Society of Actuaries Committee on Post Retirement Needs and Risk
While mostly focused on providing pre-retirement planning information for
"actuaries and other professionals with an interest in modeling and conducting
research regarding individual financial risks and needs after retirement", this
site does contain some useful information for individuals who are trying to
develop a budget in retirement.
While some retirees may find recent articles
regarding "middle market retirement strategies" somewhat unfocused and
confusing, some of the earlier material, particularly several of the issue
briefs contained in the "Managing Retirement Decisions" are understandable and
potentially helpful.
The committee makes excellent points in their
material regarding the importance of planning for "shocks", such as unexpected
health problems or entering a nursing home. In addition, some of their
material discusses the use of home equity to supplement income in retirement.
Thursday, April 18, 2013
Monday, April 15, 2013
Planning your retirement: The best ways to generate lifetime income
Steve Vernon (CBS Moneywatch, April 15, 2013)
Thanks again to Steve Vernon for mentioning my simple online tool (which has been subsequently updated to Version 2.0) in his April 15 blog post as one of the recommended systematic withdrawal approaches (Retirement Income Generator #2).
While Steve mentions three different types of Retirement Income Generators (RIGs), it is important to remember that retirees don't have to utilize just one of the three RIGs. As each type of RIG has advantages and disadvantages, you may wish to apply one of the RIGs to a portion of your accumulated savings and another RIG to the remainder of your accumulated savings. For example, you could buy an immediate annuity (or deferred annuity) with a portion of your accumulated savings and use a systematic withdrawal approach with the remainder of your savings. And my simple online calculator will enable you to see what the effect of such "RIG mixing strategies" will have on your expected income in retirement.
Steve Vernon (CBS Moneywatch, April 15, 2013)
Thanks again to Steve Vernon for mentioning my simple online tool (which has been subsequently updated to Version 2.0) in his April 15 blog post as one of the recommended systematic withdrawal approaches (Retirement Income Generator #2).
While Steve mentions three different types of Retirement Income Generators (RIGs), it is important to remember that retirees don't have to utilize just one of the three RIGs. As each type of RIG has advantages and disadvantages, you may wish to apply one of the RIGs to a portion of your accumulated savings and another RIG to the remainder of your accumulated savings. For example, you could buy an immediate annuity (or deferred annuity) with a portion of your accumulated savings and use a systematic withdrawal approach with the remainder of your savings. And my simple online calculator will enable you to see what the effect of such "RIG mixing strategies" will have on your expected income in retirement.
Monday, April 8, 2013
Taking the Mystery Out of Retirement Planning
(Department of Labor)
(Department of Labor)
Kudos to the U.S. Department of Labor, Employee
Benefits Security Administration for attempting to provide education on
retirement planning. This site contains an online calculator which follows the
booklet prepared by the DoL with the same name published in February, 2010.
Unfortunately, its focus is primarily on helping individuals who are about 10
years from retirement with their planning rather than helping retired
individuals determine a spending budget. Here is the link to the booklet
www.dol.gov/ebsa/pdf/nearretirement.pdf
The following are some of the features of the online tool that I found disappointing:
The following are some of the features of the online tool that I found disappointing:
After laboriously completing the many input
items, the spreadsheet compares the present value of future expected income with
the present value of future expected expenses. This is useful in determining an
overall shortfall or surplus, but it doesn't tell you how much you can spend
each year.
In determining the present value of future
expected income, Social Security amounts are not indexed with assumed
inflation. As far as I can tell, this is just an error in the program.
If you are over age 70, the program doesn't work
for you. I guess retirement planning is no longer a mystery after age 70.
The program uses an assumption for inflation of
3.5% per year for non-health expenses and 7% per year for health related
expenses with no flexibility to adjust those assumptions.
If you are currently retired and have a
fixed immediate annuity, the program does not allow you to input a fixed
deferred annuity. Also, there is no way to reflect a bequest motive, and the
retirement period is fixed in the program to end at age 95.
The program converts accumulated savings into
fixed (non-cpi indexed) payment amounts at retirement.
The booklet provides links to other online
savings calculators that are also primarily focused on pre-retirement savings
accumulation rather than post-retirement decumulation.
If you use this tool, don't use commas in your
input items as the program will reject them.
Thursday, March 28, 2013
Rethinking Your Retirement Rate
(SMART 401K Blog, March 28, 2013)
"Much like retirement investing, a suitable withdrawal strategy likely will be unique to an individual’s situation. After all, not everyone is going to have the same wants and needs in retirement. A number of other variables also can impact a withdrawal strategy’s success, such as number of years in retirement, other income sources, portfolio value and even asset allocation."
The SMART 401K site includes a good spending calculator that shows how long a given level of accumulated savings will last based on assumptions and desired spending levels you specify. It does not tell you how much you can spend each year, but you can work backwards to get basically the same results obtained using the spreadsheets in my website (small differences result from different assumed timing of withdrawals).
