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Old 01-14-2016, 02:02 PM
 
Location: SoCal
13,430 posts, read 6,422,494 times
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Quote:
Originally Posted by westender View Post
The challenge for the 60-year-old neighbor in your post is not her age, it is that she hasn't saved anything. I've been working for 30 years, and I have also had ups and downs in the labor and stock markets, but I've managed to squirrel away enough to return about 35% of my current salary. I've got another 10 years to work, and there will also be social security on top of that.

70% income replacement is a high level IMHO -- I think 50% is more realistic. People will have to scale back and possibly relocate, but this is not a catastrophe. I just don't know that many (any?) people who have not saved a nickel. Even my layabout 40-something cousin has saved a couple hundred thousand.
70% income replacement is pushed by the mutual fund industry, the more you save, the better for them. There is no way we can have 70% income replacement. It's most likely the pension covers about 15-25% income, of course it depends on the income. But the general statement like that is not correct for most situation.
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Old 01-14-2016, 02:36 PM
 
29,902 posts, read 34,951,892 times
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Quote:
Originally Posted by NewbieHere View Post
70% income replacement is pushed by the mutual fund industry, the more you save, the better for them. There is no way we can have 70% income replacement. It's most likely the pension covers about 15-25% income, of course it depends on the income. But the general statement like that is not correct for most situation.
Public pensions typically cover more than that and if you are a member of SS put that on top and the big variable becomes the age and years served when you declare for benefits. Many public pensions pay between 45-60% of your measured term annual salary. That had for most been three but part of reform has been to increase that. The biggest variable is the salary that the formula is applied to. A pension that pays 45% can be more valuable than one that pays 60% if the 45% comes from a much higher income area. Pensions vary considerably within states. Not in terms of percentage but in terms of benefit as salaries can vary considerably within states at the local level. The following is a good write up with a good chart representing combined pension and SS as a percentage of final salary by state

https://www.aei.org/publication/whic...sion-benefits/


Quote:
In 43 of the 50 states, the replacement rate paid to a full-career employee exceeded 75% of final earnings, which leads to the possibility that public employees are “hiding” compensation in less-visible retirement benefits. Since many public plans appear to be paying more-than-adequate benefits,
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Old 01-14-2016, 02:37 PM
 
7,995 posts, read 5,078,983 times
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Quote:
Originally Posted by westender View Post
Are you accounting for Dividends and Bond Income as well as Capital Gains? I think a 50% final salary and a 3% withdrawal rate are reasonable expectations, and also fairly "realizable" for most people saving even 10% of gross income during a 40-year career.
My analysis was a bit breezy. I'm assuming a ~1.5% annual dividend rate, which has been the norm in recent times. I'm also assuming a similar inflation rate. And something along those lines for bond income. If our capital gains hovers around zero, then dividends (especially after taxes) protect us from inflation, but cumulatively we have no growth. How could these numbers be even remotely accurate? Well, consider that in the spring of 2000, the S&P 500 was hovering around 1500. It then declined, and reached 1500 again in 2007. It then declined, crested at 2100 last year... and where is it now? I'm too terrified to look. Over 16 years, what is the cumulative rate of return? And what's the effective annual rate of return?

The upshot is that the "safe" rate of withdrawal in retirement becomes not 4% or 3%... but 0%.

Quote:
Originally Posted by westender View Post
BTW, in reference to some upthread commentary, acknowledging simple luck as a component in retirement success/ birth year/ demography does NOT require belief in a supernatural being. But luck cannot be controlled by the individual. Hard work and diligent savings can be controlled.
Agreed. But the point is that even if we're scrupulously attentive to those things within our purview, we can still get crushed by things outside of our purview. Being steadfast and responsible is necessary for success. But it's not sufficient for success.

Quote:
Originally Posted by Serious Conversation View Post
The best thing about college is that you have a large number of people at relatively the same age and stage in life close together. I'm 30ish and live hundreds of miles away from where I grew up, but I've formed new friendships and connections here.
The trouble is, that maturity in terms of studying/career/investment, is very different from maturity in terms of social-skills and relationships. In college, I was all about studying and angling for good full-time employment upon graduation. I was more or less successful on both accounts. But relationships? Eh? I was still a teenager when I graduated, and a very very late bloomer at that. I didn't "wake up" to the realities of dating until I'd already been a practicing engineer for several years. And due to the vicissitudes of the economy and my career-field, my peer-group was some 10-15 years older (a quarter of a century later, this is still true!). In hindsight, I should have spent a few years flipping burgers, hiking around Europe, caddying golf and parking cars.

