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.
Here we go again. When I first joined this forum , one of my first debates with another poster was exactly what I am about to write now.
You got your data from the Survey of consumer finances ( SCF ) , a triennial survey of a couple of thousand families done by the wonderful Federal reserve. This data is from the one in 2013 if I am not mistaken.
I pointed out that the data is wrong and inflated ( that's just my belief ). I believe independent published numbers whose parent organizations are in no way related to the Wall street - Federal reserve Mafia.
According to this , the top 1 percent would be around 2.5 million .
This to me looks much more reasonable.
Interesting. Pew does good-quality work, and the Fed employs some of the most diligent, boring, and corruption-proof economists in the country (I know some of these guys - they couldn't fudge data if their lives depended on it), so the spread is unexpected. If anyone here is trained in macro or econometrics I'd like to hear their take on this.
My naive guess is that they are counting different things - maybe one of the data sets excludes IRAs and 401(k)'s, or real estate, both of which are large holdings for affluent people.
That's untrue as well. Kind of. It is based on a 4% swr and only that.
$1 million could produce a passive income of $1 million (minus whatever taxes) once. Or two $500k. 4 x $250k. Just simply by withdrawing it as cash.
$40k is only useful if you plan to live on it for 30+ years... it isn't the "cap" on how much passive income the investment can throw out. It's just how much you can "safely" take out without money running out before you do.
The 4% rule is also based on the investment gaining more than 4%, 4% is only the part you can use, not how much the investment grows. So essentially, you could live on 10% during the years when it went up 10%, and 0% during the years it didn't grow, and put more money during the years it went down.
the idea that an investment only produces 4% a year reliably doesn't really make sense. I can point to any year and show you that at this point, it made more than 4%, at this point in time, it made less than 4%...
not exactly correct as far as what it takes to support the 4% safe withdrawal rate .
what it actually takes is about a 2% average real return over the first 15 year years of a 30 year time frame .
every failure period actually had good 30 year returns but they failed in the first 15 years to maintain at least that 2% real return average .
the individual years do not matter as far as average returns go , only the sequence of the returns matter and what inflation is ..
don't forget if you have 100 dollars and it goes up 100% you have 200.00 but if it falls 50% the following year you are back to 100.00 . you actually have zero return .
but if you look at the average return for the 2 years it is 25% . 100% minus 50% divided by 2 .
in this case you don't have a 25% average return , you got zero in real life . so sequences of returns and inflation are much more important then average nominal returns .
in practice though the 4% safe withdrawal rate has actually left you with more than you started 90% of the time over every rolling 30 year period .
in fact if we eliminated the 4 worst case scenarios the safe withdrawal rate would actually be 6.50%
Last edited by mathjak107; 03-29-2016 at 03:02 AM..
want to know what the actual results were over the worst 30 year periods ever ? this is why i said above , the fact you get more then 4% as a return over your 30 years is a moot point . in fact you can get less if the sequencing and inflation are favorable .
suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like :
so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.
so lets look at the first 15 years in those time frames determined to be the worst we ever had.
1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%
1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%
1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%
it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.
while 6.50% to 4% does not sound like a lot 1 million at 4% is an initial draw rate of 40k , at 6.50% you could have had 65k . that is a whopping 60% more .
so what it boils down to is any time you fall below a 2% real return average over the first 15 years you run the danger of 4% not holding. but even a 1/2% cut in spending will make you whole again over the next 15 years or longer.
which is why i always say if you have little discretionary spending you can cut from then you should not be in equities in retirement .
although the odds of being a worst case is very very low it can happen and the y2k retiree may be one as stock and bond returns have fallen below 2% real return the last 15 years so spending cuts may be in order.
Last edited by mathjak107; 03-29-2016 at 03:05 AM..
Interesting. Pew does good-quality work, and the Fed employs some of the most diligent, boring, and corruption-proof economists in the country (I know some of these guys - they couldn't fudge data if their lives depended on it), so the spread is unexpected. If anyone here is trained in macro or econometrics I'd like to hear their take on this.
My naive guess is that they are counting different things - maybe one of the data sets excludes IRAs and 401(k)'s, or real estate, both of which are large holdings for affluent people.
If you count the value of defined benefit pensions, the median wealth number is very likely under-reported. Any 30 year public sector worker I know retires with a pension and health care benefits that would cost me a million+ to buy as an annuity.
I think you're right about counting different things for the top 5%. My net worth calculation is quite different pre-tax. If I had to liquidate everything to create a pile of $100 bills, it would be maybe 30% less than what shows on my spreadsheet.
If I had 1 million, I can just simply pay my bills, live in a peaceful area, and pursue a meaningful career. Use my same old car. No fancy tech or gadgets (but I would upgrade my computers). And still live within my means as if I were not with a better looking bank account. More money does not make me any less frugal. Just, less stress over defaulted school loans and when I have enough to eat.
$1 million might not be enough for you, but that doesn't apply to everyone else.
$40k a year may be enough to retire on comfortably if you live in North Carolina or somewhere else with a low COL. Most people would probably still want a little more flexibility than that.
Plus, the point about inflation that mathjak107 keeps mentioning is pretty important.
it is inflation and not market returns that can cause us the most grief . the 1965/1966 group saw near no inflation only have it soaring a few years later out of left field . they ended up being the worst case scenario for decades to come .
not exactly correct as far as what it takes to support the 4% safe withdrawal rate .
what it actually takes is about a 2% average real return over the first 15 year years of a 30 year time frame .
every failure period actually had good 30 year returns but they failed in the first 15 years to maintain at least that 2% real return average .
the individual years do not matter as far as average returns go , only the sequence of the returns matter and what inflation is ..
don't forget if you have 100 dollars and it goes up 100% you have 200.00 but if it falls 50% the following year you are back to 100.00 . you actually have zero return .
but if you look at the average return for the 2 years it is 25% . 100% minus 50% divided by 2 .
in this case you don't have a 25% average return , you got zero in real life . so sequences of returns and inflation are much more important then average nominal returns .
in practice though the 4% safe withdrawal rate has actually left you with more than you started 90% of the time over every rolling 30 year period .
in fact if we eliminated the 4 worst case scenarios the safe withdrawal rate would actually be 6.50%
What if you take your (marginal) gains off the table and move them into Treasuries?
i.e. you have $100, it goes up 100%, you take the $100 gain and move it, so only your original $100 remains in the market vulnerable to loss of principal. If your original $100 loses 50% you've still got $150 even with your $100 gain essentially stagnating.
it is inflation and not market returns that can cause us the most grief . the 1965/1966 group saw near no inflation only have it soaring a few years later out of left field . they ended up being the worst case scenario for decades to come .
I was enjoying the interest rates on savings around 1973-75.
What if you take your (marginal) gains off the table and move them into Treasuries?
i.e. you have $100, it goes up 100%, you take the $100 gain and move it, so only your original $100 remains in the market vulnerable to loss of principal. If your original $100 loses 50% you've still got $150 even with your $100 gain essentially stagnating.
you lose the greatest power in the universe , compounding if you pull off your gains and get near nothing long term on it . if you do that while spending down you can run out of money way before you run out of time .
it is okay to pull some off to live but withdraw more then a few percent and you lose the cushion that the up years build to carry you through the down years when spending down .
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.
