John B. Shoven and Sita N. Slavov
Stanford Institute for Economic Policy Research (SIEPR)
http://siepr.stanford.edu/system/files/shared/documents/Efficient_Retirement_Design-March_2013b.pdf
The authors conclude "with today's life expectancies and
today's extremely low interest rates, it is almost to
everyone's interest to delay the commencement of Social
Security. For many people, it is the value maximizing
strategy." The authors also discuss value-maximizing
strategies for when to claim benefits for two-earner
couples, and suggest that individuals consider delaying
commencement of Social Security benefits either by spending
other accumulated assets after retirement and before Social
Security commencement, by continuing to work, or through a
combination of the two. An excellent read for anyone who
has not yet commenced Social Security benefits (or who is
still able to defer their Social Security benefit
commencement date).
Readers are reminded that this website contains a simple spreadsheet that enables retirees to model using
their accumulated savings to "bridge" the period between
retirement and commencement of Social Security
benefits while attempting to maintain constant total
spendable income in real dollars.
Tuesday, July 23, 2013
Friday, July 12, 2013
Plan on Living to 95
In my previous post, I referred once again to withdrawal strategy risk--the
risk of either withdrawing too much or too little each year. If we only
knew when we were going to die, planning would be so much easier. Some
retirees believe that it is sufficient and appropriate to base withdrawals
on their current life expectancy. As we will see in this post, the very significant downside of this strategy
is that withdrawals may not keep pace with inflation (or may even decrease in
dollar amount) if you have the good fortune of outliving the life expectancy
you used for planning purposes when you first retired. Based on the Society
of Actuary mortality tables, it is much more prudent to assume that you will
live to your mid-90s (unless you have already reached your 90s) rather than
use published life expectancies when developing your spending budget.
The exhibits below are based on Society of Actuaries Annuity-2000 male mortality tables with mortality projection. These tables are available in this website at this link. In both exhibits, the hypothetical retiree is assumed to have $500,000 at retirement at age 65 and desires to have constant real dollar withdrawals throughout retirement. In the first exhibit, the individual retiring at age 65 assumes he will live exactly the number of years equal to his life expectancy (in this case 21.9 years). Every fifth year thereafter he adjusts his spending plan based on his revised life expectancy. His assets are assumed to grow at 5% per year and inflation is assumed to be 3% per year. He is assumed to use the methodology outlined in this website for his withdrawal strategy with no other annuity income and no amounts left to heirs at death.
The first exhibit shows that if he lives to age 80, his annual withdrawal will only be 75% of his initial withdrawal in real dollar terms and if he lives to age 85, his annual withdrawal will only be about 54% of his initial withdrawal in real dollar terms.
By contrast, if his withdrawal strategy is such that he can live with a 30% chance of outliving his savings (by assuming that he will die at age 93 for the first 15 years, 94 if he makes it to 80 and 95 if he makes it to 85), he will be able to keep his spending constant in real dollar terms for 15 years. Even if he takes this more conservative approach, however, he is still at risk of lower real dollar withdrawals after age 80. But arguably he may be in a better position at his advanced ages to live with decreased real dollar retirement income.
According to the Society of Actuaries tables, Females generally have a 30% chance of living to approximately 95 until they reach age 80, at which time their expected age at death increases past age 95 in much the same way as anticipated for males.
The exhibits below are based on Society of Actuaries Annuity-2000 male mortality tables with mortality projection. These tables are available in this website at this link. In both exhibits, the hypothetical retiree is assumed to have $500,000 at retirement at age 65 and desires to have constant real dollar withdrawals throughout retirement. In the first exhibit, the individual retiring at age 65 assumes he will live exactly the number of years equal to his life expectancy (in this case 21.9 years). Every fifth year thereafter he adjusts his spending plan based on his revised life expectancy. His assets are assumed to grow at 5% per year and inflation is assumed to be 3% per year. He is assumed to use the methodology outlined in this website for his withdrawal strategy with no other annuity income and no amounts left to heirs at death.
The first exhibit shows that if he lives to age 80, his annual withdrawal will only be 75% of his initial withdrawal in real dollar terms and if he lives to age 85, his annual withdrawal will only be about 54% of his initial withdrawal in real dollar terms.
By contrast, if his withdrawal strategy is such that he can live with a 30% chance of outliving his savings (by assuming that he will die at age 93 for the first 15 years, 94 if he makes it to 80 and 95 if he makes it to 85), he will be able to keep his spending constant in real dollar terms for 15 years. Even if he takes this more conservative approach, however, he is still at risk of lower real dollar withdrawals after age 80. But arguably he may be in a better position at his advanced ages to live with decreased real dollar retirement income.
According to the Society of Actuaries tables, Females generally have a 30% chance of living to approximately 95 until they reach age 80, at which time their expected age at death increases past age 95 in much the same way as anticipated for males.
Thursday, July 4, 2013
Marketwatch, July 2, 2013
3 reasons retirees don’t spend
Adam Wolf
In my March, 2010 article describing the actuarial process set forth in this website, I discussed several risks associated with not sufficiently annuitizing accumulated retirement savings. I talked about withdrawal strategy risk-- the risk of either withdrawing too much or too little each year. Most experts focus on the risk of withdrawing too much, but in this article, Mr. Wolf focuses on the risk of withdrawing too little.
I agree with Mr. Wolf that, "Knowing your options can help you enjoy the retirement you saved so hard to provide for." And knowing the options of How Much Can I Afford To Spend In Retirement is what this website is all about.
Adam Wolf
In my March, 2010 article describing the actuarial process set forth in this website, I discussed several risks associated with not sufficiently annuitizing accumulated retirement savings. I talked about withdrawal strategy risk-- the risk of either withdrawing too much or too little each year. Most experts focus on the risk of withdrawing too much, but in this article, Mr. Wolf focuses on the risk of withdrawing too little.
I agree with Mr. Wolf that, "Knowing your options can help you enjoy the retirement you saved so hard to provide for." And knowing the options of How Much Can I Afford To Spend In Retirement is what this website is all about.
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