So we find ourselves in a position where one aspect of life, outstrips another. The resulting imbalance is detrimental, even if we're ahead of our peer-group in some regards.
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Old 01-14-2016, 03:06 PM
 
72,134 posts, read 72,094,203 times
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even if you dug a hole and buried your 1 million dollars , pulling 4% and inflation adjusting it would last 22 years at zero return .

as kitces pointed out :

The average real return on a 60/40 balanced portfolio associated with the worst safe withdrawal rate scenarios in history was a mere 0.86% average annual compound growth rate over the first 15 years of retirement. worst case means the income held up but not much was left at the end . anything worse and the income stream would have to have been lowered from 4% .


With nominal inflation trending just over 2% and a 10-year government bond yielding around 2%, the projected 15-year real return on bonds is projected to be slightly negative to zero .

Similarly, the current dividend yield on the S&P 500 is approximately 2%, suggesting that any real return in equities from here must come from price appreciation .

to have 4% inflation adjusted withdrawals hold you need about a 1% real return average or a 16% real return growth rate over the next 15 years on top of that dividend .

that assumes rates and dividends don't even rise .

https://www.kitces.com/blog/What-Ret...LY-Based-Upon/
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Old 01-14-2016, 05:17 PM
 
Location: VT; previously MD & NJ
2,232 posts, read 1,370,288 times
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Quote:
Originally Posted by TuborgP View Post
Frankly and truthfully one of the reasons and one of the primary reasons I have a defined benefit pension is because like a great number of other African Americans born in the 30's, 40's and 50's was that government was one of the few places we could find good professional jobs in Jim Crow or segregated America. So wow oh wow I was so fortunate there was discrimination all around and that I went out everyday one summer in high school trying to find a job and there was none. So fortunate and so thankful to the system that told me and my family and yes many relatives listened and are now retired that we needed to work for government or large employers (who also had pensions) to have a chance back then. Oh cry me a darn river people I have relatives who as kids had a mother who had to borrow money to buy milk for them. My mother was born and lived for awhile in a shack with dirt for a floor in NC and I attribute that to my feeling that I have NC in my blood. I could tell you a lot of other stories but so much of early life was driven by the need to be in some sort of equal chance if possible society. Now do my kids have to deal with that? No! Did we work and give them the opportunity to take advantage of a different society? Yes! Have they? Yes! Have I had to deal with bigotry and bull crap like so many others? Yes! So yes I give thanks and know we could be tested again but the wife and I are thankful for the path that led us to where we are. So what is hilarious it is Jim Crow America and family guidance that is the greatest reason why I have a defined benefit pension. As America changed and I was offered other opportunities it was the retirement advice from another era that kept me in that lane. For me it is about always moving forward and regardless of the current poop find that path that is clear and move on. PS, my mother didn't graduate from high school and worked part time as a domestic and my dad eventually worked for the post office and retired with a defined benefit pension, paid for house and savings ( the old school CD way. More than most people today just around the six figure mark. That was pretty impressive for a person born in 1913 and a minority. learned my lessons from him and other relatives and from those I knew and worked with. Also some of the things I was involved in made me more prone to have people talk to me about finances.

So as Miranda said that's the house that built me!
Excellent post! Sometimes we have to remind people about the history they forgot (or never knew). Sometimes we have to remind people that it hasn't been a cakewalk.
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Old 01-14-2016, 07:11 PM
 
6,353 posts, read 5,181,910 times
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Quote:
Originally Posted by ohio_peasant View Post
...in the spring of 2000, the S&P 500 was hovering around 1500. It then declined, and reached 1500 again in 2007. It then declined, crested at 2100 last year... and where is it now? I'm too terrified to look.
If you're too terrified to look, you shouldn't be investing in equities. The S&P is at 1921.

