return by any standard.

inflation was 4%.

using the same rule of thumb of letting the nest egg grow by the rate of inflation and living on everything else you could have taken over a 9% withdrawl rate.

but heres the best part of this illustration.


if we started with 100k and if we keep the gains for the 17 years the same 13% and all we do is change the order those gains and losses came in each year with no other changes your balance at the end of the 17 years ranged from a negative 187,606 to a positive 76,000.00 dollars depending on what order the years results were put in. .


thats hard to accept in a time frame that saw a 13% average return for 17 years . the difference in your balance based on just the order of gains and losses is mind blowing.

thats why you need to keep as much powder dry as possible.

if everything went as planned and market patterns followed historical patterns and if you had a 70/30 mix you had at best a 90% - 95% chance. less stock allocation meant less chance.

the more principal you spend the more you have to count on the correct order of gains, the average gains over your retirement period ,inflation and your own spending.

if you think you can figure out how much principal spending is okay ,good luck. even not planning on spending your principal can leave you with zero far to soon.