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that is why good planning includes long term care provisions or at least trusts to protect assets if you are inclined to want to go that route .
if you are self insuring then i certainly would not include any funds for that LTC purpose in my withdrawal amount when calculating . i am of the opinion that simply lumping everything together and investing it just the way you would your long term money is not how you invest money you want for insurance purposes .
that money needs to be there , available and guaranteed to keep up with inflation in healthcare regardless of how markets do AND AVAILABLE IN FULL DAY 1 ..
I didn't take the poll but am I the only one who would be hacked off if I got to my early 60s and my kids started telling me how to manage my money? Maybe when I am 85 or 90 and have dementia, but certainly not in my early 60s!
I am thinking of Robyn and perhaps others when I ask this question. Costco has the best Prime Steaks. Just the best. Now they have gone up overall in price the last year or so and how many die hard Costco Prime cut customers backed off and how many just upped and paid the higher price? So while the government may think with inflation folks will adjust whats in their basket to the lower price item many senior won't and will just keep spending to get what they want because they can afford to. Like Robin we tip well and tip service providers and being our waiter/waitress is a plus. We consider that part of the cost of doing life as we age and are more dependent on someone else and appreciated good service. As we age we can find a way to spend and save in probably the same ratio as in our early retirement years. We are probably going to visit one of the local Del Webb communities (open house) this weekend as the wife is actually showing interest. We could be spending more on housing and probably will be in our seventies.
Some observations on this thread (that I appear to be joining very late):
1) For some reason, I see a lot of young people in their 20s and 30s showing an enormous amount of interest in their parents' (and other older relatives) finances. I generally tell these folks that they would be better off making their own fortunes and spending less time wondering what they are going to do with the inheritance.
The few times I have shown any interest in my parents or in-law's financial affairs have been rebuffed as they remind me that they will call when they need help. And one set of parents is still working full-time at age 82.
I would rather have parents who are autonomous and making their own decisions as long as possible.
2) I plan to spend what I plan to spend and do NOT plan to be hindered by an arbitrary amount. I withdrew perhaps 1% the last two years and plan a 2% withdrawal next year. In 2017, I may need 5% as I have some significant travel plans.
3) My prediction in 2012 was that health care costs would double in five years due to the "A"CA. In three years, they are up about 60% so I am not really surprised.
4) Excluding health care, my rate of inflation is about -5% from last year. Unlike some of the prior posters, we do make adjustments to our habits to avoid items that are costly. The eggs I have in the refrigerator were $0.99 eggs, we replaced most beef with pork and the like. Food costs have gone down, as have travel and transportation costs. And we have realized a lot of savings from our emigration from the state of Illinois.
The OP's question was their concern that their parents withdrawing 5-6% might be too aggressive and wanted them to look into it, and was asking advice. I still maintain that most financial advisers would caution them that possibly 50% of the time it well may be. When one parent dies, and there is now one social security check plus whatever is left after 20 yrs. of draw down, it may not be enough for sustainability of the remaining spouse.
I believe it is natural to be concerned with your parents welfare if you see them doing something that you feel may hurt them in the end. And as Escort Rider pointed out in an earlier post, it may also be concern that the kids will be left with the financial obligation in the end.
I do not agree that the subject should be off topic for the kids. I think it is acceptable to voice their concerns and perhaps lead their parents to do some investigating on the subject. Obviously, if the parents refuse to consider this, there is nothing that the kids can do, except hope for the best.
Why other posters would defend such withdrawals today mystifies me. Sure if we had a big sustained run up in the stock market, everything might be hunky dory. But who would bet on that now? When you have recent studies suggesting the 4% withdrawal rate may not work in today's environment and needs to be adjusted closer to 3%, or even with MathJack's guy still maintaining 4% is probably safe, why are we not telling to OP, that 5-6% is too aggressive. They are 62 years old, and even if they curb that spending when they reach their mid 70's, it may be too late. To me with today's evaluations and interest rate, and at their young age, 4% would be aggressive enough.
Retirement planning is full of unknown's. Stock market unknowns, life expectancy unknowns, healthcare unknowns. Most people err on the side of caution when a good portion of their income may be needed from their portfolio someday.
the op has never told us how that money is even allocated . that is a huge factor .
as bernstein pointed out , if you are not using a healthy dosage of equity's and just using something like cd's , TIPS and short term bonds 2% is likely bullet-proof , 3% likely to be okay but iffy and 4% a pretty good chance of living under a bridge .