As noted in the original article on my site, the actual spreadsheet used in the process is not as important as the discipline required to review results at least once a year and make reasonable adjustments for changes in experience and assumptions.
(SMART 401K Blog, March 28, 2013)
"Much like retirement investing, a suitable withdrawal strategy likely will be unique to an individual’s situation. After all, not everyone is going to have the same wants and needs in retirement. A number of other variables also can impact a withdrawal strategy’s success, such as number of years in retirement, other income sources, portfolio value and even asset allocation."
The SMART 401K site includes a good spending calculator that shows how long a given level of accumulated savings will last based on assumptions and desired spending levels you specify. It does not tell you how much you can spend each year, but you can work backwards to get basically the same results obtained using the spreadsheets in my website (small differences result from different assumed timing of withdrawals).
As noted in the original article on my site, the actual spreadsheet used in the process is not as important as the discipline required to review results at least once a year and make reasonable adjustments for changes in experience and assumptions.
Monday, March 25, 2013
How to Draw Down Your Nest Egg: 3 Alternatives to the 4% Rule
(Time, March 22, 2013)
This article refers to the three alternatives to the 4% Rule discussed in the WSJ article of March 1, 2013 (see below). While these three alternatives are potentially better than blindly following the 4% Rule, it is important to realize that any approach that does not reflect your personal financial situation and changes in it from year to year is less likely to be successful. You need to crunch your numbers at least once a year in order to keep your spending budget on target.
(Time, March 22, 2013)
This article refers to the three alternatives to the 4% Rule discussed in the WSJ article of March 1, 2013 (see below). While these three alternatives are potentially better than blindly following the 4% Rule, it is important to realize that any approach that does not reflect your personal financial situation and changes in it from year to year is less likely to be successful. You need to crunch your numbers at least once a year in order to keep your spending budget on target.
Wednesday, March 20, 2013
Make Your Retirement Savings Last Into Your 90s
by Walter Updegrave (CNN Money, March 15, 2013)
Another article encouraging retirees to use a good retirement calculator and revisit it each year to determine annual withdrawals.
Mr. Updegrave develops a 4% withdrawal strategy (with annual inflation increases) for a retiree with $500,000 in accumulated savings who is age 65 and wants his money to last for 30 years. He assumes inflation of 2.5% per annum and some (undisclosed) assumptions for future returns on equities and bonds.
When determining annual withdrawals, it is important to consider other sources of retirement income that may not be indexed with inflation as well as the impact future inflation may have on total spending amounts, particularly if you want your total annual spendable income to keep pace with inflation.
Using the V2.0 spreadsheet on this site and inputting 4% investment return, 2.5% inflation, $500,000 of accumulated savings and zero for annuity income and amounts to heirs, we get an initial withdrawal rate of 4.08%, which is reasonably consistent with Mr. Updegrave's calculation. However, if we also input that this retiree has an annual fixed dollar pension of $10,000 per year (immediate annuity), we get an annual withdrawal of 3.55% from accumulated savings. Similarly, if we input a $10,000 deferred annuity and 10-year period of deferral, we get an annual withdrawal percentage of 4.92%.
If we assume a 6% annual investment return and 4.5% annual inflation and no annuity amounts, we get a withdrawal rate of 4.07% (just about the same as in the lower inflation environment assumed by Mr. Updegrave), but inputting a $10,000 immediate annuity drops the withdrawal rate to 3.25% under this scenario and inputting a $10,000 deferred annuity results in a 4.67% withdrawal rate.
Bottom line: Make sure the retirement calculator you use reflects your financial situation (including other annuity income and bequest plans) and you understand the implications of the assumptions you input (or that are built into the calculator).
by Walter Updegrave (CNN Money, March 15, 2013)
Another article encouraging retirees to use a good retirement calculator and revisit it each year to determine annual withdrawals.
Mr. Updegrave develops a 4% withdrawal strategy (with annual inflation increases) for a retiree with $500,000 in accumulated savings who is age 65 and wants his money to last for 30 years. He assumes inflation of 2.5% per annum and some (undisclosed) assumptions for future returns on equities and bonds.
When determining annual withdrawals, it is important to consider other sources of retirement income that may not be indexed with inflation as well as the impact future inflation may have on total spending amounts, particularly if you want your total annual spendable income to keep pace with inflation.
Using the V2.0 spreadsheet on this site and inputting 4% investment return, 2.5% inflation, $500,000 of accumulated savings and zero for annuity income and amounts to heirs, we get an initial withdrawal rate of 4.08%, which is reasonably consistent with Mr. Updegrave's calculation. However, if we also input that this retiree has an annual fixed dollar pension of $10,000 per year (immediate annuity), we get an annual withdrawal of 3.55% from accumulated savings. Similarly, if we input a $10,000 deferred annuity and 10-year period of deferral, we get an annual withdrawal percentage of 4.92%.