Quote:
The upshot is that the "safe" rate of withdrawal in retirement becomes not 4% or 3%... but 0%.
The safe withdrawal rate for a riskless, Treasury bill portfolio is 1/n where n is the number of years the money has to last. So if you need the money to last for 30 years and you don't take any risk, you can spend 3.33% of it each year and then, after 30 years, the money is gone. http://www.cfapubs.org/doi/pdf/10.2469/faj.v71.n1.2
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Old 01-14-2016, 11:28 PM
 
7,995 posts, read 5,078,983 times
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Quote:
Originally Posted by Larry Siegel View Post
If you're too terrified to look, you shouldn't be investing in equities. The S&P is at 1921.
I wish that you'd not posted that. I was basking in the blissful delusion that the S&P500 was still in the low-2000s. Having this new information is... unpleasant.

If our investment-horizon is sufficiently long, it becomes impossible to avoid equities. I'm unaware of any other investment that can maintain reasonable growth of capital. That at least is the palliative remark. For the present, however, I feel nothing short of sheer terror. This is not an exaggeration.
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Old 01-15-2016, 02:52 AM
 
6,353 posts, read 5,181,910 times
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Quote:
Originally Posted by ohio_peasant View Post
I wish that you'd not posted that. I was basking in the blissful delusion that the S&P500 was still in the low-2000s. Having this new information is... unpleasant.

If our investment-horizon is sufficiently long, it becomes impossible to avoid equities. I'm unaware of any other investment that can maintain reasonable growth of capital. That at least is the palliative remark. For the present, however, I feel nothing short of sheer terror. This is not an exaggeration.
If you're too terrified to look, you shouldn't in equities.

A quarter century of behavioral finance demonstrates that, if we have a major bear market, you'll sell all or most of your equities when the S&P crosses 1500. Then you won't get back in until it reaches 3000 sometime in the next decade. That amounts to giving away half your money.

Buy and hold both equities and bonds (index funds) for the very long run, and don't trade. Just use newly saved money as a rebalancing tool to a 50-50 portfolio. Anything riskier will cause too much pain when the market falls.

I don't give this advice to everybody but I do give it to naturally conservative investors who don't think it's OK to lose money once in a while. (I am one.)
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Old 01-15-2016, 03:14 AM
 
72,134 posts, read 72,094,203 times
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Quote:
Originally Posted by Larry Siegel View Post
If you're too terrified to look, you shouldn't be investing in equities. The S&P is at 1921.



The safe withdrawal rate for a riskless, Treasury bill portfolio is 1/n where n is the number of years the money has to last. So if you need the money to last for 30 years and you don't take any risk, you can spend 3.33% of it each year and then, after 30 years, the money is gone. http://www.cfapubs.org/doi/pdf/10.2469/faj.v71.n1.2
except inflation and negative real returns would alter that time frame greatly .

inflation subjects even cash instruments to sequence risk . in the real world anything over 2% from that scenario would not be a safe withdrawal rate at all . in fact take over 3% inflation adjusted and i would get the shopping cart and bridge spot picked out as it is likely it will be needed .

under 2% draws inflation adjusted and cd's , short term bonds , TIPS , are fine but the risk of running out of money before you run out of time sky rockets as you draw more . .

you have 3 components when spending down to pay bills and live on to worry about because they vary . markets returns ,rates and inflation .

even with cash instruments inflation vary's and negative real return years are actual years of loss. you need to spend down more of your dollars to pay the same bills and that causes sequence risk.

because of sequence risk you need to keep more powder dry and can't safely draw that 3.33%.

Last edited by mathjak107; 01-15-2016 at 04:27 AM..
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Old 01-15-2016, 06:55 AM
 
Location: Los Angeles area
14,018 posts, read 17,785,397 times
Reputation: 32309
Quote:
Originally Posted by NewbieHere View Post
70% income replacement is pushed by the mutual fund industry, the more you save, the better for them. There is no way we can have 70% income replacement. It's most likely the pension covers about 15-25% income, of course it depends on the income. But the general statement like that is not correct for most situation.
Of course the more we save the better for the mutual fund industry. Any discussion of income replacement in terms of percentages is almost meaningless because everything is relative. A person earning minimum wage really needs 100% income replacement, but on those wages that's a near impossibility. A person earning $200,000 a year can live a relatively opulent and lavish life in retirement on 50% income replacement, even if that represents a cut-back in spending.

Your statement about the pension covering "most likely....about 15-25% income" puzzles me; if people have worked a normal length career, say 35 years give or take, then the pension is likely to provide much more than that.
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