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.
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.
Wednesday, January 30, 2013
An Efficient Frontier for Retirement Income by Dr. Wade Pfau
(Social Science Research Network)
When I questioned Dr. Pfau about what he and his co-authors meant by the statement, "clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio" in the paper "The 4% Rule is Not Safe in a Low-Yield World" (see below), he responded by referring me to this new paper to be published in the February issue of The Journal of Financial Planning.
The paper uses Monte Carlo simulations and "current market" assumptions to determine an efficient frontier of investment allocations that best meet the two competing financial objectives for retirement defined by Dr. Pfau: "satisfying spending goals and preserving financial assets." He examines allocations involving six different types of investments. Based on his methodology and assumptions, he concludes that the efficient frontier for a hypothetical 65-year old couple consists of combinations of stock and fixed single premium immediate annuities.
This is another excellent paper from Dr. Pfau that should be useful in helping retirees develop or refine their investment strategy. However, the approach suggested doesn't appear to provide guidance on how adjustments are made in later years for deviations from the spending plan, actual investment experience, changes in health or changes in initial assumptions. Perhaps he anticipates that the client and financial planner will meet periodically to re-run the model and make appropriate adjustments. In any case, I look forward to further research by Dr. Pfau using this model, particularly inclusion of qualified longevity annuity contracts in the investment allocation mix.
(Social Science Research Network)
When I questioned Dr. Pfau about what he and his co-authors meant by the statement, "clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio" in the paper "The 4% Rule is Not Safe in a Low-Yield World" (see below), he responded by referring me to this new paper to be published in the February issue of The Journal of Financial Planning.
The paper uses Monte Carlo simulations and "current market" assumptions to determine an efficient frontier of investment allocations that best meet the two competing financial objectives for retirement defined by Dr. Pfau: "satisfying spending goals and preserving financial assets." He examines allocations involving six different types of investments. Based on his methodology and assumptions, he concludes that the efficient frontier for a hypothetical 65-year old couple consists of combinations of stock and fixed single premium immediate annuities.
This is another excellent paper from Dr. Pfau that should be useful in helping retirees develop or refine their investment strategy. However, the approach suggested doesn't appear to provide guidance on how adjustments are made in later years for deviations from the spending plan, actual investment experience, changes in health or changes in initial assumptions. Perhaps he anticipates that the client and financial planner will meet periodically to re-run the model and make appropriate adjustments. In any case, I look forward to further research by Dr. Pfau using this model, particularly inclusion of qualified longevity annuity contracts in the investment allocation mix.
Wednesday, January 23, 2013
Steve Vernon
http://restoflife.com/
http://www.cbsnews.com/2741-505146_162-1348.html
I worked for many years with Steve at Watson Wyatt Worldwide (now Towers Watson). Steve is a fellow Fellow of the Society of Actuaries and is very passionate about helping people prepare for and prosper in their retirement years. Steve has written four books on retirement planning. His most recent book is entitled "Money for Life." It is an excellent book, and I'm not just saying that because he is my friend or because he refers to my website on pages 145-148 of the book. You can learn more about Steve's work on his website "Rest-of-Life.com," and I recommend that you read his excellent blog articles for CBSMoneywatch.
http://restoflife.com/
http://www.cbsnews.com/2741-505146_162-1348.html
I worked for many years with Steve at Watson Wyatt Worldwide (now Towers Watson). Steve is a fellow Fellow of the Society of Actuaries and is very passionate about helping people prepare for and prosper in their retirement years. Steve has written four books on retirement planning. His most recent book is entitled "Money for Life." It is an excellent book, and I'm not just saying that because he is my friend or because he refers to my website on pages 145-148 of the book. You can learn more about Steve's work on his website "Rest-of-Life.com," and I recommend that you read his excellent blog articles for CBSMoneywatch.
Saturday, January 19, 2013
The 4% Rule is Not Safe in a Low-Yield World
(Social Science Research Network, January 15, 2013)
The authors put what is hopefully the final nails in the coffin of the 4% Withdrawal Rule, and make a compelling argument for avoiding any "safe" withdrawal rate strategy. They conclude that, "The success of the 4% rule in the U.S. may be an historical anomaly, and clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio."
As noted elsewhere on this website, I agree with the authors that the 4% Rule (or some other specific "safe" withdrawal rate) does a poor job of balancing the dual needs of retirees to maintain lifestyle spending and preserve financial assets. Retirees need a spending plan that is flexible, reflects actual spending and investment experience and reflects individual circumstances (such as existence of other lifetime income through defined benefit plans or immediate or deferred annuity contracts as well as any bequest motives). Fortunately, the actuarial approach outlined in this website can help you meet these needs.
The authors put what is hopefully the final nails in the coffin of the 4% Withdrawal Rule, and make a compelling argument for avoiding any "safe" withdrawal rate strategy. They conclude that, "The success of the 4% rule in the U.S. may be an historical anomaly, and clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio."
As noted elsewhere on this website, I agree with the authors that the 4% Rule (or some other specific "safe" withdrawal rate) does a poor job of balancing the dual needs of retirees to maintain lifestyle spending and preserve financial assets. Retirees need a spending plan that is flexible, reflects actual spending and investment experience and reflects individual circumstances (such as existence of other lifetime income through defined benefit plans or immediate or deferred annuity contracts as well as any bequest motives). Fortunately, the actuarial approach outlined in this website can help you meet these needs.
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