5 to 6% would certainly be committing financial suicide .
yeah there are a few like blanchette and pfau that are in the 3-3.50% camp but the fact is according to michael kitces whom i respect as an academic even more did a paper showing 2000 and 2008 could not make 4% fail because it is so conservative and in fact gave us guideline so mathematically we can monitor our own results going forward in real time .
all you need to do is make sure over the first 15 years of a 30 year retirement period that you are averaging at least a 2% real return . if 7 to 10 years in you still are not then a cut in draw is needed .
on the flip side if you are up 50% from where you started take another 10% increase in addition to that inflation adjustment .
if 3 years later you are still up by 50% more than you started take another 10% .
no one should or likely would just pull a fixed static amount like a robot .
since 2000 a 50/50 mix averaged about a 2.90% real return so the y2k retiree is still on track . although they are on track comparatively to the 1929 retiree . they will likely be okay but not have lots left over like 90% of the other time frames. the 2008 retiree is right on par with every other average time frame .
so going forward either monitor your performance as you go and adjust or use some form of variable withdrawal method based on each years balance of which there are many .
3-3.5% is right if for some reason you want to mostly leave principal alone. AQR's estimate of the real yield on a 60/40 portfolio is 2.4%; I've come up with similar numbers independently. So if you withdraw 3.5%, you're planning to spend about 1% of principal each year.
I, however, am 61 and do not expect to live for 100 more years. My children might enjoy a huge inheritance, but I do not owe it to them. So, when I retire, I plan to use a spending formula that consumes principal over one's remaining lifetime. The tail end (after age 85) is covered by deferred annuities, and the intervening years (age 65-85) are covered by drawing down a portfolio of conventional investments. You can read my article at http://www.cfapubs.org/doi/pdf/10.2469/faj.v69.n6.4.
the use of annuity's as longevity insurance is a whole different strategy then the op's situation .
heck , the use of permanent life insurance , your own investing and immediate annuity's has been shown to produce higher cash flow then you could do on your own as well as more money for heirs 70% of the time .
it took the most positive outcomes on your own to duplicate the results .
studys show term and investing the difference compared to whole life and investing always had a bigger balance by retirement . there were no situations it didn't .
the problem is no one followed an integrated strategy of your own investing , whole life and immediate annuity's through retirement .
day 1 income draw was higher 100% of the time from the integrated strategy and unless you died early on or had only the most positive market outcomes your heirs got more too.
it paid many times to not get a joint annuity either if married . it was cheaper and a better deal to take a single annuity , and use tax free life insurance with no rmd's for the spouse .
so even in today's low interest rate world and market uncertainty there are ways to keep retirement income up . a single immediate annuity even today has an almost 6% draw rate with no other fees or commissions .
you would deplete your own cash and bonds pretty early on trying to duplicate that cash flow and have to refill and sell equity's much sooner then the integrated strategy
Last edited by mathjak107; 12-04-2015 at 03:38 AM..
The OP's question was their concern that their parents withdrawing 5-6% might be too aggressive and wanted them to look into it, and was asking advice. I still maintain that most financial advisers would caution them that possibly 50% of the time it well may be. When one parent dies, and there is now one social security check plus whatever is left after 20 yrs. of draw down, it may not be enough for sustainability of the remaining spouse.
I believe it is natural to be concerned with your parents welfare if you see them doing something that you feel may hurt them in the end. And as Escort Rider pointed out in an earlier post, it may also be concern that the kids will be left with the financial obligation in the end.
I do not agree that the subject should be off topic for the kids. I think it is acceptable to voice their concerns and perhaps lead their parents to do some investigating on the subject. Obviously, if the parents refuse to consider this, there is nothing that the kids can do, except hope for the best.