If we assume a 6% annual investment return and 4.5% annual inflation and no annuity amounts, we get a withdrawal rate of 4.07% (just about the same as in the lower inflation environment assumed by Mr. Updegrave), but inputting a $10,000 immediate annuity drops the withdrawal rate to 3.25% under this scenario and inputting a $10,000 deferred annuity results in a 4.67% withdrawal rate.
Bottom line: Make sure the retirement calculator you use reflects your financial situation (including other annuity income and bequest plans) and you understand the implications of the assumptions you input (or that are built into the calculator).
Monday, March 4, 2013
Say Goodbye to the 4% Rule
(Wall Street Journal, March 1, 2013)
What to do when the old math doesn't add up? This Wall Street Journal article offers three alternatives to the 4% Rule. Two of the three have already been discussed on this website and the third is just a variation of the safe withdrawal rate approach. I continue to believe that the best answer to this question is to recalculate your withdrawal budget every year using data and assumptions that reflect your personal financial situation as advocated in this website.
(Wall Street Journal, March 1, 2013)
What to do when the old math doesn't add up? This Wall Street Journal article offers three alternatives to the 4% Rule. Two of the three have already been discussed on this website and the third is just a variation of the safe withdrawal rate approach. I continue to believe that the best answer to this question is to recalculate your withdrawal budget every year using data and assumptions that reflect your personal financial situation as advocated in this website.
Monday, February 18, 2013
Monday, February 11, 2013
Paper Poses New Withdrawal Rate Method
(Plansponsor, February 8, 2013)
Another paper on the same theme from Blanchett, Finke and Pfau (see "The 4 Percent Rule is Not Safe in a Low-Yield World). While I applaud the work of these gentlemen in showing that using the 4% rule, or any other "safe" withdrawal rate may be dangerous, I find that the authors are simply demonstrating the weaknesses of relying on the Monte Carlo method to determine an initial withdrawal rate that is subsequently increased by inflation. Yes, the assumptions they use for expected future experience are more sophisticated than those used in previous studies (they assume expected interest rates will rise in the future rather than remain constant). But, even this more sophisticated model makes no adjustment for possible future experience that deviates from assumed experience (or actual spending). In the Plan Sponsor article, Blanchett says, I acknowledge that this [model] may not be relevant in five years when bond yields are [assumed to be] higher." I also had to laugh when I read, "the average person running these [Monte Carlo] simulations is getting a falsely successful picture." No average retiree I know is running Monte Carlo simulations in her spare time.
(Plansponsor, February 8, 2013)
Another paper on the same theme from Blanchett, Finke and Pfau (see "The 4 Percent Rule is Not Safe in a Low-Yield World). While I applaud the work of these gentlemen in showing that using the 4% rule, or any other "safe" withdrawal rate may be dangerous, I find that the authors are simply demonstrating the weaknesses of relying on the Monte Carlo method to determine an initial withdrawal rate that is subsequently increased by inflation. Yes, the assumptions they use for expected future experience are more sophisticated than those used in previous studies (they assume expected interest rates will rise in the future rather than remain constant). But, even this more sophisticated model makes no adjustment for possible future experience that deviates from assumed experience (or actual spending). In the Plan Sponsor article, Blanchett says, I acknowledge that this [model] may not be relevant in five years when bond yields are [assumed to be] higher." I also had to laugh when I read, "the average person running these [Monte Carlo] simulations is getting a falsely successful picture." No average retiree I know is running Monte Carlo simulations in her spare time.
Sunday, February 3, 2013
How Much Can You Withdraw From Your Savings
(January/February 2013 Money magazine (page 116) -- No Link)
"Best move: Recalculate your withdrawals every year to take into account your current account balances and the fact that your nest egg doesn't have to support you for as long."
"With a decision this big, you don't want to blindly stick to the 4% rule or any other rigid system..."
"As a practical matter, though, recalculating your withdrawal rate this way can be quite complicated. So unless you're working with a financial planner capable of doing the number crunching for you, your best bet is to go to an online tool like T. Rowe Price's Retirement Income Calculator every year, plug in your most up-to-date information, and adjust your withdrawals up or down as necessary."
I couldn't agree more with this advice from Money magazine. And the online tool "like" T. Rowe Price's that you should use is located right here in this website. See related link below for a discussion of some of the weaknesses of the T. Rowe Price tool.
(January/February 2013 Money magazine (page 116) -- No Link)
"Best move: Recalculate your withdrawals every year to take into account your current account balances and the fact that your nest egg doesn't have to support you for as long."
"With a decision this big, you don't want to blindly stick to the 4% rule or any other rigid system..."
"As a practical matter, though, recalculating your withdrawal rate this way can be quite complicated. So unless you're working with a financial planner capable of doing the number crunching for you, your best bet is to go to an online tool like T. Rowe Price's Retirement Income Calculator every year, plug in your most up-to-date information, and adjust your withdrawals up or down as necessary."
I couldn't agree more with this advice from Money magazine. And the online tool "like" T. Rowe Price's that you should use is located right here in this website. See related link below for a discussion of some of the weaknesses of the T. Rowe Price tool.
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