Why other posters would defend such withdrawals today mystifies me. Sure if we had a big sustained run up in the stock market, everything might be hunky dory. But who would bet on that now? When you have recent studies suggesting the 4% withdrawal rate may not work in today's environment and needs to be adjusted closer to 3%, or even with MathJack's guy still maintaining 4% is probably safe, why are we not telling to OP, that 5-6% is too aggressive. They are 62 years old, and even if they curb that spending when they reach their mid 70's, it may be too late. To me with today's evaluations and interest rate, and at their young age, 4% would be aggressive enough.
Retirement planning is full of unknown's. Stock market unknowns, life expectancy unknowns, healthcare unknowns. Most people err on the side of caution when a good portion of their income may be needed from their portfolio someday.
one thing the researchers who claim 4% inflation adjusted returns will not hold , fail to do is actually quantify what it would take to have it fail .
don't forget you can tuck your money in a mattress and draw 4% without any interest at all or inflation adjusting and it will last 25 years at 4% . so anything extra you add can start to make you whole with adjusting for inflation on your draws
so how bad can returns get and still mathematically hold up ? it is pretty tough to have it fail since it is already based on the worse we have ever had . even worse then retiring in 1929 ..
actually the failures of 4% draw rates to hold the last 146 years for at least a 30 year time frame has been because real returns on equity's appreciation fell below 1% . the 2% i mentioned just gives you a comfortable margin for your own monitoring but actual failure points are below that by quite a bit ..
when quantified in to actual returns needed a 4% draw rate is so conservative that 96% of every 30 year time frame has resulted in ending with more than you started with.
so lets look at how bad things need to be for 4% to actually fail .
the actual breaking point where 4% inflation adjusted failed was a real return of .86% appreciation on equity's if we count the dividend yield . ..
so a typical 60/40 mix needs to achieve a .86% real return appreciation on equity's the first 15 years. today that would be you need .86% real return over the 2% current dividend
so as michael kitces computed ,
with bonds today and inflation producing real returns of zero to slightly negative and the current dividend yield on the S&P 500 being approximately 2%, that suggests that any real return in equities from here must come from price appreciation.
you need to assume not just below-average returns; you need to assume that the stock market cannot generate more than 1% real return in appreciation above the current 2% dividend between now and 2030 given a 15-year real bond return of 0% at today's rates, and that if inflation increases from here that equities will fail to increase dividends dollar payouts, grow earnings, or provide any effective hedge to inflation whatsoever.
It would only be appropriate to assume a safe withdrawal rate lower than the historical 4% – 4.5% rate if you believe that equities will fail to deliver even a 1% real return over the next 15 years, implying (given current dividend and inflation levels) that the S&P 500 price level will be lower in 2027 than it was in 2007 (which would also be lower than it was in 2000, resulting in no appreciation for 27 years!).
of course you need to monitor your performance through retirement as nothing is guaranteed , but having that 4% draw rate fail is a whole lot harder once it is quantified in to just what it took to make it fail .
I didn't take the poll but am I the only one who would be hacked off if I got to my early 60s and my kids started telling me how to manage my money? Maybe when I am 85 or 90 and have dementia, but certainly not in my early 60s!
I think it depends on the person/people. Last week we played golf with a younger fellow (40ish) whose divorced mother is a little younger than we are. Not only does she not know/understand anything about things like Medicare/Medicare Part D (and the open enrollment period - despite her need for various doctors and meds) - he said she is quickly running out of money because she doesn't have a clue how to handle finances and spends much more than she can afford to spend. His brother is trying to help their mother sort things out - but I suggested that this fellow should chip in too.
I don't know of any place in the US where kids have a legal duty to support parents (although they might exist) - but most kids feel they have a moral obligation to do so. Especially if their parents are older and can't work any longer. So - if parents crash and burn financially because of ignorance or bad habits - it can put a lot of strain on kids. Especially if they're trying to prepare for their own retirements - send kids through school - perhaps dealing with personal health issues - etc. Also - a couple may be dealing with up to 4 living parents (and up to 4 separate living situations if they're divorced). Perhaps step-parents as well.
FWIW - my late MIL gave me control of an inheritance she got when she was in her 60's. My late FIL handed me control of his finances when he was about 80 after he had a stroke. And my father did the same when he was 85 (and got a fair amount of money when he sold his house). None of these people had a hint of dementia. They just knew they didn't have much experience handling money and weren't terribly good at it. I'm not the greatest money manager in the world - but I did ok by them. Robyn
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